[Federal Register Volume 84, Number 85 (Thursday, May 2, 2019)]
[Proposed Rules]
[Pages 18741-18746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08898]


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 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 84, No. 85 / Thursday, May 2, 2019 / Proposed 
Rules  

[[Page 18741]]



FEDERAL RESERVE SYSTEM

12 CFR Part 231

[Regulation EE; Docket No. R-1661]
RIN 7100-AF 48


Netting Eligibility for Financial Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors (Board) is seeking comment on a 
proposal to amend Regulation EE to include certain new entities in the 
definition of ``financial institution'' contained in section 402 of the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) 
so that they will be covered by FDICIA's netting provisions. The 
proposal would also clarify how the existing activities-based test in 
Regulation EE applies following a consolidation of legal entities.

DATES: Comments must be received on or before July 1, 2019.

ADDRESSES: When submitting comments, please consider submitting your 
comments by email or fax because paper mail in the Washington, DC area 
and at the Board may be subject to delay. You may submit comments, 
identified by Docket No. R-1661, RIN 7100-AF 48, by any of the 
following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments are available from the Board's website at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Evan Winerman, Senior Counsel (202-
872-7578), Justyna Bolter, Attorney (202-452-2686), Legal Division. 
Users of Telecommunication Device for Deaf (TDD) only, call (202) 263-
4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    Sections 401-407 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA) \1\ validate netting contracts among 
financial institutions. Parties to a netting contract agree that they 
will pay or receive the net, rather than the gross, payment due under 
the netting contract. FDICIA provides certainty that netting contracts 
will be enforced, even in the event of the insolvency of one of the 
parties. FDICIA's netting provisions were designed to promote 
efficiency and reduce systemic risk within the banking system and 
financial markets.\2\ As market participants generally manage their 
counterparty risk by setting bilateral exposure limits vis-[agrave]-vis 
other market participants, FDICIA's netting protections allow market 
participants to rely on net exposure values, thereby enhancing market 
liquidity and reducing counterparty risk.
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    \1\ Public Law 102-242; 105 Stat. 2236, 2372-3; 12 U.S.C. 4401-
4407.
    \2\ See FDICIA section 401, 12 U.S.C. 4401.
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    The netting provisions apply to bilateral netting contracts between 
two financial institutions and multilateral netting contracts among 
members of a clearing organization. FDICIA section 402(9) defines 
``financial institution'' to include a depository institution, a 
securities broker or dealer, a futures commission merchant, or any 
other institution as determined by the Board. In Regulation EE, the 
Board broadened the definition of ``financial institution,'' consistent 
with FDICIA's purpose of enhancing efficiency and reducing systemic 
risk in the financial markets. In defining ``financial institution'' in 
Regulation EE, the Board intended to include financial market 
participants that regularly enter into financial contracts on both 
sides of a financial market, where the failure of the participant could 
create systemic problems in the financial markets in terms of losses to 
counterparties or market confidence and liquidity.\3\ Specifically, 
Regulation EE expands the FDICIA definition of ``financial 
institution''--and therefore expands FDICIA's netting protections--
using an activities-based test that includes a qualitative component 
and a quantitative component. The qualitative component requires that 
the person ``represent[ ], orally or in writing, that it will engage in 
financial contracts as a counterparty on both sides of one or more 
financial markets.'' \4\ A person that makes this representation 
demonstrates that it is willing to engage in transactions on both sides 
of the market and is, in effect, holding itself out as a market 
intermediary.\5\ The quantitative component requires that the person 
have either (1) one or more financial contracts of a total gross dollar 
value of at least $1 billion in notional principal amount outstanding 
on any day during the previous 15-month period with counterparties that 
are not its affiliates or (2) total gross mark-to-market positions of 
at least $100 million (aggregated across counterparties) in one or more 
financial contracts on any day during the previous 15-month period with 
counterparties that are not its affiliates.\6\ Since Regulation EE was 
finalized in 1994, the Board has made only a non-substantive amendment 
in 1996 to clarify that the representation of financial market 
intermediary status can be made orally or in writing.
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    \3\ 58 FR 29149, 29150 (May 19, 1993).
    \4\ 12 CFR 231.3(a). Regulation EE generally defines the term 
``financial contract'' by reference to the term ``qualified 
financial contract'' under section 11(e)(8)(D) of the Federal 
Deposit Insurance Act, 12 U.S.C. 1821(e)(8)(D). 12 CFR 231.2(c).
    \5\ 59 FR 4780, 4782 (Feb. 2, 1994).
    \6\ Id.
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    Regulation EE does not expand the definition of ``financial 
institution'' by rule to include institutions or individuals who are 
end users and not market intermediaries. However, the

[[Page 18742]]

