[Federal Register Volume 82, Number 228 (Wednesday, November 29, 2017)]
[Rules and Regulations]
[Pages 56630-56669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25529]



[[Page 56629]]

Vol. 82

Wednesday,

No. 228

November 29, 2017

Part II





Department of the Treasury





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Office of the Comptroller of the Currency





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12 CFR Parts 3, 47 and 50





Mandatory Contractual Stay Requirements for Qualified Financial 
Contracts; Final Rule

  Federal Register / Vol. 82 , No. 228 / Wednesday, November 29, 2017 / 
Rules and Regulations  

[[Page 56630]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3, 47 and 50

[Docket ID OCC-2016-0009]
RIN 1557-AE05


Mandatory Contractual Stay Requirements for Qualified Financial 
Contracts

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).

ACTION: Final rule.

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SUMMARY: The OCC is adopting a final rule that adds a new part to its 
rules to enhance the resilience and the safety and soundness of 
federally chartered and licensed financial institutions by addressing 
concerns relating to the exercise of default rights of certain 
financial contracts that could interfere with the orderly resolution of 
certain systemically important financial firms. Under the final rule, a 
covered bank is required to ensure that a covered qualified financial 
contract contains a contractual stay-and-transfer provision analogous 
to the statutory stay-and-transfer provision imposed under Title II of 
the Dodd-Frank, Wall Street Reform and Consumer Protection Act and in 
the Federal Deposit Insurance Act, and limits the exercise of default 
rights based on the insolvency of an affiliate of the covered bank. In 
addition, this final rule makes conforming amendments to the Capital 
Adequacy Standards and the Liquidity Risk Measurement Standards in its 
regulations. The requirements of this final rule are substantively 
identical to those adopted in the final rules issued by the Board of 
Governors of the Federal Reserve System and by the Federal Deposit 
Insurance Corporation.

DATES: This final rule is effective on January 1, 2018.

FOR FURTHER INFORMATION CONTACT: Valerie Song, Assistant Director, 
Scott Burnett, Attorney, or Colby Mangels, Attorney, Bank Activities 
and Structure Division, (202) 649-5500; Allison Hester-Haddad, Counsel, 
or Ron Shimabukuro, Senior Counsel, Legislative and Regulatory 
Activities Division, (202) 649-6282, 400 7th Street SW., Washington, DC 
20219.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Shared Policy Concerns of the Federal Banking Agencies
    B. Specific Policy Concerns Affecting National Banks, FSAs and 
Federal Branches and Agencies
II. Background
    A. Qualified Financial Contracts, Default Rights, and Financial 
Stability
    B. QFC Default Rights and GSIB Resolution Strategies
    C. Default Rights and Relevant Resolution Laws
III. Discussion of the Final Rule
    A. Overview, Purpose, and Authority
    B. Covered Banks
    C. Covered QFCs
    1. General Definition
    2. Definition of Counterparty
    3. Exclusion of Cleared QFCs and Financial Market Utilities
    4. Exclusion of Certain QFCs Under Foreign Bank Multi-Branch 
Master Agreements
    5. QFCs With Central Banks and Sovereign Entities
    D. Definition of ``Default Right''
    E. Required Contractual Provisions Related to U.S. Special 
Resolution Regimes
    F. Prohibited Cross-Default Rights
    1. Definitions
    2. General Prohibition
    3. General Creditor Protections
    4. Additional Creditor Protections for Supported QFCs
    5. Creditor Protections Related to FDI Act Proceedings
    6. Prohibited Terminations
    7. Agency Transactions
    8. Enforceability
    9. Interaction With Other Regulatory Requirements
    10. Compliance With the Universal Protocol
    11. Compliance With the U.S. Protocol
    G. Process for Approval of Enhanced Creditor Protections
    1. Requests for Approval of Enhanced Creditor Protections
    2. Compliance With the International Swaps and Derivatives 
Association (ISDA) 2015 Universal Resolution Stay Protocol and U.S. 
Protocol
    H. Transition Periods
    I. Revisions to Certain Definitions in the OCC's Capital and 
Liquidity Rules
IV. Regulatory Analysis

I. Introduction

    In the wake of the financial crisis of 2007-2008, U.S. and 
international financial regulators have placed increased focus on 
improving the resolvability of large, complex financial institutions 
that operate in multiple jurisdictions, which are often referred to as 
global systemically important banking organizations (GSIBs). In 
connection with these ongoing efforts, the Office of the Comptroller of 
the Currency (OCC) and the Board of Governors of the Federal Reserve 
System (FRB) worked jointly to develop and issue two separate notice of 
proposed rulemakings (NPRMs). The FRB issued an NPRM on May 3, 2016 
(FRB Proposed Rule); the OCC issued an NPRM on August 19, 2017 (OCC 
Proposed Rule).\1\ The FRB Proposed Rule and the OCC Proposed Rule were 
substantively identical, with any differences generally relating to 
differences in the types of entities supervised by the FRB and OCC--the 
FRB Proposed Rule primarily addressed entities at the bank holding 
company level, while the OCC Proposed Rule addressed entities at the 
bank level (specifically, national banks, Federal savings associations 
(FSAs), and Federal branches and agencies). The Federal Deposit 
Insurance Corporation (FDIC) issued an NPRM on October 26, 2016, which 
paralleled the FRB Proposed Rule and the OCC Proposed Rule.\2\ The OCC, 
FRB, and FDIC issued these NPRMs (hereinafter collectively referred to 
as the ``Agencies' NPRMs'') as part of their ongoing efforts to improve 
the resolvability of U.S. GSIBs and Foreign GSIBs that operate in the 
United States.\3\
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    \1\ 81 FR 29169 (May 11, 2016) (Restrictions on Qualified 
Financial Contracts of Systemically Important U.S. Banking 
Organizations and the U.S. Operations of Systemically Important 
Foreign Banking Organizations; Revisions to the Definition of 
Qualifying Master Netting Agreement and Related Definitions) (FRB 
Proposed Rule); 81 FR 55381 (August 19, 2017) (Mandatory Contractual 
Stay Requirements for Qualified Financial Contracts) (OCC Proposed 
Rule).
    \2\ 81 FR 74326 (October 26, 2016) (Restrictions on Qualified 
Financial Contracts of Certain FDIC-Supervised Institutions; 
Revisions to the Definition of Qualifying Master Netting Agreement 
and Related Definitions) (FDIC Proposed Rule).
    \3\ While the focus of the discussion in this preamble is on the 
impact of the OCC Proposed Rule specifically on national banks, 
FSAs, Federal branches and agencies, and generally on the national 
banking system, in light of the parallel nature of the OCC, FRB, and 
FDIC NPRMs, portions of the discussion in this preamble may be 
equally applicable to the FRB Proposed Rule and FDIC Proposed Rule.
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    The OCC received 21 comments on the proposed rule,\4\ representing 
comments from banks and other financial institutions, trade 
associations, and individuals. Most of the comments submitted to the 
OCC were also submitted to the FRB and FDIC. As part of the effort to 
coordinate development of the final rules, all comments were shared 
among the Federal banking agencies (OCC, FRB, and FDIC).
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    \4\ Unless otherwise noted, any reference to the ``proposed 
rule'' in this preamble is intended to refer to the OCC Proposed 
Rule.
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    The OCC has carefully reviewed all of the comments received. The 
proposed rule and the comments are discussed in Section III (Discussion 
of the Final Rule) of the preamble. The OCC notes that many of the 
comments submitted to the OCC also included attachments with the 
comments submitted to the FRB and FDIC. The OCC further notes that to 
the degree applicable, all comments submitted as attachments were 
treated

[[Page 56631]]

as comments on the OCC Proposed Rule. As such, for discussion purposes 
these comments may be recharacterized or otherwise paraphrased in this 
preamble to reflect the points applicable to this final rule. In some 
instances, however, the preamble may discuss a comment that is not 
directly relevant to this final rule but illustrates the interaction 
between this final rule and the final rules of the FRB and FDIC. This 
is likely to be the case with respect to comments submitted to the FRB 
that address broad policy issues, such as the systemic risk of GSIBs.

A. Shared Policy Concerns of the Federal Banking Agencies

    At the most basic level, the collective purpose of Agencies' NPRMs 
is to address a common supervisory concern raised by the resolvability 
of large, complex financial institutions in the United States that 
operate in multiple jurisdictions and that are subject to different 
supervisory authorities.\5\ The Agencies' NPRMs reflected the 
coordinated efforts by the Federal banking agencies to develop a 
comprehensive U.S. regulatory framework, designed to be implemented by 
the OCC, FRB, and FDIC to apply to all entities of a GSIB in the United 
States to address the threat to financial stability posed by the 
disorderly exercise of default rights contained in certain qualified 
financial contracts (QFCs).
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    \5\ This section is only intended to give a general overview of 
the NPRMs issued by the OCC, FRB, and FDIC. Please refer to the 
NPRMs and final rules of each of the Federal banking agencies for 
any specific issues.
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    The threat to financial stability arises because all GSIBs are 
interconnected with other financial firms, including other GSIBs, 
through large volumes of QFCs. The failure of one entity within a GSIB 
can trigger disruptive terminations of these contracts if the 
counterparties of both the failed entity and its affiliates exercise 
their contractual rights to terminate the contracts and liquidate 
collateral. These terminations, especially if many counterparties lose 
confidence in the GSIB quickly, can destabilize the financial system 
and potentially spark a financial crisis through several channels. For 
example, such terminations can destabilize the failed entity's 
otherwise solvent affiliates, causing them to weaken or fail with 
adverse consequences to their counterparties that can result in a chain 
reaction that ripples through the financial system. They also may 
result in ``fire sales'' of large volumes of financial assets, in 
particular, the collateral that secures the contracts, which can in 
turn weaken and cause stress for other firms by depressing the value of 
similar assets that they hold.
    The Agencies' NPRMs, generally would require banking organizations 
that are covered by the NPRMs to ensure that their covered QFCs: (1) 
Contain a contractual stay-and-transfer provision analogous to the 
statutory stay-and-transfer provision imposed under Title II of the 
Dodd-Frank, Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act),\6\ and in the Federal Deposit Insurance Act (FDI Act),\7\ and (2) 
limit the exercise of default rights based on the insolvency of an 
affiliate of the financial firm.
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    \6\ 12 U.S.C. 5390(c)(9) (empowering the FDIC to transfer QFCs); 
12 U.S.C. 5390(c)(10)(B)(i)(I) (providing for a temporary stay that 
generally lasts until 5:00 p.m. eastern time on the business day 
following the appointment of the FDIC as receiver).
    \7\ See 12 U.S.C. 1821(e)(8)-(10).
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    In the United States, the FDI Act and the Dodd-Frank Act create 
special resolution frameworks for failed financial firms that provide 
that the rights of a failed financial firm's counterparties to 
terminate their QFCs are temporarily stayed when the financial firm 
enters a resolution proceeding to allow for the transfer of the 
relevant obligations under the QFC to a solvent entity. By requiring 
covered QFCs to contain a contractual stay-and-transfer provision 
analogous to the statutory stay-and-transfer provision imposed under 
the FDI Act and Title II of the Dodd-Frank Act, the counterparties of 
QFCs have essentially contractually opted into the FDI Act and Title II 
of the Dodd-Frank Act temporary stay-and-transfer treatment. In this 
way, the Agencies' NPRMs address the concern that the statutory stay-
and-transfer treatment would be challenged by a QFC counterparty, and 
might not be enforced by a court in a foreign jurisdiction.
    With respect to the default rights based on the insolvency of an 
affiliate, the Agencies' NPRMs required covered QFCs to contain 
mandatory contractual provisions that would prohibit the counterparties 
of the QFCs from exercising default rights related, directly or 
indirectly, to the entry into resolution of an affiliate of the banking 
organizations covered by the NPRMs (cross-default rights), subject to 
certain creditor protection exceptions.

B. Specific Policy Concerns Affecting National Banks, FSAs and Federal 
Branches and Agencies

    While the OCC shares many of the overall policy concerns discussed 
in Section I-A with the FRB and FDIC with respect to the resolvability 
of large, complex financial institutions in the United States, the 
primary focus of this final rule is specifically on the safety and 
soundness of national banks, FSAs, and Federal branches and agencies, 
as well as the overall stability of the Federal banking system,\8\ as 
posed by the disorderly exercise of default rights contained in QFCs. 
As the primary regulator for national banks, FSAs, and Federal branches 
and agencies (generally referred to as ``OCC-supervised 
institutions''), the OCC has a strong safety and soundness interest in 
preventing such a disorderly termination of QFCs upon a GSIB's entry 
into resolution proceedings. QFCs are typically entered into by various 
operating entities in the GSIB group, which will often include a large 
depository institution that is subject to the OCC's supervision. These 
OCC-supervised institutions typically are some of the largest entities 
by asset size in the GSIB group, and often a party to large volumes of 
QFCs, making these institutions highly interconnected with other large 
financial firms.\9\ The exercise of default rights against an otherwise 
healthy national bank, FSA, or Federal branch or agency resulting from 
the failure of its affiliate, for example its top-tier U.S. holding 
company, may cause it to weaken or fail, and in turn spread contagion 
throughout the U.S. financial system, including the national banking 
system, by causing a chain of failures by other financial 
institutions--including other national banks, FSAs, or Federal branches 
or agencies--that are its QFC counterparties. Furthermore, if an OCC-
supervised institution were to fail, it is imperative that the default 
rights triggered by such an event are exercised in an orderly manner, 
both by domestic and foreign counterparties, to ensure that financial 
contagion does not spread to other federally chartered and licensed 
institutions and beyond, throughout the Federal banking system.
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    \8\ The term ``Federal banking system'' refers to all OCC-
supervised institutions, including national banks, FSAs, and Federal 
branches and agencies.
    \9\ 81 FR 29619, 29172 (``From the standpoint of financial 
stability, the most important of these operating subsidiaries are 
generally a U.S. insured depository institution, a U.S. broker-
dealer, and similar entities organized in other countries.'').
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    Accordingly, OCC-supervised institutions that are affiliates or 
branches of U.S. GSIBs or Foreign GSIBs are exposed, through the 
interconnectedness of their QFCs and the QFCs of their affiliates, to 
destabilizing effects if their counterparties or the counterparties of 
their affiliates exercise default rights upon the entry into resolution 
of the

[[Page 56632]]

OCC-supervised institution or any affiliate of the OCC-supervised 
institution. These potential destabilizing effects are best addressed 
by requiring all GSIB entities to amend their QFCs to include 
contractual provisions designed to avoid such destabilization. As the 
primary supervisor of national banks, FSAs, and Federal branches and 
agencies, the OCC has a significant interest in preventing or 
mitigating these destabilizing effects on the safety and soundness of 
not just the OCC-supervised institutions within a GSIB group, but to 
all OCC-supervised institutions in the Federal banking system. Measures 
to improve financial stability and the probability of a successful 
resolution of a GSIB likely will affect the operations of the OCC-
supervised institutions that are within the GSIB group.
    The OCC believes that each of the Federal banking agencies share a 
collective interest to insure the orderly resolution of all entities 
that make up a GSIB group. This final rule represents the OCC's effort 
to help address this systemic issue with respect to OCC-supervised 
institutions. Consequently, for the reasons discussed in this preamble, 
the OCC is issuing this final rule, which imposes substantively 
identical requirements on national banks, FSAs, and Federal branches 
and agencies as those imposed by the FRB and FDIC final rules.\10\
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    \10\ ``Restrictions on Qualified Financial Contracts of 
Systemically Important U.S. Banking Organizations and the U.S. 
Operations of Systemically Important Foreign Banking Organizations; 
Revisions to the Definition of Qualifying Master Netting Agreement 
and Related Definitions,'' 82 FR 42882 (September 12, 2017) (FRB 
Final Rule). See also 12 U.S.C. 5365(b)(4) (requiring the FRB to 
consult with each Financial Stability Oversight Council (FSOC) 
member that primarily supervises any subsidiary when any prudential 
standard is likely to have a ``significant impact'' on such 
subsidiary).
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II. Background

    The following background discussion describes in detail the 
financial contracts that are the subject of this final rule, the 
default rights often contained in such contracts, and impacts on 
financial stability resulting from the exercise of such default rights. 
This section also provides in more detail background information on the 
resolution strategies for GSIBs and how they fit within the resolution 
frameworks in the United States.

A. Qualified Financial Contracts, Default Rights, and Financial 
Stability

    The final rule covers QFCs, which include swaps, other derivative 
contracts, repurchase agreements (repos) and reverse repos, and 
securities lending and borrowing agreements. GSIB entities enter into 
QFCs to borrow money to finance their investments, to lend money, to 
manage risk, to attempt to profit from market movements, and to enable 
their clients and counterparties to perform these financial activities.
    QFCs play a role in economically valuable financial intermediation 
when markets are functioning normally. But they are also a major source 
of financial interconnectedness, which may pose a threat to financial 
stability in times of stress. The final rule focuses on one of the most 
serious threats to both a global systemically important bank holding 
company (BHC) and its covered banks' subsidiaries--the failure of a 
GSIB that is party to large volumes of QFCs, which are likely to 
include QFCs with counterparties that are themselves systemically 
important. By contract, a party to a QFC generally has the right to 
take certain actions if its counterparty defaults on the QFC (that is, 
if it fails to meet certain contractual obligations). Common default 
rights include the right to suspend performance of the non-defaulting 
party's obligations, the right to terminate or accelerate the contract, 
the right to set off amounts owed between the parties, and the right to 
seize and liquidate the defaulting party's collateral. In general, 
default rights allow a party to a QFC to reduce the credit risk 
associated with the QFC by granting it the right to exit the QFC and 
thereby reduce its exposure to its counterparty upon the occurrence of 
a specified condition, such as its counterparty's entry into resolution 
proceedings.
    This final rule focuses on two distinct scenarios in which a non-
defaulting party to a QFC is commonly able to exercise default rights. 
These two scenarios involve a default that occurs when either the 
defaulting party to the QFC or an affiliate of that party enters a 
resolution proceeding.\11\
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    \11\ This preamble uses phrases such as ``entering a resolution 
proceeding'' and ``going into resolution'' to refer to the concept 
of ``becoming subject to a receivership, insolvency, liquidation, 
resolution, or similar proceeding.'' These phrases refer to 
proceedings established by law to deal with a failed legal entity. 
In the context of the failure of a global systemically important 
BHC, the most relevant types of resolution proceeding include: (1) 
For most US-based legal entities, the bankruptcy process established 
by the U.S. Bankruptcy Code (Title 11, United States Code); (2) for 
U.S. insured depository institutions, a receivership administered by 
the FDIC under the FDI Act (12 U.S.C. 1821); (3) for companies whose 
``resolution under otherwise applicable Federal or State law would 
have serious adverse effects on the financial stability of the 
United States,'' the Dodd-Frank Act's Orderly Liquidation Authority 
(12 U.S.C. 5383(b)(2)); and, (4) for entities based outside the 
United States, resolution proceedings created by foreign law.
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    The first scenario occurs when a legal entity that is itself a 
party to the QFC enters a resolution proceeding. This final rule refers 
to such a scenario as a ``direct default'' and refers to the 
contractual default rights that arise from a direct default as ``direct 
default rights.'' \12\
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    \12\ For convenience, this preamble uses the general term 
``default'' to refer specifically to a default that occurs when a 
QFC party or its affiliate enters a resolution proceeding.
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    The second scenario occurs when an affiliate of the legal entity 
that is a direct party to the QFC (such as the direct party's parent 
holding company) enters a resolution proceeding. This final rule refers 
to such a scenario as a ``cross-default'' and refers to contractual 
default rights that arise from a cross-default as ``cross-default 
rights.'' For example, a GSIB parent entity might guarantee the 
derivatives transactions of its subsidiaries and those derivatives 
contracts could contain cross-default rights against a subsidiary of 
the GSIB that would be triggered by the bankruptcy filing of the GSIB 
parent entity even though the subsidiary continues to meet all of its 
financial obligations.
    Direct default rights and cross-default rights are referred to 
collectively in this final rule as ``default rights.''
    As noted in the OCC Proposed Rule, if a significant number of QFC 
counterparties exercise their default rights precipitously and in a 
manner that would impede an orderly resolution of a GSIB, all QFC 
counterparties and the broader financial system, including institutions 
supervised by the OCC, may potentially be worse off and less stable.
    The destabilization can occur in several ways. First, 
counterparties' exercise of default rights may drain liquidity from the 
troubled GSIB, forcing it to sell off assets at depressed prices, both 
because the sales must be done in a short timeframe and because the 
elevated supply will push prices down. These asset ``fire sales'' may 
cause or deepen balance-sheet insolvency at the GSIB, reducing the 
amount that its other creditors can recover and thereby imposing losses 
on those creditors and threatening their solvency (and, indirectly, the 
solvency of their own creditors, and so on). The GSIB may also respond 
by withdrawing liquidity that it had offered to other firms, forcing 
them to engage in asset fire sales. Alternatively, if the GSIB's QFC 
counterparty itself liquidates the QFC collateral at fire sale prices, 
the effect will again be to weaken the GSIB's balance sheet, because 
the debt satisfied by the liquidation would be less than

[[Page 56633]]

what the value of the collateral would have been outside the fire sale 
context. The counterparty's set-off rights may allow it to further 
drain the GSIB's capital and liquidity by withholding payments owed to 
the GSIB. The GSIB may also have rehypothecated collateral that it 
received from QFC counterparties, for instance in back-to-back repo or 
securities lending transactions, in which case demands from those 
counterparties for the early return of their rehypothecated collateral 
could be especially disruptive.
    The asset fire sales can also spread contagion throughout the 
financial system by increasing volatility and by lowering the value of 
similar assets held by other financial institutions, potentially 
causing them to suffer diminished market confidence in their own 
solvency, mark-to-market losses, margin calls, and creditor runs (which 
could lead to further fire sales, thereby worsening the contagion). 
Finally, the early terminations of derivatives upon which the 
defaulting GSIB relied on to hedge its risks could leave major risks 
unhedged, increasing the GSIB's probable losses going forward.
    Where there are significant simultaneous terminations and these 
effects occur contemporaneously, such as upon the failure of a GSIB 
that is party to a large volume of QFCs, they may pose a substantial 
risk to financial stability. In short, QFC continuity is important for 
the orderly resolution of a GSIB so that the instability caused by 
asset fire sales can be avoided.\13\
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    \13\ The FRB and the FDIC identified the exercise of default 
rights in financial contracts as a potential obstacle to orderly 
resolution in the context of resolution plans filed pursuant to 
Sec.  165(d) of the Dodd-Frank Act, and accordingly, instructed the 
most systemically important firms to demonstrate that they are 
``amending, on an industry-wide and firm-specific basis, financial 
contracts to provide for a stay of certain early termination rights 
of external counterparties triggered by insolvency proceedings.'' 
FRB and FDIC, ``Agencies Provide Feedback on Second Round Resolution 
Plans of 'First-Wave' Filers'' (August 5, 2014), available at http://www.federalreserve.gov/newsevents/press/bcreg/20140805a.htm. See 
also FRB and FDIC, ``Agencies Provide Feedback on Resolution Plans 
of Three Foreign Banking Organizations'' (March 23, 2015), available 
at http://www.federalreserve.gov/newsevents/press/bcreg/20150323a.htm; FRB and FDIC, ``Guidance for 2013 165(d) Annual 
Resolution Plan Submissions by Domestic Covered Companies that 
Submitted Initial Resolution Plans in 2012'' 5-6 (April 15, 2013), 
available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20130415c2.pdf.
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    As will be discussed further, the final rule is primarily concerned 
only with default rights that run against a GSIB--that is, direct 
default rights and cross-default rights that arise from the entry into 
resolution of a GSIB. The final rule would not affect contractual 
default rights that a GSIB (or any other entity) may have against a 
counterparty that is not a GSIB. The OCC believes that this limited 
scope is appropriate because the risk posed to financial stability by 
the exercise of QFC default rights is greatest when the defaulting 
counterparty is a GSIB.

B. QFC Default Rights and GSIB Resolution Strategies

    Under the Dodd-Frank Act, many complex GSIBs are required to submit 
resolution plans to the FRB and the FDIC, detailing how the company can 
be resolved in a rapid and orderly manner in the event of material 
financial distress or failure of the company. In response to these 
requirements, these firms have developed resolution strategies that, 
broadly speaking, fall into two categories: The single-point-of-entry 
(SPOE) strategy and the multiple-point-of-entry (MPOE) strategy. As 
noted in the FRB Proposed Rule, cross-default rights in QFCs pose a 
potential obstacle to the implementation of either of these strategies.
    In an SPOE resolution, only a single legal entity--the GSIB's top-
tier BHC--would enter a resolution proceeding. The losses that led to 
the GSIB's failure would be passed up from the operating subsidiaries 
that incurred the losses to the holding company and would then be 
imposed on the equity holders and unsecured creditors of the holding 
company through the resolution process. This strategy is designed to 
help ensure that the GSIB's subsidiaries remain adequately capitalized. 
An SPOE resolution could thereby prevent those operating subsidiaries 
from failing or entering resolution themselves and allow them to 
instead continue normal operations. The expectation that the holding 
company's equity holders and unsecured creditors would absorb the 
GSIB's losses in the event of failure would help to maintain the 
confidence of the operating subsidiaries' creditors and counterparties 
(including QFC counterparties), reducing their incentive to engage in 
potentially destabilizing funding runs or margin calls and thus 
lowering the risk of asset fire sales.
    An SPOE proceeding can avoid the need for covered banks to be 
placed into receivership or similar proceedings, as they would continue 
to operate as going concerns, only if the parent's entry into 
resolution proceedings does not trigger the exercise of cross-default 
rights. Accordingly, this final rule, by limiting such cross-default 
rights based on an affiliate's entry into resolution proceedings, 
enables the SPOE strategy, and in turn, would assist in stabilizing 
both the covered bank and the Federal banking system.
    This final rule is also intended to yield benefits for resolution 
under the MPOE strategy. Unlike the SPOE strategy, an MPOE strategy 
involves several entities in the GSIB group entering proceedings. For 
example, an MPOE strategy might involve a Foreign GSIB's U.S. 
intermediate holding company going into resolution or a GSIB's U.S. 
insured depository institution entering resolution under the FDI Act. 
Similar to the benefits associated with the SPOE strategy, this final 
rule would help support the continued operation of affiliates of an 
entity experiencing resolution to the extent the affiliate continues to 
perform on its QFCs.

C. Default Rights and Relevant Resolution Laws

    In order to understand the connection between direct defaults, 
cross-defaults, the SPOE and MPOE resolution strategies, and the 
threats to financial stability discussed previously, it is necessary to 
understand how QFCs, and the default rights contained therein, are 
treated when an entity enters resolution. The following sections 
discuss the treatment of QFCs in greater detail under three U.S. 
resolution laws: The Bankruptcy Code, the Orderly Liquidation Authority 
(OLA), and the FDI Act. As discussed in these sections, each of these 
resolution laws has special provisions detailing the treatment of QFCs 
upon an entity's entry into such proceedings.
    U.S. Bankruptcy Code. While covered banks themselves are not 
subject to resolution under the Bankruptcy Code, in general, if a BHC 
were to fail, it would be resolved under the Bankruptcy Code. When an 
entity goes into resolution under the Bankruptcy Code, attempts by the 
creditors of the debtor to enforce their debts through any means other 
than participation in the bankruptcy proceeding (for instance, by suing 
in another court, seeking enforcement of a preexisting judgment, or 
seizing and liquidating collateral) are generally blocked by the 
imposition of an automatic stay, which generally persists throughout 
the bankruptcy proceeding.\14\ A key purpose of the automatic stay, and 
of bankruptcy law in general, is to maximize the value of the 
bankruptcy estate and the creditors' ultimate recoveries by 
facilitating an orderly liquidation or restructuring of the debtor. As 
a result, the automatic stay addresses the collective action problem, 
in which the creditors' individual incentives to race to recover as 
much from the debtor as possible

[[Page 56634]]

before other creditors can do so, collectively cause a value-destroying 
disorderly liquidation of the debtor.\15\
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    \14\ See 11 U.S.C. 362.
    \15\ See, e.g., Aiello v. Providian Financial Corp., 239 F.3d 
876, 879 (7th Cir. 2001).
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    The Bankruptcy Code, however, largely exempts QFC counterparties of 
the debtor from the automatic stay through special ``safe harbor'' 
provisions.\16\ Under these provisions, any contractual rights that a 
QFC counterparty has to terminate the contract, set off obligations, or 
liquidate collateral in response to a direct default or cross-default 
are not subject to the stay and may be exercised at any time.\17\
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    \16\ The U.S. Bankruptcy Code does not use the term ``qualified 
financial contract,'' but the set of transactions covered by its 
safe harbor provisions closely tracks the set of transactions that 
fall within the definition of ``qualified financial contract'' used 
in Title II of the Dodd-Frank Act and in this final rule. See 11 
U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556, 559, 560, and 
561.
    \17\ The Bankruptcy Code does not itself confer any default 
rights upon QFC counterparties; it merely permits QFC counterparties 
to exercise certain contractual rights that they have under the 
terms of the QFC. This final rule does not restrict the exercise of 
any default rights that fall within the Bankruptcy Code's safe 
harbor provisions, which are described here to provide context.
---------------------------------------------------------------------------

    Where the failed firm is a GSIB's holding company with covered 
banks that are going concerns and are party to large volumes of QFCs, 
the mass exercise of default rights under the QFCs based on the 
affiliate default represents a significant impediment to the SPOE 
resolution strategy.\18\ This is because the failure of a covered 
bank's affiliate will trigger the mass exercise of cross-default rights 
against the covered bank, which will not be stayed by the affiliate's 
entry into bankruptcy proceedings. This can in turn lead to fire sales 
that could threaten the ongoing viability of the covered bank and the 
successful resolution of the particular GSIB--and thus could also pose 
a threat to the Federal banking system and broader financial system.
---------------------------------------------------------------------------

    \18\ As noted previously, the MPOE strategy will similarly 
benefit from the override of cross-defaults. The SPOE strategy is 
used here for illustrative purposes only.
---------------------------------------------------------------------------

    Special Resolution Regimes Under U.S. Law. For purposes of this 
final rule, there are two special resolution regimes under U.S. law: 
Title II of the Dodd-Frank Act and the Orderly Liquidation Authority 
and the FDI Act. While these regimes both impose certain limitations on 
the ability of counterparties to exercise default rights--thus 
mitigating the potential for disorderly resolution due to the exercise 
by counterparties of such default rights--these limitations may not be 
applicable or clearly enforceable in certain contexts.
    Title II of the Dodd-Frank Act and the Orderly Liquidation 
Authority. Title II of the Dodd-Frank Act establishes an alternative 
resolution framework intended ``to provide the necessary authority to 
liquidate failing financial companies that pose a significant risk to 
the financial stability of the United States in a manner that mitigates 
such risk and minimizes moral hazard.'' \19\
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 5384(a) (section 204(a) of the Dodd-Frank Act).
---------------------------------------------------------------------------

    As noted, although a failed BHC would generally be resolved under 
the Bankruptcy Code, Congress recognized that a U.S. financial company 
might fail under extraordinary circumstances, in which an attempt to 
resolve it through the bankruptcy process would have serious adverse 
effects on financial stability in the United States. Title II therefore 
authorizes the Secretary of the Treasury, upon the recommendation of 
other government agencies and a determination that several 
preconditions are met, to place a U.S. financial company into a 
receivership conducted by the FDIC as an alternative to bankruptcy.
    Title II empowers the FDIC, when it acts as receiver in an OLA 
resolution, to protect financial stability against the QFC-related 
threats discussed previously. Title II addresses direct default rights 
in a number of ways. Title II empowers the FDIC to transfer the QFCs to 
a bridge financial company or some other financial company that is not 
in a resolution proceeding and should therefore be capable of 
performing under the QFCs.\20\ To give the FDIC time to effect this 
transfer, Title II temporarily stays QFC counterparties of the failed 
entity from exercising termination, netting, and collateral liquidation 
rights ``solely by reason of or incidental to'' the failed entity's 
entry into OLA resolution, its insolvency, or its financial 
condition.\21\ Once the QFCs are transferred in accordance with the 
statute, Title II permanently stays the exercise of those direct 
default rights based on the prior event of default and 
receivership.\22\
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 5390(c)(9).
    \21\ 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay 
generally lasts until 5:00 p.m. eastern time on the business day 
following the appointment of the FDIC as receiver.
    \22\ If the QFCs are transferred to a solvent third party before 
the stay expires, the counterparty is permanently enjoined from 
exercising such rights based upon the appointment of the FDIC as 
receiver of the financial company (or the insolvency or financial 
condition of the financial company), but is not stayed from 
exercising such rights based upon other events of default. 12 U.S.C. 
5390(c)(10)(B)(i)(II).
---------------------------------------------------------------------------

