[Federal Register Volume 85, Number 1 (Thursday, January 2, 2020)]
[Rules and Regulations]
[Pages 1-3]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27801]



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 Rules and Regulations
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 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
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  Federal Register / Vol. 85, No. 1 / Thursday, January 2, 2020 / Rules 
and Regulations  

[[Page 1]]



DEPARTMENT OF THE TREASURY

31 CFR Part 148


Qualified Financial Contracts Recordkeeping Related to Orderly 
Liquidation Authority

AGENCY: Department of the Treasury.

ACTION: Notification of exemption.

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SUMMARY: The Secretary of the Treasury (the ``Secretary''), as 
Chairperson of the Financial Stability Oversight Council, after 
consultation with the Federal Deposit Insurance Corporation (the 
``FDIC''), is issuing a determination regarding a request for an 
exemption from certain requirements of the rule implementing the 
qualified financial contracts (``QFC'') recordkeeping requirements of 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (the ``Dodd-Frank Act'' or the ``Act'').

DATES: The exemption granted is effective January 2, 2020.

FOR FURTHER INFORMATION CONTACT: Peter Phelan, Deputy Assistant 
Secretary for Capital Markets, (202) 622-1746; Daniel Harty, Director, 
Office of Capital Markets, (202) 622-0509; Peter Nickoloff, Financial 
Economist, Office of Capital Markets, (202) 622-1692; or Stephen T. 
Milligan, Deputy Assistant General Counsel (Banking & Finance), (202) 
622-4051.

SUPPLEMENTARY INFORMATION:

Background

    On October 31, 2016, the Secretary published a final rule pursuant 
to section 210(c)(8)(H) of the Dodd-Frank Act requiring certain 
financial companies to maintain records with respect to their QFC 
positions, and the associated counterparties, legal documentation, and 
collateral, that would assist the FDIC as receiver in exercising its 
rights and fulfilling its obligations under Title II of the Act (the 
``rule'').\1\
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    \1\ See 31 CFR part 148; 81 FR 75624 (Oct. 31, 2016).
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    Section 148.3(c)(3) of the rule provides that one or more records 
entities may request an exemption from one or more of the requirements 
of the rule by writing to the Department of the Treasury 
(``Treasury''), the FDIC, and the applicable primary financial 
regulatory agency or agencies, if any.\2\ Among other things, the 
written request for an exemption must provide details as to the size, 
risk, complexity, leverage, frequency and dollar amount of QFCs, and 
interconnectedness to the financial system of each records entity, to 
the extent appropriate, and any other relevant factors and specify the 
reasons why granting the exemption will not impair or impede the FDIC's 
ability to exercise its rights or fulfill its statutory obligations 
under sections 210(c)(8), (9), and (10) of the Act.
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    \2\ See 31 CFR 148.3(c)(3).
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    The rule provides that, upon receipt of a written recommendation 
from the FDIC, prepared in consultation with the primary financial 
regulatory agency or agencies for the applicable records entity or 
entities, the Secretary may grant, in whole or in part, a conditional 
or unconditional exemption from compliance with one or more of the 
requirements of the rule to one or more records entities.\3\ The rule 
further provides that, in determining whether to grant an exemption, 
the Secretary will consider any factors deemed appropriate by the 
Secretary, including whether application of one or more requirements of 
the rule is not necessary to achieve the purpose of the rule.\4\
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    \3\ See 31 CFR 148.3(c)(4)(i).
    \4\ See 31 CFR 148.3(c)(4)(ii).
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Request for Exemption