Board has issued a limited number of case-by-case ``financial 
institution'' determinations with respect to certain government-
sponsored end users and members in a large-value fund transfer 
system.\7\
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    \7\ Pursuant to these case-by-case determinations, the Board has 
granted ``financial institution'' status to certain members of the 
CHIPS[supreg] funds-transfer system and to certain government-
sponsored enterprises including Fannie Mae, Freddie Mac, Sallie Mae, 
the Farm Credit System Banks, and the Federal Home Loan Banks.
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    Certain payment, clearing, and settlement systems continue to rely 
on FDICIA's netting provisions to ensure that their netting agreements 
will be enforceable if a participant in the system becomes 
insolvent.\8\ An organization that relies on the bilateral netting 
provisions of FDICIA section 403 would require that all of its members 
qualify as financial institutions under FDICIA's statutory definition 
or under Regulation EE. An organization that relies on the multilateral 
netting provisions of FDICIA section 404 would generally require that 
all of its members qualify as either (1) financial institutions under 
FDICIA's statutory definition or under Regulation EE or (2) clearing 
organizations as defined in FDICIA section 402(2).\9\
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    \8\ The Board recognizes that certain financial institutions and 
clearing organizations may also rely on provisions of the Bankruptcy 
Code, the Federal Deposit Insurance Act, and other statutes to 
ensure the enforceability of netting agreements for particular 
financial contracts (e.g., swap agreements and repurchase 
agreements) and master netting agreements for multiple types of 
financial contracts.
    \9\ FDICIA section 402(2) generally defines ``clearing 
organization'' to include entities that provide clearing, netting, 
and settlement services to their members and in which all members of 
the entity are themselves financial institutions or clearing 
organizations. However, certain entities qualify as clearing 
organizations under FDICIA section 402(2)--and are therefore 
eligible for the multilateral netting protections under FDICIA 
section 404--without regard to whether all of their members qualify 
as financial institutions or clearing organizations. Specifically, 
an entity automatically qualifies as a clearing organization if it 
is (1) registered with the Securities and Exchange Commission (SEC) 
as a clearing agency or has been exempted from registration by SEC 
order or (2) registered with the Commodity Futures Trading 
Commission (CFTC) as a derivatives clearing organization or has been 
exempted from registration by the CFTC.
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II. Description of Proposed Rule

    The Board proposes to extend ``financial institution'' status for 
purposes of FDICIA's netting provisions to certain new categories of 
entities. The Board also proposes to clarify how the existing 
activities-based test in Regulation EE applies following a 
consolidation of legal entities.

A. Qualification as a Financial Institution Based on Type of Entity

    Consistent with the purposes of FDICIA's netting provisions, the 
proposal would apply the netting benefits in Regulation EE to entities 
whose coverage would reduce systemic risk and increase efficiency in 
the financial markets. (The Board recognizes that some entities that 
would qualify as financial institutions under the proposal might 
already qualify as financial institutions under FDICIA's statutory 
definition or under the existing activities-based test in Regulation 
EE.)
    When the Board promulgated Regulation EE in 1994, the Board chose 
not to adopt a test for expanding financial institution status based on 
an entity's regulatory status or charter category. The Board stated at 
the time that such a test would have been over-inclusive because it 
would have extended financial institution status to entities that (1) 
were not market intermediaries and (2) did not engage in a volume of 
transactions that could create systemic risk.\10\ The Board also noted, 
when it proposed Regulation EE in 1993, that a test based on regulatory 
status or charter category would have been under-inclusive because it 
would have excluded ``major unregulated market participants, such as 
swap dealers . . . .'' \11\
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    \10\ 59 FR 4780, 4783 (Feb. 2, 1994).
    \11\ 58 FR 29149, 29150 (May 19, 1993).
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    Since the Board promulgated Regulation EE in 1994, the domestic and 
global landscape for financial regulation has changed dramatically. For 
example, the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act),\12\ signed into law on July 21, 2010, imposed or 
expanded federal supervision and regulation for multiple types of 
entities that serve as financial market intermediaries or are 
systemically important, including swap dealers, security-based swap 
dealers, nonbank financial companies that the Financial Stability 
Oversight Council (FSOC) has subjected to Board supervision and 
regulation, and FSOC-designated financial market utilities. In 
subjecting these entities to higher levels of regulation and 
supervision due to their activities, transaction volumes, and risks 
presented to the financial markets, Congress indicated the importance 
of the smooth functioning of these entities to the financial markets.
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    \12\ Public Law 111-203, 124 Stat. 1376.
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    In keeping with FDICIA's goals of reducing systemic risk and 
increasing efficiency in the financial markets, the Board believes that 
the addition of certain categories of institutions to the definition of 
``financial institution'' would benefit financial markets that continue 
to rely on FDICIA's netting provisions.
1. Swap Dealers and Security-Based Swap Dealers
    As noted above, when the Board proposed Regulation EE in 1993, the 
Board recognized the important role that swap dealers played in the 
financial markets but stated that swap dealers were ``unregulated.'' 
\13\ Congress subsequently imposed extensive new requirements on swap 
dealers and security-based swap dealers. Specifically, Title VII of the 
Dodd-Frank Act imposes a variety of requirements on swap dealers and 
security-based swap dealers, including a requirement to register with 
the CFTC or the SEC, respectively, when they exceed a de minimis level 
of dealing activity.\14\
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    \13\ 58 FR 29149, 29150 (May 19, 1993).
    \14\ See 7 U.S.C. 6s (swap dealer registration requirement) and 
17 CFR 1.3 (swap dealer definition and de minimis thresholds); 15 
U.S.C. 78o-10 (security-based swap dealer registration requirement) 
and 17 CFR 240.3a71-1 and 240.3a71-2 (security-based swap dealer 
definition and de minimis thresholds).
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    The requirements in Title VII of the Dodd-Frank Act recognize the 
important role that swap dealers and security-based swap dealers play 
as intermediaries in derivatives markets. Proposed Sec.  231.3(d)(1) 
and (2) would clarify that swap dealers registered with the CFTC and 
security-based swap dealers registered with the SEC are financial 
institutions.
2. Major Swap Participants and Major Security-Based Swap Participants
    Title VII of the Dodd-Frank Act not only imposes new requirements 
on swap dealers and security-based swap dealers, but also on major swap 
participants (MSPs) and major security-based swap participants 
(MSBSPs). MSPs and MSBSPs are, generally, entities that hold large 
derivatives positions but are not swap dealers or security-based swap 
dealers.\15\ Like swap dealers and security-based swap dealers, MSPs 
and MSBSPs must, inter alia, register with the CFTC and SEC, 
respectively.\16\ The requirements in Title VII of the Dodd-Frank Act 
recognize that, while MSPs and MSBSPs are not necessarily 
intermediaries, they may present an important source of risk in the 
derivatives markets. Proposed Sec.  231.3(d)(1) and (2) would clarify 
that