    Title II addresses cross-default rights through a similar 
procedure. It empowers the FDIC ``to enforce contracts of subsidiaries 
or affiliates'' of the failed company that are guaranteed or otherwise 
supported by or linked to the covered financial company, 
notwithstanding any contractual right to cause the termination, 
liquidation, or acceleration of such contracts based solely on the 
insolvency, financial condition, or receivership of the failed company, 
so long as, if such contracts are guaranteed or otherwise supported by 
the covered financial company, the FDIC takes certain steps to protect 
the QFC counterparty's interests by the end of the business day 
following the company's entry into OLA resolution.\23\
---------------------------------------------------------------------------

    \23\ 12 U.S.C. 5390(c)(16); 12 CFR 380.12.
---------------------------------------------------------------------------

    These stay-and-transfer provisions of the Dodd-Frank Act go far to 
mitigate the threat posed by QFC default rights by preventing mass 
closeouts against the entity that has entered into OLA proceedings or 
its going concern affiliates. At the same time, they allow for 
appropriate protections for QFC counterparties of the failed financial 
company. They only stay the exercise of default rights based on the 
failed company's entry into resolution, the fact of its insolvency, or 
its financial condition. Further, the stay period is brief, unless the 
FDIC transfers the QFCs to another financial company that is not in 
resolution and should therefore be capable of performing under the 
QFCs.
    Federal Deposit Insurance Act. Under the FDI Act, a failing insured 
depository institution would generally enter a receivership 
administered by the FDIC. The FDI Act addresses direct default rights 
in the failed bank's QFCs with stay-and-transfer provisions that are 
substantially similar to the provisions of Title II of the Dodd-Frank 
Act as discussed.\24\ However, the FDI Act does not address cross-
default rights, leaving the QFC counterparties of the failed depository 
institution's affiliates free to exercise any contractual rights they 
may have to terminate, net, and liquidate collateral based on the 
depository institution's entry into resolution.
---------------------------------------------------------------------------

    \24\ See 12 U.S.C. 1821(e)(8)-(10).
---------------------------------------------------------------------------

III. Discussion of the Final Rule

A. Overview, Purpose, and Authority

    As discussed previously, the exercise of default rights by 
counterparties of a failed GSIB can have a significant impact on 
financial stability. This financial stability concern is necessarily 
intertwined with the safety and soundness of covered banks and the 
Federal banking system--the disorderly exercise of default rights can 
produce a sudden, contemporaneous threat to the safety and soundness of 
individual institutions throughout the system,

[[Page 56635]]

which in turn threatens the system as a whole. Accordingly, national 
banks, FSAs, and Federal branches and agencies are affected by 
financial instability--even if such instability is precipitated outside 
the Federal banking system--and can themselves also be sources of 
financial destabilization due to the interconnectedness of these 
institutions to each other and to other entities within the financial 
system. Thus, safety and soundness of individual national banks, FSAs, 
and Federal branches and agencies, the Federal banking system, and 
financial stability of the system as a whole are interconnected.
    The purpose of this final rule is to enhance the safety and 
soundness of covered banks and the Federal banking system, thereby also 
bolstering financial stability generally, by addressing the two main 
issues raised by covered QFCs with the orderly resolution of these 
covered banks as generally previously described.
    While Title II and the FDI Act empower the use of the QFC stay-and-
transfer provisions, a court in a foreign jurisdiction may decline to 
enforce these important provisions. The final rule directly improves 
the safety and soundness of covered banks by clarifying the 
applicability of U.S. special resolution regimes to all counterparties, 
whether they are foreign or domestic. Although domestic entities are 
clearly subject to the temporary stay provisions of OLA and the FDI 
Act, these stays may be difficult to enforce in a cross-border context. 
As a result, domestic counterparties of a failed U.S. financial 
institution may be disadvantaged relative to foreign counterparties, as 
the domestic counterparties would be subject to the stay, and 
accompanying potential market volatility, while if the stay was not 
enforced by foreign authorities, foreign counterparties could close out 
immediately. Furthermore, a mass close out by such foreign 
counterparties would likely exacerbate market volatility, which in turn 
would likely magnify harm to the stayed U.S. counterparties' positions, 
which are likely to include other national banks and FSAs. This final 
rule would eliminate the potential for these adverse consequences by 
requiring covered banks to condition the exercise of default rights in 
covered contracts on the stay provisions of OLA and the FDI Act.
    In spite of the QFC stay-and-transfer provisions in Title II and 
the FDI Act, the affiliates of a global systemically important BHC that 
goes into resolution under the Bankruptcy Code may face disruptions to 
their QFCs as their counterparties exercise cross-default rights. Thus, 
a healthy covered bank whose parent BHC entered resolution proceedings 
could fail due to its counterparties exercising cross-default rights. 
This is both a safety and soundness concern for the otherwise healthy 
covered bank, but it also has the additional negative effect of 
defeating the orderly resolution of the GSIB, since a key element of 
SPOE resolution in the United States is ensuring that critical 
operating subsidiaries--such as covered banks--continue to operate on a 
going concern basis. This final rule would address this issue by 
generally restricting the exercise of cross-default rights by 
counterparties against a covered bank.
    Moreover, a disorderly resolution of the kind described could 
jeopardize not just the covered bank and the orderly resolution of its 
failed parent BHC, but all surviving counterparties, many of which are 
likely to be other national banks and other FSAs, regardless of size or 
interconnectedness, by harming the overall condition of the Federal 
banking system and the financial system as a whole. A disorderly 
resolution could result in additional defaults, fire sales of 
collateral, and other consequences likely to amplify the systemic 
fallout of the resolution of a covered bank.
    The final rule is designed to minimize such disorder, and therefore 
enhance the safety and soundness of all individual national banks, 
FSAs, and Federal branches and agencies, the Federal banking system, 
and the broader financial system. This is particularly important 
because financial institutions are more sensitive than other firms to 
the overall health of the financial system.\25\
---------------------------------------------------------------------------

    \25\ The OCC, along with the FDIC and FRB, recently made this 
point in the swap margin notice of proposed rulemaking. 79 FR 57348, 
57361 (September 24, 2014) (``Financial firms present a higher level 
of risk than other types of counterparties because the profitability 
and viability of financial firms is more tightly linked to the 
health of the financial system than other types of counterparties. 
Because financial counterparties are more likely to default during a 
period of financial stress, they pose greater systemic risk and risk 
to the safety and soundness of the covered swap entity.'').
---------------------------------------------------------------------------

    The final rule covers the OCC-supervised operations of foreign 
banking organizations (FBOs) designated as systemically important, 
including national bank and FSA subsidiaries, as well as Federal 
branches and agencies, of these FBOs. As with a national bank or FSA 
subsidiary of a U.S. global systemically important BHC, the OCC 
believes that this final rule should apply to a national bank or FSA 
subsidiary of a global systematically important FBO for essentially the 
same reasons. While the national bank or FSA may not be considered 
systemically important itself, as part of a GSIB, the disorderly 
resolution of the covered national banks and FSAs could have a 
significant negative impact on the Federal banking system and on the 
U.S. financial system, in general.
    Specifically, the final rule is designed to prevent the failure of 
a global systemically important FBO from disrupting the ongoing 
operations or orderly resolution of the covered bank by protecting the 
healthy national bank or FSA from the mass triggering of default rights 
by the QFC counterparties. Additionally, the application of this final 
rule to the QFCs of these national bank and FSA subsidiaries should 
avoid creating what may otherwise be an incentive for counterparties to 
concentrate QFCs in these firms because they are subject to fewer 
counterparty restrictions. Similarly, it is important to cover certain 
QFCs entered into by any Federal branch or agency of a global 
systemically important FBO in order to ensure the orderly resolution of 
these entities if the parent FBO were to be placed into resolution in 
its home jurisdiction.
    The OCC is issuing this final rule under its authorities under the 
National Bank Act (12 U.S.C. 1 et seq.), the Home Owners' Loan Act (12 
U.S.C. 1461 et seq.), and the International Banking Act of 1978 (12 
U.S.C. 3101 et seq.), including its general rulemaking authorities.\26\ 
The OCC views the final rule as consistent with its overall statutory 
mandate of assuring the safety and soundness of entities subject to its 
supervision, including national banks, FSAs, and Federal branches and 
agencies.\27\
---------------------------------------------------------------------------

    \26\ See 12 U.S.C. 93a, 1463(a)(2), and 3108(a).
    \27\ See 12 U.S.C. 1. This primary responsibility is also 
defined in various provisions throughout the OCC's express statutory 
authorities with respect to each institution type under their 
respective statutes.
---------------------------------------------------------------------------

    In developing this final rule, the OCC reviewed and carefully 
considered all comments received on the OCC Proposed Rule as part of 
the notice and comment process. In addition, in light of the closely 
connected nature between BHC supervision and the supervision of 
national banks, FSAs, and Federal branches and agencies, and in order 
to maintain substantive consistency with the FRB Proposed Rule and FDIC 
Proposed Rule, the OCC reviewed comments received by the FRB and FDIC 
on their proposed rules to the degree such comments were relevant to

[[Page 56636]]

the substance of this final rule. In characterizing comments and the 
OCC responses to the commenters in this preamble, the OCC may reference 
and discuss comments received by the FRB and FDIC as comments to the 
OCC to the extent applicable to the substance of the OCC final rule.

B. Covered Banks (Sec.  47.3(a), (b), and (c))

    OCC Proposed Rule.\28\ The proposed rule applied to ``covered 
banks.'' The term ``covered bank'' was defined to include (i) any 
national bank or FSA that is a subsidiary of a global systemically 
important BHC that has been designated pursuant to subpart I of 12 CFR 
part 252 (FRB Regulation YY); or (ii) any national bank or FSA 
subsidiary, or Federal branch or agency of a global systemically 
important FBO that has been designated pursuant to subpart I of 12 CFR 
part 252 (FRB Regulation YY).
---------------------------------------------------------------------------

    \28\ References in this preamble to the ``proposed rule'' refer 
to the OCC Proposed Rule unless otherwise specified.
---------------------------------------------------------------------------

    The proposed rule defined global systemically important BHC and 
global systemically important FBO by cross-reference to newly added 
subpart I of 12 CFR part 252 of the FRB Proposed Rule. The list of 
banking organizations that meet the methodology proposed in the FRB 
Proposed Rule is currently the same set of banking organizations that 
meet the Basel Committee on Banking Supervision (BCBS) definition of a 
GSIB.\29\
---------------------------------------------------------------------------

    \29\ In November 2015, the Financial Stability Board and BCBS 
published a list of banks that meet the BCBS definition of a global 
systemically important bank (BCBS G-SIB) based on year-end 2014 
data. A list based on year-end 2014 data was published November 3, 
2015 (available at http://www.fsb.org/wp-content/uploads/2015-update-of-list-of-global-systemically-important-banks-G-SIBs.pdf). 
The U.S. top-tier BHCs that are currently identified as a BCBS G-SIB 
are Bank of America Corporation, Bank of New York Mellon 
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan 
Chase & Co., Morgan Stanley, State Street Corporation, and Wells 
Fargo & Company.
---------------------------------------------------------------------------

    Under the proposed rule, the term covered bank also included any 
subsidiary of a national bank, FSA, or Federal branch or agency. The 
definition of ``subsidiary of covered bank'' in the proposed rule was 
intended to mirror the definition of subsidiary in the FRB Regulation 
YY (12 CFR 252.82(b)(2) and (3)), and it was intended to be 
substantially the same as the FRB definition with respect to a 
subsidiary of a covered bank.\30\
---------------------------------------------------------------------------

    \30\ The Bank Holding Company Act (BHC Act) definition of 
control includes ownership, control or the power to vote 25 percent 
of any class of voting securities; control in any manner of the 
election of a majority of the directors or trustees of; or exercise 
of a controlling influence over the management or policies. 12 
U.S.C. 1841.
---------------------------------------------------------------------------

    Comments. While commenters overall supported the purpose of the 
proposed rule, a few commenters urged the OCC not to expand the scope 
of covered banks to include non-GSIBs. The definition of covered bank 
in the proposed rule only applied to a national bank, FSA, or Federal 
branch or agency that is under a global systemically important BHC or 
FBO as designated by the FRB final rule. However, the OCC requested 
comment on whether an additional threshold should be added to the 
definition of covered bank to cover a national bank or FSA that is not 
under a BHC but may have total assets sufficiently large to require 
application of the final rule. As discussed further in the following 
section, the OCC has decided to add an additional provision to the 
definition of covered bank to capture a national bank or FSA that has 
more than $700 billion in total assets as reported on its most recent 
Consolidated Reports of Condition and Income (Call Report).
    A number of commenters urged the OCC to move to a financial 
consolidation standard to define a ``subsidiary of a covered bank'' 
instead of the BHC Act control standard set forth in the FRB Regulation 
YY.\31\ These commenters asserted that, under U.S. generally accepted 
accounting principles (GAAP), a company generally would consolidate an 
entity in which it holds a majority voting interest, or over which it 
has the power to direct the most significant economic activities, to 
the extent it also holds a variable interest in the entity. In 
addition, commenters pointed out that financially consolidated 
subsidiaries are often subject to operational control and generally 
fully integrated into the parent's enterprise-wide governance, 
policies, procedures, control frameworks, business strategies, 
information technology systems, and management systems. These 
commenters pointed out that the concept of BHC Act control was designed 
to serve other policy purposes (e.g., separation between banking and 
commercial activities). A number of commenters raised concerns that BHC 
Act control may include an entity that is not under the day-to-day 
operational control of the GSIB and over whom the GSIB does not have 
the practical ability to require remediation of that entity's QFCs to 
comply with the proposed rule. Moreover, commenters contended that 
entities that are not consolidated with a GSIB for financial reporting 
are unlikely to raise the types of concerns for the orderly resolution 
of GSIBs targeted by the proposed rule. Commenters also noted that the 
International Swaps and Derivatives Association (ISDA) master 
agreements and Universal Protocol define ``affiliate'' by reference to 
ownership of a majority of the voting power of an entity or person. For 
these reasons, commenters urged the OCC to define the term 
``subsidiary'' of a covered bank based on financial consolidation under 
the final rule.
---------------------------------------------------------------------------

    \31\ Commenters generally expressed a similar view with respect 
to the definition of ``affiliate'' of a covered bank as the term is 
used in Sec. Sec.  47.4 and 47.5 of the proposed rule which was 
likewise defined by reference to BHC Act control.
---------------------------------------------------------------------------

    Commenters generally urged that regardless of whether financial 
consolidation is adopted for the purpose of defining ``subsidiary,'' 
the final rule should exclude any entities over which the covered bank 
does not exercise operational control. Specifically, with respect to 
comments to the FRB Proposed Rule, commenters noted that such entities 
could include merchant banking portfolio companies, section 2(h)(2) 
companies, joint ventures, sponsored funds as distinct from their 
sponsors or investment advisors, securitization vehicles, entities in 
which the covered entity holds only a minority interest and does not 
exert a controlling influence, and subsidiaries held pursuant to 
provisions for debt previously contracted in good faith (DPC 
subsidiaries).\32\
---------------------------------------------------------------------------

    \32\ See, e.g., 12 U.S.C. 1842(a)(A)(ii), 1843(c)(2); 12 CFR 
225.12(b), 225.22(d)(1).
---------------------------------------------------------------------------

    Similarly, OCC commenters also requested that covered banks should 
exempt entities over which a covered bank does not exercise operational 
control. The OCC notes that with respect to covered banks, such 
entities would include DPC subsidiaries,\33\ as well as a covered 
bank's investment in community development corporations (CDCs) or small 
business investment corporations (SBICs).\34\ These entities 
potentially present similar issues of operational control as in 
merchant banking, sponsored funds, and joint ventures.
---------------------------------------------------------------------------

    \33\ See 12 U.S.C. 29; 12 CFR 5.34; and 12 U.S.C. 1464 (FSA DPC 
authority).
    \34\ National banks may own or make controlling or minority 
investments in SBICs as defined under 13 CFR 107.50, CDCs pursuant 
to 12 U.S.C. 24(Eleventh), or other public welfare investments 
pursuant to 12 U.S.C. 24(Seventh). FSAs may also make such 
controlling or minority investments in SBICs and CDCs pursuant to 
their general lending authority under 12 U.S.C. 1464(c).
---------------------------------------------------------------------------

    In terms of foreign GSIBs, some commenters believed that FBO 
subsidiaries for which the FBO has been given special relief by FRB 
order not to hold the subsidiary under an intermediate holding company 
(IHC) should not be included in the definition

[[Page 56637]]

of covered bank, even if such entities would be consolidated under 
financial consolidation principles.\35\ These commenters asserted that 
since neither the covered bank nor the Foreign GSIB parent would 
provide credit support to these entities or name such entities in a 
cross-default provision in a QFC or related agreement, the failure of 
any of these types of entities would be unlikely to affect QFCs entered 
into by the covered bank or any other affiliate. These commenters 
further noted that the few such requests that have been granted by the 
FRB often involved situations in which the FBO did not have sufficient 
operational control over the entity to ensure its compliance. 
Commenters also requested that U.S. Federal branches and agencies of 
FBOs be excluded from the definition of ``covered bank'' where the 
FBO's home country legal framework imposes similar requirements of the 
final rule on the FBO and the Federal branch or agency. These 
commenters asserted that the requirements of the final rule would be 
duplicative of the requirements with respect to such Federal branches 
and agencies if their QFCs are already subject to existing and 
substantially equivalent resolution powers in the home country, without 
a proportionate incremental benefit to their resolvability or reduction 
in risk to U.S. financial stability.\36\
---------------------------------------------------------------------------

    \35\ FRB orders granting such approvals to FBOs that have 
requested such treatment can be found at Regulation YY Foreign 
Banking Organization Requests, available at https://www.federalreserve.gov/supervisionreg/regulation-yy-foreign-banking-organization-requests.htm.
    \36\ In the alternative, these commenters requested that the 
requirements only apply to U.S. Federal branches and agencies of 
Foreign GSIBs insofar as the home resolution regime and group 
resolution strategy would not adequately ensure that early 
termination rights, including cross-default rights against the U.S. 
IHC or subsidiaries, will not be triggered in resolution.
---------------------------------------------------------------------------

    Final Rule. Under the final rule, a ``covered bank'' is generally 
defined to include (1) a national bank or FSA not under a BHC and that 
has more than $700 billion in total assets as reported on their most 
recent Call Report, (2) a national bank or FSA that is a subsidiary of 
a global systemically important BHC that has been designated pursuant 
to subpart I of 12 CFR part 252 of this title (FRB Regulation YY); or 
(3) is a national bank or FSA subsidiary, or Federal branch or agency 
of a global systemically important FBO designated pursuant to subpart I 
of 12 CFR part 252 of this title (FRB Regulation YY) that has been 
designated pursuant to FRB Regulation YY.
    The final rule generally adopts the definition of covered bank as 
proposed with the exception of the addition of a provision to include a 
national bank or FSA not under a BHC and that has more than $700 
billion in total assets as reported on their most recent Call Report. 
This provision is intended to address the OCC's concern that a national 
bank or FSA, not under a BHC, with a sufficient number of large total 
assets would be subject to the requirement of the final rule. While 
currently a null set, the OCC believes that any national bank or FSA 
that has total assets that exceed $700 billion would raise similar 
concerns with respect to interconnectedness and financial contagion.
    As in the proposed rule, a covered bank includes the OCC-regulated 
subsidiaries of entities identified as U.S. GSIB top-tier holding 
companies under the FRB GSIB surcharge rule.\37\ U.S. GSIBs generally 
enter into QFCs through subsidiary legal entities rather than through 
the top-tier holding company.\38\ Therefore, in order to increase GSIB 
resilience and resolvability by addressing the potential obstacles to 
orderly resolution posed by QFCs, it is necessary to apply the proposed 
restrictions to the U.S. GSIBs' subsidiaries. In particular, to 
facilitate the resolution of a GSIB under an SPOE strategy, in which 
only the top-tier holding company would enter a resolution proceeding 
while its subsidiaries would continue to meet their financial 
obligations, or an MPOE strategy where an affiliate of an entity that 
is otherwise performing under a QFC enters resolution, it is necessary 
to ensure that those subsidiaries or affiliates do not enter into QFCs 
that contain cross-default rights that the counterparty could exercise 
based on the holding company's or an affiliate's entry into resolution 
(or that any such cross-default rights are stayed when the holding 
company enters resolution). Moreover, including U.S. and non-U.S. 
entities of a U.S. GSIB as a covered bank should help ensure that such 
cross-default rights do not affect the ability of performing and 
solvent entities of a GSIB--regardless of jurisdiction--to remain 
outside of resolution proceedings.
---------------------------------------------------------------------------

    \37\ 12 CFR 217.402; 80 FR 49106 (Aug. 14, 2015). See the FRB 
final rule Sec.  252.82(a)(1).
    \38\ Under the clean holding company component of the FRB's 
recent Total Loss-Absorbing Capacity (TLAC) final rule, the top-tier 
holding companies of U.S. GSIBs would be prohibited from entering 
into direct QFCs with third parties. See 82 FR 8266, 8298 (December 
15, 2016).
---------------------------------------------------------------------------

    The term ``subsidiary'' in the final rule continues to be defined 
by reference to BHC Act control as does the definition of 
``affiliate.'' \39\ The final rule does not define covered banks to 
include only those subsidiaries of GSIBs that are financially 
consolidated subsidiaries as requested by certain commenters. Defining 
``subsidiary'' and ``affiliate'' by reference to BHC Act control is 
consistent with the definitions of those terms in the FDI Act and Title 
II of the Dodd-Frank Act. Specifically, Title II permits the FDIC, as 
receiver of a covered financial company or a receiver for its 
subsidiary, to enforce QFCs and other contracts of subsidiaries and 
affiliates, defined by reference to the BHC Act, notwithstanding cross-
default rights based solely on the insolvency, financial condition, or 
receivership of the covered financial company.\40\ Therefore, 
maintaining consistent definitions of subsidiary and affiliate with 
Title II should better ensure that QFC stays may be effected in a 
resolution under a U.S. Special Resolution Regime. As covered banks, as 
well as their subsidiaries and affiliates, are typically subsidiaries 
of BHCs, which are in turn subject to the activity restrictions and 
other requirements of the BHC Act, they should already know all of 
their BHC Act controlled subsidiaries and be familiar with BHC Act 
control principles.\41\ Moreover, GSIBs should be able to rely on 
governance rights and other negotiated mechanisms to ensure that such 
subsidiaries conform their QFCs to the final rule's requirements.
---------------------------------------------------------------------------

    \39\ See 12 CFR 252.2.
    \40\ 12 U.S.C. 5390(c)(16).
    \41\ For example, under the FRB final rule a covered entity may 
own more than five percent (and less than 25 percent) of the voting 
shares of a registered investment company for which the covered 
entity provides investment advisory, administrative, and other 
services and has a number of director and officer interlocks, 
without controlling the fund for purposes of the BHC Act. See letter 
to H. Rodgin Cohen, Esq., Sullivan & Cromwell (First Union Corp.), 
from Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System (June 24, 1999) (finding that a bank holding 
company does not control a mutual fund for which it provides 
investment advisory and other services and that complies with the 
limitations of section 4(c)(7) of the BHC Act (12 U.S.C. 
1843(c)(7)), so long as (i) the BHC reduces its interest in the fund 
to less than 25 percent of the fund's voting shares after a six-
month period, and (ii) a majority of the fund's directors are 
independent of the BHC and the BHC cannot select a majority of the 
board); see also 12 CFR 225.86(b)(3) (authorizing a financial 
holding company to organize, sponsor, and manage a mutual fund so 
long as (i) the fund does not exercise managerial control over the 
entities in which the fund invests, and (ii) the financial holding 
company reduces its ownership in the fund, if any, to less than 25 
percent of the equity of the fund within one year of sponsoring the 
fund or such additional period as the FRB permits).
---------------------------------------------------------------------------

    The final rule excludes from the scope of covered bank DPC 
subsidiaries, portfolio companies held under the

[[Page 56638]]

Small Business Investment Act of 1956, and certain companies engaged in 
the business of making public welfare investments. In general, there 
are legal restrictions and other limitations on the involvement of the 
GSIB in the operations of these kinds of subsidiaries. Moreover, it is 
unlikely that the disorderly unwind of the QFCs of these subsidiaries 
would impair the orderly resolution of the GSIB. Therefore, the impact 
of these exclusions should be relatively small while responding to 
commenter's concerns and reducing burden.
    Finally, covered banks include almost all U.S. operations of 
Foreign GSIBs--their national banks, Federal savings associations, 
Federal branches, Federal agencies, or subsidiaries of such entities. 
The final rule, like the proposed rule, covers only the U.S. operations 
of Foreign GSIBs. To provide the same treatment for foreign GSIBs and 
U.S. GSIBs, the final rule also excludes DPC subsidiaries, portfolio 
companies held under the Small Business Investment Act of 1956, and 
public welfare investments of foreign GSIBs.\42\
---------------------------------------------------------------------------

    \42\ See final rule Sec.  47.3(b)(3)(ii)-(iv).
---------------------------------------------------------------------------

    The final rule does not exempt U.S. Federal branches and agencies 
of Foreign GSIBs or U.S. subsidiaries of Foreign GSIBs that are not 
held under an IHC pursuant to a FRB order, as requested by certain 
commenters. As with the coverage of subsidiaries of U.S. GSIBs, 
coverage of the U.S. operations of foreign GSIBs will enhance the 
prospects for an orderly resolution of the Foreign GSIB and its U.S. 
operations. In particular, covering QFCs that involve any U.S. 
subsidiary or Federal branch or agency of a Foreign GSIB will reduce 
the potentially disruptive cancellation of those QFCs if the Foreign 
GSIB or any of its subsidiaries enters resolution, including resolution 
under the U.S. Bankruptcy Code or the U.S. Special Resolution 
Regimes.\43\
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    \43\ The laws and regulations imposed in non-U.S. jurisdictions 
that commenters noted were similar to the requirements of the 
proposed rule do not address resolution under U.S. insolvency or the 
U.S. Special Resolution Regimes.
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C. Covered QFCs (Sections 47.4(a), 47.5(a), 47.7, and 47.8)

1. General Definition
    Proposal. The proposed rule required covered banks to ensure that 
each ``covered QFC'' conforms to the requirements of sections 47.4 and 
47.5. These sections required that a covered QFC (1) contain 
contractual stay-and-transfer provisions similar to those imposed under 
Title II of the Dodd-Frank Act and the FDI Act, and (2) limit the 
exercise of default rights based on the insolvency of an affiliate of 
the covered bank. A ``covered QFC'' was generally defined as any QFC 
that a covered bank enters, executes, or otherwise becomes party to. A 
party to a QFC included a party acting as agent under the QFC. 
``Qualified financial contract'' or ``QFC'' was defined to have the 
same meaning as in Section 210(c)(8)(D) of Title II of the Dodd-Frank 
Act and would include derivatives, swaps, repurchase, reverse 
repurchase, and securities lending and borrowing transactions.\44\
---------------------------------------------------------------------------

    \44\ 81 FR 55381, 55399 (August 19, 2016); 12 U.S.C. 
5390(c)(8)(D).
---------------------------------------------------------------------------

    Comments. The application of the proposed rule's requirements to a 
``covered QFC'' was one of the most commented upon aspects of the 
proposed rule. Certain commenters argued that the definition of QFC in 
Title II of the Dodd-Frank Act was overly broad and imprecise and could 
include agreements that market participants may not expect to be 
subject to the stay-and-transfer provisions of the U.S. Special 
Resolution Regimes. More generally, commenters argued that the proposed 
definition of QFC was too broad and would capture contracts that do not 
present any obstacles to an orderly resolution. Commenters urged the 
OCC to exclude a variety of types of QFCs from the requirements of the 
final rule. In particular, a number of commenters urged the OCC to 
exclude QFCs that do not contain any transfer restrictions or default 
rights, because these types of QFCs do not give rise to the risk that 
counterparties will exercise their contractual rights in a manner that 
is inconsistent with the provisions of the U.S. Special Resolution 
Regimes.
    Commenters named several examples of contracts that fall into this 
category, including cash market securities transactions, certain spot 
foreign exchange (FX) transactions (including securities conversion 
transactions), retail brokerage agreements, retirement/Individual 
Retirement Account (IRA) account agreements, margin agreements, options 
agreements, FX forward master agreements, and delivery versus payment 
client agreements. Commenters contended that these types of QFCs number 
in the millions at some firms and that remediating these contracts to 
include the express provisions required by the final rule would require 
an enormous client outreach effort that would be extremely burdensome 
and costly while providing no meaningful resolution benefits. For 
example, commenters pointed out that for certain types of transactions, 
such as cash securities transactions, FX spot transactions, and retail 
QFCs, such a requirement could require an overhaul of existing market 
practice and documentation that affects hundreds of thousands, if not 
millions, of transactions occurring on a daily basis and significant 
education of the general market.
    Commenters also urged the OCC to exclude QFCs that do not contain 
any default or cross-default rights but that may contain transfer 
restrictions. Commenters contended that examples of these types of 
agreements included investment advisory account agreements with retail 
customers, which contain transfer restrictions as required by Section 
205(a)(2) of the Investment Advisers Act of 1940, but no direct default 
or cross-default rights; underwriting agreements; \45\ and client 
onboarding agreements. A few commenters provided prime brokerage or 
margin loan agreements as examples of transactions that generally do 
not have default or cross-default rights but may have transfer 
restrictions. Another commenter also requested the exclusion of 
securities market transactions that generally settle in the short term, 
do not impose ongoing or continuing obligations on either party after 
settlement, and do not typically include default rights.\46\ In these 
cases, commenters contended that remediation of these agreements would 
be burdensome with no meaningful resolution benefits.
---------------------------------------------------------------------------

    \45\ However, some commenters noted that underwriting, purchase, 
subscription, or placement agency agreements may contain rights that 
could be construed as direct default rights or cross-default rights.
    \46\ In the alternative, the commenter requested that such 
securities market transactions be excluded to the extent they are 
cleared, processed, and settled through (or subject to the rules of) 
financial market utilities through expansion of the proposed 
exemption for transactions with central counterparties. This aspect 
of the comment is addressed in the subsequent section discussing 
requests for expansion of the proposed exemption for transactions 
with central counterparties.
---------------------------------------------------------------------------

    Commenters also argued for the exclusion of a number of other types 
of contracts from the definition of covered QFC in the final rule. In 
particular, a number of commenters urged the OCC to exclude contracts 
issued in the capital markets or related to a capital market issuance, 
like warrants or a certificate representing a call option, typically on 
a security or a basket of securities. Although warrants issued in 
capital markets may contain direct default and cross-default rights as 
well

[[Page 56639]]

as transfer restrictions, commenters argued that remediation of 
outstanding warrant agreements would be difficult, if not impossible, 
since remediation would require the affirmative vote of a substantial 
number of separate voting groups of holders to amend the terms of the 
instruments and that obtaining such consent could be expensive due to 
``hold-out'' premiums. Commenters also argued that since these 
instruments are traded in the markets, it is not possible for an issuer 
to ascertain whether a particular investor in such instruments has also 
entered into other QFCs with the dealer or any of its affiliates (or 
vice versa) for purposes of complying with the proposed mechanism for 
remediation of existing QFCs.
    Commenters argued that issuers would be able to comply if the final 
rule's requirements applied only on a prospective basis with respect to 
new issuances, since new investors could be informed of the terms of 
the warrant at the time of purchase and no after-the-fact consent would 
be required, as is the case with existing outstanding warrants. 
Commenters expressed the view that prospective application of the final 
rule's requirements to warrants would allow time for firms to develop 
new warrant agreements and warrant certificates, to engage in client 
outreach efforts, and to make any appropriate public disclosures. 
Commenters suggested that the requirements of the final rule should 
only apply to such instruments issued after the effective date of the 
final rule and that the compliance period for such new issuances be 
extended to allow time to establish new issuance programs that comply 
with the final rule's requirements. Other examples of contracts in this 
category given by commenters include contracts with special purpose 
vehicles that are multi-issuance note platforms, which commenters urged 
would be difficult to remediate for similar reasons to warrants other 
than on a prospective basis.
    Commenters also urged the exclusion of contracts for the purchase 
of commodities in the ordinary course of business (e.g., utility and 
gas energy supply contracts) or physical delivery commodity contracts 
more broadly.\47\ In general, commenters argued that exempting these 
contracts would not increase systemic risk but would help ensure the 
smooth operation of utilities and the physical commodities markets.\48\ 
Commenters indicated that failure to make commodity deliveries on time 
can result in the accrual of damages and penalties beyond the accrual 
of interest (e.g., demurrage and other fines in shipping) and that 
counterparties may not be able to obtain appropriate compensation for 
amendment of default rights due to the difficulty of pricing the risk 
associated with an operational failure due to the failure to deliver a 
commodity on time. Commenters also contended that agreements with power 
operators governed by regulatory tariffs would be difficult, if not 
impossible, to remediate.\49\
---------------------------------------------------------------------------