    On August 14, 2018, Wells Fargo & Company submitted, on behalf of 
its subsidiaries Wells Fargo Clearing Services, LLC (``WFCS'') and 
Wells Fargo Advisors Financial Network, LLC (``FiNet''), a request for 
an exemption from the rule to Treasury, the FDIC, and, as the primary 
financial regulatory agencies for WFCS and FiNet, the Securities and 
Exchange Commission (``SEC'') and the Commodity Futures Trading 
Commission (``CFTC''), which Wells Fargo supplemented with information 
provided on March 5, 2019, in response to questions from the FDIC, and 
on June 26, 2019, and August 30, 2019, in response to questions from 
Treasury.\5\ Wells Fargo requested an exemption for WFCS and FiNet from 
compliance with sections 148.3 and 148.4 of the rule for WFCS' and 
FiNet's current and future QFC portfolio consisting of QFCs entered 
into by WFCS or FiNet with or on behalf of clients, referred to herein 
as ``client activity QFCs,'' and QFCs entered into by WFCS or FiNet in 
connection with or in support of client activity QFCs. As an 
alternative, Wells Fargo requested an exemption for QFCs, and all 
credit enhancements related to such QFCs, entered into by WFCS and 
FiNet with, on behalf of, or for the benefit of clients for which any 
of their transactions would be defined as being with a ``customer'' 
under the Securities Investor Protection Act, as amended (``SIPA''),\6\ 
and transactions entered into in order to facilitate or complete 
transactions with such a customer. Wells Fargo also asked for an 
exemption from certain guarantees WFCS enters into for the benefit of a 
futures commission merchant in connection with WFCS' introduction of 
customer trades to such futures commission merchant.
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    \5\ Each of WFCS and FiNet is registered with the SEC as a 
broker-dealer under the Securities Exchange Act of 1934 and as an 
investment adviser under the Investment Advisers Act of 1940 and is 
registered with the CFTC as an introducing broker under the 
Commodity Exchange Act.
    \6\ 15 U.S.C. 78aaa et seq.
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    In support of its request, Wells Fargo submitted information 
detailing the types, volume, and complexity of client activity and 
related QFCs to which WFCS and FiNet are a party. Wells Fargo stated 
that WFCS and FiNet's primary business activities comprise retail 
securities and commodities brokerage, investment advisory services, 
asset management, estate planning, retirement planning, and portfolio 
analysis and monitoring services and that WFCS, as a self-clearing 
broker-dealer, also carries the customer accounts of and provides 
clearing services on a fully disclosed basis to FiNet and various 
unaffiliated broker-dealers.
    Wells Fargo represented that the client activity QFCs of WFCS and 
FiNet consist of retail cash and margin securities transactions, retail 
brokerage agreements, margin agreements, non-

[[Page 2]]

purpose lending agreements, and a limited number of mortgage-backed 
securities forward transactions. As to leverage, Wells Fargo 
represented that retail margin and securities-based lending is done in 
accordance with initial and maintenance margin requirements. As to 
WFCS' and FiNet's interconnectedness to the rest of the financial 
system, Wells Fargo noted that the activities of WFCS and FiNet are 
limited to certain products and types of clients and, moreover, that 
their operations, funding, and liquidity are independent from the 
separate Wells Fargo broker-dealer subsidiary, Wells Fargo Securities, 
LLC, that serves institutional clients.\7\ Furthermore, neither WFCS 
nor FiNet is registered with the CFTC as a swap dealer or a futures 
commission merchant; the lack of these registrations restricts their 
ability to transact in certain types of QFCs, including OTC 
derivatives. Finally, Wells Fargo asserted that the extent and nature 
of WFCS' and FiNet's businesses with respect to client activity QFCs, 
as described above, support its view that granting the requested 
exemption would not impair or impede the FDIC's ability to exercise its 
rights under section 210(c)(8), (9), and (10) of the Act.
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    \7\ Wells Fargo Securities, LLC was not included within the 
exemption request.
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    Treasury received a final recommendation from the FDIC, prepared in 
consultation with the SEC and CFTC, regarding the exemption request, 
and, after consultation with the FDIC, Treasury is making the 
determination discussed below.\8\
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    \8\ All exemptions to the recordkeeping requirements of the rule 
are made at the discretion of the Secretary, and the Secretary's 
discretion is not limited by any recommendations received from other 
agencies. Exemptions from the FDIC's recordkeeping rules under 12 
CFR part 371 (Recordkeeping Requirements for Qualified Financial 
Contracts) are at the discretion of the board of directors of the 
FDIC and entail a separate request and process and different policy 
considerations. References to the FDIC in this document should not 
be taken to imply that the FDIC has determined that similar 
exemptions under part 371 would be available.
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Evaluation of the Exemption Request