[[Page 18743]]

MSPs registered with the CFTC and MSBSPs registered with the SEC are 
financial institutions.
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    \15\ See 7 U.S.C. 1a(33) (MSP definition) and 15 U.S.C. 
78c(a)(67) (MSBSP definition).
    \16\ See 7 U.S.C. 6s (MSP registration requirement) and 15 
U.S.C. 78o-10 (MSBSP registration requirement).
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3. Nonbank Systemically Important Financial Institutions
    Title I of the Dodd-Frank Act \17\ extends Board supervision and 
regulation to certain nonbank financial companies that could pose a 
threat to financial stability.\18\ Title I authorizes the FSOC to 
subject nonbank financial companies to supervision and regulation by 
the Board in order to address any potential risks that these companies 
pose to financial stability (such designated entities are referred to 
as ``nonbank systemically important financial institutions'' or 
``nonbank SIFIs'').\19\ In determining whether to designate an entity 
as a nonbank SIFI, the FSOC considers its leverage, off-balance-sheet 
exposures, interconnectedness with other entities, importance as a 
source of liquidity, source of credit, manner of asset management, 
asset mix, other regulatory oversight, amount and nature of financial 
assets, amount and types of liabilities, and other risk-related 
factors.\20\
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    \17\ 12 U.S.C. chapter 53, subchapter 1.
    \18\ 12 U.S.C. 5311(a)(4).
    \19\ 12 U.S.C. 5323.
    \20\ Id.
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    FSOC designation of a nonbank SIFI indicates that the nonbank SIFI 
plays an important role in U.S. financial markets. Consistent with 
FDICIA's purpose of enhancing efficiency and reducing systemic risk in 
the financial markets, proposed Sec.  231.3(d)(6) would define 
``financial institution'' to include nonbank SIFIs.
4. Certain Financial Market Utilities
    Financial market utilities (FMUs) are entities that manage or 
operate multilateral systems for the purpose of transferring, clearing 
or settling payments, securities, or other financial transactions among 
participants or between participants and the FMU itself.\21\ FMUs 
include payment systems, central securities depositories (CSDs), 
securities settlement systems (SSSs), and central counterparties 
(CCPs). Since FDICIA was enacted in 1991, lawmakers and regulators 
around the world have increasingly recognized the importance of FMUs, 
which can serve a critical role in fostering financial stability but 
can also pose significant risks to the financial system.
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    \21\ 12 U.S.C. 5462.
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a. Derivatives Clearing Organizations and Clearing Agencies
    The Dodd-Frank Act and other post-FDICIA legislation demonstrate 
specific Congressional interest in derivatives clearing organizations 
(DCOs) and clearing agencies (CAs).\22\ For example, the Commodity 
Futures Modernization Act of 2000 \23\ amended the Commodity Exchange 
Act to create core principles with which a DCO must comply in order to 
be registered and to maintain registration as a DCO, while Title VII of 
the Dodd-Frank Act amended the Commodity Exchange Act to provide 
explicitly that the CFTC can implement these core principles via 
rulemaking.\24\ Similarly, Title VII of the Dodd-Frank Act amended the 
Securities Exchange Act to, inter alia, require the SEC to adopt rules 
governing CAs that clear security-based swaps.\25\
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    \22\ DCOs provide clearing services for CFTC-regulated 
derivatives, while CAs provide clearing services for securities. See 
7 U.S.C. 1a(15) and 15 U.S.C. 78c(a)(23).
    \23\ Public Law 106-554, 114 Stat. 2763 (2000).
    \24\ See 7 U.S.C. 7a-1(c)(2).
    \25\ 15 U.S.C. 78q-1(j).
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    Under FDICIA section 402(2), DCOs and CAs are ``clearing 