    \47\ For example, some commenters urged the exclusion of all 
contracts requiring physical delivery between commercial entities in 
the course of regulatory business such as (i) contracts subject to a 
Federal Energy Regulatory Commission-filed tariff; (ii) contracts 
that are traded in markets overseen by independent system operators 
or regional transmission operators; (iii) retail electric contracts; 
(iv) contracts for storage or transportation of commodities; (v) 
contracts for financial services with regulated financial entities 
(e.g., brokerage agreements and futures account agreements); and 
(vi) public utility contracts.
    \48\ One commenter also argued that utility and gas supply 
contracts are covered sufficiently in Section 366 of the U.S. 
Bankruptcy Code. This section of the U.S. Bankruptcy Code places 
restrictions on the ability of a utility to ``alter, refuse, or 
discontinue service to, or discriminate against, the trustee or the 
debtor solely on the basis of the commencement of a case under [the 
U.S. Bankruptcy Code] or that a debt owed by the debtor to such 
utility for service rendered before the order for relief was not 
paid when due.'' 11 U.S.C. 366. The purpose and effect of Sec.  47.5 
of the final rule and Section 366 of the U.S. Bankruptcy Code are 
different and therefore do not serve as substitutes. Section 366 of 
the U.S. Bankruptcy Code does not address cross-defaults or provide 
additional clarity regarding the application of the U.S. Special 
Resolution Regimes. Similarly, Sec.  47.5 of the final rule does not 
prevent a covered entity from entering into a covered QFC that 
allows the counterparty to exercise default rights once a covered 
entity that is a direct party either enters bankruptcy or fails to 
pay or perform under the QFC.
    \49\ One commenter also requested exclusion of overnight 
transactions, particularly overnight repurchase agreements, arguing 
that such transactions present little risk of creating negative 
liquidity effects and that an express exclusion for such 
transactions may increase the likelihood that such contracts would 
remain viable funding sources in times of liquidity stress. Although 
the final rule does not exempt overnight repo transactions, the 
final rule may have limited if any effect on such transactions. As 
described below, the final rule provides a number of exemptions that 
may apply to overnight repo and similar transactions. Moreover, the 
restrictions on default rights in Sec.  47.5 of the final rule do 
not apply to any right under a contract that allows a party to 
terminate the contract on demand or at its option at a specified 
time, or from time to time, without the need to show cause. See 
final rule Sec.  47.2 (defining ``default right''). Therefore, Sec.  
47.5 does not restrict the ability of QFCs, including overnight 
repos, to terminate at the end of the term of the contract.
---------------------------------------------------------------------------

    Final Rule. The final rule applies to any ``covered QFC,'' which 
generally is defined as any ``in-scope QFC'' that a covered entity 
enters into, executes, or to which the covered entity otherwise becomes 
a party.\50\ As under the proposed rule, ``qualified financial 
contract'' or ``QFC'' is defined in the final rule as in Section 
210(c)(8)(D) of Title II of the Dodd-Frank Act and includes swaps, repo 
and reverse repo transactions, securities lending and borrowing 
transactions, commodity contracts, and forward agreements.\51\ Parties 
that enter into contracts with covered entities have been potentially 
subject to the stay-and-transfer provisions of Title II of the Dodd-
Frank Act since its enactment. Consistent with Title II, the final rule 
does not exempt QFCs involving physical commodities. However, as 
explained below, the final rule responds to concerns regarding the 
smooth operation of physical commodities end users and markets by 
allowing counterparties to terminate QFCs based on the failure to pay 
or perform.
---------------------------------------------------------------------------

    \50\ See final rule Sec.  47.3(c).
    \51\ See final rule Sec.  47.2. See also 12 U.S.C. 
5390(c)(8)(D).
---------------------------------------------------------------------------

    In response to concerns raised by commenters, the final rule 
exempts QFCs that have no transfer restrictions or default rights, as 
these QFCs have no provisions that the rule is intended to address. The 
final rule effects this exemption by limiting the scope of QFCs 
potentially subject to the rule to those QFCs that explicitly restrict 
the transfer of a QFC from a covered bank or explicitly provide default 
rights that may be exercised against a covered bank (in-scope 
QFCs).\52\ This change addresses a major concern raised by commenters 
regarding the overbreadth of the definition of ``covered QFC'' in the 
proposed rule. The change also mitigates the burden of complying with 
the proposed rule without undermining its purpose by not requiring 
covered banks to conform contracts that do not contain the types of 
default rights and transfer restrictions that the final rule is 
intended to address. The OCC has declined, however, to exclude QFCs 
that have transfer restrictions (but no default rights or cross-default 
rights), as requested by certain commenters, as such QFCs would have 
provisions (i.e., transfer restrictions) that are subject to the 
requirements of the final rule and could otherwise impede the orderly 
resolution of a covered entity or its affiliate.
---------------------------------------------------------------------------

    \52\ See final rule Sec.  47.3(d).
---------------------------------------------------------------------------

    The final rule provides that a covered bank is not required to 
conform certain investment advisory contracts described by commenters 
(i.e., investment advisory contracts with retail advisory customers 
\53\ of the covered bank that

[[Page 56640]]

only contain the transfer restrictions required by Section 205(a) of 
the Investment Advisers Act). The final rule also exempts existing 
warrants evidencing a right to subscribe or to otherwise acquire a 
security of a covered bank or its affiliate.\54\ The final rule 
excludes these types of agreements since there is persuasive evidence 
that these types of contracts would be burdensome to conform and that 
it is unlikely that excluding such contracts from the requirements of 
the final rule would impair the orderly resolution of a GSIB.\55\
---------------------------------------------------------------------------

    \53\ See final rule Sec.  47.8(c)(1). The final rule defines 
retail customer or counterparty by reference to the Board's 
Regulation WW. See 12 CFR 249.3; see also FR 2052a, https://www.federalreserve.gov/reportforms/forms/FR_2052a20161231_f.pdf. 
Covered entities should be familiar with this definition and its 
application.
    \54\ See final rule Sec.  47.8(c)(2). Warrants issued after the 
effective date of the final rule are not excluded from the 
requirements of the final rule.
    \55\ These exemptions are not interpretations of the definition 
of QFC.
---------------------------------------------------------------------------

    The final rule also provides the OCC with authority to exempt one 
or more covered banks from conforming certain contracts or types of 
contracts to the final rule after considering, in addition to any other 
factor the OCC deems relevant, the burden the exemption would relieve 
and the potential impact of the exemption on the resolvability of the 
covered bank or its affiliates.\56\ Covered banks that request that the 
OCC exempt additional contracts from the final rule should be prepared 
to provide information in support of their requests. The OCC expects to 
consult as appropriate with the FRB and FDIC during its consideration 
of any such request.
---------------------------------------------------------------------------

    \56\ See final rule Sec.  47.8(d).
---------------------------------------------------------------------------

2. Definition of Counterparty
    Proposal. As noted above, the proposed rule applied to any 
``covered QFC,'' generally defined as a QFC that a covered entity 
enters after the effective date and a QFC entered earlier, but only if 
the covered entity or its affiliate enters a new QFC with the same 
person or an affiliate of the same person.\57\ ``Affiliate'' in the 
proposed rule was defined in the same manner as under the BHC Act to 
mean any company that controls, is controlled by, or is under common 
control with another company.\58\ As noted above, ``control'' under the 
BHC Act means the power to vote 25 percent or more of any class of 
voting securities; control in any manner the election of a majority of 
the directors or trustees; or exercise of a controlling influence over 
the management or policies.\59\
---------------------------------------------------------------------------

    \57\ See proposed rule Sec.  47.4(a). For convenience, this 
preamble generally refers to ``a covered entity's QFCs'' or ``QFCs 
to which a covered entity is party'' as shorthand to encompass this 
definition. [EDIT]
    \58\ See 12 CFR 252.2 (defining ``affiliate'').
    \59\ See 12 U.S.C. 1841(k).
---------------------------------------------------------------------------

    Comments. Commenters argued that requiring remediation by a covered 
bank of an existing QFC if any entity in the GSIB group entered into a 
new QFC with an affiliate of the counterparty would make compliance 
with the proposed rule overly burdensome.\60\ Commenters pointed out 
that this requirement would demand that the GSIB and the covered bank 
track each counterparty's organizational structure by relying on 
information provided by counterparties, which would subject 
counterparties to enhanced tracking and reporting burdens. Commenters 
requested that the phrase ``or affiliate of the same person'' be 
deleted from the definition of covered QFC and argued that such a 
modification would not undermine the ultimate goals of the rule since 
existing QFCs with the counterparty's affiliate would still have to be 
remediated if the covered entity or its affiliate entered into a new 
QFC with that counterparty affiliate. In the alternative, commenters 
argued that an affiliate of a counterparty be established by reference 
to financial consolidation principles rather than BHC Act control, 
since counterparties may not be familiar with BHC Act control. 
Commenters argued that many counterparties are not regulated BHCs and 
would be unfamiliar with BHC Act control. Some commenters also argued 
that a new QFC with one fund in a fund family should not result in 
other funds in the fund family being required to conform their pre-
existing QFCs with the covered bank or an affiliate.
---------------------------------------------------------------------------

    \60\ One commenter believed that the burden of conforming 
contracts with all affiliates of a counterparty would be too great, 
whether defined in terms of BHC Act control or financial 
consolidation principles, even though the burden would be reduced by 
definition in terms of financial consolidation principles.
---------------------------------------------------------------------------

    Final Rule. The final rule's definition of ``covered QFC'' has been 
substantially modified to address the concerns raised by commenters 
with respect to the remediation of existing QFCs. In particular, the 
final rule provides that a covered QFC includes a QFC that the covered 
bank entered, executed, or otherwise became a party to before January 
1, 2019, if the covered bank or any affiliate that is a covered entity 
(under the FRB final rule), covered bank, or covered FSI (under the 
FDIC final rule) also enters, executes, or otherwise becomes a party to 
a QFC with the same person or a consolidated affiliate of the same 
person on or after January 1, 2019.\61\
---------------------------------------------------------------------------

    \61\ See final rule Sec.  47.3(c).
---------------------------------------------------------------------------

    With respect to counterparties, the final rule has been changed to 
define ``consolidated affiliate'' by reference to financial 
consolidation principles, as generally reflected by U.S. GAAP or 
International Financial Reporting Standards (IFRS) \62\ instead of by 
reference to the BHC Act. As commenters pointed out, counterparties 
will already track and monitor financially consolidated affiliates 
under either U.S. GAAP or IFRS. Moreover, exposures to a non-
consolidated affiliate may be captured as a separate counterparty 
(e.g., when the non-consolidated affiliate enters a new QFC with the 
covered bank or an affiliate of the covered bank that is either a 
covered bank, covered entity under FRB final rule, or a covered FSI 
under the FDIC final rule). As a consequence, modifying the coverage of 
affiliates in this manner addresses concerns raised by commenters 
regarding burden while still providing sufficient incentives to 
remediate existing covered QFCs.
---------------------------------------------------------------------------

    \62\ See final rule Sec.  47.2.
---------------------------------------------------------------------------

    As discussed, the definition of ``covered QFC'' is intended to 
limit the restrictions of the final rule to those financial 
transactions whose disorderly unwind has substantial potential to 
frustrate the orderly resolution of a GSIB. By adopting the Dodd-Frank 
Act's definition of QFC, with the modifications described above, the 
final rule generally extends stay-and-transfer protections to the same 
types of transactions as Title II of the Dodd-Frank Act. In this way, 
the final rule enhances the prospects for an orderly resolution in 
bankruptcy and under the U.S. Special Resolution Regimes.
3. Exclusion of Cleared QFCs and Financial Market Utilities
    Proposal. The proposed rule excluded from the definition of 
``covered QFC'' all QFCs that are cleared through a central 
counterparty (CCP). The proposed rule, however, did not exclude from 
the definition of ``covered QFC'' QFCs that are cleared, processed, or 
settled through the facilities of a financial market utility (FMU). The 
proposed rule noted that the OCC was continuing to consider the 
appropriate treatment of centrally cleared QFCs, in light of 
differences between cleared and uncleared QFCs with respect to 
contractual arrangements, counterparty credit risk, default management, 
and supervision.
    Comments. Commenters generally expressed support for the exclusion 
of QFCs that are cleared through a CCP, but some commenters requested 
that the OCC broaden this exclusion in the final rule. In particular, a 
number of commenters urged the OCC to exclude the ``client-facing leg'' 
of a cleared swap

[[Page 56641]]

where a clearing member faces a CCP on one leg of the transaction and 
faces the client on an otherwise identical offsetting transaction.\63\ 
One commenter requested the OCC confirm its understanding that ``FCM 
agreements,'' which the commenter defined as futures and cleared swaps 
agreements with a futures commission merchant (FCM), are excluded 
because FCM agreements ``are only QFCs to the extent that they relate 
to futures and swaps and, since futures and cleared swaps are excluded, 
the FCM [a]greements are also excluded.'' \64\ The commenter requested, 
in the alternative, that the final rule expressly exclude such 
agreements.
---------------------------------------------------------------------------

    \63\ Commenters argued that, in the European-style principal-to-
principal clearing model, the clearing member faces the CCP on one 
swap (the ``CCP-facing leg''), and the clearing member, frequently a 
covered bank or covered entity (under the FRB Proposed Rule), faces 
the client on an otherwise identical, offsetting swap (the ``client-
facing leg''). Under the proposed rule, only the CCP-facing leg of 
the transaction was excluded, even though the client-facing leg is 
necessary to the mechanics of clearing and is only entered into by 
the clearing member to effectuate the cleared transaction. 
Commenters argued that the proposed rule thus treated two pieces of 
the same transaction differently, which could result in an imbalance 
in insolvency or resolution and that the possibility of such an 
imbalance for the clearing member could expose the clearing member 
to unnecessary and undesired market risk. Commenters urged the OCC 
to adopt the same approach taken under Sec.  2 of the Universal 
Protocol, which allows the client-facing leg of the cleared swap 
with the clearing member that is a covered bank or covered entity to 
be closed out substantially contemporaneously with the CCP-facing 
leg in the event the CCP were to take action to close out the CCP-
facing leg.
    Some commenters requested clarification that transactions 
between a covered bank or covered entity client and its clearing 
member (as opposed to transactions where the covered bank or covered 
entity is the clearing member) would be subject to the rule's 
requirements, since this would be consistent with the Universal 
Protocol. As explained in this section, the exemption in the final 
rule regarding CCPs does not depend on whether the covered bank or 
covered entity is a clearing member or a client. A covered QFC--
generally a QFC to which a covered bank or covered entity is a 
party--is exempted from the requirements of the final rule if a CCP 
is also a party.
    \64\ Letter to Legislative and Regulatory Affairs Division, 
Office of the Comptroller of the Currency, from James M. Cain, 
Sutherland Asbill & Brennan LLP, writing on behalf of the eleven 
Federal Home Loan Banks, at 2-3 (October 18, 2016).
---------------------------------------------------------------------------

    A few commenters requested that the OCC modify the definition of 
``central counterparty,'' which was defined by reference to the FRB 
Regulation YY \65\ to mean ``a counterparty (for example, a clearing 
house) that facilitates trades between counterparties in one or more 
financial markets by either guaranteeing trades or novating trades'' in 
the proposed rule.\66\ These commenters argued that a CCP does far more 
than ``facilitate'' or ``guarantee'' trades and that a CCP ``interposes 
itself between counterparties to contacts traded in one or more 
financial markets, becoming the buyer to every seller and the seller to 
every buyer and thereby ensuring the performance of open contracts.'' 
\67\ As an alternative definition of CCP, these commenters suggested 
the final rule should define CCP to mean: ``an entity (for example, a 
clearinghouse or similar facility, system, or organization) that, with 
respect to an agreement, contract, or transaction: (i) Enables each 
party to the agreement contract, or transaction to substitute, through 
novation or otherwise, the credit of the CCP for the credit of the 
parties; and (ii) arranges or provides, on a multilateral basis, for 
the settlement or netting of obligations resulting from such 
agreements, contracts, or transactions executed by participants in the 
CCP.'' \68\
---------------------------------------------------------------------------

    \65\ In order to minimize the number of cross references in the 
definition section, where feasible, the rule replaces cross 
references with the actual text of the definition.
    \66\ 12 CFR 217.2.
    \67\ Letter to Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, from Walt L. Lukken, 
President and CEO, Futures Industry Association, at 8 (October 17, 
2016) (citing Principles of Financial Market Infrastructures (April 
2012), published by the Committee on Payment and Settlement Systems 
and the International Organization of Securities Commissions, at 9).
    \68\ Id. at 9.
---------------------------------------------------------------------------

    Commenters also urged the OCC to exclude from the requirements of 
the final rule all QFCs that are cleared, processed, or settled through 
the facilities of an FMU, as defined in Section 803(6) of the Dodd-
Frank Act,\69\ or that are entered into subject to the rules of an 
FMU.\70\ For example, commenters argued that QFCs with FMUs, such as 
the provision of an extension of credit by a central securities 
depository (CSD) to a covered bank that is a member of the CSD in 
connection with the settlement of securities transactions, should be 
excluded from the requirements of the final rule. Commenters contended 
that, similar to CCPs, the relationship between a covered entity and 
FMU is governed by the rules of the FMU and that there are no market 
alternatives to continuing to transact with FMUs. Commenters argued 
that FMUs generally should be excluded for the same reasons as CCPs and 
that a broader exemption to cover FMUs would serve to mitigate the 
systemic risk of a GSIB in distress, an underlying objective of the 
rule's requirements. Commenters contended that such an exclusion would 
be consistent with the treatment of FMUs under regulation adopted by 
the United Kingdom (U.K.) and Germany. Some commenters also requested 
that related or underlying agreements to CCP-cleared QFCs and QFCs 
entered into with other FMUs also be excluded, since such agreements 
``form an integrated whole with [those] QFCs'' and such an exemption 
would facilitate the continued expansion of the clearing and settlement 
framework and the benefits of such a framework.\71\ One commenter urged 
that the final rule should not in any manner restrict an FMU's ability 
to close out a defaulting clearing member's portfolio, including 
potential liquidation of cleared contracts.
---------------------------------------------------------------------------

    \69\ 12 U.S.C. 5462(6). In general, Title VIII of the Dodd-Frank 
Act defines ``financial market utility'' to mean any person that 
manages or operates a multilateral system for the purpose of 
transferring, clearing, or settling payments, securities, or other 
financial transactions among financial institutions or between 
financial institutions and the person. Id.
    \70\ As discussed, one commenter who recommended an exclusion of 
securities market transactions that generally settle in the short 
term, do not impose ongoing or continuing obligations on either 
party after settlement, and do not typically include the default 
rights targeted by the proposed rule, requested this treatment in 
the alternative.
    \71\ Letter to Legislative and Regulatory Affairs Division, 
Office of the Comptroller of the Currency, from Larry E. Thompson, 
Vice Chairman and General Counsel, The Depository Trust & Clearing 
Corporation, at 2 (October 17, 2016); Letter to Robert deV. 
Frierson, Secretary, Board of Governors of the Federal Reserve 
System, from Larry E. Thompson, Vice Chairman and General Counsel, 
The Depository Trust & Clearing Corporation, at 6 (August 5, 2016).
---------------------------------------------------------------------------

    Final Rule. The issues that the final rule is intended to address 
with respect to non-cleared QFCs may also exist in the context of 
centrally cleared QFCs. However, clearing through a CCP provides unique 
benefits to the financial system while presenting unique issues related 
to the cancellation of cleared contracts. Accordingly, the OCC 
continues to believe it is appropriate to exclude centrally cleared 
QFCs, in light of differences between cleared and non-cleared QFCs with 
respect to contractual arrangements, counterparty credit risk, default 
management, and supervision. The OCC has not extended the exclusion for 
CCPs to the client-facing leg of a cleared transaction because 
bilateral trades between a GSIB and a non-CCP counterparty are the 
types of transactions that the final rule intends to address and 
because nothing in the final rule would prohibit a covered entity 
clearing member and a client from agreeing to terminate or novate a 
trade to balance the clearing member's exposure. The final rule 
continues to define central counterparty as a counterparty that 
facilitates trades between counterparties in one or more financial 
markets by either guaranteeing trades or novating contracts, which is a 
broad definition used in the regulatory

[[Page 56642]]

capital rules \72\ that should be familiar to market participants.
---------------------------------------------------------------------------

    \72\ See final rule Sec.  47.2. The proposed rule defined CCP by 
cross reference to the definition in the FRB Proposed Rule, which in 
turn cross referenced the definition in the FRB Regulation Q 
(Capital Adequacy Regulations). The definition in Regulation Q (12 
CFR 217.2) is the common definition of CCP also used in the OCC 
capital adequacy rule (12 CFR 3.2). For ease of reference, the final 
rule replaces these cross references with the text of the definition 
of CCP used in 12 CFR 3.2 and 217.2.
---------------------------------------------------------------------------

    The final rule also makes clear that, if one or more FMUs are the 
only counterparties to a covered QFC, the covered bank is not required 
to conform the covered QFC to the final rule.\73\ Therefore, an FMU's 
default rights and transfer restrictions under the covered QFC are not 
affected by the final rule. However, this exclusion would not include a 
covered QFC with a non-FMU counterparty, even if the QFC is settled by 
an FMU or if the FMU is a party to such QFC, because the final rule is 
intended to address default rights of non-FMU parties. For example, if 
two covered banks engage in a bilateral QFC that is facilitated by an 
FMU, and in the course of this facilitation each covered entity 
maintains a QFC solely with the FMU, then the final rule would not 
apply to each QFC between the FMU and each covered bank but the 
requirements of the final rule would apply to the bilateral QFC between 
the two covered banks. This approach ensures that QFCs that are 
directly with FMUs are treated in a manner similar to transactions 
between covered entities and CCPs, but also ensures that QFCs conducted 
by covered banks that are related to the direct QFC with the FMU remain 
subject to the final rule's requirements.
---------------------------------------------------------------------------

    \73\ See final rule Sec.  47.8(a)(2). In response to commenters, 
the final rule uses the definition of FMU in Title VIII of the Dodd-
Frank Act and may apply, for purposes of the final rule, to entities 
regardless of jurisdiction. The definition of FMU in the final rule 
includes a broader set of entities, in addition to CCPs. However, 
the definition in the final rule does not include depository 
institutions that are engaged in carrying out banking-related 
activities, including providing custodial services for tri-party 
repurchase agreements. The definition also explicitly excludes 
certain types of entities (e.g., registered futures associations, 
swap data repositories) and other types of entities that perform 
certain functions for or related to FMUs (e.g., FCMs).
---------------------------------------------------------------------------

    The final rule does not explicitly exclude futures and cleared 
swaps agreements with a FCM, as requested by a commenter. The nature 
and scope of the requested exclusion is unclear, and therefore, it is 
unclear whether the exclusion would be necessary, on the one hand, or 
overbroad, on the other hand. However, the final rule makes a number of 
other clarifications and exemptions that may help address the 
commenter's concern regarding FCM agreements.
4. Exclusion of Certain QFCs Under Foreign Bank Multi-Branch Master 
Agreements
    Proposed Rule. To avoid imposing unnecessary restrictions on QFCs 
that are not closely connected to the United States, the proposed rule 
excluded from the definition of ``covered QFC'' certain QFCs of Foreign 
GSIBs that lack a close connection to the Foreign GSIB's U.S. 
operations.\74\ The proposed definition of ``QFC'' included master 
agreements that apply to QFCs.\75\ Master agreements are contracts that 
contain general terms that the parties wish to apply to multiple 
transactions between them; having executed the master agreement, the 
parties can then include those terms in future contracts through 
reference to the master agreement. Moreover, the Dodd-Frank Act's 
definition of ``qualified financial contract,'' which was proposed, 
treats master agreements for QFCs together with all supplements to the 
master agreement (including underlying transactions) as a single 
QFC.\76\
---------------------------------------------------------------------------

    \74\ See proposed rule Sec.  47.8.
    \75\ See proposed rule Sec.  47.2.
    \76\ 12 U.S.C. 5390(c)(8)(D)(viii); see also 12 U.S.C. 
1821(e)(8)(D)(vii); 109 H. Rpt. 31, Prt. 1 (April 8, 2005) 
(explaining that a ``master agreement for one or more securities 
contracts, commodity contracts, forward contracts, repurchase 
agreements or swap agreements will be treated as a single QFC under 
the [FDI Act] or the [Federal Credit Union Act] (but only with 
respect to the underlying agreements are themselves QFCs)'').
---------------------------------------------------------------------------

    Foreign GSIBs have master agreements that permit transactions to be 
entered into both at a Federal branch or agency of the Foreign GSIB and 
at a non-U.S. location of the Foreign GSIB (such as a foreign branch). 
Notwithstanding the proposed rule's general treatment of a master 
agreement and all QFCs thereunder as a single QFC, the proposed rule 
would have excluded QFCs under such a ``multi-branch master agreement'' 
that are not booked at a covered bank and for which no payment or 
delivery may be made at a covered bank.\77\ Under the proposed rule, a 
multi-branch master agreement was a covered QFC with respect to QFC 
transactions that are booked at a covered bank or for which payment or 
delivery may be made at a covered bank.
---------------------------------------------------------------------------

    \77\ See proposed rule Sec.  47.8. With respect to a Federal 
branch or agency of a Foreign GSIB, a multi-branch master agreement 
that is a covered QFC solely because the master agreement permits 
agreements or transactions that are QFCs to be entered into at one 
or more Federal branches or agencies of the Foreign GSIB was 
considered a covered QFC for purposes of the proposed rule only with 
respect to such agreements or transactions booked at such Federal 
branches and agencies or for which a payment or delivery may be made 
at such Federal branches or agencies.
---------------------------------------------------------------------------

    Comments. Commenters expressed support for this exclusion, but 
requested that the requirement exclude from the definition of covered 
QFC those transactions under master agreements where payments and 
deliveries may be made by or to the Federal branch or agency so long as 
the transactions or assets are not booked in the Federal branch or 
agency. These commenters argued that the ability to make payments or 
deliveries alone does not make a QFC sufficiently closely connected to 
the United States to raise the concerns about resolution that the 
proposed rule was intended to address. Commenters also argued that the 
requirement to include new contractual terms in a QFC where payment or 
delivery may occur in the United States would require Foreign GSIBs to 
amend many additional QFCs booked abroad, many of which must also be 
amended to comply with contractual stay requirements of the Foreign 
GSIBs' home country regulatory regimes. Commenters argued that amending 
such QFCs under multi-branch master agreements that are not booked in 
the United States would require some Foreign GSIBs to amend thousands 
of contracts at significant cost and would impose a disproportionate 
burden on Foreign GSIBs as compared to U.S. GSIBs. These commenters 
argued this would impose a significant burden on non-U.S. covered banks 
with no benefit to U.S. financial stability, as these QFCs would not be 
expected to be subject to a U.S. resolution regime.
    One commenter also recommended that multi-branch master agreements 
be treated as a single QFC, rather than requiring the application of 
different requirements to different transactions thereunder, so as to 
align the proposed rule's requirements with current industry-standard 
documentation and to avoid additional implementation hurdles and costs. 
The commenter recommended that the entirety of a multi-branch master 
agreement and underlying transactions be a covered QFC if a new QFC 
with the counterparty or its consolidated affiliates is booked to the 
Federal branch or agency after the compliance date or if a new QFC is 
entered into with an affiliate of the Federal branch or agency that is 
also subject to the requirements.
    Final Rule. The final rule has been modified to address the 
concerns raised by commenters. In particular, the final rule is 
modified to provide that, with respect to a Federal branch or agency of 
a Foreign GSIB, a Foreign GSIB multi-branch master agreement that is a

[[Page 56643]]

covered QFC solely because the master agreement permits agreements or 
transactions that are QFCs to be entered into at one or more Federal 
branches or agencies of the Foreign GSIB will be considered a covered 
QFC for purposes of this final rule only with respect to such 
agreements or transactions booked at such Federal branches and 
agencies.\78\ The final rule does not provide that such an agreement 
will be a covered QFC solely because payment or delivery may be made at 
such Federal branch or agency. These modifications will avoid imposing 
unnecessary restrictions on QFCs that are not closely connected to the 
United States and will mitigate burden and reduce costs on Foreign 
GSIBs without undermining the purpose of the final rule. The purpose of 
this exclusion is to help ensure that, where a Foreign GSIB has a 
multi-branch master agreement, the Foreign GSIB will only have to 
conform those QFCs entered into under the multi-branch master agreement 
that could have the most direct effect on the covered Federal branch or 
agency of the Foreign GSIB and that could therefore have the most 
direct effect on the resolution of the Foreign GSIB and the financial 
stability of the United States.
---------------------------------------------------------------------------

    \78\ See final rule Sec.  47.7.
---------------------------------------------------------------------------

    The final rule does not, as requested by one commenter, deem the 
entirety of a multi-branch master agreement to be a covered QFC if a 
new QFC with the counterparty (or its consolidated affiliate) is booked 
to the covered entity or its affiliate. Many commenters supported 
excluding transactions from multi-branch master netting agreements that 
are not closely connected to the United States. In contrast to the 
proposed rule and these comments, the modification requested by this 
commenter would require transactions that are not booked in the United 
States or otherwise connected to the United States to be conformed to 
the requirements of the final rule. The commenter's concerns regarding 
costs associated with potentially breaking netting sets may nonetheless 
be addressed through adherence to the Universal Protocol or the U.S. 
Protocol, which are discussed below.
5. QFCs With Central Banks and Sovereign Entities
    Proposed Rule. Section 47.7 of the proposed rule provided that a 
covered bank would not be required to conform covered QFCs to which a 
CCP was a party. However, central banks and sovereign entities are not 
included in the proposed rule's definition of CCP consistent with Title 
II of the Dodd-Frank Act and the FDI Act. Therefore, covered QFCs 
entered into with sovereign entities and central banks would be 
required to adhere to the conformance requirements of Sec.  47.6 of the 
proposed rule.
    Comments. Commenters urged the OCC to exclude QFCs with central 
bank and sovereign counterparties from the final rule. Commenters 
argued that sovereign entities might not be willing to agree to 
limitations on their QFC default rights and noted that other countries' 
measures, such as those of the United Kingdom and Germany, consistent 
with their governing laws, exclude central banks and sovereign 
entities. Commenters contended that central banks and sovereign 
entities are sensitive to financial stability concerns and 
resolvability goals, thus reducing the concern that they would exercise 
default rights in a way that would undermine resolvability of a GSIB or 
financial stability. Commenters indicated it was unclear whether 
central banks or sovereign entities would be permitted under applicable 
statutes to enter into QFCs with limited default rights, but did not 
provide specific examples of such statutes.\79\ Commenters further 
noted that these entities did not participate in the development of the 
Universal Protocol and that the Universal Protocol does not provide a 
viable mechanism for compliance with the final rule by these entities.
---------------------------------------------------------------------------

    \79\ These commenters argued that, to the extent central banks 
and sovereign entities are unable or unwilling to agree to 
limitations on their QFC default rights, application of the proposed 
rule's requirements to QFCs with these entities creates a 
significant disincentive for these entities to enter into QFCs with 
covered banks, resulting in the loss of valuable counterparties in a 
way that will hinder market liquidity and covered entity risk 
management.
---------------------------------------------------------------------------

    Final Rule. The OCC continues to believe that covering QFCs with 
sovereign entities and central banks under the final rule is an 
important requirement and has not modified the final rule to address 
the requests made by commenters. Excluding QFCs with sovereign entities 
and central banks would be inconsistent with Title II of the Dodd-Frank 
Act and the FDI Act. Moreover, the mass termination of such QFCs has 
the potential to undermine the resolution of a GSIB and the financial 
stability of the United States. The final rule provides covered banks 
two years to conform covered QFCs with sovereign entities and central 
banks (as well as certain other counterparties, as discussed below). 
This additional time should provide covered banks sufficient time to 
develop separate conformance mechanisms for sovereign entities and 
central banks, if necessary.