    The FDIC has the authority under Title II to transfer the assets 
and liabilities of any financial company for which it has been 
appointed receiver under Title II (a ``covered financial company'') to 
either a bridge financial company established by the FDIC or to another 
financial institution.\9\ The FDIC generally has broad discretion under 
Title II as to which QFCs it transfers to the bridge financial company 
or to another financial institution subject to certain limitations, 
including the ``all or none rule.'' \10\
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    \9\ See, e.g., 12 U.S.C. 5390(a)(1)(G)(i).
    \10\ For further discussion of the FDIC's authorities and 
responsibilities addressed in this section of the document, see the 
notice of exemption issued with respect to Morgan Stanley Smith 
Barney, 83 FR 66618, 66619-20 (Dec. 27, 2018).
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    Separately, if the FDIC is appointed receiver of a covered 
financial company that is a broker-dealer and the FDIC establishes a 
bridge financial company to assist with the resolution of that broker-
dealer, the FDIC must, pursuant to section 210(a)(1)(O) of the Act,\11\ 
unless certain conditions are met, transfer to the bridge financial 
company all ``customer accounts'' of the broker-dealer and all 
associated ``customer name securities'' and ``customer property,'' as 
those terms are defined by reference to SIPA.\12\ There are two 
conditions under which the FDIC is permitted not to transfer all such 
customer accounts, customer name securities, and customer property to 
the bridge financial company: (i) If the FDIC determines, after 
consulting with the Securities Investor Protection Corporation and the 
SEC, that such customer accounts, customer securities, and customer 
property are likely to be promptly transferred to another registered 
broker-dealer or (ii) if the transfer would materially interfere with 
the ability of the FDIC to avoid or mitigate serious adverse effects on 
financial stability or economic conditions in the United States.\13\
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    \11\ 12 U.S.C. 5390(a)(1)(O).
    \12\ See 15 U.S.C. 78aaa et seq. See also section 201(a)(10) of 
the Dodd-Frank Act (12 U.S.C. 5381(a)(10)) (providing that the terms 
``customer,'' ``customer name securities,'' and ``customer 
property'' as used in Title II shall have the same meaning as 
provided in SIPA).
    \13\ See 12 U.S.C. 5390(a)(1)(O)(i)(I)-(II).
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    Not all of a broker-dealer's clients qualify as ``customers'' under 
SIPA. For instance, a client of a broker-dealer that engaged in an FX 
spot transaction or an FX forward would not be a ``customer'' under 
SIPA with respect to those transactions.\14\ Even if such a client were 
otherwise to have a customer relationship with the broker-dealer under 
SIPA, such as by virtue of having a brokerage account for the trading 
of securities, then, although that customer account would be required 
to be transferred pursuant to section 210(a)(1)(O) of the Act, the FX 
spot transaction or forward would not be required to be transferred 
pursuant to section 210(a)(1)(O) of the Act. However, pursuant to the 
all or none rule, if the FDIC were to transfer a customer account that 
held QFCs between the broker-dealer and the client, the FDIC would be 
required to transfer (i) all QFCs between the broker-dealer and the 
client and, if the client is a non-natural person, (ii) all QFCs 
between the broker-dealer and any affiliates of such client.
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    \14\ See 15 U.S.C. 78lll(2) (defining ``customer'' as . . . 
``any person (including any person with whom the debtor deals as 
principal or agent) who has a claim on account of securities 
received, acquired, or held . .'' (emphasis added); id. section 
78lll(14) (defining ``security'' to exclude currency and rights to 
buy and sell currency other than FX options and other derivatives 
executed on a national securities exchange).
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Determination of Exemption

    Given the above-discussed restrictions on the FDIC's discretion as 
to whether or not to transfer QFCs from a broker-dealer, the limited 
nature of WFCS and FiNet's businesses, and the limited types of QFCs 
entered into by WFCS and FiNet with their clients, Treasury has 
determined to exempt WFCS and FiNet from the recordkeeping requirements 
of the rule with respect to any QFCs with clients that are their 
respective customers under SIPA with respect to any transactions or 
accounts such customers have with WFCS and FiNet, respectively, subject 
to the conditions stipulated below.\15\ Treasury does not expect that 
granting this exemption will unduly interfere with the FDIC's ability 
to avoid or mitigate serious adverse effects on financial stability or 
economic conditions in the United States. In the case of each of WFCS 
and FiNet, the size, risk, complexity, and leverage of its QFCs with 
its customers do not present a high likelihood that the financial 
stability exception to the transfer requirement of section 210(a)(1)(O) 
of the Act would be met. If the financial stability exception is not 
met, the FDIC would likely either transfer, pursuant to section 
210(a)(1)(O), all of a broker-dealer's customer accounts, customer name 
securities, and customer property included in such customer accounts 
and any other QFCs with such customer to the bridge financial company 
or transfer all such accounts, securities, and property to another 
broker-dealer. In either case, the FDIC would not need the detailed 
records required by the rule with respect to QFCs to accomplish the 
transfer. Likewise, Treasury has determined to exempt any guarantees of 
such QFCs by a third party if the guarantor is an affiliate of the 
customer, is itself a customer of WFCS or FiNet, as applicable, or does 
not have any other QFCs with WFCS or FiNet, as applicable. In addition, 
Treasury has determined to exempt WFCS from the