organizations,'' and therefore their members are eligible for the 
multilateral netting protections under FDICIA section 404 without 
regard to whether all participants in a DCO or CA qualify as financial 
institutions or clearing organizations. However, DCOs and CAs do not 
themselves automatically qualify as ``financial institutions.'' 
Ensuring that DCOs and CAs are ``financial institutions'' would ensure 
that DCOs and CAs can participate in other FMUs that rely on the 
bilateral netting protections in FDICIA section 403, which would reduce 
systemic risk and increase efficiency in the financial markets.
    Accordingly, proposed Sec.  231.3(d)(3) would define ``financial 
institution'' to include DCOs that are registered with the CFTC or have 
been exempted from registration by the CFTC,\26\ and proposed Sec.  
231.3(d)(4) would define ``financial institution'' to include CAs that 
are registered with the SEC or have been exempted from registration by 
the SEC.\27\
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    \26\ See 7 U.S.C. 7a-1(a) and (h).
    \27\ See 15 U.S.C. 78q-1(b) and (k).
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b. Designated Financial Market Utilities
    Under Title VIII of the Dodd-Frank Act, the FSOC can designate FMUs 
as systemically important, after which such designated FMUs (DFMUs) 
become subject to an enhanced supervisory framework.\28\ In determining 
whether to designate an entity as a DFMU, the FSOC considers the 
aggregate monetary value of its transactions, its aggregate exposure, 
interconnectedness with other entities, effect of its failure or 
disruption on the financial system and any other factors that the FSOC 
deems appropriate.\29\ The FSOC has currently designated eight FMUs, 
including a U.S. dollar payment system,\30\ a multi-currency foreign 
exchange settlement system,\31\ a CSD/SSS,\32\ and CCPs for securities 
and derivatives.\33\ Ensuring that all DFMUs (not just those that are 
CAs or DCOs, which are captured in the discussion above) qualify as 
``financial institutions'' would ensure that all DFMUs can participate 
in other FMUs that rely on FDICIA's netting protections, which would 
reduce systemic risk and increase efficiency in the financial markets.
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    \28\ See 12 U.S.C. 5461-5472.
    \29\ 12 U.S.C. 5463.
    \30\ The Clearing House Payment Company, L.L.C., on the basis of 
its role as operator of the Clearing House Interbank Payments 
System.
    \31\ CLS Bank International.
    \32\ The Depository Trust Company.
    \33\ Chicago Mercantile Exchange, Inc.; ICE Clear Credit L.L.C.; 
The Options Clearing Corporation; Fixed Income Clearing Corporation; 
and National Securities Clearing Corporation.
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    Accordingly, proposed Sec.  231.3(d)(5) would define ``financial 
institution'' to include DFMUs.
5. Foreign Banks
    FDICIA section 402(9) defines the term ``financial institution'' to 
include ``a depository institution,'' and FDICIA section 402(6) defines 
``depository institution'' to include ``a branch or agency of a foreign 
bank, a foreign bank and any branch or agency of the foreign bank, or 
the foreign bank that established the branch or agency, as those terms 
are defined in section 1(b) of the International Banking Act of 1978.'' 
The International Banking Act defines ``foreign bank'' broadly to 
encompass banking institutions organized under the laws of a foreign 
country, a territory of the United States, Puerto Rico, Guam, American 
Samoa, or the Virgin Islands.\34\
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    \34\ 12 U.S.C. 3101(7).
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    The Board believes that FDICIA's statutory definitions of 
``depository institution'' and ``financial institution'' extend to all 
foreign banks, including foreign banks that do not have a U.S. branch 
or agency. This view is consistent with the statutory language as well 
as the relevant legislative history.\35\

[[Page 18744]]