D. Definition of ``Default Right''

    Proposed Rule. As discussed previously, a party to a QFC generally 
has a number of rights that it can exercise if its counterparty 
defaults on the QFC by failing to meet certain contractual obligations. 
These rights are generally, but not always, contractual in nature. One 
common default right is a setoff right which is the right to reduce the 
total amount that the non-defaulting party must pay by the amount that 
its defaulting counterparty owes. A second common default right is the 
right to liquidate pledged collateral and use the proceeds to pay the 
defaulting party's net obligation to the non-defaulting party. Other 
common rights include the ability to suspend or delay the non-
defaulting party's performance under the contract or to accelerate the 
obligations of the defaulting party.
    Finally, the non-defaulting party typically has the right to 
terminate the QFC, meaning that the parties would not make payments 
that would have been required under the QFC in the future. The phrase 
``default right'' in Sec.  47.2 of the proposed rule was broadly 
defined to include these common rights as well as ``any similar 
rights.'' Additionally, the definition included all such rights 
regardless of source, including rights existing under contract, 
statute, or common law.
    However, the proposed definition excluded two rights that are 
typically associated with the business-as-usual functioning of a QFC. 
First, same-day netting that occurs during the life of the QFC in order 
to reduce the number and amount of payments each party owes the other 
was excluded from the definition of ``default right.'' \80\ Second, 
contractual margin requirements that arise solely from the change in 
the value of the collateral or the amount of an economic exposure were 
also excluded from the definition.\81\ The effect of these exclusions 
was to leave such rights unaffected by the proposed rule. The 
exclusions were appropriate because the proposed rule is intended to 
improve resolvability by addressing default rights that could disrupt 
an orderly resolution, and not to interrupt the parties' business-as-
usual dealings under a QFC.
---------------------------------------------------------------------------

    \80\ See Proposed Rule Sec.  47.2.
    \81\ See id.
---------------------------------------------------------------------------

    However, certain QFCs are also commonly subject to rights that 
would increase the amount of collateral or margin that the defaulting 
party (or a guarantor) must provide upon an event

[[Page 56644]]

of default. The financial impact of such default rights on a covered 
bank could be similar to the impact of the liquidation and acceleration 
rights discussed previously. Therefore, the proposed definition of 
``default right'' included such rights (with the exception discussed in 
the previous paragraph for margin requirements based solely on the 
value of collateral or the amount of an economic exposure).\82\
---------------------------------------------------------------------------

    \82\ See id.
---------------------------------------------------------------------------

    Finally, contractual rights to terminate without the need to show 
cause, including rights to terminate on demand and rights to terminate 
at contractually specified intervals, were excluded from the definition 
of ``default right'' for purposes the proposed rule's restrictions on 
cross-default rights (Sec.  47.5 of the proposed rule).\83\ This was 
consistent with the proposed rule's objective of restricting only 
default rights that are related, directly or indirectly, to the entry 
into resolution of an affiliate of the covered bank, while leaving 
other default rights unrestricted.
---------------------------------------------------------------------------

    \83\ See Proposed Rule Sec. Sec.  47.2 and 47.5.
---------------------------------------------------------------------------

    Comments. Commenters expressed support for a number of aspects of 
the definition of default rights. For example, a number of commenters 
supported the proposed exclusion from the definition of ``default 
right'' of contractual rights to terminate without the need to show 
cause, noting that such rights exist for a variety of reasons and that 
reliance on these rights is unlikely to result in a fire sale of assets 
during a GSIB resolution. At least one commenter requested that this 
exclusion be expanded to include force majeure events. Commenters also 
expressed support for the exclusion for what commenters referred to as 
``business-as-usual'' payments associated with a QFC. However, these 
commenters requested clarification that certain ``business-as-usual'' 
actions would not be included in the definition of default right, such 
as payment netting, posting and return of collateral, procedures for 
the substitution of collateral and modification to the terms of the 
QFC, and also requested clarification that the definition of ``default 
right'' would not include off-setting transactions to third parties by 
the non-defaulting counterparty. One commenter urged that, if the OCC's 
goal is to provide that a party cannot enforce a provision that 
requires more margin because of a credit downgrade but may demand more 
margin for market price changes, the rule should state so explicitly. 
Another commenter expressed concern that the definition of default 
right in the proposed rule would permit a defaulting covered bank to 
demand collateral from its QFC counterparty as margin due to a market 
price change, but would not allow the non-covered counterparty to 
demand collateral from the covered bank.
    Final Rule. The final rule retains the same definition of ``default 
right'' as that of the proposed rule.\84\ The OCC believes that the 
definition of default right is sufficiently clear and that additional 
modifications are not needed to address the concerns raised by 
commenters. The final rule does not adopt a particular exclusion for 
force majeure events, as requested by certain commenters, as it is not 
clear--without reference to particular contractual provisions--what 
this term would encompass. Moreover, it should be clear that events 
typically considered to be captured by force majeure clauses (e.g., 
natural disasters) would not be related, directly or indirectly, to the 
resolution of an affiliate.\85\
---------------------------------------------------------------------------

    \84\ See final rule Sec.  47.2.
    \85\ See final rule Sec.  47.5(b).
---------------------------------------------------------------------------

    ``Business-as-usual'' rights regarding changes in collateral or 
margin would not be included within the definition of default right to 
the extent that the right or operation of a contractual provision 
arises solely from either a change in the value of collateral or margin 
or a change in the amount of an economic exposure. In response to 
commenters' requests for clarification, this exception includes changes 
in margin due to changes in market price, but does not include changes 
due to counterparty credit risk (e.g., credit rating downgrades). 
Therefore, the right of either party to a covered QFC to require margin 
due to changes in market price would be unaffected by the definition of 
default right. Moreover, default rights that arise before a covered 
bank or its affiliate enters resolution, and that would not be affected 
by the stay-and-transfer provisions of the U.S. Special Resolution 
Regimes also would not be affected.
    With respect to transactions with third parties, the final rule, 
like the proposed rule, does not require covered banks to address 
default rights in QFCs solely between parties that are not covered 
banks (e.g., off-setting transactions to third parties by the non-
defaulting counterparty, to the extent none are covered banks).

E. Required Contractual Provisions Related to U.S. Special Resolution 
Regimes (Sec.  47.4)

    Proposed Rule. The proposed rule generally would have required a 
covered QFC to explicitly provide both (a) that the transfer of the QFC 
(and any interest or obligation in or under it and any property 
collateralizing it) from the covered bank to a transferee would be 
effective to the same extent as it would be under the U.S. Special 
Resolution Regimes if the covered QFC were governed by the laws of the 
United States or of a state of the United States and (b) that default 
rights with respect to the covered QFC that could be exercised against 
a covered bank could be exercised to no greater extent than they could 
be exercised under the U.S. Special Resolution Regimes if the covered 
QFC were governed by the laws of the United States or of a state of the 
United States.\86\ The proposed rule would define the term ``U.S. 
Special Resolution Regimes'' to mean the FDI Act \87\ and Title II of 
the Dodd-Frank Act,\88\ along with regulations issued under those 
statutes.\89\
---------------------------------------------------------------------------

    \86\ See Proposed Rule Sec.  47.4.
    \87\ 12 U.S.C. 1811-1835a.
    \88\ 12 U.S.C. 5381-5394.
    \89\ See Proposed Rule Sec.  47.2.
---------------------------------------------------------------------------

    Comments. A number of commenters noted that the wording of these 
requirements in proposed Sec.  47.4 was confusing and could be read to 
be inconsistent with the intent of the section. In response to these 
comments, the final rule makes clearer that the substantive 
restrictions apply only in the event the covered bank (or, in the case 
of the requirement regarding default rights, its affiliate) becomes 
subject to a proceeding under a U.S. Special Resolution Regime.\90\
---------------------------------------------------------------------------

    \90\ See id.
---------------------------------------------------------------------------

    A number of commenters argued that QFCs should be exempt from the 
requirements of Sec.  47.4 of the proposed rule if the QFC is governed 
by U.S. law. An example of such a QFC provided by commenters includes 
the standard form repurchase and securities lending agreement published 
by the Securities Industry and Financial Markets Association. These 
commenters argued that counterparties to such agreements are already 
required to observe the stay-and-transfer provisions of the FDI Act and 
Title II of the Dodd-Frank Act, as mandatory provisions of U.S. Federal 
law, and that requiring an amendment of these types of QFCs to include 
the express provisions required under Sec.  47.4 would be redundant and 
would not provide any material resolution benefit, but would 
significantly increase the remediation burden on covered banks.
    Other commenters suggested a three-prong test of ``nexus with the 
United States'' for purposes of recognizing an exclusion from the 
express acknowledgment of the requirements of Sec.  47.4 of the 
proposed rule. In

[[Page 56645]]

particular, these commenters argued that the presence of two factors, 
in addition to the contract being governed by U.S. law, would provide 
greater certainty that courts would apply the stay-and-transfer 
provisions of the FDI Act and Title II of the Dodd-Frank Act: (1) If a 
contract is entered into between entities organized in the United 
States; and (2) to the extent the GSIB's obligations under the QFC are 
collateralized, if the collateral is held with a U.S. custodian or 
depository pursuant to an account agreement governed by U.S. law.\91\ 
Other commenters contended that only whether the contract is under U.S. 
law, and not the location of the counterparty or the collateral, is 
relevant to the analysis of whether the FDI Act and the Dodd-Frank Act 
would govern the contract. Commenters also requested that if the first 
additional factor (i.e., that the QFC be entered into between entities 
organized in the United States) were to be included within the 
exception, it should be broadened to include counterparties that have 
principal places of business or that are otherwise domiciled in the 
United States.
---------------------------------------------------------------------------

    \91\ These commenters noted that it would be unlikely that any 
court interpreting a QFC governed by U.S. law could have a 
reasonable basis for disregarding the stay-and-transfer provisions 
of the FDI Act or Title II of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Commenters also argued that it would be more appropriate for 
Congress to act to obtain cross-border recognition of U.S. Special 
Resolution Regimes, rather than for the OCC to do so through this final 
rule.
    Final Rule. The requirements of the final rule seek to provide 
certainty that all covered QFCs would be treated the same way in the 
context of a resolution of a covered bank under the Dodd-Frank Act or 
the FDI Act. The stay-and-transfer provisions of the U.S. Special 
Resolution Regimes should be enforced with respect to all contracts of 
any U.S. GSIB entity that enters resolution under a U.S. Special 
Resolution Regime, as well as all transactions of the subsidiaries of 
such an entity. Nonetheless, it is possible that a court in a foreign 
jurisdiction would decline to enforce those provisions. In general, the 
requirement that the effect of the statutory stay-and-transfer 
provisions be incorporated directly into the QFC contractually helps to 
ensure that a court in a foreign jurisdiction would enforce the effect 
of those provisions, regardless of whether the court would otherwise 
have decided to enforce the U.S. statutory provisions.\92\ Further, the 
knowledge that a court in a foreign jurisdiction would reject the 
purported exercise of default rights in violation of the required 
contractual provisions would deter counterparties of covered banks, 
covered entities (under the FRB final rule), or covered FSIs (under the 
FDIC final rule), from attempting to exercise such rights.
---------------------------------------------------------------------------

    \92\ See generally Financial Stability Board, ``Principles for 
Cross-border Effectiveness of Resolution Actions'' (November 3, 
2015), http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
---------------------------------------------------------------------------

    In response to comments, the final rule exempts from the 
requirements of Sec.  47.4 a covered QFC that meets two 
requirements.\93\ First, the covered QFC must state that it is governed 
by the laws of the United States or a State of the United States.\94\ 
It has long been clear that the laws of the United States and the laws 
of a State of the United States both include U.S. Federal law, such as 
the U.S. Special Resolution Regimes.\95\ Therefore, this requirement 
ensures that contracts that meet this exemption also contain language 
that helps ensure that foreign courts will enforce the stay-and-
transfer provisions of the U.S. Special Resolution Regimes. Second, the 
QFC counterparty to the covered bank must be organized under the laws 
of the United States or a State,\96\ have its principal place of 
business\97\ located in the United States, or be a Federal branch or 
agency.\98\ Similarly, a counterparty that is an individual must be 
domiciled in the United States.\99\ This requirement helps ensure that 
the FDIC will be able to quickly and easily enforce the stay-and-
transfer provisions of the U.S. Special Resolution Regimes.\100\ This 
exemption is expected to significantly reduce the burden associated 
with complying with the final rule while continuing to provide 
assurance that the stay-and-transfer provisions of the U.S. Special 
Resolution Regimes may be enforced.
---------------------------------------------------------------------------

    \93\ See final rule Sec.  47.4(a).
    \94\ However, a contract that explicitly provides that one or 
both of the U.S. Special Resolution Regimes, including a broader set 
of laws that includes a U.S. Special Resolution Regime, is excluded 
from the laws governing the QFC would not meet this exemption under 
the final rule. For example, a covered QFC would not meet this 
exemption if the contract stated that it was governed by the laws of 
the state of New York but also stated that it was not governed by 
U.S. Federal law. In contrast, a contract that stated that it was 
governed by the laws of the state of New York but opted out of a 
specific, non-mandatory Federal law (e.g., the Federal Arbitration 
Act) would meet this exemption. Cf. Volt Info. Scis. v. Bd. of Trs., 
489 U.S. 468 (1989).
    \95\ Although many QFCs only explicitly state that the contract 
is governed by the laws of a specific State of the United States, it 
has been made clear on numerous occasions that the laws of each 
State include Federal law. See, e.g., Hauenstain v. Lynham, 100 U.S. 
483, 490 (1979) (stating that federal law is ``as much a part of the 
law of every State as its own local laws and the Constitution''); 
Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 157 
(1982) (same); Testa v. Katt, 330 U.S. 386, 393 (1947) (``For the 
policy of the federal Act is the prevailing policy in every 
state.'').
    \96\ The final rule defines ``State'' means any state, 
commonwealth, territory, or possession of the United States, the 
District of Columbia, the Commonwealth of Puerto Rico, the 
Commonwealth of the Northern Mariana Islands, American Samoa, Guam, 
or the United States Virgin Islands. See final rule Sec.  47.2.
    \97\ See Hertz Corp. v. Friend, 559 U.S. 77 (2010) (describing 
the appropriate test for principal place of business).
    \98\ See final rule Sec.  47.4(a).
    \99\ See id.
    \100\ See, e.g., Daimler AG v. Bauman, 134 S. Ct. 746 (2014); 
Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 
(2011); Hertz Corp. v. Friend, 559 U.S. 77 (2010).
---------------------------------------------------------------------------

    This section of the final rule is consistent with efforts by 
regulators in other jurisdictions to address similar risks by requiring 
that financial firms within their jurisdictions ensure that the effect 
of the similar provisions under these foreign jurisdictions' respective 
special resolution regimes would be enforced by courts in other 
jurisdictions, including the United States. For example, the U.K.'s 
Prudential Regulation Authority (PRA) recently required certain 
financial firms to ensure that their counterparties to newly created 
obligations agree to be subject to stays on early termination that are 
similar to those that would apply upon a U.K. firm's entry into 
resolution if the financial arrangements were governed by U.K. 
law.\101\ Similarly, the German parliament passed a law in November 
2015 requiring German financial institutions to have provisions in 
financial contracts that are subject to the law of a country outside of 
the European Union that acknowledge the provisions regarding the 
temporary suspension of termination rights and accept the exercise of 
the powers regarding such temporary suspension under the German special 
resolution regime.\102\ Additionally, the Swiss

[[Page 56646]]

Federal Council requires that banks ``ensure at both the individual 
institution and group level that new agreements or amendments to 
existing agreements which are subject to foreign law or envisage a 
foreign jurisdiction are agreed only if the counterparty recognizes a 
postponement of the termination of agreements in accordance with'' the 
Swiss special resolution regime.\103\ Japan's Financial Services Agency 
also revised its supervisory guidelines for major banks to require 
those banks to ensure that the effect of the statutory stay decision 
and statutory special creditor protections under Japanese resolution 
regimes extends to contracts governed by foreign laws.\104\
---------------------------------------------------------------------------

    \101\ See PRA Rulebook: CRR Firms and Non-Authorised Persons: 
Stay in Resolution Instrument 2015, (November 12, 2015), http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515app1.pdf; see also Bank of England, Prudential Regulation 
Authority, ``Contractual stays in financial contracts governed by 
third-country law'' (PS25/15), (Nov. 2015), http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf. These PRA rules apply to PRA-authorized banks, building 
societies, PRA-designated investment firms, and their qualifying 
parent undertakings, including U.K. financial holding companies and 
U.K. mixed financial holding companies.
    \102\ See Gesetz zur Sanierung und Abwicklung von Instituten und 
Finanzgruppen, Sanierungs-und Abwicklungsgesetz [SAG] [German Act on 
the Reorganisation and Liquidation of Credit Institutions], December 
10, 2014, Sec.  60a, https://www.gesetze-im-internet.de/bundesrecht/sag/gesamt.pdf, as amended by Gesetz zur Anpassung des nationalen 
Bankenabwicklungsrechts an den Einheitlichen Abwicklungsmechanismus 
und die europ[auml]ischen Vorgaben zur Bankenabgabe, November 2, 
2015, Artikel 1(17).
    \103\ See Verordnung [uuml]ber die Finanzmarktinfrastrukturen 
und das Marktverhalten im Effekten- und Derivatehandel [FinfraV] 
[Ordinance on Financial Market Infrastructures and Market Conduct in 
Securities and Derivatives Trading] Nov. 25, 2015, amending 
Bankenverordnung vom 30. April 2014 [BankV] [Banking Ordinance of 30 
April 2014] April 30, 2014, SR 952.02, art. 12 paragraph 2bis, 
translation at http://www.news.admin.ch/NSBSubscriber/message/attachments/42659.pdf; see also Erl[auml]uterungsbericht zur 
Verordnung [uuml]ber die Finanzmarktinfrastrukturen und das 
Marktverhalten im Effekten- und Derivatehandel (November 25, 2015) 
(providing commentary).
    \104\ See Section III-11 of Comprehensive Guidelines for 
Supervision of Major Banks, etc., http://www.fsa.go.jp/common/law/guide/city.pdf.
---------------------------------------------------------------------------

    As discussed in Section III.A. of this preamble, the OCC believes 
it is appropriate to adopt this final rule in order to promote the 
safety and soundness of the Federal banking system, and as a 
consequence, U.S. financial stability, by improving the resolvability 
and resilience of national banks, FSAs, and Federal branches and 
agencies, pursuant to its existing statutory authorities. Because of 
the current risk that the stay-and-transfer provisions of U.S. Special 
Resolution Regimes may not be recognized under the laws of other 
jurisdictions, Sec.  47.4 of the final rule requires similar 
contractual recognition to help ensure that courts in foreign 
jurisdictions will recognize these provisions.
    This requirement advances the goal of the final rule of removing 
QFC-related obstacles to the orderly resolution of covered banks, and 
by extension their associated GSIBs. As discussed above, restrictions 
on the exercise of QFC default rights are an important prerequisite for 
an orderly GSIB resolution. Congress recognized the importance of such 
restrictions when it enacted the stay-and-transfer provisions of the 
U.S. Special Resolution Regimes. As demonstrated by the 2007-2009 
financial crisis, the modern financial system is global in scope, and 
covered banks are party to large volumes of QFCs with connections to 
foreign jurisdictions. The stay-and-transfer provisions of the U.S. 
Special Resolution Regimes would not achieve their purpose of 
facilitating orderly resolution in the context of the failure of a GSIB 
with large volumes of QFCs, if such QFCs could escape the effect of 
those provisions. To remove doubt about the scope of coverage of these 
provisions, the requirements of Sec.  47.4 of the final rule would 
ensure that the stay-and-transfer provisions apply as a matter of 
contract to all covered QFCs, wherever the transaction. This will 
advance the resolvability goals of the Dodd-Frank Act and the FDI Act 
and improve the resiliency of covered banks subject to the 
requirements.

F. Prohibited Cross-Default Rights (Sec.  47.5)

1. Definitions
    Proposed Rule and Final Rule. Section 47.5 of the final rule, like 
the proposed rule, pertains to cross-default rights in QFCs between 
covered banks and their counterparties, many of which are subject to 
credit enhancements (such as guarantees) provided by an affiliate of 
the covered bank. Because credit enhancements on QFCs are themselves 
``qualified financial contracts'' under the Dodd-Frank Act's definition 
of that term (which this final rule adopts), the final rule includes 
the following additional definitions in order to precisely describe the 
relationships to which this section applies. These definitions are the 
same as under the proposed rule since no comments were received on 
these definitions.
    First, the final rule distinguishes between a credit enhancement 
and a ``direct QFC,'' which is defined as any QFC that is not a credit 
enhancement. The final rule also defines ``direct party'' to mean a 
covered bank that itself is a party to the direct QFC, as distinct from 
an entity that provides a credit enhancement. In addition, the final 
rule defines ``affiliate credit enhancement'' to mean ``a credit 
enhancement that is provided by an affiliate of the party to the direct 
QFC that the credit enhancement supports,'' as distinct from a credit 
enhancement provided by either the direct party itself or by an 
unaffiliated party. Moreover, the final rule defines ``covered 
affiliate credit enhancement'' to mean an affiliate credit enhancement 
provided by a covered bank, or a covered entity under the FRB final 
rule, and defines ``covered affiliate support provider'' to mean the 
affiliate of the covered bank that provides the covered affiliate 
credit enhancement. Finally, the final rule defines the term 
``supported party'' to mean any party that is the beneficiary of the 
covered affiliate support provider's obligations under a covered 
affiliate credit enhancement (that is, the QFC counterparty of a direct 
party, assuming that the direct QFC is subject to a covered affiliate 
credit enhancement).
2. General Prohibition
    Proposed Rule. Subject to certain exceptions discussed below, the 
proposed rule generally prohibited a covered bank from being a party to 
a covered QFC that allows for the exercise of any default right that is 
related, directly or indirectly, to the entry into resolution of an 
affiliate of the covered bank. The proposed rule also generally 
prohibited a covered bank from being party to a covered QFC that would 
prohibit the transfer of any credit enhancement applicable to the QFC 
(such as another entity's guarantee of the covered bank's obligations 
under the QFC), along with associated obligations or collateral, upon 
the entry into resolution of an affiliate of the covered bank.\105\
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    \105\ This prohibition would be subject to an exception that 
would allow supported parties to exercise default rights with 
respect to a QFC if the supported party would be prohibited from 
being the beneficiary of a credit enhancement provided by the 
transferee under any applicable law, including the Employee 
Retirement Income Security Act of 1974 and the Investment Company 
Act of 1940. This exception is substantially similar to an exception 
to the transfer restrictions in section 2(f) of the ISDA 2014 
Resolution Stay Protocol (2014 Protocol) and the ISDA 2015 Universal 
Resolution Stay Protocol, which was added to address the concerns 
expressed by asset managers during the drafting of the 2014 
Protocol.
---------------------------------------------------------------------------

    Comments. One commenter expressed strong support for these 
provisions.\106\ Another commenter expressed support for this provision 
as currently limited in scope under the proposed rule to prohibited 
cross-default rights and requested that the scope not be expanded.
---------------------------------------------------------------------------

    \106\ This commenter also expressed support for Congressional 
amendment of the U.S. Bankruptcy Code.
---------------------------------------------------------------------------

    A number of commenters representing counterparties to covered banks 
objected to Sec.  47.5 of the proposed rule and requested the 
elimination of this provision. These commenters expressed concern about 
limitations on counterparties' exercise of default rights during 
insolvency proceedings and argued that rights should not be taken away 
from contracting parties other than where limitation of such rights is 
necessary for public policy reasons and the resolution process is 
controlled by a

[[Page 56647]]

regulatory authority with particular expertise in the resolution of the 
type of entity subject to the proceedings. Certain commenters argued 
that eliminating cross-default termination rights undermines the 
ability of QFC counterparties to effectively manage and mitigate their 
exposure to market and credit risk to a GSIB and interferes with market 
forces. One commenter similarly argued that, unless appropriate 
measures to strengthen the financial condition and creditworthiness of 
a failing GSIB during and after the temporary stay are taken, the stay 
will only expose QFC counterparties to an additional 48 hours of credit 
risk exposure without achieving the orderly resolution goals of the 
proposed rule.
    Another commenter argued that non-defaulting counterparties should 
not be prevented from filing proofs of claim or other pleadings in a 
bankruptcy case during the stay period, since bankruptcy deadlines 
might pass and leave the counterparty unable to collect the unsecured 
creditor dividend. Commenters contended that restrictions on cross-
default rights may lead to pro-cyclical behavior with asset managers 
moving funds away from covered entities as soon as those entities show 
signs of distress, and perhaps even in normal situations, and would 
disadvantage non-GSIB parties (e.g., end users who rarely receive 
initial margin from GSIB counterparties and are less well protected 
against a GSIB default).\107\
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    \107\ One commenter stated that, to the extent the final rule 
prevents an insurer from terminating QFC transactions upon the 
credit rating downgrade of a GSIB counterparty, the insurer may be 
in violation of State insurance laws that typically impose strict 
counterparty credit rating guidelines and limits. This commenter did 
not give any specific examples of such laws. Counterparties, 
including insurance companies, should evaluate and comply with all 
relevant applicable requirements.
---------------------------------------------------------------------------

    Some commenters argued that, if these rights must be restricted by 
law, Congress should impose such restrictions and that the requirements 
of the proposed rule circumvented the legislative process by creating a 
de facto amendment to the U.S. Bankruptcy Code that forecloses 
countless QFC counterparties from exercising their rights of cross-
default protection under Section 362 of the U.S. Bankruptcy Code. Some 
of these commenters argued that parties cannot by contract alter the 
U.S. Bankruptcy Code's provisions, such as the administrative priority 
of a claim in bankruptcy, and one commenter suggested that non-covered 
bank counterparties may challenge the legality of contractual stays on 
the exercise of default rights if a GSIB becomes distressed. Certain 
commenters also questioned the OCC's ability to rely on its authority 
under the National Bank Act in imposing these requirements over QFC 
counterparties not subject to its supervision and argued that making 
Title II resolution possible under the U.S. Bankruptcy Code was not an 
appropriate justification for the proposed rule. Other commenters, 
however, argued that the provisions of the proposed rule were necessary 
to address systemic risks posed by the exemption for QFCs in the U.S. 
Bankruptcy Code.
    As an alternative to eliminating the proposed rule's requirements 
to remediate cross-default rights, these commenters expressed the view 
that, if the OCC adopts the proposed rule as final, the final rule 
should at least contain those minimum creditor protections established 
by the Universal Protocol. Certain commenters also argued that this 
provision in the proposed rule was overly broad in that it covered not 
only U.S. Federal resolution and insolvency proceedings but also State 
and foreign resolution and insolvency proceedings.\108\ Certain 
commenters also urged the OCC to provide a limited exception to these 
restrictions, if retained in the final rule, to help ensure the 
continued functioning of physical commodities markets.\109\
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    \108\ Certain commenters also indicated that these provisions 
should only apply to U.S. Special Resolution Regimes, which provide 
certain protections for counterparties, or, at most, to U.S. Special 
Resolution Regimes, resolution under the Securities Investor 
Protection Act, and insolvency under Chapter 11 of the U.S. 
Bankruptcy Code. That commenter noted that liquidation and 
insolvency under Chapter 7 of the Bankruptcy Code do not seek to 
preserve the GSIB as a viable entity, which is an objective of this 
proposal. As discussed later, the rule seeks to facilitate the 
resolution of a GSIB outside of U.S. Special Resolution Regimes, 
including under the U.S. Bankruptcy Code, and is intended to 
facilitate other approaches to GSIB resolution. Therefore, the final 
rule applies these provisions in the same way as the proposed rule. 
In addition, the additional creditor protections for supported 
parties under the final rule permit contractual requirements that 
any transferee not be in bankruptcy proceedings and that the credit 
support provider not be in bankruptcy proceedings other than a 
Chapter 11 proceeding. See final rule Sec.  47.5(f).
    \109\ In particular, these commenters requested that, when a 
covered bank defaults on any physical delivery obligation to any 
counterparty following the insolvency of an affiliate of a covered 
bank, its counterparties with obligations to deliver or take 
delivery of physical commodities within a short time frame after the 
default should be able to immediately terminate all trades (both 
physical and financial) with the covered bank. The final rule, like 
the proposed rule, allows covered QFCs to permit a counterparty to 
exercise its default rights under a covered QFC if the covered bank 
has failed to pay or perform its obligations under the covered QFC. 
See final rule Sec.  47.5(d). The final rule, like the proposed 
rule, also allows covered QFCs to permit a counterparty to exercise 
its default rights under a covered QFC if the covered bank has 
failed to pay or perform on other contracts between the same parties 
and the failure gives rise to a default right in the covered QFC. 
See id. These exceptions should help reduce credit risk and ensure 
the smooth operation of the physical commodities markets without 
permitting one failure to pay or perform by a covered entity to 
allow a potentially large number of its counterparties that are not 
directly affected by the failure to exercise their default rights 
and thereby endanger the viability of the covered bank.
---------------------------------------------------------------------------

    Some commenters argued that the OCC should eliminate the stay on 
default rights that are related ``indirectly'' to an affiliate of the 
direct party becoming subject to insolvency proceedings, claiming it is 
unclear what constitutes a right related ``indirectly'' to insolvency 
and noting that any default right exercised by a counterparty after an 
affiliate of that counterparty enters resolution could arguably be 
motivated by the affiliate's entry into resolution.
    Final Rule. The final rule retains the same scope as the proposed 
rule. A primary purpose of the proposed restrictions is to facilitate 
the resolution of a GSIB outside of Title II, including under the U.S. 
Bankruptcy Code. As discussed in the Background section, the potential 
for the mass exercise of QFC default rights is a major reason why the 
failure of a global systemically important BHC could have a severe 
negative impact on financial stability and on the Federal banking 
system. In the context of an SPOE resolution, if the global 
systemically important BHC's entry into resolution triggers the mass 
exercise of cross-default rights by the subsidiaries' QFC 
counterparties of the covered QFCs against the covered bank, then the 
national bank or FSA could themselves experience financial distress or 
failure. Moreover, the mass exercise of covered QFC default rights 
would entail asset fire sales, which could affect other U.S. financial 
companies and undermine financial stability of the U.S. financial 
system. Similar disruptive results can occur with an MPOE resolution of 
an affiliate of an otherwise performing covered bank that triggers 
default rights on QFCs against the performing covered bank.
    In an SPOE resolution, this damage can be avoided if actions of the 
following two types are prevented: The exercise of direct default 
rights against the top-tier holding company that has entered 
resolution, and the exercise of cross-default rights against the 
national bank and FSA subsidiaries and other operating subsidiaries 
based on their parent BHC entry into resolution. Direct default rights 
against the national bank or FSA subsidiary would not be exercisable, 
because that subsidiary

[[Page 56648]]

would continue normal operations and would not enter resolution. In an 
MPOE resolution, this damage occurs from the exercise of default rights 
against a performing entity based on the failure of an affiliate.
    Title II of the Dodd-Frank Act's stay-and-transfer provisions would 
address both direct default rights and cross-default rights. But, as 
explained in the Background section, no similar statutory provisions 
would apply to a resolution under the U.S. Bankruptcy Code. The final 
rule attempts to address these obstacles to orderly resolution under 
the U.S. Bankruptcy Code by extending the stay-and transfer-provisions 
to any type of resolution. Similarly, the final rule would facilitate a 
transfer of the GSIB parent's interests in its subsidiaries, along with 
any credit enhancements it provides for those subsidiaries, to a 
solvent financial company by prohibiting covered banks from having QFCs 
that would allow the QFC counterparty to prevent such a transfer or to 
use it as a ground for exercising default rights.
    Accordingly, the final rule is intended to enhance the potential 
for orderly resolution of a GSIB under the U.S. Bankruptcy Code, the 
FDI Act, or similar resolution proceedings. In doing so, the proposed 
rule would advance the Dodd-Frank Act's goal of making the orderly 
resolution of a covered bank workable under the U.S. Bankruptcy 
Code.\110\
---------------------------------------------------------------------------

    \110\ See 12 U.S.C. 5365(d).
---------------------------------------------------------------------------

    Likewise, the final rule retains the prohibition against 
contractual provisions that permit the exercise of default rights that 
are indirectly related to the resolution of an affiliate. QFCs may 
include a number of default rights triggered by an event that is not 
the resolution of an affiliate but is caused by the resolution, such as 
a credit rating downgrade in response to the resolution. A primary 
purpose of the final rule is to prevent early terminations caused by 
the resolution of an affiliate. A regulation that specifies each type 
of early termination provision that should be stayed would be over-
inclusive, under-inclusive, and easy to evade. Similarly, a stay of 
default rights that are only directly related to the resolution of an 
affiliate could increase the likelihood of litigation to determine if 
the relationship between the default right and the affiliate resolution 
was sufficient to be considered ``directly'' related. The final rule 
attempts to decrease such uncertainty and litigation risk by including 
default rights that are related (i.e., directly or indirectly) to the 
resolution of an affiliate.
    Moreover, the final rule does not affect parties' rights under the 
U.S. Bankruptcy Code. As explained above, the final rule does not 
prohibit a covered QFC from permitting the exercise of default rights 
against a covered entity that has entered bankruptcy proceedings.\111\ 
Therefore, counterparties to a covered entity in bankruptcy would be 
able to exercise their existing contractual default rights to the full 
extent permitted under any applicable safe harbor to the automatic stay 
of the U.S. Bankruptcy Code.
---------------------------------------------------------------------------