[[Page 3]]

recordkeeping requirements of the rule with respect to any QFC entered 
into by WFCS with a clearing organization for the purpose of 
facilitating the clearance or settlement of any QFC subject to the 
exemption discussed above. As used in the exemption, the term 
``clearing organization'' includes, among other things, clearing 
agencies registered with the SEC and derivatives clearing organizations 
registered with the CFTC.\16\
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    \15\ As used in the remainder of this notification of exemption, 
the term ``customer'' means a person who is a customer as defined in 
SIPA with respect to any transaction or account it has with WFCS or 
FiNet.
    \16\ The exemption cross-references the definition from section 
402 of the Federal Deposit Insurance Corporation Improvement Act of 
1991, 12 U.S.C. 4402.
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    Treasury has determined not to exempt (i) QFCs with clients that 
are not customers under SIPA with respect to any transactions or 
accounts they have with WFCS and FiNet or (ii) WFCS's or FiNet's QFCs 
with third parties that are not customers, such as transactions with 
other broker-dealers entered into to fulfill obligations to customers 
or to hedge risk, other than the guarantees and the QFCs with clearing 
organizations discussed above. The exemption would not include any 
guarantees WFCS may enter into for the benefit of a futures commission 
merchant in connection with WFCS' introduction of customer trades to 
such futures commission merchant. Because the FDIC would retain 
discretion as to whether to transfer or retain QFCs with clients that 
are not customers under SIPA, and in consideration of the size of the 
QFCs with non-customer third parties and the risks they impose, the 
FDIC would need the detailed records required by the rule to make a 
transfer determination with respect to such transactions of WFCS and 
FiNet. To the extent the transactions excluded from this exemption 
qualify for the exemptions previously granted by Treasury with respect 
to cash market transactions and overnight transactions, WFCS or FiNet 
would only be required to maintain limited records with respect to such 
transactions.\17\
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    \17\ See 83 FR 65509 (Dec. 21, 2018).
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Conditions of the Exemption

    The exemption granted below is based on the factual representations 
made by Wells Fargo on behalf of WFCS and FiNet to Treasury, the FDIC, 
the SEC, and the CFTC in its submissions. Treasury reserves the right 
to request an updated submission from WFCS and FiNet as to their 
business, and to rescind or modify the exemption, at any time. Further, 
Treasury intends to reassess the exemption in five years. At that time, 
Treasury, in consultation with the FDIC and the primary financial 
regulatory agencies, would evaluate any material changes in the nature 
of WFCS' and FiNet's businesses as well as any relevant changes to 
market structure or applicable law or other relevant factors that might 
affect the reasons for granting the exemptions. Treasury expects that 
it would provide notice to WFCS and FiNet prior to any modification or 
rescission of the exemption and that, in the event of a rescission or 
modification, Treasury would grant a limited period of time in which to 
come into compliance with the applicable recordkeeping requirements of 
the rule.

Terms and Conditions of the Exemption

    Each of WFCS and FiNet (each a ``records entity'') is hereby 
granted an exemption from the requirements of 31 CFR 148.3 and 148.4 
for the following: (i) Any QFC entered into by the records entity with 
or on behalf of any customer of the records entity that is booked and 
carried in accounts at the records entity maintained for the benefit of 
such customer and (ii) any guarantee of such an exempt QFC if the 
guarantor (x) is an affiliate of the customer whose obligations are 
guaranteed, (y) is itself a customer of the records entity, or (z) does 
not have any other QFCs with the records entity. In addition, WFCS is 
hereby granted an exemption from the requirements of 31 CFR 148.3 and 
148.4 for QFCs entered into by WFCS with a clearing organization in 
order to facilitate the clearance or settlement of any QFC referenced 
in clause (i) of the preceding sentence. For purposes of the exemption, 
``customer'' means a person who is a customer as defined in 15 U.S.C. 
78lll(2) with respect to any transactions or accounts it has with the 
records entity, and ``clearing organization'' has the meaning provided 
in 12 U.S.C. 4402.
    The exemption is subject to modification or revocation at any time 
the Secretary determines that such action is necessary or appropriate 
in order to assist the FDIC as receiver for a covered financial company 
in being able to exercise its rights and fulfill its obligations under 
sections 210(c)(8), (9), or (10) of the Act. The exemption extends only 
to WFCS and FiNet and to no other entities.

    Dated: December 13, 2019.
Peter Phelan,
Deputy Assistant Secretary for Capital Markets.
[FR Doc. 2019-27801 Filed 12-31-19; 8:45 am]
BILLING CODE 4810-25-P