Certain market participants have expressed concern that an alternative 
reading of the statute is possible and that a court might find that a 
foreign bank does not qualify as a ``depository institution''--and thus 
does not meet FDICIA's statutory definition of ``financial 
institution''--unless the foreign bank has a U.S. branch or agency. 
Proposed Sec.  231.3(d)(7) would clarify that all foreign banks are 
financial institutions, including foreign banks that do not have a U.S. 
branch or agency and bridge banks that foreign authorities establish to 
facilitate the resolution of foreign banks.
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    \35\ See H.R. Rep No. 109-31, at 126 (2005) (noting that 
expanding FDICIA's definition of ``financial institutions'' to 
include foreign banks would ``extend the protections of FDICIA to 
ensure that U.S. financial organizations participating in netting 
agreements with foreign banks are covered by [FDICIA], thereby 
enhancing the safety and soundness of these arrangements'').
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6. Bridge Institutions
    Under certain circumstances, governmental authorities can charter 
bridge institutions to facilitate the resolution of another legal 
entity, including a non-bank entity. For example, under Title II of the 
Dodd-Frank Act, the Federal Deposit Insurance Corporation (FDIC) can 
establish a ``bridge financial company'' when the FDIC acts as receiver 
for a nonbank ``covered financial company.'' \36\ Title II allows a 
bridge financial company to, inter alia, assume liabilities of the 
covered financial company and purchase assets from the covered 
financial company.\37\ Similarly, section 11(n) of the Federal Deposit 
Insurance Act allows the FDIC to establish a bridge bank or savings 
association to facilitate the resolution of a failed bank or savings 
association.\38\ Foreign authorities can establish similar bridge 
institutions.\39\
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    \36\ 12 U.S.C. 5390(h).
    \37\ 12 U.S.C. 5390(h)(1)(b).
    \38\ 12 U.S.C. 1821(n).
    \39\ See, e.g., Directive 2014/59/EU of the European Parliament 
and of the Council of 15 May 2014 establishing a framework for the 
recovery and resolution of credit institutions and investment firms 
and amending Council Directive 82/891/EEC, and Directives 2001/24/
EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 
2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and 
(EU) No 648/2012, of the European Parliament and of the Council, 
2014 OJ (L 173) 190, Article 40.
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    The Board believes that any bridge institution, foreign or 
domestic, would require uninterrupted access to payment systems or 
clearing organizations, some of which might require participants to be 
financial institutions for purposes of FDICIA's netting provisions. A 
bridge bank or savings association that the FDIC establishes pursuant 
to section 11(n) of the Federal Deposit Insurance Act would qualify as 
a financial institution under FDICIA's statutory definition, which 
extends financial institution status to any ``depository institution.'' 
\40\ The Board also believes that a foreign bridge bank would qualify 
as a financial institution under FDICIA's statutory definition, because 
FDICIA's statutory definitions of ``depository institution'' and 
``financial institution'' extend to all foreign banks, including 
foreign bridge banks.\41\
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    \40\ The first prong of FDICIA's definition of ``depository 
institution'' includes a depository institution as defined in 
section 19(b)(1)(A) of the Federal Reserve Act (other than clause 
(vii)). The relevant section of the Federal Reserve Act states that 
the term ``depository institution'' includes, inter alia, any 
insured bank as defined in section 3 of the Federal Deposit 
Insurance Act and any savings association (as defined in section 3 
of the Federal Deposit Insurance Act) which is an insured depository 
institution (as defined in such Act). Section 3(h) of the Federal 
Deposit Insurance Act in turn defines the term ``insured bank'' to 
mean any bank, the deposits of which are insured in accordance with 
the provisions of the Act, and section 3(c)(2) of the Federal 
Deposit Insurance Act defines ``insured depository institution'' to 
mean any bank or savings association, the deposits of which are 
insured by the Corporation pursuant to the Act. Section 11(n)(d) of 
the Federal Deposit Insurance Act states that a bridge depository 
institution shall be an insured depository institution from the time 
it is chartered as a national bank or Federal savings association. 
Accordingly, at the time the FDIC charters a bridge bank or savings 
association, the deposits of that bridge bank or savings association 
are insured by the FDIC, and the bridge bank or savings association 
therefore qualifies as (1) an insured bank and/or an insured 
depository institution under the Federal Deposit Insurance Act and 
(2) a depository institution under Federal Reserve Act section 
19(b)(1)(A) and FDICIA section 402.
    \41\ As noted above, proposed Sec.  231.3(d)(7) would codify the 
Board's existing view that all foreign banks are financial 
institutions, including foreign bridge banks.
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    Proposed Sec.  231.3(d)(8) would ensure that all bridge 
institutions that are established to help resolve financial 
institutions--including bridge financial companies established by the 
FDIC and similar nonbank bridge institutions established under foreign 
law--can qualify as financial institutions. Proposed Sec.  231.3(d)(8) 
would provide that ``[a] bridge institution established for the purpose 
of resolving a financial institution'' is itself a financial 
institution.\42\ Proposed Sec.  231.2(c) would define ``bridge 
institution'' as ``a legal entity that has been established by a 
governmental authority to take over, transfer, or continue operating 
critical functions and viable operations of an entity in resolution. A 
bridge institution could include a bridge depository institution or a 
bridge financial company organized by the Federal Deposit Insurance 
Corporation in accordance with 12 U.S.C. 1821(n) or 5390(h), 
respectively, or a similar entity organized under foreign law.''
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    \42\ This provision would apply to a bridge institution 
established for the purpose of resolving an entity that either (1) 
meets FDICIA's statutory definition of financial institution or (2) 
qualifies as a financial institution under Regulation EE.
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7. Federal Reserve Banks
    The Federal Reserve Banks participate in financial markets through 
various types of transactions, called ``open market operations,'' that 
are used to implement monetary policy.\43\ In the event that a Federal 
Reserve Bank does not separately meet the quantitative test in 
Regulation EE, the Board believes that it should be clear that each 
Federal Reserve Bank is a ``financial institution'' and is able to 
benefit from the netting provisions of Regulation EE. Proposed Sec.  
231.3(d)(9) would ensure that the Federal Reserve Banks qualify as 
financial institutions.
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    \43\ See sections 12A and 14 of the Federal Reserve Act 
(allowing the Federal Open Market Committee to authorize the Federal 
Reserve Banks to engage in various types of open market operations).
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8. Request for Comment
    The Board requests comment on whether the entities described above 
should qualify as financial institutions. The Board also requests 
comment on whether other categories of entities should qualify as 
financial institutions.
    In addition, the Board requests comment on whether it should 
include in the definition of financial institution an entity that is a 
qualifying central counterparty under 12 CFR 217.2. What entities might 
benefit from such inclusion?