    \111\ See final rule Sec.  47.5(d)(1).
---------------------------------------------------------------------------

    The final rule could also prevent the disorderly failure of the 
national bank or FSA subsidiary and allow it to continue normal 
operations. In addition, while it may be in the individual interest of 
any given counterparty to exercise any available contractual rights to 
run on the national bank or FSA subsidiary, the mass exercise of such 
rights could harm the collective interest of all the counterparties by 
causing the subsidiary to fail. Therefore, like the automatic stay in 
bankruptcy, which also serves to maximize creditors' ultimate 
recoveries by preventing a disorderly liquidation of the debtor, the 
proposed rule would mitigate this collective action problem to the 
benefit of the creditors and counterparties of covered banks by 
preventing a disorderly resolution. And because many of these 
counterparties and creditors are themselves covered banks, or other 
systemically important financial firms, improving outcomes for these 
creditors and counterparties would further protect the safety and 
soundness of the Federal banking system and financial stability of the 
United States.
3. General Creditor Protections
    Proposed Rule and Final Rule. While the proposed restrictions would 
facilitate orderly resolution, they would also have the effect of 
diminishing the ability of the counterparties of the covered banks to 
include protections for themselves in covered QFCs. In order to reduce 
this effect, the final rule, like the proposed rule, includes several 
significant exceptions to the proposed restrictions. These permitted 
creditor protections are intended to allow creditors to exercise cross-
default rights outside of an orderly resolution of a GSIB, and 
therefore would not be expected to undermine such a resolution.
    First, in order to ensure that the proposed prohibitions would 
apply only to cross-default rights (and not direct default rights), the 
final rule would provide that a covered QFC may permit the exercise of 
default rights based on the direct party's entry into a resolution 
proceeding.\112\ This provision helps to ensure that, if the direct 
party to a QFC were to enter bankruptcy, its QFC counterparties could 
exercise any relevant direct default rights. Thus, direct QFC 
counterparties of a covered bank's subsidiary or affiliate would not 
risk the delay and expense associated with becoming involved in a 
bankruptcy proceeding, and would be able to take advantage of default 
rights that would fall within the U.S. Bankruptcy Code's safe harbor 
provisions.
---------------------------------------------------------------------------

    \112\ See final rule Sec.  47.5(d)(1). The proposed rule 
exempted from this creditor protection provision proceedings under a 
U.S. or foreign special resolution regime. As explained in the 
proposed rule, special resolution regimes typically stay direct 
default rights, but may not stay cross-default rights. For example, 
as discussed above, the FDI Act stays direct default rights, see 12 
U.S.C. 1821(e)(10)(B), but does not stay cross-default rights, 
whereas the Dodd-Frank Act's OLA stays direct default rights and 
cross-defaults arising from a parent's receivership, see 12 U.S.C. 
5390(c)(10)(B) and 5390(c)(16). The proposed exemption of special 
resolution regimes from the creditor protection provisions was 
intended to help ensure that special resolution regimes that do not 
stay cross-defaults, such as the FDI Act, would not disrupt the 
orderly resolution of a GSIB under the U.S. Bankruptcy Code or other 
ordinary insolvency proceedings.
    One commenter requested the OCC revise this provision to clarify 
that default rights based on a covered bank or an affiliate entering 
resolution under the FDI Act or Title II of the Dodd-Frank Act are 
not prohibited but instead are merely subject to the terms of such 
regimes. The commenter requested the OCC clarify that such default 
rights are permitted so long as they are subject to the provisions 
of the FDI Act or Title II of the Dodd-Frank Act as required under 
Sec.  47.5. The final rule eliminates this proposed exemption for 
special resolution regimes because the rule separately addresses 
cross-defaults arising from the FDI Act and because foreign special 
resolution regimes, along with efforts in other jurisdictions to 
contractually recognize stays of default rights under those regimes, 
should reduce the risk that such a regime should pose to the orderly 
resolution of a GSIB under the U.S. Bankruptcy Code or other 
ordinary insolvency proceedings.
---------------------------------------------------------------------------

    The final rule also allows covered QFCs to permit the exercise of 
default rights based on the failure of (1) the direct party, (2) a 
covered affiliate support provider, or (3) a transferee that assumes a 
credit enhancement to satisfy its payment or delivery obligations under 
the direct QFC or credit enhancement. Moreover, the final rule would 
allow covered QFCs to permit the exercise of a default right in one QFC 
that is triggered by the direct party's failure to satisfy its payment 
or delivery obligations under another contract between the same 
parties. This exception takes appropriate account of the 
interdependence that exists among the contracts in effect between the 
same counterparties.
    As explained in the proposed rule, the exceptions in the final rule 
for the

[[Page 56649]]

creditor protections described are intended to help ensure that the 
proposed rule permits a covered bank's QFC counterparties to protect 
themselves from imminent financial loss and does not create a risk of 
delivery gridlocks or daisy-chain effects, in which a covered bank's 
failure to make a payment or delivery when due leaves its counterparty 
unable to meet its own payment and delivery obligations. The daisy-
chain effect would be prevented because the covered bank's counterparty 
would be permitted to exercise its default rights, such as by 
liquidating collateral. These exceptions are generally consistent with 
the treatment of payment and delivery obligations under the U.S. 
Special Resolution Regimes.\113\
---------------------------------------------------------------------------

    \113\ See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii) 
(suspending payment and delivery obligations for one business day or 
less).
---------------------------------------------------------------------------

    These exceptions also help to ensure that the counterparties of a 
covered bank's subsidiaries or affiliates would not risk the delay and 
expense associated with becoming involved in a bankruptcy proceeding, 
since, unlike a typical creditor of an entity that enters bankruptcy, 
the QFC counterparty would retain its ability under the U.S. Bankruptcy 
Code's safe harbors to exercise direct default rights. This should 
further reduce the counterparty's incentive to run. Reducing incentives 
to run in the period leading up to resolution promotes orderly 
resolution because a QFC creditor run (such as a mass withdrawal of 
repo funding) could lead to a disorderly resolution and pose a threat 
to financial stability.
4. Additional Creditor Protections for Supported QFCs
    Proposed Rule and Final Rule. The final rule, like the proposed 
rule, allows the inclusion of additional creditor protections for a 
non-defaulting counterparty that is the beneficiary of a credit 
enhancement from an affiliate of the covered bank that is also a 
covered bank under the final rule or a covered entity under the FRB 
final rule. The final rule would allow these creditor protections in 
recognition of the supported party's interest in receiving the benefit 
of its credit enhancement. The OCC, FRB, and FDIC believe that these 
creditor protections would not undermine an SPOE resolution of a 
GSIB.\114\
---------------------------------------------------------------------------

    \114\ See 81 FR 29169 (May 11, 2016).
---------------------------------------------------------------------------

    Where a covered QFC is supported by a covered affiliate credit 
enhancement,\115\ the covered QFC and the credit enhancement would be 
permitted to allow the exercise of default rights under the 
circumstances after the expiration of a stay period. Under the final 
rule, the applicable stay period would begin when the credit support 
provider enters resolution and would end at the later of 5:00 p.m. 
(eastern time) on the next business day and 48 hours after the entry 
into resolution. This portion of the final rule is similar to the stay 
treatment provided in a resolution under the OLA or the FDI Act.\116\
---------------------------------------------------------------------------

    \115\ Note that the final rule would not apply with respect to 
credit enhancements that are not covered affiliate credit 
enhancements. In particular, it would not apply with respect to a 
credit enhancement provided by a non-U.S. entity of a foreign GSIB, 
which would not be a covered bank or covered entity.
    \116\ See U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i), 
5390(c)(16)(A). While the stay period is similar to the stay periods 
that would be imposed by the U.S. Special Resolution Regimes, it 
could run longer than those stay periods under some circumstances.
---------------------------------------------------------------------------

    Under the final rule, contractual provisions may permit the 
exercise of default rights at the end of the stay period if the covered 
affiliate credit enhancement has not been transferred away from the 
covered affiliate support provider and that support provider becomes 
subject to a resolution proceeding other than a proceeding under 
Chapter 11 of the U.S. Bankruptcy Code.\117\ Covered QFCs may also 
permit the exercise of default rights at the end of the stay period if 
the transferee (if any) of the credit enhancement enters a resolution 
proceeding, protecting the supported party from a transfer of the 
credit enhancement to a transferee that is unable to meet its financial 
obligations.
---------------------------------------------------------------------------

    \117\ Chapter 11 (11 U.S.C. 1101-1174) is the portion of the 
U.S. Bankruptcy Code that provides for the reorganization of the 
failed company, as opposed to its liquidation, and, relative to 
special resolution regimes, is generally well-understood by market 
participants.
---------------------------------------------------------------------------

    QFCs may also permit the exercise of default rights at the end of 
the stay period if the original credit support provider does not 
remain, and no transferee becomes obligated to the same (or 
substantially similar) extent as the original credit support provider 
was obligated immediately prior to entering a resolution proceeding 
(including a Chapter 11 proceeding) with respect to (a) the covered 
affiliate credit enhancement, (b) all other covered affiliate credit 
enhancements provided by the credit support provider on any other 
covered QFCs between the same parties, and (c) all credit enhancements 
provided by the credit support provider between the direct party and 
affiliates of the direct party's QFC counterparty. Such creditor 
protections are permitted to prevent the support provider or the 
transferee from ``cherry picking'' by assuming only those QFCs of a 
given counterparty that are favorable to the support provider or 
transferee. Title II of the Dodd-Frank Act and the FDI Act contain 
similar provisions to prevent cherry picking.
    Finally, if the covered affiliate credit enhancement is transferred 
to a transferee, then the non-defaulting counterparty could exercise 
default rights at the end of the stay period unless either (a) all of 
the support provider's ownership interests in the direct party are also 
transferred to the transferee or (b) reasonable assurance is provided 
that substantially all of the support provider's assets (or the net 
proceeds from the sale of those assets) will be transferred to the 
transferee in a timely manner. These conditions would help to assure 
the supported party that the transferee generally would be at least as 
financially capable of providing the credit enhancement as the covered 
affiliate support provider.
    Comments. Commenters generally expressed strong support for these 
exclusions but also requested that these exclusions be broadened in a 
number of ways. Some commenters urged the OCC to broaden the exclusions 
to permit, after the trigger of the stay-and-transfer provisions, the 
exercise of default rights by a counterparty against a direct 
counterparty or covered support provider with respect to any default 
right under the QFC (other than a default right explicitly based on the 
failure of an affiliate) and not just with respect to defaults 
resulting from payment or delivery failure or the direct party becoming 
subject to certain resolution or insolvency proceedings (e.g., failure 
to maintain a license or certain capital level, materially breaching 
its representations under the QFC). Some commenters contended that, at 
a minimum, the final rule should provide for creditor protections that 
meet the minimum standards set forth by the Universal Protocol. One 
commenter specifically identified three creditor protections found in 
the Universal Protocol that it argued the OCC should include in Sec.  
47.5: (1) Priority rights in a bankruptcy proceeding against the 
transferee or original credit support provider (if the QFC providing 
credit support was not transferred); (2) a right to submit claims in 
the insolvency proceeding of the insolvent credit support provider if 
the transferee becomes insolvent; and (3) the ability to declare a 
default and close out of both the original QFC with the direct 
counterparty as well as QFCs with the transferee if the transferee 
defaults under the transferred QFC or under any other QFC with the non-

[[Page 56650]]

defaulting counterparty, subject to the contractual terms and 
consistent with applicable law. Another commenter argued for creditor 
protections not found in the Universal Protocol, including that the 
transferee be required to be a U.S. person and be registered with and 
licensed by the primary regulator of either the direct counterparty or 
transferor entity.
    The final rule does not include the additional creditor protections 
of the Universal Protocol or other creditor protections requested by 
commenters. As explained in the proposed rule and below, the additional 
creditor protections of the Universal Protocol do not appear to 
materially diminish the prospects for an orderly resolution of a GSIB 
because the Universal Protocol includes a number of desirable features 
that the final rule otherwise lacks.\118\ Providing additional 
circumstances under which default rights may be exercised during and 
immediately after the stay period, in the absence of any 
counterbalancing benefits to resolution, would increase the risk of a 
disorderly resolution of a GSIB in contravention of the purposes of 
this final rule.
---------------------------------------------------------------------------

    \118\ See 81 FR 55381, 55394 (August 19, 2016).
---------------------------------------------------------------------------

    One commenter also argued that transfer should be limited to a 
bridge bank under the FDI Act or a bridge financial company under Title 
II of the Dodd-Frank Act to ensure that the transferee is more likely 
to be able to satisfy the obligations of a credit support provider and 
is subject to regulatory oversight. Section 47.5 of the final rule 
permits QFCs to include provisions allowing a counterparty to exercise 
its default rights against a direct party that enters resolution under 
the FDI Act or Title II of the Dodd-Frank Act, other than the limited 
case contemplated by Sec.  47.5(h) of the final rule. The OCC is not 
adopting the proposed additional creditor protection because it would 
defeat in large part the purpose of Sec.  47.5 and potentially create 
confusion regarding the requirements and purposes of sections 47.4 and 
47.5 of the final rule.\119\
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    \119\ To the extent the commenter's reference to ``bridge 
financial company'' was not only to a bridge financial company under 
Title II of the Dodd-Frank Act, the requested amendment would not 
appear to provide a meaningful reduction in credit risk to 
counterparties compared to the creditor protections permitted under 
Sec.  47.5 of the final rule and those available under the Universal 
Protocol and U.S. Protocol, discussed below.
---------------------------------------------------------------------------

    A few commenters expressed concern that the additional creditor 
protections applied only to QFCs supported by a credit enhancement 
provided by a ``covered affiliate support provider'' (i.e., an 
affiliate that is a covered entity, covered bank, or covered FSI) and 
noted that Foreign GSIBs often will have their QFCs supported by a non-
U.S. affiliate that is not a covered entity, covered bank, or covered 
FSI. Such non-U.S. affiliate credit supporter providers would not be 
able to rely on the additional creditor protections for supported QFCs. 
As the FRB Proposed Rule explained, ``[s]uch credit enhancements [are] 
excluded in order to help ensure that the resolution of a non-[U.S.] 
entity would not negatively affect the financial stability of the 
United States by allowing for the exercise of default rights against a 
covered entity [or in the case of the OCC Proposed Rule, the covered 
bank].'' \120\
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    \120\ 81 FR 29169, 29180 n.92 (May 11, 2016) (``Note that the 
exception in Sec.  252.84(g) of the [FRB Proposed Rule] would not 
apply with respect to credit enhancements that are not covered 
affiliate credit enhancements. In particular, it would not apply 
with respect to a credit enhancement provided by a non-U.S. entity 
of a [F]oreign GSIB, which would not be a covered entity under the 
proposal. Such credit enhancements would be excluded in order to 
help ensure that the resolution of a non-U.S. entity would not 
negatively affect the financial stability of the United States by 
allowing for the exercise of default rights against a covered 
entity.''). See also FRB final rule Sec.  252.84(f).
---------------------------------------------------------------------------

    One commenter requested clarification that the creditors of a non-
U.S. credit support provider are permitted to exercise any and all 
rights against that non-U.S. credit support provider that they could 
exercise under the non-U.S. resolution regime applicable to that non-
U.S. credit support provider. In general, covered banks may be entities 
organized or operating in the United States or, with respect to U.S. 
GSIBs, abroad. The final rule, like the proposed rule, is limited to 
QFCs to which a covered bank is a party. Section 47.5 of the final rule 
generally prohibits QFCs to which a covered bank is a party from 
allowing the exercise of cross-default rights of the covered QFC, 
regardless of whether the affiliate entering resolution and/or the 
credit support provider is organized or operates in the United States.
    Another commenter expressed concern that the proposed Sec.  
47.5(g)(3) (Sec.  47.5(f)(3) of the final rule) would provide a right 
without a remedy because, if the covered affiliate credit support 
provider is no longer obligated and no transferee has taken on the 
obligation, the non-covered entity counterparty may have only a breach 
of contract claim against an entity that has transferred all of its 
assets to a third party. The creditor protections of Sec.  47.5, if 
triggered, permit contractual provisions allowing the exercise of 
existing default rights against the direct party to the covered QFC, as 
well as any existing rights against the credit enhancement provider. 
Another commenter suggested revising proposed Sec.  47.5(g) (Sec.  
47.5(f) of the final rule) to clarify that, for a covered direct QFC 
supported by a covered affiliate credit enhancement, the covered direct 
QFC and the covered affiliate credit enhancement may permit the 
exercise of a default right after the stay period that is related, 
directly or indirectly, to the covered affiliate support provider 
entering into resolution proceedings. This reading is incorrect and 
revising the final rule as requested would largely defeat the purpose 
of Sec.  47.5 of the final rule by merely delaying QFC termination en 
masse.
    Some commenters also requested specific provisions related to 
physical commodity contracts, including a provision that would allow 
regulators to override a stay if necessary to avoid disruption of the 
supply or prevent exacerbation of price movements in a commodity or a 
provision that would allow the exercise of default rights of 
counterparties delivering or taking delivery of physical commodities if 
a covered bank defaults on any physical delivery obligation to any 
counterparty. As noted above, QFCs may permit a counterparty to 
exercise its default rights immediately, even during the stay period, 
if the covered bank fails to pay or perform on the covered QFC with the 
counterparty (or another contract between the same parties that gives 
rise to a default under the covered QFC).
5. Creditor Protections Related to FDI Act Proceedings
    Proposed Rule and Final Rules. In the case of a covered QFC that is 
supported by a covered affiliate credit enhancement, both the covered 
QFC and the credit enhancement would be permitted to allow the exercise 
of default rights related to the credit support provider's entry into 
resolution proceedings under the FDI Act \121\ only under the following 
circumstances: (a) After the FDI Act stay period,\122\ if the credit 
enhancement is not transferred under the relevant provisions of the FDI 
Act \123\ and associated regulations, and (b) during the FDI Act stay 
period, to the extent that the default right permits the supported 
party to suspend performance under the covered QFC to the same

[[Page 56651]]

extent as that party would be entitled to do if the covered QFC were 
with the credit support provider itself and were treated in the same 
manner as the credit enhancement. This provision is intended to ensure 
that a QFC counterparty of a subsidiary of a covered bank that goes 
into FDI Act receivership can receive the same level of protection that 
the FDI Act provides to QFC counterparties of the covered bank itself. 
No comments were received on this aspect of the proposed rule, and the 
final rule remains unchanged.
---------------------------------------------------------------------------

    \121\ As discussed, the FDI Act stays direct default rights 
against the failed depository institution but does not stay the 
exercise of cross-default rights against its affiliates.
    \122\ Under the FDI Act, the relevant stay period runs until 
5:00 p.m. (eastern time) on the business day following the 
appointment of the FDIC as receiver. 12 U.S.C. 1821(e)(10)(B)(I).
    \123\ 12 U.S.C. 1821(e)(9)-(10).
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6. Prohibited Terminations
    Proposed Rule. In case of a legal dispute as to a party's right to 
exercise a default right under a covered QFC, the proposed rule 
required that a covered QFC must provide that, after an affiliate of 
the direct party has entered a resolution proceeding, (a) the party 
seeking to exercise the default right shall bear the burden of proof 
that the exercise of that right is indeed permitted by the covered QFC 
and (b) the party seeking to exercise the default right must meet a 
``clear and convincing evidence'' standard, a similar standard,\124\ or 
a more demanding standard.
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    \124\ The reference to a ``similar'' burden of proof is intended 
to allow covered QFCs to provide for the application of a standard 
that is analogous to clear and convincing evidence in jurisdictions 
that do not recognize that particular standard. A covered QFC would 
not be permitted to provide for a lower standard.
---------------------------------------------------------------------------

    This proposed requirement was intended to prevent QFC 
counterparties from circumventing the limitations on resolution-related 
default rights in this proposal by exercising other contractual default 
rights in instances where such QFC counterparty cannot demonstrate that 
the exercise of such other contractual default rights is unrelated to 
the affiliate's entry into resolution.
    Comments. A few commenters requested guidance on how to satisfy the 
burden of proof of clear and convincing evidence so that they may avoid 
seeking such clarity through litigation. Other commenters urged that 
this standard was not appropriate and should be eliminated. In 
particular, a number of commenters expressed concern that the burden of 
proof requirements, which are more stringent than the burden of proof 
requirements for typical contractual disputes adjudicated in a court, 
unduly hamper the creditor protections of counterparties and impose a 
burden directly on non-covered entities, who should be able to exercise 
default rights if it is commercially reasonable in the context. One 
commenter contended that this burden, combined with the stay on default 
rights related ``indirectly'' to an affiliate entering insolvency 
proceedings, effectively prohibits counterparties from exercising any 
default rights during the stay period. These commenters argued that it 
is inappropriate for the OCC by regulation to alter the burden of proof 
for contractual disputes. One commenter suggested that, in a scenario 
involving a master agreement with some transactions out of the money 
and others in the money, the defaulting GSIB will have a lower burden 
of proof for demonstrating that it is owed money than for demonstrating 
that it owes money, should the non-GSIB counterparty exercise its 
termination rights. Certain commenters suggested instead that the final 
rule shift the burden and adopt a rebuttable presumption that the non-
defaulting counterparty's exercise of default rights is permitted under 
the QFC unless the defaulting covered entity demonstrates otherwise. 
One commenter requested that the burden of proof not apply to the 
exercise of direct default rights.
    Final Rule. The final rule retains the proposed burden of proof 
requirements. The requirement is based on a primary goal of the final 
rule--to avoid the disorderly termination of QFCs in response to the 
failure of an affiliate of a GSIB. The requirement accomplishes this 
goal by making clear that a party that exercises a default right when 
an affiliate of its direct party enters receivership of insolvency 
proceedings is unlikely to prevail in court unless there is clear and 
convincing evidence that the exercise of the default right against a 
covered entity is not related to the insolvency or resolution 
proceeding. The requirement therefore should discourage the 
impermissible exercise of default rights without prohibiting the 
exercise of all default rights. Moreover, the burden of proof 
requirement should not discourage the exercise of default rights after 
or in response to a failure to satisfy a creditor protection provision 
(e.g., direct default rights); such a failure should be easily 
evidenced, even under a heightened burden of proof, such that 
clarification through court proceedings should not be necessary.
7. Agency Transactions
    Proposed Rule. In addition to entering into QFCs as principal, 
GSIBs may engage in QFCs as agent for other principals. For example, a 
GSIB subsidiary may enter into a master securities lending arrangement 
with a foreign bank as agent for a U.S.-based pension fund. The GSIB 
would document its role as agent for the pension fund, often through an 
annex to the master agreement, and would generally provide to its 
customer (the principal party) a securities replacement guarantee or 
indemnification for any shortfall in collateral in the event of the 
default of the foreign bank.\125\ A covered bank may also enter into a 
QFC as principal where there is an agent acting on its behalf or on 
behalf of its counterparty.
---------------------------------------------------------------------------

    \125\ The definition of QFC under Title II of the Dodd-Frank Act 
includes security agreements and other credit enhancements as well 
as master agreements (including supplements). 12 U.S.C. 
5390(c)(8)(D).
---------------------------------------------------------------------------

    The proposed rule would have applied to a covered QFC regardless of 
whether the covered bank or the covered bank's direct counterparty is 
acting as a principal or as an agent. The proposed rule did not 
distinguish between agents and principals with respect to default 
rights or transfer restrictions applicable to covered QFCs. The 
proposed rule would have limited default rights and transfer 
restrictions that the principal and its agent may have against a 
covered bank consistent with the U.S. Special Resolution Regimes. The 
proposed rule would have ensured that, subject to the enumerated 
creditor protections, neither the agent nor the principal could 
exercise cross-default rights under the covered QFC against the covered 
bank based on the resolution of an affiliate of the covered bank.\126\
---------------------------------------------------------------------------

    \126\ Under the proposed rule, if a covered bank (acting as 
agent) is a direct party to a covered QFC, then the general 
prohibitions of Sec.  47.5(d) would only affect the substantive 
rights of the agent's principal(s) to the extent that the covered 
QFC provides default rights based directly or indirectly on the 
entry into resolution of an affiliate of the covered bank (acting as 
agent).
---------------------------------------------------------------------------

    Comments. Commenters argued that the provisions of sections 47.4 
and 47.5 that relate to transactions entered into by the covered bank 
as agent should exclude QFCs where the covered bank or its affiliate 
does not have any liability (including contingent liability) under or 
in connection with the contract, or any payment or delivery obligations 
with respect thereto. Commenters also argued that the proposed agent 
provisions should not apply to circumstances where the covered bank 
acts as agent for a counterparty whose transactions are excluded from 
the requirements of the final rule.\127\ Commenters provided as an 
example where an agent simply executes an agreement on behalf of the 
principal but bears no liability thereunder, such as where an

[[Page 56652]]

investment manager signs an agreement on behalf of a client. Commenters 
noted that such agreements could contain events of default relating to 
the insolvency of the agent or an affiliate of the agent but that such 
default rights would be difficult to track and that close-out of such 
QFCs would not result in any loss or liquidity impact to the agent. 
Rather, early termination under the agreements would subject the cash 
and securities of the principals--not the agent--to realization and 
liquidation. Therefore, the agent would not be exposed to the liquidity 
and asset fire sale risks the proposed rule was intended to address.
---------------------------------------------------------------------------

    \127\ Commenters argued this should be the case even where an 
agent has entered an umbrella master agreement on behalf of more 
than one principal, but only with respect to the contract of any 
principals that are excluded counterparties.
---------------------------------------------------------------------------

    Commenters contended that the requirement to conform QFCs with all 
affiliates of a counterparty when an agent is acting on behalf of the 
counterparty would be particularly burdensome, as the agent may not 
have information about the counterparty's affiliates or their contracts 
with covered entities. Commenters also requested clarification that 
conformance is not required of contracts between a covered entity as 
agent on behalf of a non-U.S. affiliate of a Foreign GSIB that would 
not be a covered bank under the proposed rule, since default rights 
related to the non-U.S. operations of Foreign GSIBs are not the focus 
of the rule and do not bear a sufficient connection to U.S. financial 
stability to warrant the burden and cost of compliance.
    One commenter also urged that securities lending authorization 
agreements (SLAAs) should be exempt from the final rule. The commenter 
explained that SLAAs are banking services agreements that establish an 
agency relationship with the lender of securities and an agent, and may 
be considered credit enhancements for securities lending transactions 
(and therefore QFCs) because the SLAAs typically require the agent to 
indemnify the lender for any shortfall between the value of the 
collateral and the value of the securities in the event of a borrower 
default. The commenter explained that SLAAs typically do not contain 
provisions that may impede the resolution of a GSIB, but may contain 
termination rights or contractual restrictions on assignability. 
However, the commenter argued that the beneficiaries under SLAAs lack 
the incentive to contest the transfer of the SLAA to a bridge 
institution in the event of GSIB insolvency.
    Final Rule. To respond to concerns raised by commenters, the agency 
provisions of the proposed rule have been modified in the final rule. 
The final rule provides that a covered bank does not become a party to 
a QFC solely by acting as agent to a QFC.\128\ Therefore, an in-scope 
QFC would not be a covered QFC solely because a covered bank was acting 
as the agent of a principal with respect to the QFC.\129\ For example, 
the final rule would not require a covered bank to conform a master 
securities lending arrangement (or the transactions under the 
agreement) to the requirements of the final rule if the only 
obligations of the covered bank under the agreement are to act as an 
agent on behalf of one or more principals. This modification should 
address many of the concerns raised by commenters.
---------------------------------------------------------------------------

    \128\ See final rule Sec.  47.3(e)(1).
    \129\ Such a QFC would nonetheless be a covered QFC with respect 
to a principal that also was a covered entity. In response to 
comments, the OCC notes that covered banks do not include non-U.S. 
subsidiaries of a Foreign GSIB.
---------------------------------------------------------------------------

    The final rule does not specifically exempt SLAAs because the 
agreements provide the beneficiaries with contractual rights that may 
hinder the orderly resolution of a GSIB and because it is unclear how 
such beneficiaries would act in response to the failure of their agent. 
More generally, the final rule does not exempt a QFC with respect to 
which an agent also acts in another capacity, such as guarantor. 
Continuing the example regarding the covered bank acting as agent with 
respect to a master securities lending agreement, if the covered entity 
also provided a SLAA that included the typical indemnification 
provision discussed above, the agency exemption of the final rule would 
not exclude the SLAA but would still exclude the master securities 
lending agreement. This is because the covered bank is acting solely as 
agent with respect to the master securities lending agreement but is 
acting as agent and guarantor with respect to the SLAA. However, SLAAs 
would be exempted under the final rule to the extent that they are not 
``in-scope QFCs'' or otherwise meet the exemptions for covered QFCs of 
the final rule.
8. Enforceability
    Proposed Rule and Final Rule. Commenters also requested that the 
final rule should clarify that obligations under a QFC would still be 
enforceable even if its terms do not comply with the requirements of 
the final rule, similar to assurances provided in respect of the U.K. 
rule and German legislation. The enforceability of a contract is beyond 
the scope of this final rule.
9. Interaction With Other Regulatory Requirements
    Proposed Rule and Final Rule. Certain commenters requested 
clarification that amending covered QFCs as required by this final rule 
should not trigger other regulatory requirements for covered banks, 
such as the swap margin requirements issued by the OCC, other 
prudential regulators (FRB, FDIC, Farm Credit Administration, and 
Federal Housing Financing Agency), and the U.S. Commodity Futures 
Trading Commission (CFTC). In particular, commenters urged that 
amending a swap to conform to this final rule should not jeopardize the 
status of the swap as a legacy swap for purposes of the swap margin 
requirements for non-cleared swaps.
    These issues are outside the scope of this final rule as they 
relate to the requirements of another rule issued by the OCC jointly 
with the other prudential regulators, as well as a rule issued by the 
CFTC. As commenters pointed out, addressing such issues may require 
consultation with the other prudential regulators as well as the CFTC 
and the U.S. Securities and Exchange Commission to determine the impact 
of the amendments required by this final rule for purposes of the 
regulatory requirements under Title VII of the Dodd-Frank Act. However, 
as the proposed rule noted, the OCC is considering an amendment to the 
definition of ``eligible master netting agreement'' to account for the 
restrictions on covered QFCs and is consulting with the other 
prudential regulators and the CFTC on this aspect of the final 
rule.\130\ The OCC does not expect that compliance with this final rule 
would trigger the swap margin requirements for non-cleared swaps.
---------------------------------------------------------------------------

    \130\ See 81 FR 55381, 55396 (August 19, 2016).
---------------------------------------------------------------------------

10. Compliance With the Universal Protocol
    Proposed Rule. The proposed rule allowed covered banks to conform 
covered QFCs to the requirements of the proposed rule through adherence 
to the Universal Protocol. The Universal Protocol has two primary 
operative provisions, Section 1 and Section 2. Under Section 1, 
adhering parties essentially ``opt in'' to the U.S. Special Resolution 
Regimes and certain other special resolution regimes. Therefore, 
Section 1 is generally responsive to the concerns addressed in Sec.  
47.4 of the proposed rule. Under Section 2, adhering parties 
essentially forego, subject to the creditor protections of Section 2, 
cross-default rights and

[[Page 56653]]

transfer restrictions on affiliate credit enhancements. Therefore, 
Section 2 is generally responsive to the concerns addressed in Sec.  
47.5 of the proposed rule.
    The proposed rule noted that, while the scope of the stay-and-
transfer provisions of the Universal Protocol are narrower than the 
stay-and-transfer provisions that would have been required under the 
proposed rule, and the Universal Protocol provides a number of creditor 
protection provisions that would not otherwise have been available 
under the proposed rule, the Universal Protocol includes a number of 
desirable features that the proposed rule lacked. The proposed rule 
explained that ``when an entity (whether or not it is a covered bank) 
adheres to the [Universal] Protocol, it necessarily adheres to the 
[Universal] Protocol with respect to all covered entities that have 
also adhered to the [Universal] Protocol rather than one or a subset of 
covered entities (as the [proposed rule] may otherwise permit). . . . 
By allowing for all covered QFCs to be modified by the same contractual 
terms, this 'all-or-none' feature would promote transparency, 
predictability and equal treatment with respect to default rights of 
non-defaulting parties.'' \131\ This ``all-or-none'' feature is 
referred to as ``universal adherence'' in the remainder of this 
preamble. The proposed rule explained that the Universal Protocol 
included other favorable features, which include that it amends all 
existing transactions of adhering parties, does not provide the 
counterparty with default rights in addition to those provided under 
the underlying QFC, applies to all QFCs, and includes resolution under 
bankruptcy as well as U.S. and certain non-U.S. Special Resolution 
Regimes. Because the features of the Universal Protocol, considered 
together, appeared to increase the likelihood that the resolution of a 
GSIB under a range of scenarios could be carried out in an orderly 
manner, the proposal stated that QFCs amended by the Universal Protocol 
would have been consistent with the proposal, notwithstanding 
differences from Sec.  47.5 of the proposed rule.
---------------------------------------------------------------------------