B. Activities-Based Test

    As noted above, the quantitative component of the activities-based 
test requires that a person have either (1) one or more financial 
contracts of a total gross dollar value of at least $1 billion in 
notional principal amount outstanding on any day during the previous 
15-month period with counterparties that are not its affiliates or (2) 
total gross mark-to-market positions of at least $100 million 
(aggregated across counterparties) in one or more financial contracts 
on any day during the previous 15-month period with counterparties that 
are not its affiliates.\44\ The Board proposes to add

[[Page 18745]]

language to clarify, consistent with its current understanding, that 
the ``previous 15-month period'' also includes the day on which the 
notional principal amount of $1 billion is met by adding the words ``at 
such time'' to proposed Sec. Sec.  231.3(a)(1) and (a)(2).\45\
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    \44\ 12 CFR 231.3(a). The Bankruptcy Code includes a test for 
identifying ``financial participants'' that is substantively 
identical to the quantitative test in Regulation EE. 11 U.S.C. 
101(22A). Under the Bankruptcy Code, financial participants that 
enter into certain types of financial contracts and master netting 
agreements for those financial contracts are exempt from provisions 
of the Bankruptcy Code that might otherwise delay or prevent netting 
related to those contracts. See, e.g., 11 U.S.C. 362(b)(6), (7), 
(17), and (27) (specifying that the Bankruptcy Code's automatic stay 
does not prevent a financial participant from exercising a 
contractual right to, inter alia, ``offset or net out any 
termination value, payment amount, or other transfer obligation 
arising under or in connection with'' certain types of financial 
contracts and master netting agreements for those financial 
contracts).
    \45\ This amendment would align Regulation EE with the 
Bankruptcy Code test for identifying ``financial participants'', 
which is substantively identical to the activities-based test in 
Regulation EE but includes the words ``at such time.'' 11 U.S.C. 
101(22A).
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    The Board also proposes to clarify how the existing activities-
based test in Regulation EE applies following a consolidation of legal 
entities. The quantitative component of the activities-based test may 
not be clear if, for example, two or more entities consolidate and each 
of these entities did not, on its own, meet the quantitative thresholds 
described above. Accordingly, the Board is proposing to clarify that, 
upon the consolidation of two or more entities, the surviving entity 
may aggregate the total gross dollar value of notional principal 
amounts outstanding or the total gross mark-to-market positions of both 
entities on each calendar day during the previous 15-month period, and 
such total amounts would be used to determine whether the surviving 
entity meets the quantitative thresholds of the activities-based 
test.\46\ Proposed Sec.  231.3(b) would clarify that ``[a]fter two or 
more persons consolidate, such as through a merger or acquisition, the 
surviving person meets the quantitative thresholds . . . if, on the 
same, single calendar day during the previous 15-month period, the 
aggregate financial contracts of the consolidated persons would have 
met such quantitative thresholds.'' The Board requests comment on this 
proposed approach.
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    \46\ For example, if company A acquires company B and, on the 
same, single calendar day in the last fifteen months, company A and 
company B each had financial contracts of a total gross dollar value 
of $500 million in notional principal amount outstanding (equaling 
an aggregate notional principal amount of $1 billion outstanding on 
that day), company A would meet the quantitative test even if it 
does not currently have financial contracts of a total gross 
notional value of $1 billion. Similarly, if company A and company B 
each had, on the same, single calendar day in the last fifteen 
months, total gross mark-to-market positions of $50 million in one 
or more financial contracts (equaling an aggregate gross mark-to-
market position of $100 million on such day), company A would meet 
the quantitative test even if it does not currently have financial 
contracts with a total gross mark-to-market positions of at least 
$100 million. Each of these qualifications under the quantitative 
test for surviving company A would last 15 months from the day on 
which the relevant quantitative threshold was reached, unless 
surviving company A subsequently independently meets the test.
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    The Board also requests comment on whether it should make any other 
modifications to the existing activities-based test. The Board does not 
propose to make any other changes at this time.