    \131\ 81 FR 55381, 55394 (August 19, 2016).
---------------------------------------------------------------------------

    Comments and Final Rule. Commenters generally supported the 
proposed rule's provisions to allow covered banks to comply with the 
requirements of the proposed rule through adherence to the Universal 
Protocol. For the reasons discussed in this preamble and in the 
proposed rule, the final rule continues to allow covered banks to 
comply with the rule through adherence to the Universal Protocol and 
makes other modifications to the proposed rule to address comments.
    A few commenters requested that the final rule clarify two 
technical aspects of adherence to the Universal Protocol. These 
commenters requested confirmation that adherence to the Universal 
Protocol would also satisfy the requirements of Sec.  47.4. The 
commenters also requested confirmation that QFCs that incorporate the 
terms of the Universal Protocol by reference also would be deemed to 
comply with the terms of the proposed alternative method of 
compliance.\132\ By clarifying Sec.  47.6(a), the final rule confirms 
(1) that adherence to the Universal Protocol is deemed to satisfy the 
requirements of Sec.  47.4 of the final rule (as well as Sec.  47.5) 
and (2) that conformance of a covered QFC through the Universal 
Protocol includes incorporation of the terms of the Universal Protocol 
by reference by protocol adherents. This clarification also applies to 
the U.S. Protocol, discussed below.
---------------------------------------------------------------------------

    \132\ ``As between two Adhering Parties, the [Universal 
Protocol] only amends agreements between the Adhering Parties that 
have been entered into as of the date that the Adhering Parties 
adhere (as well as any subsequent transactions thereunder), but it 
does not amend agreements that Adhering Parties enter into after 
that date. . . . If Adhering Parties wish for their future 
agreements to be subject to the terms of the [Universal Protocol] or 
a Jurisdictional Module Protocol under the ISDA JMP, it is expected 
that they would incorporate the terms of the [relevant protocol] by 
reference into such agreements.'' Letter to Robert deV. Frierson, 
Secretary, Board of Governors of the Federal Reserve System, from 
Katherine T. Darras, ISDA General Counsel, The International Swaps 
and Derivatives Association, Inc., at 8-9 (August 5, 2016). This 
commenter noted that incorporation by reference was consistent with 
the proposed rule and asked that the text of the final rule be 
clarified. Id. at 9. Given the OCC's intent to ensure that the 
substantive requirements of its final rule are consistent with those 
of the FRB and FDIC, the OCC has reviewed this letter to the extent 
applicable to the OCC's final rule.
---------------------------------------------------------------------------

    One commenter indicated that many non-covered entity counterparties 
do not have ISDA master agreements for physically-settled forward and 
commodity contracts and, therefore, compliance with the proposed rule's 
requirements through adherence to the Universal Protocol would entail 
substantial time and educational effort. As in the proposed rule, the 
final rule simply permits adherence to the Universal Protocol as one 
method of compliance with the final rule's requirements, and parties 
may meet the final rule's requirements through bilateral negotiation, 
if they choose. Moreover, the Securities Financing Transaction Annex 
and Other Agreements Annex of the Universal Protocol, which are 
specifically identified in the proposed and final rule, are designed to 
amend QFCs that are not ISDA master agreements.
11. Compliance With the U.S. Protocol
    Proposed Rule and Comments. In addition to the Universal Protocol, 
many commenters argued that the final rule should allow compliance with 
the final rule through a yet-to-be-created ``U.S. Jurisdictional Module 
to the ISDA Resolution Stay Jurisdictional Modular Protocol'' (an 
``approved U.S. JMP'') that is generally the same but narrower in scope 
than the Universal Protocol.\133\ Many non-GSIB commenters argued that 
they were not involved with the drafting of the Universal Protocol and 
that an approved U.S. JMP would create a level playing field between 
those that were involved in the drafting and those that were not. In 
general, commenters identified two aspects of the Universal Protocol 
that they argued should be narrowed in the approved U.S. JMP: The scope 
of the special resolution regimes and the universal adherence feature 
of the Universal Protocol.
---------------------------------------------------------------------------

    \133\ Commenters argued that approval of the approved U.S. JMP 
should not require satisfaction of the administrative requirements 
of Sec.  47.6, since the OCC has already conducted that analysis in 
deciding to provide a safe harbor for the Universal Protocol.
---------------------------------------------------------------------------

    With respect to the scope of the special resolution regimes of the 
Universal Protocol, commenters' concern focused on the special 
resolution regimes of ``Protocol-eligible Regimes.'' Some commenters 
also expressed concern with the scope of ``Identified Regimes'' of the 
Universal Protocol.
    The Universal Protocol defines ``Identified Regimes'' as the 
special resolution regimes of France, Germany, Japan, Switzerland, and 
the United Kingdom, as well as the U.S. Special Resolution Regimes. The 
Universal Protocol defines ``Protocol-eligible Regimes'' as resolution 
regimes of other jurisdictions specified in the protocol that satisfies 
the requirements of the Universal Protocol. The Universal Protocol 
provides a ``Country Annex,'' which is a mechanism by which individual 
adherents to the Universal Protocol may agree that a specific 
jurisdiction satisfies the requirements of a ``Protocol-eligible 
Regime.'' The Universal Protocol referred to in the proposed rule did 
not include any Country Annex for any Protocol-eligible Regime.\134\
---------------------------------------------------------------------------

    \134\ The proposed rule defined the Universal Protocol as the 
``ISDA 2015 Universal Resolution Stay Protocol, including the 
Securities Financing Transaction Annex and Other Agreements Annex, 
published by the International Swaps and Derivatives Association, 
Inc., as of May 3, 2016, and minor or technical amendments 
thereto.'' See proposed rule Sec.  47.6(a). As of May 3, 2016, ISDA 
had not published any Country Annex for a Protocol-eligible Regime 
and such publication would not be a minor or technical amendment to 
the Universal Protocol. Consistent with the proposed rule, the final 
rule does not define the Universal Protocol to include any Country 
Annex. However, the final rule does not penalize adherence to any 
Country Annex. A covered QFC that is amended by the Universal 
Protocol--but not a Country Annex--will be deemed to conform to the 
requirements of the final rule. In addition, a covered QFC that is 
amended by the Universal Protocol--including one or more Country 
Annexes--is also deemed to conform to the requirements of the final 
rule. See final rule Sec.  47.6(a)(2).

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[[Page 56654]]

    Commenters requested the final rule include a safe harbor for an 
approved U.S. JMP that does not include Protocol-eligible Regimes. 
Commenters argued that many counterparties may not be able to adhere to 
the Universal Protocol because they would not be able to adhere to a 
Protocol-eligible Regime in the absence of law or regulation mandating 
such adherence, as it would force counterparties to give up default 
rights in jurisdictions where that is not yet legally required.\135\ In 
support of their argument, commenters cited their fiduciary duties to 
act in the best interests of their clients or shareholders. Commenters 
also argued that an approved U.S. JMP should not include Identified 
Regimes and noted that the other Identified Regimes have already 
adopted measures to require contractual recognition of their special 
resolution regimes.\136\
---------------------------------------------------------------------------

    \135\ The Protocol-eligible Regime requirements of the Universal 
Protocol do not include a requirement that a law or regulation, such 
as the final rule, require parties to contractually opt in to the 
regime.
    \136\ One commenter requested clarification that a QFC of a 
covered bank with a non-U.S. credit support provider for the covered 
bank complies with the requirements of the final rule to the extent 
the covered bank has adhered to the relevant jurisdictional modular 
protocol for the jurisdiction of the non-U.S. credit support 
provider. The jurisdictional modular protocols for other counties do 
not satisfy the requirements of the final rule.
---------------------------------------------------------------------------

    With respect to the universal adherence feature of the Universal 
Protocol, commenters argued that universal adherence imposed 
significant monitoring burdens since new adherents may join the 
Universal Protocol at any time. To address this concern, some 
commenters requested that an approved U.S. JMP allow a counterparty to 
adhere on a firm-by-firm or entity-by-entity basis. Other commenters 
suggested, or supported approval of, an approved U.S. JMP in which a 
counterparty would adhere to all current covered entities under the 
final rule (to be identified on a ``static list'') and would adhere to 
new covered entities on an entity-by-entity basis. This static list, 
commenters argued, would retain the ``universal adherence mechanics'' 
of the Universal Protocol and allow market participants to fulfill due 
diligence obligations related to compliance. Commenters also argued 
that universal adherence would be overbroad because the Universal 
Protocol could amend QFCs to which a covered bank was not a party. 
Certain commenters argued that adhering with respect to any 
counterparty would also be inconsistent with their fiduciary duties.
    Final Rule. In response to comments and to further facilitate 
compliance, the final rule provides that covered QFCs amended through 
adherence to the Universal Protocol or a new (and separate) protocol 
(the ``U.S. Protocol'') would be deemed to conform the covered QFCs to 
the requirements of the final rule.\137\ The U.S. Protocol may differ 
(and is required to differ) from the Universal Protocol in certain 
respects, as discussed below, but otherwise must be substantively 
identical to the Universal Protocol.\138\ Therefore, the reasons for 
deeming covered QFCs amended by the Universal Protocol to conform to 
the final rule, discussed above and in the proposed rule, apply to the 
U.S. Protocol.
---------------------------------------------------------------------------

    \137\ The final rule also provides that the OCC may determine 
otherwise based on specific facts and circumstances. See final rule 
Sec.  47.6(a).
    \138\ Commenters expressed support for having the U.S. Protocol 
apply to both existing and future QFCs. One commenter requested that 
an approved U.S. JMP should apply only to QFCs governed by non-U.S. 
law because the U.S. Special Resolution Regimes already apply to 
QFCs governed by U.S. law. As discussed, the final rule does not 
exempt a QFC solely because the QFC explicitly states that it is 
governed by U.S. law. Moreover, such a limited application would 
reduce the desirable additional benefits of the Universal Protocol 
as discussed.
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    Consistent with the proposed rule \139\ and requests by commenters, 
the U.S. Protocol may limit the application of the provisions the 
Universal Protocol identifies as Section 1 and Section 2 to only 
covered banks.\140\ As requested by commenters, this limitation on the 
scope of the U.S. Protocol may ensure that the U.S. Protocol would only 
amend covered QFCs under this final rule or the substantively identical 
final rules issued by the FRB and FDIC, and not also QFCs outside the 
scope of the final rules of the OCC, FRB, and FDIC (i.e., QFCs between 
parties that are not covered entities, covered banks, or covered FSIs).
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    \139\ The proposed rule explained that a ``jurisdictional module 
for the United States that is substantively identical to the 
[Universal] Protocol in all respects aside from exempting QFCs 
between adherents that are not covered entities or covered banks 
would be consistent with the current proposal.''
    \140\ The final rule does not require the U.S. Protocol to 
retain the same section numbering as the Universal Protocol. The 
final rule allows the U.S. protocol to have minor and technical 
differences from the Universal Protocol. See final rule Sec.  
47.6(a)(3)(ii)(E).
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    The final rule also provides that the U.S. Protocol is required to 
include the U.S. Special Resolution Regimes and the other Identified 
Regimes but is not required to include Protocol-eligible Regimes.\141\ 
As noted, the Universal Protocol, as defined in the proposed rule, did 
not include any Country Annex for a Protocol-eligible Regime; the only 
special resolution regimes specifically identified in the Universal 
Protocol, as defined in the proposed rule, were the U.S. Special 
Resolution Regimes and the other Identified Regimes. As explained in 
the proposed rule, inclusion of the Identified Regimes should help 
facilitate the resolution of a GSIB across a broader range of 
circumstances. Inclusion of the Identified Regimes in the U.S. Protocol 
also should support laws and regulations similar to the final rule and 
help encourage GSIB entities in the United States to adhere to a 
protocol that includes all Identified Regimes. However, the final rule 
does not require the U.S. Protocol to include Protocol-eligible 
Regimes, including definitions and adherence mechanisms related to 
Protocol-eligible Regimes.\142\ Inclusion of only the Identified 
Regimes in the U.S. Protocol, considered in light of the other benefits 
to the resolution of GSIBs provided by the Universal Protocol and U.S. 
Protocol as well as commenters' concerns with potential adherence to 
Protocol-eligible Regimes, should sufficiently advance the objective of 
the final rule to increase the likelihood that a resolution of a GSIB 
could be carried out in an orderly manner under a range of scenarios.
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    \141\ See final rule Sec.  47.6(a)(3)(ii)(A). The U.S. Protocol 
is likewise not required to include definitions and adherence 
mechanisms related to Protocol-eligible Regimes. The final rule 
allows the U.S. Protocol to include minor and technical differences 
from the Universal Protocol and, similarly, differences necessary to 
conform the U.S. Protocol to the substantive differences allowed or 
required from the Universal Protocol. See final rule Sec.  
47.6(a)(3)(ii)(E).
    \142\ See final rule Sec.  47.6(a)(3)(ii)(A).
---------------------------------------------------------------------------

    The final rule does not permit the U.S. Protocol to permit parties 
to adhere on a firm-by-firm or entity-by-entity basis because such 
adherence mechanisms requested by commenters would obviate one of the 
primary benefits of the Universal Protocol: universal adherence. 
Similarly, the final rule does not permit adherence to a ``static 
list'' of all current covered entities, which other commenters 
requested.\143\ Although the static list

[[Page 56655]]

would initially provide for universal adherence, the static list would 
not provide for universal adherence with respect to entities that 
became covered entities after the static list was finalized. To help 
ensure that the additional creditor protections of the Universal 
Protocol and U.S. Protocol continue to be justified, both protocols 
must ensure that the desirable features of the protocols, including 
universal adherence, continue to be present as GSIBs acquire 
subsidiaries with existing QFCs and existing organizations become 
designated as GSIBs.
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    \143\ The final rule, however, does not prohibit the creation of 
a dynamic list identifying all current ``Covered Parties,'' as would 
be defined in the U.S. Protocol, to facilitate due diligence and 
provide additional clarity to the market. See final rule Sec.  
47.6(a)(3)(ii)(E) (allowing minor and technical differences from the 
Universal Protocol).
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    The final rule also addresses provisions that allow an adherent to 
elect that Section 1 and/or Section 2 of the Universal Protocol do not 
apply to the adherent's contracts.\144\ The Universal Protocol refers 
to these provisions as ``opt-outs.'' The proposed rule explained that 
adherence to the Universal Protocol was an alternative method of 
compliance with the proposed rule and that covered QFCs that were not 
amended by the Universal Protocol must otherwise conform to the 
proposed rule. In other words, the proposed rule would have required 
that a covered QFC be conformed regardless of the method the covered 
bank and counterparty chooses to conform the QFC.\145\
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    \144\ Section 4(b) of the Universal Protocol.
    \145\ Under the final rule, if an adherent to the Universal 
Protocol or U.S. Protocol exercises an available opt-out, covered 
banks with covered QFCs affected by the exercise would be required 
to otherwise conform the covered QFCs to the requirements of the 
final rule.
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    Consistent with the basic purposes of the final rule, the U.S. 
Protocol must require that opt-outs exercised by its adherents will 
only be effective to the extent that the affected covered QFCs 
otherwise conform to the requirements of the final rule. Therefore, the 
U.S. Protocol allows counterparties to exercise available opt-out 
rights in a manner that also allows covered banks to ensure that their 
covered QFCs continue to conform to the requirements of the final rule.
    The final rule also provides that, under the U.S. Protocol, the 
opt-out in Section 4(b)(i)(A) of the attachment to the Universal 
Protocol (Sunset Opt-out) \146\ must not apply with respect to the U.S. 
Special Resolution Regimes because the opt-out is no longer relevant 
with respect to the U.S. Special Resolution Regimes. This final rule, 
along with the substantively identical rules expected to be issued by 
the FRB and FDIC, should prevent exercise of the Sunset Opt-out with 
respect to the U.S. Special Resolution Regimes under the Universal 
Protocol. Inapplicability of this opt-out with respect to U.S. Special 
Resolution Regimes in the U.S. Protocol should provide additional 
clarity to adherents that the U.S. Protocol will continue to provide 
for universal adherence after January 1, 2018.
---------------------------------------------------------------------------

    \146\ See Sec.  4(b)(i)(A) of the Universal Protocol.
---------------------------------------------------------------------------

    The final rule also expressly addresses a provision in the 
Universal Protocol that concerns the client-facing leg of a cleared 
transaction. As discussed above, the final rule, like the proposed 
rule, does not exempt the client-facing leg of a cleared transaction. 
Therefore, the U.S. Protocol must not include the exemption in Section 
2 of the Universal Protocol regarding the client-facing leg of the 
transaction.\147\
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    \147\ Section 2 of the Universal Protocol provides an exemption 
for any client-facing leg of a cleared transaction. See section 2(k) 
of the Universal Protocol and the definition of ``Cleared Client 
Transaction.'' The final rule does not amend the proposed rule's 
treatment of QFCs that are ``Cleared Client Transactions'' under the 
Universal Protocol, but requires that the provisions of that section 
must not apply with respect to the U.S. Protocol. See final rule 
Sec.  47.6(a)(3)(ii)(D).
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G. Process for Approval of Enhanced Creditor Protections (Sec.  47.6)

1. Requests for Approval of Enhanced Creditor Protections
    Proposed Rule. As discussed previously, the proposed restrictions 
would leave many creditor protections that are commonly included in 
QFCs unaffected. The proposed rule would have also allowed any covered 
bank to submit to the OCC a request to approve as compliant with the 
proposed rule one or more QFCs that contain additional creditor 
protections--that is, creditor protections that would be impermissible 
under the proposed restrictions set forth previously. A covered bank 
making such a request would have been required to explain how its 
request is consistent with the purposes of the proposed rule, including 
an analysis of the contractual terms for which approval is requested in 
light of a range of factors that are laid out by the proposed rule and 
intended to facilitate the OCC's consideration of whether permitting 
the contractual terms would be consistent with the proposed 
restrictions. The proposed rule noted that the OCC expected to consult 
with the FDIC and FRB during its consideration of a request under this 
section.
    The first two factors concerned the potential impact of the 
requested creditor protections on GSIB resilience and resolvability. 
The next four concerned the scope of the covered bank's request: 
Adoption on an industry-wide basis, coverage of existing and future 
transactions, coverage of one or multiple QFCs, and coverage of some or 
all covered banks. Creditor protections that may be applied on an 
industry-wide basis may help to ensure that impediments to resolution 
are addressed on a uniform basis, which could increase market 
certainty, transparency, and equitable treatment. Creditor protections 
that apply broadly to a range of QFCs and covered banks would increase 
the chance that all of a GSIB's QFC counterparties would be treated the 
same way during a resolution of that GSIB and may improve the prospects 
for an orderly resolution of that GSIB. By contrast, covered bank 
requests that would expand counterparties' rights beyond those afforded 
under existing QFCs would conflict with the proposed rule's goal of 
reducing the risk of mass unwinds of GSIB QFCs. The proposed rule also 
included three factors that focus on the creditor protections specific 
to supported parties. The proposed rule noted that the OCC may weigh 
the appropriateness of additional protections for supported QFCs 
against the potential impact of such provisions on the orderly 
resolution of a GSIB.
    In addition to analyzing the request under the enumerated factors, 
a covered bank requesting that the OCC approve enhanced creditor 
protections would have been required to submit a legal opinion stating 
that the requested terms would be valid and enforceable under the 
applicable law of the relevant jurisdictions, along with any additional 
relevant information requested by the OCC.
    Under the proposed rule, the OCC could have approved a request for 
an alternative set of creditor protections if the terms of that QFC, as 
compared to a covered QFC containing only the limited exceptions 
discussed previously, would promote the orderly resolution of federally 
chartered or licensed institutions or their affiliates, prevent or 
mitigate risks to the financial stability of the United States or the 
Federal banking system that could arise from the failure of a global 
systemically important BHC or global systemically important FBO, and 
protect the safety and soundness of covered banks to at least the same 
extent. The proposed request-and-approval process improved flexibility 
by allowing for an industry-proposed alternative to the set of creditor 
protections permitted by the proposed rule while ensuring that any

[[Page 56656]]

approved alternative would serve the proposed rule's policy goals to at 
least the same extent.
    Comments. Commenters requested that this approval process be made 
less burdensome and more flexible and urged for additional 
clarifications on the process for submitting and approving such 
requests (e.g., whether approvals would be published in the Federal 
Register). For example, commenters requested the final rule include a 
reasonable timeline (e.g., 180 days) by which the OCC would approve or 
deny a request. Certain commenters urged that counterparties and trade 
groups, in addition to covered banks, should be permitted to make such 
requests. One commenter noted that the proposed rule's approval process 
would have created a free-rider problem, where parties that submit 
enhanced creditor protection conditions for OCC approval bear the full 
cost of learning which remedies are available for creditors while other 
parties will gain that information for free. Commenters contended that 
the provision requiring a ``written legal opinion verifying the 
proposed provisions and amendments would be valid and enforceable under 
applicable law of the relevant jurisdictions'' should be eliminated as 
unnecessary.\148\ Additionally, commenters urged that the provision 
should be broadened to allow approvals of provisions not directly 
related to enhanced creditor protections.
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    \148\ One commenter also suggested permitting amendments to QFCs 
to be accomplished through a confirmation document for a new 
agreement or by email instead of a formal amendment of the QFC 
signed by the parties. The final rule does not prescribe a specific 
method for amending covered QFCs.
---------------------------------------------------------------------------

    Final Rule. The final rule clarifies that the OCC could approve an 
alternative proposal of additional creditor protections as compliant 
with sections 47.4 and 47.5 of the final rule, but the OCC has not 
otherwise modified these provisions of the proposal in response to 
changes requested by commenters. The provisions contain flexibility and 
guidance on the process for submitting and approving enhanced creditor 
protections. The final rule directly places requirements only on 
covered banks, and thus only covered banks are eligible to submit 
requests pursuant to these provisions. In response to commenters' 
concerns, the OCC notes that the final rule does not prevent multiple 
covered banks from presenting one request and does not prevent covered 
banks from seeking the input of counterparties when developing a 
request. The final rule does not provide a maximum time to review 
proposals because proposals could vary greatly in complexity and 
novelty. The final rule also maintains the provision requiring a 
written legal opinion, which helps ensure that proposed provisions are 
valid and enforceable under applicable law. The final rule does not 
expand the approval process beyond additional creditor protections; 
however, revisions to aspects of the final rule may be made through the 
rulemaking process.
2. Compliance With the International Swaps and Derivatives Association 
(ISDA) 2015 Universal Resolution Stay Protocol and U.S. Protocol
    Proposed Rule and Final Rule. In lieu of the process for the 
approval of enhanced creditor protections that are described 
previously, a covered bank would be permitted to comply with the 
proposed rule by amending a covered QFC through adherence to the ISDA 
2015 Universal Resolution Stay Protocol (including immaterial 
amendments to the Protocol).\149\ The Protocol ``enables parties to 
amend the terms of their financial contracts to contractually recognize 
the cross-border application of special resolution regimes applicable 
to certain financial companies and support the resolution of certain 
financial companies under the [U.S.] Bankruptcy Code.'' \150\ The 
Protocol amends ISDA Master Agreements, which are used for derivatives 
transactions. Market participants also may amend their master 
agreements for securities financing transactions by adhering to the 
Securities Financing Transaction Annex \151\ to the Protocol and may 
amend all other QFCs by adhering to the Other Agreements Annex. Thus, a 
covered bank would be able to comply with the proposed rule with 
respect to all of its covered QFCs through adherence to the Protocol 
and the annexes.
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    \149\ International Swaps and Derivatives Association, Inc., 
``ISDA 2015 Universal Resolution Stay Protocol'' (November 4, 2015), 
available at http://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf/. 
The Protocol was developed by a working group of member institutions 
of the ISDA, in coordination with the FRB, the FDIC, the OCC, and 
foreign financial supervisory agencies. ISDA is expected to 
supplement the Protocol with ISDA Resolution Stay Jurisdictional 
Modular Protocols for the United States and other jurisdictions. A 
U.S. module that is the same in all respects to the Protocol aside 
from exempting QFCs between adherents that are not covered banks 
would be consistent with the current proposed rule.
    \150\ Protocol Press Release at http://www2.isda.org/functional-areas/protocol-management/protocol/22.
    \151\ The Securities Financing Transaction Annex was developed 
by the International Capital Markets Association, the International 
Securities Lending Association, and the Securities Industry and 
Financial Markets Association, in coordination with the ISDA.
---------------------------------------------------------------------------

    The Protocol has the same general objective as the proposed rule, 
which is to make GSIB entities more resolvable by amending their 
contracts to, in effect, contractually recognize the applicability of 
special resolution regimes (including the OLA and the FDI Act) and to 
restrict cross-default provisions to facilitate orderly resolution 
under the U.S. Bankruptcy Code. The provisions of the Protocol largely 
track the requirements of the proposed rule.\152\ However, the Protocol 
does have a narrower scope than the proposed rule,\153\ and it allows 
for somewhat stronger creditor protections than would otherwise be 
permitted under the proposed rule.\154\
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    \152\ For example, sections 2(a) and 2(b) of the Protocol impose 
general prohibitions on cross-default rights based on the entry of 
an affiliate of the direct party into the most common U.S. 
resolution proceedings, including resolution under the U.S. 
Bankruptcy Code. By allowing the exercise of ``Performance Default 
Rights'' and ``Unrelated Default Rights,'' as those terms are 
defined in Sec.  6 of the Protocol, sections 2(a) and 2(b) also 
generally permit the creditor protections that would be allowed 
under the proposed rule. Section 2(f) of the Protocol overrides 
certain contractual provisions that would block the transfer of a 
credit enhancement to a transferee entity. Section 2(i), 
complemented by the Protocol's definition of the term ``Unrelated 
Default Rights,'' provides that a party seeking to exercise 
permitted default rights must bear the burden of establishing by 
clear and convincing evidence that those rights may indeed be 
exercised.
    \153\ The restrictions on default rights imposed by section 2 of 
the Protocol apply only when an affiliate of the direct party enters 
``U.S. Insolvency Proceedings,'' which is defined to include 
proceedings under Chapters 7 and 11 of the Bankruptcy Code, the FDI 
Act, and the Securities Investor Protection Act. By contrast, Sec.  
47.4 of the proposed rule would apply broadly to default rights 
related to affiliates of the direct party ``becoming subject to a 
receivership, insolvency, liquidation, resolution, or similar 
proceeding,'' which encompasses proceedings under State and foreign 
law.
    \154\ For example, the Protocol allows a non-defaulting party to 
exercise cross-default rights based on the entry of an affiliate of 
the direct party into certain resolution proceedings if the direct 
party's U.S. parent has not gone into resolution. See paragraph (b) 
of the Protocol's definition of ``Unrelated Default Rights''; see 
also sections 1 and 3(b) of the Protocol. As another example, if the 
affiliate credit support provider that has entered bankruptcy 
remains obligated under the credit enhancement, rather than 
transferring it to a transferee, then the Protocol's restrictions on 
the exercise of default rights continue to apply beyond the stay 
period only if the Bankruptcy Court issues a ``Creditor Protection 
Order.'' Such an order would, among other things, grant 
administrative expense status to the non-defaulting party's claims 
under the credit enhancement. See sections 2(b)(i)(B) and 
2(b)(iii)(B) of the Protocol and the Protocol's definitions of 
``Creditor Protection Order'' and ``DIP Stay Conditions.''
---------------------------------------------------------------------------

    The Protocol also includes a feature, not included in the proposed 
rule, that compensates for the Protocol's narrower scope and allowance 
for stronger creditor protections: When an entity

[[Page 56657]]

(whether or not it is a covered bank) adheres to the Protocol, it 
necessarily adheres to the Protocol with respect to all covered 
entities that have also adhered to the Protocol.\155\ Thus, if all 
covered banks adhere to the Protocol, any other entity that chooses to 
adhere will simultaneously adhere with respect to all covered entities 
and covered banks. By allowing for all covered QFCs to be modified by 
the same contractual terms, this ``all-or-none'' feature would promote 
transparency, predictability, and equal treatment with respect to 
counterparties' default rights during the resolution of a GSIB entity 
and thereby advance the proposed rule's objective of increasing the 
likelihood that such a resolution could be carried out in an orderly 
manner.
---------------------------------------------------------------------------

    \155\ Under section 4(a) of the Protocol, the Protocol is 
generally effective as between any two adhering parties, once the 
relevant effective date has arrived. Under section 4(b)(ii), an 
adhering party that is not a covered bank may choose to opt out of 
section 2 of the Protocol with respect to its contracts with any 
other adhering party that is also not a covered bank. However, the 
Protocol will apply to relationships between any covered bank that 
adheres and any other adhering party.
---------------------------------------------------------------------------

    Like Sec.  47.5 of the proposed rule, Section 2 of the Protocol was 
developed to increase GSIB resolvability under the Bankruptcy Code and 
other U.S. insolvency regimes. The Protocol does allow for somewhat 
broader creditor protections than would otherwise be permitted under 
the proposed rule, but, consistent with the Protocol's purpose, those 
additional creditor protections would not materially diminish the 
prospects for the orderly resolution of a GSIB. And the Protocol 
carries the desirable all-or-none feature, which would further increase 
a GSIB entity's resolvability and which the proposed rule otherwise 
lacks. For these reasons, and consistent with the broad policy 
objective of enhancing the stability of the U.S. financial system by 
increasing the resolvability of systemically important financial 
companies in the United States, this provision of the proposed rule is 
adopted by this final rule, to allow a covered bank to bring its 
covered QFCs into compliance by amending them through adherence to the 
Protocol (and, as relevant, the annexes to the Protocol).

H. Transition Periods (Sections 47.4 and 47.5)

    Proposed Rule. Under the proposed rule, compliance would be 
required on the first day of the first calendar quarter that begins at 
least one year after the issuance of the final rule (effective 
date).\156\ Moreover, the proposed rule required a covered bank to 
bring preexisting covered QFCs entered into prior to the effective date 
into compliance with the proposed rule no later than the first date on 
or after the effective date on which the covered bank enters into a new 
covered QFC with the counterparty to the preexisting covered QFC or 
with an affiliate of that counterparty. Thus, under the proposed rule, 
a covered bank would not be required to conform a preexisting QFC if 
that covered bank (or any affiliate of that covered bank) does not 
enter into any new QFCs with the same counterparty or an affiliate of 
that counterparty on or after the effective date.
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    \156\ Under section 302(b) of the Riegle Community Development 
and Regulatory Improvement Act of 1994, new regulations that impose 
requirements on insured depository institutions generally must 
``take effect on the first day of a calendar quarter which begins on 
or after the date on which the regulations are published in final 
form.'' 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

    Comments. A number of commenters urged the OCC to adopt a phased-in 
approach to compliance that would extend the compliance deadline for 
covered QFCs with certain types of counterparties in order to allow 
time for necessary client outreach and education, especially for non-
GSIB counterparties that may be unfamiliar with the Universal Protocol 
or the final rule's requirements. These commenters contended that the 
original compliance period of one year should be limited to 
counterparties that are banks, broker-dealers, swap dealers, security-
based swap dealers, major swap participants, and major security-based 
swap participants. These commenters urged that the compliance period 
for QFCs with asset managers, commodity pools, private funds, and other 
entities that are predominantly engaged in activities that are 
financial in nature within the meaning of Section 4(k) of the BHC Act 
should be extended for six months after the date of the original 
compliance period identified in the proposed rule. Finally, these 
commenters argued that the compliance period for QFCs with all other 
counterparties should be extended for 12 months after the date of the 
original compliance period identified in the proposed rule as these 
counterparties are likely to be least familiar with the requirements of 
the final rule.
    One commenter suggested that the final rule should take effect no 
sooner than one year from the date that an approved U.S. JMP is 
published and available for adherence, including any additional time it 
might take to seek the OCC's approval of it. Certain commenters 
requested that the compliance deadline for covered QFCs entered into by 
an agent on behalf of a principal be extended by six months as well. 
Other commenters, however, cautioned against an approach that would 
impose different deadlines with respect to different classes of QFCs, 
as opposed to counterparty types, since the main challenge in 
connection with the remediation is the need for outreach to and 
education of counterparties. These commenters contended that once a 
counterparty has become familiar with the requirements of the rule and 
the terms of the required amendments, it would be more efficient to 
remediate all covered QFCs with the counterparty at the same time.
    A number of commenters also requested that the OCC confirm that 
entities that are acquired by a GSIB, and thereby become new covered 
banks, have until the first day of the first calendar quarter 
immediately following one year after becoming covered banks to conform 
their existing QFCs. Commenters argued that this would allow the GSIB 
to conform existing QFCs in an orderly fashion without impairing the 
ability of covered bank and the affiliates of the covered bank to 
engage in corporate activities. These commenters also requested 
clarification that, during that conformance period, affiliates of 
covered banks would not be prohibited from entering into new 
transactions or QFCs with counterparties of the newly acquired entity 
if the existing covered banks otherwise comply with the final rule's 
requirements.
    Some commenters urged the OCC to exclude existing contracts from 
the final rule's requirements and only apply the rule on a prospective 
basis. Certain commenters opposed application of the requirements of 
the rule to existing QFCs, requesting instead that the final rule only 
apply to QFCs entered into after the effective date of any final rule 
and that all pre-existing QFCs not be subject to the rule's 
requirements. Commenters suggested that end users of QFCs with GSIB 
affiliates might not have entered into existing contracts without the 
default rights prohibited in the proposed rule and that revising 
existing QFCs would be time-consuming and expensive. Commenters pointed 
out that this treatment would be consistent with the final rules in the 
U.K. and the statutory requirements adopted by Germany.
    Final Rule. The effective date for the final rule is January 1, 
2018. However, in order to reduce the compliance burden of the final 
rule, the OCC has adopted a phased-in compliance schedule, as requested 
by commenters. The final rule provides that a covered bank must conform 
a covered QFC to

[[Page 56658]]

the requirements of this final rule by the first day of the calendar 
quarter immediately following one year from the January 1, 2018, 
effective date of the final rule with respect to covered QFCs with 
other covered entities, covered banks, or covered FSIs (referred to as 
the ``first compliance date'' for the purposes of this preamble).\157\ 
This provision allows the counterparties that should be most familiar 
with the requirements of the final rule over one year to conform with 
the final rule's requirements. Moreover, this is a relatively small 
number of counterparties that would need to modify their QFCs in the 
first year following the January 1, 2018, effective date of the final 
rule, and many covered entities, covered banks, and covered FSIs with 
covered QFCs have already adhered to the Universal Protocol.
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    \157\ See final rule Sec.  47.3(f)(1)(i). The definition of 
covered QFC of the final rule has been revised to make clear that, 
consistent with the proposed rule, a covered QFC is a QFC that the 
covered bank becomes a party to on or after the first day of the 
calendar quarter immediately following one year from the January 1, 
2018, effective date of this final rule. See final rule Sec.  
47.3(c). As discussed above, a covered bank's in-scope QFC that is 
entered into before this date may also be a covered QFC if the 
covered bank or any affiliate that is a covered entity, covered 
bank, or covered FSI also becomes a party to a QFC with the same 
counterparty or a consolidated affiliate of the same counterparty on 
or after the first compliance date. See id.
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    The final rule provides additional time for compliance with the 
requirements for other types of counterparties. In particular, for 
other types of financial counterparties \158\ (other than small 
financial institutions),\159\ the final rule provides 18 months from 
the January 1, 2018, effective date of the final rule for compliance 
with its requirements, as requested by commenters.\160\ For community 
banks and other non-financial counterparties, the final rule provides 
two years from the January 1, 2018, effective date of the final rule 
for compliance with its requirements, as requested by commenters.\161\ 
Adopting a phased-in compliance approach based on the type (and, in 
some cases, size) of the counterparty will allow market participants 
time to adjust to the new requirements and make required changes to 
QFCs in an orderly manner. It will also give time for development of 
the U.S. Protocol or any other protocol that would meet the 
requirements of the final rule.
---------------------------------------------------------------------------

    \158\ See final rule Sec.  47.2 (defining ``financial 
counterparty'').
    \159\ The final rule defines small financial institution as an 
insured bank, insured savings association, farm credit system 
institution, or credit union with assets of $10,000,000,000 or less. 
See final rule Sec.  47.2.
    \160\ See final rule Sec.  47.3(f)(1)(ii).
    \161\ See final rule Sec.  47.3(f)(1)(iii).
---------------------------------------------------------------------------

    The OCC is giving this additional time for compliance to respond to 
concerns raised by commenters. The OCC encourages covered banks to 
start planning and outreach efforts early in order to come into 
compliance with the final rule in the time frames provided. The OCC 
believes that this additional time for compliance should also address 
concerns raised by commenters regarding the burden of conforming 
existing contracts by allowing firms additional time to conform all 
covered QFCs to the requirements of the final rule.
    Although the phased-in compliance period does not contain special 
rules related to acting as an agent as requested by certain commenters, 
the final rule has been modified as described above to clarify that a 
covered bank does not become a party to a QFC solely by acting as agent 
with respect to the QFC.\162\
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    \162\ See final rule Sec.  47.3(e)(1).
---------------------------------------------------------------------------

    National banks, FSAs, and Federal branches and agencies that are 
covered banks when the final rule is effective on January 1, 2018, 
would be required to comply with the requirements of the final rule 
beginning on the first compliance date. Thus, a covered bank would be 
required to ensure that covered QFCs entered into on or after the first 
compliance date comply with the final rule's requirements but would be 
given more time to conform such covered QFCs with counterparties (or 
other parties to the QFC) that are not a covered entity, covered bank, 
or covered FSI.\163\ Moreover, a covered bank would be required to 
bring an in-scope QFC entered into prior to the first compliance date 
into compliance with the final rule no later than the applicable date 
of the tiered compliance dates (discussed previously) if the covered 
bank or an affiliate (that is also a covered entity, covered bank, or 
covered FSI) enters into a new covered QFC with the counterparty to the 
pre-existing covered QFC or a consolidated affiliate of the 
counterparty on or after the first compliance date.\164\ Thus, 
consistent with the proposed rule, a covered bank would not be required 
to conform a pre-existing QFC if that covered bank and its affiliate 
that is a covered entity, covered bank, or covered FSI do not enter 
into any new QFCs with the same counterparty or its consolidated 
affiliates on or after the first compliance date.
---------------------------------------------------------------------------

    \163\ See final rule Sec.  47.3(c)(1) and (f)(1).
    \164\ See id.
---------------------------------------------------------------------------

    In addition, a national bank, FSA or Federal branch or agency that 
becomes a covered bank after the January 1, 2018, effective date of the 
final rule (referred to as a ``new covered bank'' for purposes of this 
preamble) generally has the same period of time to comply as a national 
bank, FSA, or Federal branch or agency that is a covered bank on the 
January 1, 2018, effective date (i.e., compliance will phase in over a 
two-year period based on the type of counterparty).\165\ The final rule 
also clarifies that a covered QFC, with respect to a new covered bank, 
means an in-scope QFC that the new covered bank becomes a party to (1) 
on the date the covered bank first becomes a covered bank, and (2) 
before that date, if the covered bank or one of its affiliates that is 
a covered entity, covered bank, or covered FSI also enters, executes, 
or otherwise becomes a party to a QFC with the same counterparty or a 
consolidated affiliate of the counterparty after that date.\166\ Under 
the final rule, a national bank, FSA, or Federal branch or agency that 
is a covered bank on the January 1, 2018, effective date of the final 
rule (referred to as an ``existing covered bank'' for purposes of this 
preamble) and becomes an affiliate of a new covered bank generally must 
conform any existing but non-conformed in-scope QFC that the existing 
covered bank continues to have with a counterparty after the applicable 
initial compliance date by the date the new covered bank enters a QFC 
with the same counterparty (or any of its consolidated affiliates) or 
within a reasonable period thereafter. Acquisitions of new entities are 
planned in advance and should include preparing to comply with 
applicable laws and regulations.
---------------------------------------------------------------------------

    \165\ See final rule Sec.  47.3(f)(2).
    \166\ See final rule Sec.  47.3(c)(2).
---------------------------------------------------------------------------

    The OCC does not believe it is appropriate to exclude all pre-
existing QFCs because of the current and future risk that existing 
covered QFCs pose to the orderly resolution of a covered bank. 
Moreover, application of different default rights to existing and 
future transactions within a netting set could cause the netting set to 
be broken, which commenters noted could increase burden to both parties 
to the netting set.\167\ Therefore, the final rule requires an existing 
QFC between a covered bank and a counterparty to be conformed to the 
requirements of the final rule if the covered bank (or an affiliate 
that is a covered entity, covered bank, or covered FSI) enters into 
another QFC with the

[[Page 56659]]

counterparty or its consolidated affiliate on or after the first day of 
the calendar quarter immediately following one year from the January 1, 
2018, effective date of the final rule. Subject to any compliance date 
applicable to the covered bank, the OCC expects a covered bank to 
conform existing QFCs that become covered QFCs within a reasonable 
period.
---------------------------------------------------------------------------

    \167\ The requirements of the final rule, particularly those of 
Sec.  47.5, may have a different impact on netting, including close-
out netting, than the U.K. and German requirements cited by 
commenters.
---------------------------------------------------------------------------

    By permitting a covered bank to remain a party to noncompliant QFCs 
entered into before the effective date unless the covered bank or any 
affiliate (that is also a covered entity, covered bank, or covered FSI) 
enters into new QFCs with the same counterparty or its affiliates, the 
final rule strikes a balance between ensuring QFC continuity if the 
GSIB were to fail and ensuring that covered banks and their existing 
counterparties can manage any compliance costs and disruptions 
associated with conforming existing QFCs by refraining from entering 
into new QFCs. The requirement that a covered bank ensure that all 
existing QFCs with a particular counterparty and its affiliates are 
compliant before it or any affiliate of the covered bank (that is also 
a covered entity, covered bank, or covered FSI) enters into a new QFC 
with the same counterparty or its affiliates after the January 1, 2018, 
effective date will provide covered banks with an incentive to seek the 
modifications necessary to ensure that their QFCs with their most 
important counterparties are compliant. Moreover, the volume of 
noncompliant covered QFCs outstanding can be expected to decrease over 
time and eventually to reach zero. In light of these considerations, 
and to avoid creating potentially inappropriate compliance costs with 
respect to existing QFCs with counterparties that, together with their 
consolidated affiliates, do not enter into new covered QFCs with the 
GSIB on or after the first day of the calendar quarter that is one year 
from the January 1, 2018, effective date of the final rule, it would be 
appropriate to permit a limited number of noncompliant QFCs to remain 
outstanding, in keeping with the terms described above. Moreover, the 
final rule also excludes existing warrants and retail investment 
advisory agreements to address concerns raised by commenters and 
mitigate burden.\168\ The OCC will monitor covered banks' levels of 
noncompliant QFCs and evaluate the risk, if any, that they pose to the 
safety and soundness of the Federal banking system, and indirectly, to 
GSIBs or to U.S. financial stability.
---------------------------------------------------------------------------

    \168\ See final rule Sec.  47.8(c).
---------------------------------------------------------------------------

I. Revisions to Certain Definitions in the OCC's Capital and Liquidity 
Rules

    The regulatory capital rules, as implemented by the OCC, FRB, and 
FDIC, permit a bank to measure exposure from certain types of financial 
contracts on a net basis and recognize the risk-mitigating effect of 
financial collateral for other types of exposures, provided that the 
contracts are subject to a ``qualifying master netting agreement,'' a 
collateral agreement, eligible margin loan, or repo-style transaction 
(collectively referred to as netting agreements) that provides for 
certain rights upon a counterparty default. With limited exception, to 
qualify for netting treatment, a qualifying netting agreement must 
permit a bank to terminate, apply close-out netting, and promptly 
liquidate or set-off collateral upon an event of default of the 
counterparty (default rights), thereby reducing its counterparty 
exposure and market risks. Measuring the amount of exposure of these 
contracts on a net basis, rather than a gross basis, results in a lower 
measure of exposure, and thus, a lower capital requirement.
    An exception to the immediate close-out requirement is made for the 
stay of default rights if the financial company is in receivership, 
conservatorship, or resolution under Title II of the Dodd-Frank Act, or 
the FDI Act. Accordingly, transactions conducted under netting 
agreements where default rights may be stayed under Title II of the 
Dodd-Frank Act or the FDI Act would not be disqualified from netting 
treatment.
    On December 30, 2014, the OCC and the FRB issued a joint interim 
final rule (effective January 1, 2015) that amended the definitions of 
``qualifying master netting agreement,'' ``collateral agreement,'' 
``eligible margin loan,'' and ``repo-style transaction,'' in the OCC 
and FRB regulatory capital rules, and ``qualifying master netting 
agreement'' in the OCC and FRB liquidity coverage ratio (LCR) rules to 
expand the exception to the immediate close-out requirement to ensure 
that the current netting treatment under the regulatory capital, 
liquidity, and lending limits rules \169\ for over-the-counter (OTC) 
derivatives, repo-style transactions, eligible margin loans, and other 
collateralized transactions would be unaffected by the adoption of 
various foreign special resolution regimes through the ISDA Protocol. 
In particular, the interim final rule amended these definitions to 
provide that a relevant netting agreement or collateral agreement may 
provide for a limited stay or avoidance of rights where the agreement 
is subject by its terms to, or incorporates, certain resolution regimes 
applicable to financial companies, including Title II of the Dodd-Frank 
Act, the FDI Act, or any similar foreign resolution regime that 
provides for limited stays substantially similar to the stay for 
qualified financial contracts provided in Title II of the Dodd-Frank 
Act or the FDI Act.
---------------------------------------------------------------------------

    \169\ The impact of these amendments to these definition on the 
legal lending limits requirements for national banks and FSAs is 
indirect. The definition of qualifying master netting agreement used 
in the legal lending limit rules is defined by cross-reference to 
the definition in regulatoy capital requirements. See 12 CFR 32.2(u) 
(Definition of ``qualifying master netting agreement'' cross-
referencing 12 CFR 3.2); see also 79 FR 78287, 78292 (December 30, 
2014).
---------------------------------------------------------------------------

    Section 47.4 of the proposed rule essentially limits the default 
rights exercisable against a covered bank to the same stay-and-transfer 
restrictions imposed under the U.S. Special Resolution Regime against a 
direct counterparty. Section 47.4 of the proposed rule mirrors the 
contractual stay-and-transfer restrictions reflected in the ISDA 
Protocol with one notable difference. While adoption of the ISDA 
Protocol is voluntary, covered banks subject to the proposed rule must 
conform their covered QFCs to the stay-and-transfer restrictions in 
Sec.  47.4.
    With respect to limitations on cross-default rights in proposed 
Sec.  47.5, the OCC proposed additional conforming amendments in order 
to maintain the existing netting treatment for covered QFCs for 
purposes of the regulatory capital, liquidity, and lending limits 
rules. Specifically, the OCC is proposed to amend the definition of 
``qualifying master netting agreement,'' as well as to make conforming 
amendments to ``collateral agreement,'' ``eligible margin loan,'' and 
``repo-style transaction,'' in the regulatory capital rules in part 3, 
and ``qualifying master netting agreement'' in the LCR rules in part 50 
to ensure that the regulatory capital, liquidity, and lending limits 
treatment of OTC derivatives, repo-style transactions, eligible margin 
loans, and other collateralized transactions would be unaffected by the 
adoption of proposed Sec.  47.5. Without these proposed amendments, 
covered banks that amend their covered QFCs to comply with this final 
rule would no longer be permitted to recognize covered QFCs as subject 
to a qualifying master netting agreement or satisfying the criteria 
necessary for the current regulatory capital, liquidity, and lending 
limits treatment, and would be required to measure exposure from these 
contracts on a gross, rather than net,

[[Page 56660]]

basis. This result would undermine the proposed requirements in Sec.  
47.5. The OCC does not believe that the disqualification of covered 
QFCs from master netting agreements would accurately reflect the risk 
posed by these OTC derivatives transactions.
    Although the proposed rule reformats some of the definitions in 
parts 3 and 50 to include the text from the interim final rule, the 
proposed amendments did not alter the substance or effect of the prior 
amendment adopted by the interim final rule.
    The rule establishing margin and capital requirements for covered 
swap entities (swap margin rule) defines the term ``eligible master 
netting agreement'' in a manner similar to the definition of 
``qualifying master netting agreement.'' Thus, it may also be 
appropriate to amend the definition of ``eligible master netting 
agreement'' to account for the proposed restrictions on covered 
entities' QFCs.

IV. Regulatory Analysis

Effective Date

    The APA requires that a substantive rule must be published not less 
than 30 days before its effective date, unless, among other things, the 
rule grants or recognizes an exemption or relieves a restriction.\170\ 
Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (RCDRIA) requires that regulations imposing 
additional reporting, disclosure, or other requirements on insured 
depository institutions take effect on the first day of the calendar 
quarter after publication of the final rule, unless, among other 
things, the agency determines for good cause that the regulations 
should become effective before such time.\171\ The January 1, 2018 
effective date of this final rule meets both the APA and RCDRIA 
effective date requirements, as it will take effect at least 30 days 
after its publication date of November 29, 2017 and on the first day of 
the calendar quarter following publication, January 1, 2018.
---------------------------------------------------------------------------

    \170\ 5 U.S.C. 553(d)(1).
    \171\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    Section 302 of the RCDRIA also requires the OCC to consider, 
consistent with principles of safety and soundness and the public 
interest, any administrative burdens that such regulations would place 
on depository institutions, including small depository institutions, 
and customers of depository institutions, as well as the benefits of 
such regulations.\172\ The OCC has considered comment on these matters 
in other sections of this SUPPLEMENTARY INFORMATION section.
---------------------------------------------------------------------------

    \172\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

Paperwork Reduction Act

    In accordance with section 3512 of the Paperwork Reduction Act 
(PRA) of 1995 (44 U.S.C. 3501-3521) (as amended), the OCC may not 
conduct or sponsor, and a respondent is not required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number. Certain provisions of the 
final rule contain ``collection of information'' requirements within 
the meaning of the PRA. The information collection requirements 
contained in this final rule were submitted to OMB for review at the 
proposed rule stage. OMB instructed the OCC to (i) examine public 
comment in response to the information collection requirements found in 
the proposed rule; and (ii) describe in the supporting statement for 
the final rule any public comments received and why any recommendations 
were or were not incorporated. The OCC received no comments regarding 
the information collection requirements contained in the proposed rule.
    Comments continue to be invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the OCC's functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments are 
solicited on aspects of this final rule that may affect reporting, 
recordkeeping, or disclosure requirements and burden estimates. Because 
paper mail in the Washington, DC area and at the OCC is subject to 
delay, commenters are encouraged to submit comments by email, if 
possible. Comments may be sent to: Legislative and Regulatory 
Activities Division, Office of the Comptroller of the Currency, 
Attention: 1557-0339, 400 7th Street SW., Suite 3E-218, Washington, DC 
20219. In addition, comments may be sent by fax to (571) 465-4326 or by 
electronic mail to [email protected]. You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC 
20219. For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.
    All comments received, including attachments and other supporting 
materials, are part of the public record and subject to public 
disclosure. Do not include any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.
    Additionally, please send a copy of your comments by mail to: OCC 
Desk Officer, 1557-0339, U.S. Office of Management and Budget, 725 17th 
Street NW., #10235, Washington, DC 20503 or by email to: 
[email protected].
    Title of Information Collection: Mandatory Contractual Stay 
Requirements for Qualified Financial Contracts.
    Affected Public: Businesses or other for-profit.
    Respondents: National banks or FSAs that have more than $700 
billion in total assets as reported in their most recent Call Reports; 
national banks or FSAs (including any subsidiary of a national bank or 
FSA) that are subsidiaries of a global systemically important BHC that 
has been designated pursuant to 252.82 of the FRB's Regulation YY; 
national banks or FSAs (including any subsidiary of a national bank or 
FSA) that are subsidiaries of a global systemically important FBO 
designated pursuant to section 252.87 of the FRB's Regulation YY; and 
Federal branches and agencies (including any U.S. subsidiary of a 
Federal branch or agency) of a global systemically important FBO that 
has been designated pursuant to section 252.87 of the FRB's Regulation 
YY.
    Abstract: Section 47.6(b)(1) provides that a covered bank may 
request that the OCC approve as compliant with the requirements of 
Sec. Sec.  47.4 and 47.5 provisions of one or more forms of covered 
QFCs, or amendments to one or more forms of covered QFCs, with enhanced 
creditor protection conditions. The request must include: (1) An 
analysis of the proposal under each consideration of the relevance of 
creditor protection provisions; (2) a

[[Page 56661]]

written legal opinion verifying that proposed provisions or amendments 
would be valid and enforceable under applicable law of the relevant 
jurisdictions, including, in the case of proposed amendments, the 
validity and enforceability of the proposal to amend the covered QFCs; 
and (3) any additional information relevant to its approval that the 
OCC requests.
    Burden Estimates:
    Estimated Number of Respondents: 44.
    Estimated Burden per Respondent: 40 hours.
    Total Estimated Burden: 1,760 hours.

Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (RFA), an agency must 
prepare a regulatory flexibility analysis for all proposed and final 
rules that describes the impact of the rule on small entities.\173\ 
Under section 605(b) of the RFA, this analysis is not required if the 
head of the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities and publishes 
its certification and a short explanatory statement in the Federal 
Register along with its rule.
---------------------------------------------------------------------------

    \173\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    The OCC currently supervises approximately 956 small entities.\174\ 
The scope of the final rule is limited to large banks and their 
affiliates (covered banks). Therefore, the final rule will not have a 
direct impact on OCC-supervised small entities. The final rule may 
indirectly have an impact on OCC-supervised small entities that are a 
party to a QFC with a covered bank. The OCC expects that any costs 
associated with this will be minimal. Therefore, the OCC certifies that 
this final rule does not have a significant economic impact on a 
substantial number of small entities supervised by the OCC. 
Accordingly, a regulatory flexibility analysis is not required.
---------------------------------------------------------------------------

    \174\ The OCC bases its estimate of the number of small entities 
on the Small Business Administration's size thresholds for 
commercial banks and savings institutions, and trust companies, 
which are $550 million and $38.5 million, respectively. Consistent 
with the General Principles of Affiliation 13 CFR 121.103(a), the 
OCC counts the assets of affiliated financial institutions when 
determining if the OCC should classify an OCC-supervised institution 
as a small entity. The OCC uses December 31, 2016, to determine size 
because a ``financial institution's assets are determined by 
averaging the assets reported on its four quarterly financial 
statements for the preceding year.'' See footnote 8 of the U.S. 
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------

Unfunded Mandates Reform Act of 1995 Determination

    The OCC has analyzed the final rule under the factors in the 
Unfunded Mandates Reform Act of 1995 (UMRA).\175\ Under this analysis, 
the OCC considered whether the final rule includes a Federal mandate 
that may result in the expenditure by state, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted annually for inflation). The 
UMRA does not apply to regulations that incorporate requirements 
specifically set forth in law.
---------------------------------------------------------------------------

    \175\ 2 U.S.C. 1531 et seq.
---------------------------------------------------------------------------

    The OCC finds that the rule does not trigger the UMRA cost 
threshold because we estimate that the UMRA cost is less than $36 
million. The OCC believes that the largest direct cost of implementing 
the final rule is the cost of amending contracts without an ISDA master 
agreement in place, which is estimated to range from approximately 
$1.18 million to approximately $35.4 million. Accordingly, the OCC has 
not prepared the written statement described in section 202 of the 
UMRA.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, Federal savings 
associations, National banks, Reporting and recordkeeping requirements, 
Risk.

12 CFR Part 47

    Administrative practice and procedure, Banks and banking, Bank 
resolution, Default rights, Federal savings associations, National 
banks, Qualified financial contracts, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 50

    Administrative practice and procedure, Banks and banking, 
Liquidity, Reporting and recordkeeping requirements, Savings 
associations.

Authority and Issuance

    For the reasons stated in the Supplementary Information, the Office 
of the Comptroller of the Currency is amending 12 CFR part 3, adding 12 
CFR part 47, and amending 12 CFR part 50 as follows:

PART 3--CAPITAL ADEQUACY STANDARDS

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

    Authority:  12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).


0
2. Section 3.2 is amended by:
0
a. Revising the definition of ``collateral agreement'';
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin 
loan'';
0
c. Revising the definition of ``qualifying master netting agreement''; 
and
0
d. Revising paragraph (3)(ii)(A) of the definition of ``repo-style 
transaction''.
    The revisions are set forth below:


Sec.  3.2  Definitions.

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

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

    (ii) Where the agreement is subject by its terms to any of the laws 
referenced in paragraph (1)(i) of this definition; or
    (2) Other than to the extent necessary for the counterparty to 
comply with the requirements of part 47, subpart I of part 252, and 
part 382 of this title 12, as applicable.
* * * * *
    Eligible margin loan * * *
    (1) * * *
    (iii) The extension of credit is conducted under an agreement that 
provides the national bank or Federal

[[Page 56662]]

savings association the right to accelerate and terminate the extension 
of credit and to liquidate or set-off collateral promptly upon an event 
of default, including upon an event of receivership, insolvency, 
liquidation, conservatorship, or similar proceeding, of the 
counterparty, provided that, in any such case:
    (A) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than in receivership, conservatorship, or resolution under the Federal 
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any 
similar insolvency law applicable to GSEs,\5\ or laws of foreign 
jurisdictions that are substantially similar \6\ to the U.S. laws 
referenced in this paragraph (1)(iii)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty; and
---------------------------------------------------------------------------

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

    (B) The agreement may limit the right to accelerate, terminate, and 
close-out on a net basis all transactions under the agreement and to 
liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 252, and part 382, 
of this title 12, as applicable.
* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the national bank or Federal savings 
association the right to accelerate, terminate, and close-out on a net 
basis all transactions under the agreement and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case:
    (i) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than:
    (A) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \7\ to the U.S. laws 
referenced in this paragraph (2)(i)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

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

    (B) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this 
definition; and
    (ii) The agreement may limit the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and 
to liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 252, and part 382, 
of this title 12, as applicable.
* * * * *
    Repo-style transaction * * *
    (3) * * *
    (ii) * * *
    (A) The transaction is executed under an agreement that provides 
the national bank or Federal savings association the right to 
accelerate, terminate, and close-out the transaction on a net basis and 
to liquidate or set-off collateral promptly upon an event of default, 
including upon an event of receivership, insolvency, liquidation, or 
similar proceeding, of the counterparty, provided that, in any such 
case:
    (1) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than in receivership, conservatorship, or resolution under the Federal 
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any 
similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \8\ to the U.S. laws 
referenced in this paragraph (3)(ii)(A)(1) in order to facilitate the 
orderly resolution of the defaulting counterparty; and
---------------------------------------------------------------------------

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

    (2) The agreement may limit the right to accelerate, terminate, and 
close-out on a net basis all transactions under the agreement and to 
liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 252, and part 382, 
of this title 12, as applicable; or
* * * * *

PART 47--MANDATORY CONTRACTUAL STAY REQUIREMENTS FOR QUALIFIED 
FINANCIAL CONTRACTS

0
3. Add part 47 to read as follows:

PART 47--MANDATORY CONTRACTUAL STAY REQUIREMENTS FOR QUALIFIED 
FINANCIAL CONTRACTS

Sec.
47.1 Authority and purpose.
47.2 Definitions.
47.3 Applicability.
47.4 U.S. special resolution regimes.
47.5 Insolvency proceedings.
47.6 Approval of enhanced creditor protection conditions.
47.7 Foreign bank multi-branch master agreements.
47.8 Exclusion of certain QFCs.

    Authority:  12 U.S.C. 1, 93a, 481, 1462a, 1463, 1464, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 3102(b), 3108(a), 
5412(b)(2)(B), (D)-(F).


Sec.  47.1  Authority and purpose.

    (a) Authority. 12 U.S.C. 1, 93a, 1462a, 1463, 1464, 1467a, 1818, 
1828, 1831n, 1831p-1, 1831w, 1835, 3102(b), 3108(a), 5412(b)(2)(B), 
(D)-(F).
    (b) Purpose. The purpose of this part is to promote the safety and 
soundness of federally chartered or licensed institutions by mitigating 
the potential destabilizing effects of the resolution of a global 
systemically important banking entity on an affiliate that is a covered 
bank (as defined by this part) by requiring covered banks to include in 
financial contracts covered by this part certain mandatory contractual 
provisions relating to stays on acceleration and close out rights and 
transfer rights.


Sec.  47.2  Definitions.

    As used in this part:
    Affiliate means an affiliate as defined in 12 U.S.C. 1841(k) (Bank 
Holding Company Act).
    Central counterparty (CCP) means a counterparty (for example, a 
clearing house) that facilitates trades between counterparties in one 
or more financial markets by either guaranteeing trades or novating 
contracts.
    Chapter 11 proceeding means a proceeding under Chapter 11 of Title 
11, United States Code (11 U.S.C. 1101-74).