IV. Regulatory Analysis

A. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320, Appendix A.1), the Board may not conduct 
or sponsor, and a respondent is not required to respond to, an 
information collection unless it displays a valid Office of Management 
and Budget (OMB) control number. The Board reviewed the proposed rule 
under the authority delegated to the Board by the OMB and determined 
that it contains no collections of information under the PRA.\47\ 
Accordingly, there is no paperwork burden associated with the rule.
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    \47\ See 44 U.S.C. 3502(3).
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B. Regulatory Flexibility Act

    In accordance with section 4 of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601 et seq., the Board is publishing an initial 
regulatory flexibility analysis for the proposed rule. The RFA 
generally requires an agency to assess the impact a rule is expected to 
have on small entities. The RFA requires an agency either to provide a 
regulatory flexibility analysis or to certify that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities.
    Two of the requirements of an initial regulatory flexibility 
analysis \48\--a description of the reasons why the action is being 
considered and a statement of the objectives of, and legal basis for, 
the proposed rule--are contained in the information above. There are no 
reporting provisions or relevant federal rules that duplicate, overlap, 
or conflict with the proposed rule.\49\
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    \48\ 5 U.S.C. 603(b).
    \49\ As noted above, certain entities and financial markets do 
not rely on FDICIA's netting provisions to ensure the enforceability 
of their netting agreements, but instead rely on provisions of the 
Bankruptcy Code, the Federal Deposit Insurance Act, and other 
statutes to ensure the enforceability of netting agreements for 
particular financial contracts (e.g., swap agreements and repurchase 
agreements) and master netting agreements for multiple types of 
financial contracts.
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    Another requirement for the initial regulatory flexibility analysis 
is a description of, and where feasible, an estimate of, the number of 
small entities to which the proposed rule will apply. The Small 
Business Administration (SBA) has adopted small entity size standards 
which generally provide that financial entities are ``small entities'' 
only if they have (1) at most, $38.5 million or less in annual receipts 
or (2) for depository institutions and credit card issuers, $550 
million or less in assets.\50\ The Board does not believe that the 
proposed rule would apply to any small entities. The proposed rule 
would extend ``financial institution'' status to swap dealers, 
security-based swap dealers, MSPs, MSBSPs, DCOs, clearing agencies, 
bridge institutions, and Federal Reserve Banks.\51\ The Board has 
previously determined that DFMUs are not small entities; \52\ the CFTC 
has previously determined that swap dealers, MSPs, and DCOs are not 
small entities; \53\ and the SEC has previously determined that 
security-based swap dealers, MSBSPs, and clearing agencies are not 
small entities.\54\ The Federal Reserve Banks are not small 
entities.\55\
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    \50\ 13 CFR 121.201, sector 52 (SBA small entity size standards 
for finance and insurance entities).
    \51\ As explained above, the proposed rule would also codify the 
Board's existing view that foreign banks are financial institutions.
    \52\ 79 FR 65543, 65556 (Nov. 5, 2014).
    \53\ See, e.g., 81 FR 80563, 80565 (Nov. 16, 2016); 76 FR 69334, 
69428 (Nov. 8, 2011).
    \54\ See, e.g., 81 FR 29959, 30142 (May 3, 2016); 81 FR 70744, 
70784 (Oct. 13, 2016).
    \55\ None of the industry codes in the SBA's small entity size 
standards necessarily apply to the Federal Reserve Banks per se, but 
the SBA's size standards for commercial depository institutions are 
instructive. Generally, the SBA's size standards provide that 
depository institutions are small entities if they have $550 million 
or less in assets. 13 CFR 121.201, sector 52. Each of the Federal 
Reserve Banks holds significantly more than $550 million in assets. 
See the Statement of Condition of Each Federal Reserve Bank, https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab10a.
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    Similarly, a bridge financial company would not be a small 
entity.\56\ As noted above, under U.S. law, the FDIC can establish a 
bridge financial company when it acts as receiver for a failing 
financial company. In order for the FDIC to be appointed as receiver 
for a financial company, the Secretary of the Treasury must determine 
that, inter alia, ``the failure of the financial company and its 
resolution under otherwise applicable Federal or State law would have 
serious adverse effects on financial stability in the United States.'' 
\57\ The failure of a financial company that is a ``small entity'' 
would not affect financial

[[Page 18746]]

stability in the United States.\58\ Accordingly, the FDIC would not act 
as receiver--and would not form a bridge financial company--for a small 
entity. It is therefore unlikely that a bridge financial company would 
be a small entity.
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    \56\ A bridge depository institution might be a small entity, 
but this proposed rule would not affect the status of bridge 
depository institutions under FDICIA because (as noted above) such 
institutions qualify as ``financial institutions'' under FDICIA's 
statutory definition.
    \57\ 12 U.S.C. 5383(b)(2).
    \58\ See 13 CFR 121.201, sector 52 (Small Business 
Administration small entity size standards for finance and insurance 
entities), which generally provides that financial entities are 
``small entities'' only if they have (1) at most, $38.5 million or 
less in annual receipts or (2) for depository institutions and 
credit card issuers, $550 million or less in assets.
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C. Plain Language