[[Page 56663]]

    Consolidated affiliate means an affiliate of another company that:
    (1) Either consolidates the other company, or is consolidated by 
the other company, on financial statements prepared in accordance with 
U.S. Generally Accepted Accounting Principles, the International 
Financial Reporting Standards, or other similar standards;
    (2) Is, along with the other company, consolidated with a third 
company on a financial statement prepared in accordance with principles 
or standards referenced in paragraph (1) of this definition; or
    (3) For a company that is not subject to principles or standards 
referenced in paragraph (1) of this definition, if consolidation as 
described in paragraph (1) or (2) of this definition would have 
occurred if such principles or standards had applied.
    Control has the same meaning as in 12 U.S.C. 1841 (Bank Holding 
Company Act).
    Covered entity has the same meaning as in Sec.  252.82(a) of this 
title (Federal Reserve Board Regulation YY) (12 CFR 252.82).
    Covered FSI has the same meaning as in Sec.  382.2(b) of this title 
(Federal Deposit Insurance Corporation) (12 CFR 382.2(b)).
    Default right (1) Means, with respect to a QFC, any:
    (i) Right of a party, whether contractual or otherwise (including, 
without limitation, rights incorporated by reference to any other 
contract, agreement, or document, and rights afforded by statute, civil 
code, regulation, and common law), to liquidate, terminate, cancel, 
rescind, or accelerate such agreement or transactions thereunder, set 
off or net amounts owing in respect thereto (except rights related to 
same-day payment netting), exercise remedies in respect of collateral 
or other credit support or property related thereto (including the 
purchase and sale of property), demand payment or delivery thereunder 
or in respect thereof (other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure), suspend, 
delay, or defer payment or performance thereunder, or modify the 
obligations of a party thereunder, or any similar rights; and
    (ii) Right or contractual provision that alters the amount of 
collateral or margin that must be provided with respect to an exposure 
thereunder, including by altering any initial amount, threshold amount, 
variation margin, minimum transfer amount, the margin value of 
collateral, or any similar amount, that entitles a party to demand the 
return of any collateral or margin transferred by it to the other party 
or a custodian or that modifies a transferee's right to reuse 
collateral or margin (if such right previously existed), or any similar 
rights, in each case, other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure;
    (2) With respect to Sec.  47.5, does not include any right under a 
contract that allows a party to terminate the contract on demand or at 
its option at a specified time, or from time to time, without the need 
to show cause.
    FDI Act proceeding means a proceeding that commences upon the 
Federal Deposit Insurance Corporation being appointed as conservator or 
receiver under section 11 of the Federal Deposit Insurance Act (12 
U.S.C. 1821).
    FDI Act stay period means, in connection with an FDI Act 
proceeding, the period of time during which a party to a QFC with a 
party that is subject to an FDI Act proceeding may not exercise any 
right that the party that is not subject to an FDI Act proceeding has 
to terminate, liquidate, or net such QFC, in accordance with section 
11(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)) and any 
implementing regulations.
    Financial counterparty means a person that is:
    (1)(i) A bank holding company or an affiliate thereof; a savings 
and loan holding company as defined in section 10(n) of the Home 
Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding 
company that is established or designated for purposes of compliance 
with Sec.  252.153 of this title (Federal Reserve Board Regulation YY) 
(12 CFR 252.153); or a nonbank financial company supervised by the 
Federal Reserve Board under Title II of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5323);
    (ii) A depository institution as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that 
is organized under the laws of a foreign country and that engages 
directly in the business of banking outside the United States; a 
Federal credit union or State credit union as defined in section 2 of 
the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); an 
institution that functions solely in a trust or fiduciary capacity as 
described in section 2(c)(2)(D) of the Bank Holding Company Act (12 
U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, 
or other similar institution described in section 2(c)(2)(H) of the 
Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
    (iii) An entity that is state-licensed or registered as:
    (A) A credit or lending entity, including a finance company, money 
lender; installment lender; consumer lender or lending company; 
mortgage lender, broker, or bank; motor vehicle title pledge lender; 
payday or deferred deposit lender; premium finance company; commercial 
finance or lending company; or commercial mortgage company; except 
entities registered or licensed solely on account of financing the 
entity's direct sales of goods or services to customers;
    (B) A money services business, including a check casher; money 
transmitter; currency dealer or exchange; or money order or traveler's 
check issuer;
    (iv) A regulated entity as defined in section 1303(20) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
as amended (12 U.S.C. 4502(20)) or any entity for which the Federal 
Housing Finance Agency or its successor is the primary federal 
regulator;
    (v) Any institution chartered in accordance with the Farm Credit 
Act of 1971, as amended (12 U.S.C. 2002 et seq.), that is regulated by 
the Farm Credit Administration;
    (vi) Any entity registered with the Commodity Futures Trading 
Commission as a swap dealer or major swap participant pursuant to the 
Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that 
is registered with the U.S. Securities and Exchange Commission as a 
security-based swap dealer or a major security-based swap participant 
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.);
    (vii) A securities holding company, with the meaning specified in 
section 618 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in 
sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 
202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an 
investment company registered with the U.S. Securities and Exchange 
Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et 
seq.); or a company that has elected to be regulated as a business 
development company pursuant to section 54(a) of the Investment Company 
Act of 1940 (15 U.S.C. 80a-53(a));

[[Page 56664]]

    (viii) A private fund as defined in section 202(a) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that 
would be an investment company under section 3 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an 
entity that is deemed not to be an investment company under section 3 
of the Investment Company Act of 1940 pursuant to Investment Company 
Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange 
Commission;
    (ix) A commodity pool, a commodity pool operator, or a commodity 
trading advisor as defined, respectively, in sections 1a(10), 1a(11), 
and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 
1a(11), and 1a(12)); a floor broker, a floor trader, or introducing 
broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) 
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 
1a(31)); or a futures commission merchant as defined in section 1a(28) 
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
    (x) An employee benefit plan as defined in paragraphs (3) and (32) 
of section 3 of the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1002);
    (xi) An entity that is organized as an insurance company, primarily 
engaged in writing insurance or reinsuring risks underwritten by 
insurance companies, or is subject to supervision as such by a State 
insurance regulator or foreign insurance regulator; or
    (xii) An entity that would be a financial counterparty described in 
paragraphs (1)(i)-(xi) of this definition, if the entity were organized 
under the laws of the United States or any state thereof.
    (2) The term ``financial counterparty'' does not include any 
counterparty that is:
    (i) A sovereign entity;
    (ii) A multilateral development bank; or
    (iii) The Bank for International Settlements.
    Financial market utility (FMU) means any person, regardless of the 
jurisdiction in which the person is located or organized, that manages 
or operates a multilateral system for the purpose of transferring, 
clearing, or settling payments, securities, or other financial 
transactions among financial institutions or between financial 
institutions and the person, but does not include:
    (1) Designated contract markets, registered futures associations, 
swap data repositories, and swap execution facilities registered under 
the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national securities 
exchanges, national securities associations, alternative trading 
systems, security-based swap data repositories, and swap execution 
facilities registered under the Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.), solely by reason of their providing facilities for 
comparison of data respecting the terms of settlement of securities or 
futures transactions effected on such exchange or by means of any 
electronic system operated or controlled by such entities, provided 
that the exclusions in paragraph (1) of this definition apply only with 
respect to the activities that require the entity to be so registered; 
or
    (2) Any broker, dealer, transfer agent, or investment company, or 
any futures commission merchant, introducing broker, commodity trading 
advisor, or commodity pool operator, solely by reason of functions 
performed by such institution as part of brokerage, dealing, transfer 
agency, or investment company activities, or solely by reason of acting 
on behalf of a FMU or a participant therein in connection with the 
furnishing by the FMU of services to its participants or the use of 
services of the FMU by its participants, provided that services 
performed by such institution do not constitute critical risk 
management or processing functions of the FMU.
    Investment advisory contract means any contract or agreement 
whereby a person agrees to act as investment adviser to or to manage 
any investment or trading account of another person.
    Master agreement means a QFC of the type set forth in section 
210(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V) of Title 
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 
U.S.C. 5390(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V)) 
or a master agreement that the Federal Deposit Insurance Corporation 
determines by regulation is a QFC pursuant to section 210(c)(8)(D)(i) 
of Title II of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5390(c)(8)(D)(i)).
    Person includes an individual, bank, corporation, partnership, 
trust, association, joint venture, pool, syndicate, sole 
proprietorship, unincorporated organization, or any other form of 
entity.
    Qualified financial contract (QFC) has the same meaning as in 
section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
    Retail customer or counterparty means a customer or counterparty 
that is:
    (1) An individual;
    (2) A business customer, but solely if and to the extent that:
    (i) The national bank, Federal savings association, or Federal 
branch or agency manages its transactions with the business customer, 
including deposits, unsecured funding, and credit facility and 
liquidity facility transactions, in the same way it manages its 
transactions with individuals;
    (ii) Transactions with the business customer have liquidity risk 
characteristics that are similar to comparable transactions with 
individuals; and
    (iii) The total aggregate funding raised from the business customer 
is less than $1.5 million; or
    (3) A living or testamentary trust that:
    (i) Is solely for the benefit of natural persons;
    (ii) Does not have a corporate trustee; and
    (iii) Terminates within 21 years and 10 months after the death of 
grantors or beneficiaries of the trust living on the effective date of 
the trust or within 25 years, if applicable under state law.
    Small financial institution means a company that:
    (1) Is organized as a bank, as defined in section 3(a) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(a)), the deposits of 
which are insured by the Federal Deposit Insurance Corporation; a 
savings association, as defined in section 3(b) of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(b)), the deposits of which are insured by 
the Federal Deposit Insurance Corporation; a farm credit system 
institution chartered under the Farm Credit Act of 1971 (12 U.S.C. 2002 
et seq.); or an insured Federal credit union or State-chartered credit 
union under the Federal Credit Union Act (12 U.S.C. 1751 et seq.); and
    (2) Has total assets of $10,000,000,000 or less on the last day of 
the company's most recent fiscal year.
    State means any state, commonwealth, territory, or possession of 
the United States, the District of Columbia, the Commonwealth of Puerto 
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, 
Guam, or the United States Virgin Islands.
    Subsidiary of a covered bank means any operating subsidiary of a 
national bank, Federal savings association, or Federal branch or agency 
as defined in Sec.  5.34 of this chapter (national banks), or Sec.  
5.38 of this chapter (Federal savings associations), or any other 
entity owned or controlled by the covered bank that would be a 
subsidiary under 12 U.S.C. 1841 (Bank Holding Company Act).

[[Page 56665]]

    U.S. agency has the same meaning as the term ``agency'' in 12 
U.S.C. 3101(1).
    U.S. branch has the same meaning as the term ``branch'' in 12 
U.S.C. 3101(3).
    U.S. special resolution regimes means the Federal Deposit Insurance 
Act (12 U.S.C. 1811-1835a) and regulations promulgated thereunder and 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (12 U.S.C. 5381-5394) and regulations promulgated thereunder.


Sec.  47.3  Applicability.

    (a) General requirement. A covered bank must ensure that each 
covered QFC conforms to the requirements of Sec. Sec.  47.4 and 47.5.
    (b) Covered bank--(1) Generally. For purposes of this part, a 
covered bank is:
    (i) A national bank or Federal savings association that has more 
than $700 billion in total assets as reported on the national bank's or 
Federal savings association's most recent Consolidated Reports of 
Condition and Income (Call Report);
    (ii) A national bank or Federal savings association that is a 
subsidiary of a global systemically important bank holding company that 
has been designated pursuant to Sec.  252.82 of this title (Federal 
Reserve Board Regulation YY) (12 CFR 252.82);
    (iii) A national bank or Federal savings association that is a 
subsidiary of a global systemically important foreign banking 
organization that has been designated pursuant to Sec.  252.87 of this 
title (Federal Reserve Board Regulation YY) (12 CFR 252.87); or
    (iv) A Federal branch or agency, as defined in subpart B of this 
chapter (governing Federal branches and agencies), of a global 
systemically important foreign banking organization that has been 
designated pursuant to Sec.  252.87 of this title (Federal Reserve 
Board Regulation YY) (12 CFR 252.87).
    (2) Subsidiary of a covered bank. This part applies to a subsidiary 
of a covered bank as provided under paragraph (b)(1) of this section. 
Specifically, the covered bank is required to ensure that a covered QFC 
to which the subsidiary of a covered bank is a party (as a direct 
counterparty or a support provider) satisfies the requirements of 
Sec. Sec.  47.4 and 47.5 in the same manner and to the same extent 
applicable to the covered bank.
    (3) Subsidiaries not included as covered banks. Notwithstanding 
paragraphs (b)(1) and (2) of this section, a covered bank does not 
include:
    (i) A subsidiary that is owned by a covered bank in satisfaction of 
debt previously contracted in good faith pursuant to section 5137 of 
the Revised Statutes (12 U.S.C. 29) (national bank) or section 5(c) of 
the Home Owners' Loan Act (12 U.S.C. 1464) (Federal savings 
association);
    (ii) A portfolio concern, as defined under 13 CFR 107.50, that is 
controlled by a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662) (national banks), or under section 5(c) of the Home Owners' Loan 
Act (12 U.S.C. 1464(c)) (Federal savings associations);
    (iii) A subsidiary that is owned pursuant to paragraph (7) of 
section 5136 of the Revised Statutes (12 U.S.C. 24(Seventh)), or 
paragraph (11) of section 5136 of the Revised Statutes (12 U.S.C. 
24(Eleventh)) (national banks), or Sec.  5.59 of this chapter (12 CFR 
5.59) (Federal savings associations) designed primarily to promote the 
public welfare, including the welfare of low- and moderate-income 
communities or families (such as providing housing, services or jobs).
    (c) Covered QFCs. For purposes of this part, a covered QFC is:
    (1) With respect to a covered bank that is a covered bank on 
January 1, 2018, an in-scope QFC that the covered bank:
    (i) Enters, executes, or otherwise becomes a party to on or after 
January 1, 2019; or
    (ii) Entered, executed, or otherwise became a party to before 
January 1, 2019, if the covered bank, or any affiliate that is a 
covered entity, covered bank, or covered FSI, also enters, executes, or 
otherwise becomes a party to a QFC with the same person or a 
consolidated affiliate of the same person on or after January 1, 2019.
    (2) With respect to a covered bank that becomes a covered bank 
after January 1, 2018, an in-scope QFC that the covered bank:
    (i) Enters, executes or otherwise becomes a party to on or after 
the later of the date the covered bank first becomes a covered bank and 
January 1, 2019; or
    (ii) Entered, executed, or otherwise became a party to before the 
date identified in paragraph (c)(2)(i) of this section with respect to 
the covered bank, if the covered bank or any affiliate that is a 
covered entity, covered bank, or covered FSI, also enters, executes, or 
otherwise becomes a party to a QFC with the same person or consolidated 
affiliate of the same person on or after the date identified in 
paragraph (c)(2)(i) of this section with respect to the covered bank.
    (d) In-scope QFCs. An in-scope QFC is a QFC that explicitly:
    (1) Restricts the transfer of a QFC (or any interest or obligation 
in or under, or any property securing, the QFC) from a covered bank; or
    (2) Provides one or more default rights with respect to a QFC that 
may be exercised against a covered bank.
    (e) Rules of construction. For purposes of this part:
    (1) A covered bank does not become a party to a QFC solely by 
acting as agent with respect to the QFC; and
    (2) The exercise of a default right with respect to a covered QFC 
includes the automatic or deemed exercise of the default right pursuant 
to the terms of the QFC or other arrangement.
    (f) Initial applicability of requirements for covered QFCs. (1) 
With respect to each of its covered QFCs, a covered bank that is a 
covered bank on January 1, 2018, must conform the covered QFC to the 
requirements of this part by:
    (i) January 1, 2019, if each party to the covered QFC is a covered 
entity, covered bank, or covered FSI;
    (ii) July 1, 2019, if each party to the covered QFC (other than the 
covered bank) is a financial counterparty that is not a covered entity, 
covered bank, or covered FSI; or
    (iii) January 1, 2020, if a party to the covered QFC (other than 
the covered bank) is not described in paragraphs (f)(1)(i) or 
(f)(1)(ii) of this section, or if, notwithstanding paragraph (f)(1)(ii) 
of this section, a party to the covered QFC (other than the covered 
bank) is a small financial institution.
    (2) With respect to each of its covered QFCs, a covered bank that 
is not a covered bank on January 1, 2018, must conform the covered QFC 
to the requirements of this part by:
    (i) The first day of the calendar quarter immediately following one 
year after the date the covered bank first becomes a covered bank if 
each party to the covered QFC is a covered entity, covered bank, or 
covered FSI;
    (ii) The first day of the calendar quarter immediately following 18 
months from the date the covered bank first becomes a covered bank if 
each party to the covered QFC (other than the covered bank) is a 
financial counterparty that is not a covered entity, covered bank, or 
covered FSI; or
    (iii) The first day of the calendar quarter immediately following 
two years from the date the covered bank first becomes a covered bank 
if a party to the covered QFC (other than the covered bank) is not 
described in paragraphs (f)(2)(i) or (f)(2)(ii) of this section, or if, 
notwithstanding paragraph (f)(2)(ii) of this section, a party to the 
covered QFC (other than the covered bank) is a small financial 
institution.

[[Page 56666]]

Sec.  47.4  U.S. special resolution regimes.

    (a) Covered QFCs not required to be conformed. (1) Notwithstanding 
Sec.  47.3, a covered bank is not required to conform a covered QFC to 
the requirements of this section if:
    (i) The covered QFC designates, in the manner described in 
paragraph (a)(2) of this section, the U.S. special resolution regimes 
as part of the law governing the QFC; and
    (ii) Each party to the covered QFC, other than the covered bank, 
is:
    (A) An individual that is domiciled in the United States, including 
any State;
    (B) A company that is incorporated in or organized under the laws 
of the United States or any State;
    (C) A company the principal place of business of which is located 
in the United States, including any State; or
    (D) A U.S. branch or U.S. agency.
    (2) A covered QFC designates the U.S. special resolution regimes as 
part of the law governing the QFC if the covered QFC:
    (i) Explicitly provides that the covered QFC is governed by the 
laws of the United States or a state of the United States; and
    (ii) Does not explicitly provide that one or both of the U.S. 
special resolution regimes, or a broader set of laws that includes a 
U.S. special resolution regime, is excluded from the laws governing the 
covered QFC.
    (b) Provisions required. A covered QFC must explicitly provide 
that:
    (1) In the event the covered bank becomes subject to a proceeding 
under a U.S. special resolution regime, the transfer of the covered QFC 
(and any interest and obligation in or under, and any property 
securing, the covered QFC) from the covered bank will be effective to 
the same extent as the transfer would be effective under the U.S. 
special resolution regime if the covered QFC (and any interest and 
obligation in or under, and any property securing, the covered QFC) 
were governed by the laws of the United States or a state of the United 
States; and
    (2) In the event the covered bank or an affiliate of the covered 
bank becomes subject to a proceeding under a U.S. special resolution 
regime, default rights with respect to the covered QFC that may be 
exercised against the covered bank are permitted to be exercised to no 
greater extent than the default rights could be exercised under the 
U.S. special resolution regime if the covered QFC were governed by the 
laws of the United States or a state of the United States.
    (c) Relevance of creditor protection provisions. The requirements 
of this section apply notwithstanding paragraphs (d), (f), and (h) of 
Sec.  47.5.


Sec.  47.5  Insolvency proceedings.

    (a) Covered QFCs not required to be conformed. Notwithstanding 
Sec.  47.3, a covered bank is not required to conform a covered QFC to 
the requirements of this section if the covered QFC:
    (1) Does not explicitly provide any default right with respect to 
the covered QFC that is related, directly or indirectly, to an 
affiliate of the direct party becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding; and
    (2) Does not explicitly prohibit the transfer of a covered 
affiliate credit enhancement, any interest or obligation in or under 
the covered affiliate credit enhancement, or any property securing the 
covered affiliate credit enhancement to a transferee upon or following 
an affiliate of the direct party becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding or would 
prohibit such a transfer only if the transfer would result in the 
supported party being the beneficiary of the credit enhancement in 
violation of any law applicable to the supported party.
    (b) General prohibitions. (1) A covered QFC may not permit the 
exercise of any default right with respect to the covered QFC that is 
related, directly or indirectly, to an affiliate of the direct party 
becoming subject to a receivership, insolvency, liquidation, 
resolution, or similar proceeding.
    (2) A covered QFC may not prohibit the transfer of a covered 
affiliate credit enhancement, any interest or obligation in or under 
the covered affiliate credit enhancement, or any property securing the 
covered affiliate credit enhancement to a transferee upon or following 
an affiliate of the direct party becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding unless the 
transfer would result in the supported party being the beneficiary of 
the credit enhancement in violation of any law applicable to the 
supported party.
    (c) Definitions relevant to the general prohibitions--(1) Direct 
party. Direct party means a covered entity, covered bank, or covered 
FSI that is a party to the direct QFC.
    (2) Direct QFC. Direct QFC means a QFC that is not a credit 
enhancement, provided that, for a QFC that is a master agreement that 
includes an affiliate credit enhancement as a supplement to the master 
agreement, the direct QFC does not include the affiliate credit 
enhancement.
    (3) Affiliate credit enhancement. Affiliate credit enhancement 
means a credit enhancement that is provided by an affiliate of a party 
to the direct QFC that the credit enhancement supports.
    (d) General creditor protections. Notwithstanding paragraph (b) of 
this section, a covered direct QFC and covered affiliate credit 
enhancement that supports the covered direct QFC may permit the 
exercise of a default right with respect to the covered QFC that arises 
as a result of:
    (1) The direct party becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding;
    (2) The direct party not satisfying a payment or delivery 
obligation pursuant to the covered QFC or another contract between the 
same parties that gives rise to a default right in the covered QFC; or
    (3) The covered affiliate support provider or transferee not 
satisfying a payment or delivery obligation pursuant to a covered 
affiliate credit enhancement that supports the covered direct QFC.
    (e) Definitions relevant to the general creditor protections--(1) 
Covered direct QFC. Covered direct QFC means a direct QFC to which a 
covered entity, covered bank, or covered FSI is a party.
    (2) Covered affiliate credit enhancement. Covered affiliate credit 
enhancement means an affiliate credit enhancement in which a covered 
entity, covered bank, or covered FSI is the obligor of the credit 
enhancement.
    (3) Covered affiliate support provider. Covered affiliate support 
provider means, with respect to a covered affiliate credit enhancement, 
the affiliate of the direct party that is obligated under the covered 
affiliate credit enhancement and is not a transferee.
    (4) Supported party. Supported party means, with respect to a 
covered affiliate credit enhancement and the direct QFC that the 
covered affiliate credit enhancement supports, a party that is a 
beneficiary of the covered affiliate support provider's obligation 
under the covered affiliate credit enhancement.
    (f) Additional creditor protections for supported QFCs. 
Notwithstanding paragraph (b) of this section, with respect to a 
covered direct QFC that is supported by a covered affiliate credit 
enhancement, the covered direct QFC and the covered affiliate credit 
enhancement may permit the exercise of a default right after the stay 
period that is related, directly or indirectly, to the covered 
affiliate support provider becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding if:

[[Page 56667]]

    (1) The covered affiliate support provider that remains obligated 
under the covered affiliate credit enhancement becomes subject to a 
receivership, insolvency, liquidation, resolution, or similar 
proceeding other than a Chapter 11 proceeding;
    (2) Subject to paragraph (h) of this section, the transferee, if 
any, becomes subject to a receivership, insolvency, liquidation, 
resolution, or similar proceeding;
    (3) The covered affiliate support provider does not remain, and a 
transferee does not become, obligated to the same, or substantially 
similar, extent as the covered affiliate support provider was obligated 
immediately prior to entering the receivership, insolvency, 
liquidation, resolution, or similar proceeding with respect to:
    (i) The covered affiliate credit enhancement;
    (ii) All other covered affiliate credit enhancements provided by 
the covered affiliate support provider in support of other covered 
direct QFCs between the direct party and the supported party under the 
covered affiliate credit enhancement referenced in paragraph (f)(3)(i) 
of this section; and
    (iii) All covered affiliate credit enhancements provided by the 
covered affiliate support provider in support of covered direct QFCs 
between the direct party and affiliates of the supported party 
referenced in paragraph (f)(3)(ii) of this section; or
    (4) In the case of a transfer of the covered affiliate credit 
enhancement to a transferee:
    (i) All of the ownership interests of the direct party directly or 
indirectly held by the covered affiliate support provider are not 
transferred to the transferee; or
    (ii) Reasonable assurance has not been provided that all or 
substantially all of the assets of the covered affiliate support 
provider (or net proceeds therefrom), excluding any assets reserved for 
the payment of costs and expenses of administration in the 
receivership, insolvency, liquidation, resolution, or similar 
proceeding, will be transferred or sold to the transferee in a timely 
manner.
    (g) Definitions relevant to the additional creditor protections for 
supported QFCs--(1) Stay period. Stay period means, with respect to a 
receivership, insolvency, liquidation, resolution, or similar 
proceeding, the period of time beginning on the commencement of the 
proceeding and ending at the later of 5:00 p.m. (eastern time) on the 
business day following the date of the commencement of the proceeding 
and 48 hours after the commencement of the proceeding.
    (2) Business day. Business day means a day on which commercial 
banks in the jurisdiction the proceeding is commenced are open for 
general business (including dealings in foreign exchange and foreign 
currency deposits).
    (3) Transferee. Transferee means a person to whom a covered 
affiliate credit enhancement is transferred upon the covered affiliate 
support provider entering a receivership, insolvency, liquidation, 
resolution, or similar proceeding or thereafter as part of the 
resolution, restructuring, or reorganization involving the covered 
affiliate support provider.
    (h) Creditor protections related to FDI Act proceedings. 
Notwithstanding paragraphs (b), (d), and (f) of this section, with 
respect to a covered direct QFC that is supported by a covered 
affiliate credit enhancement, the covered direct QFC and the covered 
affiliate credit enhancement may permit the exercise of a default right 
that is related, directly or indirectly, to the covered affiliate 
support provider becoming subject to FDI Act proceedings:
    (1) After the FDI Act stay period, if the covered affiliate credit 
enhancement is not transferred pursuant to section 11(e)(9)-(e)(10) of 
Federal Deposit Insurance Act (12 U.S.C. 1821(e)(9)-(e)(10)) and any 
regulations promulgated thereunder; or
    (2) During the FDI Act stay period, if the default right may only 
be exercised so as to permit the supported party under the covered 
affiliate credit enhancement to suspend performance with respect to the 
supported party's obligations under the covered direct QFC to the same 
extent as the supported party would be entitled to do if the covered 
direct QFC were with the covered affiliate support provider and were 
treated in the same manner as the covered affiliate credit enhancement.
    (i) Prohibited terminations. A covered QFC must require, after an 
affiliate of the direct party has become subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding:
    (1) The party seeking to exercise a default right to bear the 
burden of proof that the exercise is permitted under the covered QFC; 
and
    (2) Clear and convincing evidence or a similar or higher burden of 
proof to exercise a default right.


Sec.  47.6  Approval of enhanced creditor protection conditions.

    (a) Protocol compliance. (1) Unless the OCC determines otherwise 
based on the specific facts and circumstances, a covered QFC is deemed 
to comply with this part if it is amended by the universal protocol or 
the U.S. protocol.
    (2) A covered QFC will be deemed to be amended by the universal 
protocol for purposes of paragraph (a)(1) of this section 
notwithstanding the covered QFC being amended by one or more Country 
Annexes, as the term is defined in the universal protocol.
    (3) For purposes of paragraphs (a)(1) and (2) of this section:
    (i) The universal protocol means the ISDA 2015 Universal Resolution 
Stay Protocol, including the Securities Financing Transaction Annex and 
Other Agreements Annex, published by the International Swaps and 
Derivatives Association, Inc., as of May 3, 2016, and minor or 
technical amendments thereto;
    (ii) The U.S. protocol means a protocol that is the same as the 
universal protocol other than as provided in paragraphs (a)(3)(ii)(A)-
(F) of this section.
    (A) The provisions of Section 1 of the attachment to the universal 
protocol may be limited in their application to a covered entity, 
covered bank, or covered FSI and may be limited with respect to 
resolutions under the Identified Regimes, as those regimes are 
identified by the universal protocol;
    (B) The provisions of Section 2 of the attachment to the universal 
protocol may be limited in their application to a covered entity, 
covered bank, or covered FSI;
    (C) The provisions of Section 4(b)(i)(A) of the attachment to the 
universal protocol must not apply with respect to U.S. special 
resolution regimes;
    (D) The provision of Section 4(b) of the attachment to the 
universal protocol may only be effective to the extent that the covered 
QFC affected by an adherent's election thereunder would continue to 
meet the requirements of this part;
    (E) The provisions of Section 2(k) of the attachment to the 
universal protocol must not apply; and
    (F) The U.S. protocol may include minor and technical differences 
from the universal protocol and differences necessary to conform the 
U.S. protocol to the differences described in paragraphs (a)(3)(ii)(A)-
(E) of this section;
    (iii) Amended by the universal protocol or the U.S. protocol, with 
respect to covered QFCs between adherents to the protocol, includes 
amendments through incorporation of the terms of the protocol (by 
reference or otherwise) into the covered QFC; and

[[Page 56668]]

    (iv) The attachment to the universal protocol means the attachment 
that the universal protocol identifies as ``ATTACHMENT to the ISDA 2015 
UNIVERSAL RESOLUTION STAY PROTOCOL.''
    (b) Proposal of enhanced creditor protection conditions. (1) A 
covered bank may request that the OCC approve as compliant with the 
requirements of Sec. Sec.  47.4 and 47.5 proposed provisions of one or 
more forms of covered QFCs, or proposed amendments to one or more forms 
of covered QFCs, with enhanced creditor protection conditions.
    (2) Enhanced creditor protection conditions means a set of limited 
exemptions to the requirements of Sec.  47.5(b) that are different than 
that of paragraphs (d), (f), and (h) of Sec.  47.5.
    (3) A covered bank making a request under paragraph (b)(1) of this 
section must provide:
    (i) An analysis of the proposal that addresses each consideration 
in paragraph (d) of this section;
    (ii) A written legal opinion verifying that proposed provisions or 
amendments would be valid and enforceable under applicable law of the 
relevant jurisdictions, including, in the case of proposed amendments, 
the validity and enforceability of the proposal to amend the covered 
QFCs; and
    (iii) Any other relevant information that the OCC requests.
    (c) OCC approval. The OCC may approve, subject to any conditions or 
commitments the OCC may set, a proposal by a covered bank under 
paragraph (b) of this section if the proposal, as compared to a covered 
QFC that contains only the limited exemptions in paragraphs of (d), 
(f), and (h) of Sec.  47.5 or that is amended as provided under 
paragraph (a) of this section, would promote the safety and soundness 
of federally chartered or licensed institutions by mitigating the 
potential destabilizing effects of the resolution of a global 
significantly important banking entity that is an affiliate of the 
covered bank, at least to the same extent.
    (d) Considerations. In reviewing a proposal under this section, the 
OCC may consider all facts and circumstances related to the proposal, 
including:
    (1) Whether, and the extent to which, the proposal would reduce the 
resiliency of such covered banks during distress or increase the impact 
on U.S. financial stability were one or more of the covered banks to 
fail;
    (2) Whether, and the extent to which, the proposal would materially 
decrease the ability of a covered bank, or an affiliate of a covered 
bank, to be resolved in a rapid and orderly manner in the event of the 
financial distress or failure of the covered bank, or an affiliate of a 
covered bank, that is required to submit a resolution plan;
    (3) Whether, and the extent to which, the set of conditions or the 
mechanism in which they are applied facilitates, on an industry-wide 
basis, contractual modifications to remove impediments to resolution 
and increase market certainty, transparency, and equitable treatment 
with respect to the default rights of non-defaulting parties to a 
covered QFC;
    (4) Whether, and the extent to which, the proposal applies to 
existing and future transactions;
    (5) Whether, and the extent to which, the proposal would apply to 
multiple forms of QFCs or multiple covered banks or an affiliates of 
covered banks;
    (6) Whether the proposal would permit a party to a covered QFC that 
is within the scope of the proposal to adhere to the proposal with 
respect to only one or a subset of covered banks or an affiliates of 
covered banks;
    (7) With respect to a supported party, the degree of assurance the 
proposal provides to the supported party that the material payment and 
delivery obligations of the covered affiliate credit enhancement and 
the covered direct QFC it supports will continue to be performed after 
the covered affiliate support provider enters a receivership, 
insolvency, liquidation, resolution, or similar proceeding;
    (8) The presence, nature, and extent of any provisions that require 
a covered affiliate support provider or transferee to meet conditions 
other than material payment or delivery obligations to its creditors;
    (9) The extent to which the supported party's overall credit risk 
to the direct party may increase if the enhanced creditor protection 
conditions are not met and the likelihood that the supported party's 
credit risk to the direct party would decrease or remain the same if 
the enhanced creditor protection conditions are met; and
    (10) Whether the proposal provides the counterparty with additional 
default rights or other rights.


Sec.  47.7  Foreign bank multi-branch master agreements.

    (a) Treatment of foreign bank multi-branch master agreements. With 
respect to a Federal branch or agency of a global systemically 
important foreign banking organization, a foreign bank multi-branch 
master agreement that is a covered QFC solely because the master 
agreement permits agreements or transactions that are QFCs to be 
entered into at one or more Federal branches or agencies of the global 
systemically important foreign banking organization will be considered 
a covered QFC for purposes of this part only with respect to such 
agreements or transactions booked at such Federal branches or agencies.
    (b) Definition of foreign bank multi-branch master agreements. A 
foreign bank multi-branch master agreement means a master agreement 
that permits a Federal branch or agency and another place of business 
of a foreign bank that is outside the United States to enter 
transactions under the agreement.


Sec.  47.8  Exclusion of certain QFCs.

    (a) Exclusion of QFCs with FMUs. Notwithstanding Sec.  47.3, a 
covered bank is not required to conform to the requirements of this 
part a covered QFC to which:
    (1) A CCP is party; or
    (2) Each party (other than the covered bank) is an FMU.
    (b) Exclusion of certain covered entity and covered FSI QFCs. If a 
covered QFC is also a covered QFC under part 382 or 252, subpart I, of 
this title that an affiliate of the covered bank is also required to 
conform pursuant to part 382 or 252, subpart I, of this title and the 
covered bank is:
    (1) The affiliate credit enhancement provider with respect to the 
covered QFC, then the covered bank is required to conform the credit 
enhancement to the requirements of this part but is not required to 
conform the direct QFC to the requirements of this part; or
    (2) The direct party to which the excluded bank is the affiliate 
credit enhancement provider, then the covered bank is required to 
conform the direct QFC to the requirements of this part but is not 
required to conform the credit enhancement to the requirements of this 
part.
    (c) Exclusion of certain contracts. Notwithstanding Sec.  47.3, a 
covered bank is not required to conform the following types of 
contracts or agreements to the requirements of this part:
    (1) An investment advisory contract that:
    (i) Is with a retail customer or counterparty;
    (ii) Does not explicitly restrict the transfer of the contract (or 
any QFC entered into pursuant thereto or governed thereby, or any 
interest or obligation in or under, or any property securing, any such 
QFC or the contract) from the covered bank except as necessary to 
comply with section 205(a)(2) of the Investment Advisers Act of 1940 
(15 U.S.C. 80b-5(a)(2)); and

[[Page 56669]]

    (iii) Does not explicitly provide a default right with respect to 
the contract or any QFC entered pursuant thereto or governed thereby.
    (2) A warrant that:
    (i) Evidences a right to subscribe to or otherwise acquire a 
security of the covered bank or an affiliate of the covered bank; and
    (ii) Was issued prior to January 1, 2018.
    (d) Exemption by order. The OCC may exempt by order one or more 
covered banks from conforming one or more contracts or types of 
contracts to one or more of the requirements of this part after 
considering:
    (1) The potential impact of the exemption on the ability of the 
covered bank, or affiliates of the covered bank, to be resolved in a 
rapid and orderly manner in the event of the financial distress or 
failure of the entity that is required to submit a resolution plan;
    (2) The burden the exemption would relieve; and
    (3) Any other factor the OCC deems relevant.

PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS

0
4. The authority citation for part 50 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 93a, 481, 1818, and 1462 et 
seq.

0
5. Section 50.3 is amended by revising the definition of ``qualifying 
master netting agreement'' to read as follows:


Sec.  50.3  Definitions.

* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the national bank or Federal savings 
association the right to accelerate, terminate, and close-out on a net 
basis all transactions under the agreement and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case:
    (i) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than:
    (A) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws 
referenced in this paragraph (2)(i)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty; or
    (B) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this 
definition; and
    (ii) The agreement may limit the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and 
to liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 225, or part 382 of 
this title, as applicable;
* * * * *

    Dated: November 20, 2017.
Keith A. Noreika,
Acting Comptroller of the Currency.
[FR Doc. 2017-25529 Filed 11-28-17; 8:45 am]
BILLING CODE 4810-33-P