    Section 722 of the Gramm-Leach Bliley Act requires the Board to use 
plain language in all proposed and final rules published after January 
1, 2000. The Board invites your comments on how to make this proposed 
rule easier to understand. For example:
     Has the Board organized the material to suit your needs? 
If not, how could this material be better organized?
     Are the requirements in the proposed rule clearly stated? 
If not, how could the proposed rule be more clearly stated?
     Does the proposed rule contain language or jargon that is 
not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the proposed rule easier to 
understand? If so, what changes to the format would make the proposed 
rule easier to understand?
     What else could the Board do to make the regulation easier 
to understand?

List of Subjects in 12 CFR Part 231

    Banks, Banking, Financial institutions, Netting.

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation EE, 12 CFR part 231, as follows:

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

0
1. The authority citation for Part 231 continues to read as follows:

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

0
2. In Sec.  231.2, redesignate paragraphs (c) through (f) as paragraphs 
(d) through (g), and add new paragraph (c) to read as follows:


Sec.  231.2  Definitions.

* * * * *
    (c) Bridge institution means a legal entity that has been 
established by a governmental authority to take over, transfer, or 
continue operating critical functions and viable operations of an 
entity in resolution. A bridge institution could include a bridge 
depository institution or a bridge financial company organized by the 
Federal Deposit Insurance Corporation in accordance with 12 U.S.C. 
1821(n) or 5390(h), respectively, or a similar entity organized under 
foreign law.
0
3. Amend Sec.  231.3 by revising paragraph (a), re-designating 
paragraph (c) as paragraph (d) and paragraph (b) as paragraph (c) and 
adding new paragraphs (b) and (e) to read as follows:


Sec.  231.3  Qualification as a financial institution.

    (a) Activities-based test: A person qualifies as a financial 
institution for purposes of sections 401-407 of the Act if it 
represents, orally or in writing that it will engage in financial 
contracts as a counterparty on both sides of one or more financial 
markets and either--
    (1) Had one or more financial contracts of a total gross dollar 
value of at least $1 billion in notional principal amount outstanding 
at such time or on any day during the previous 15-month period with 
counterparties that are not its affiliates; or
    (2) Had total gross mark-to-market positions of at least $100 
million (aggregated across counterparties) in one or more financial 
contracts at such time or on any day during the previous 15-month 
period with counterparties that are not its affiliates.
    (b) After two or more persons consolidate, such as through a merger 
or acquisition, the surviving person meets the quantitative thresholds 
under paragraphs (a)(1) and (a)(2) if, on the same, single calendar day 
during the previous 15-month period, the aggregate financial contracts 
of the consolidated persons would have met such quantitative 
thresholds.
* * * * *
    (e) Other financial institutions: A person qualifies as a financial 
institution for purposes of sections 401-407 of the Act if it is--
    (1) A swap dealer or major swap participant registered with the 
Commodity Futures Trading Commission pursuant to section 4s of the 
Commodity Exchange Act (7 U.S.C. 6s).
    (2) A security-based swap dealer or major security-based swap 
participant registered with the U.S. Securities and Exchange Commission 
pursuant to section 15F of the Securities Exchange Act of 1934 (15 
U.S.C. 78o-10).
    (3) A derivatives clearing organization registered with the 
Commodity Futures Trading Commission pursuant to section 5b(a) of the 
Commodity Exchange Act (7 U.S.C. 7a-1(a)) or a derivatives clearing 
organization that the Commodity Futures Trading Commission has exempted 
from registration by rule or order pursuant to section 5b(h) of the 
Commodity Exchange Act (7 U.S.C. 7a-1(h)).
    (4) A clearing agency registered with the U.S. Securities and 
Exchange Commission pursuant to section 17A(b) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78q-1(b)) or a clearing agency that the 
U.S. Securities and Exchange Commission has exempted from registration 
by rule or order pursuant to section 17A(k) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78q-1(k)).
    (5) A financial market utility that the Financial Stability 
Oversight Council has designated as, or as likely to become, 
systemically important pursuant to 12 U.S.C. 5463.
    (6) A nonbank financial company that the Financial Stability 
Oversight Council has determined shall be supervised by the Board and 
subject to prudential standards, pursuant to 12 U.S.C. 5323;
    (7) A foreign bank as defined in section 1(b) of the International 
Banking Act of 1978 (12 U.S.C. 3101), including a foreign bridge bank;
    (8) A bridge institution established for the purpose of resolving a 
financial institution; or
    (9) A Federal Reserve Bank.

    By order of the Board of Governors of the Federal Reserve 
System, April 26, 2019.
Ann Misback,
Secretary of the Board.
[FR Doc. 2019-08898 Filed 5-1-19; 8:45 am]
 BILLING CODE 3210-01-P