[Federal Register Volume 87, Number 2 (Tuesday, January 4, 2022)]
[Notices]
[Pages 271-274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27733]


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DEPARTMENT OF THE TREASURY


Qualified Financial Contracts Recordkeeping Related to Orderly 
Liquidation Authority

AGENCY: Department of the Treasury.

ACTION: Notice 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 applicable January 4, 2022.

FOR FURTHER INFORMATION CONTACT: 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, 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\ 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\ The written request for an 
exemption must: (i) Identify the records entity or records entities or 
the types of records entities to which the exemption would apply; (ii) 
specify the requirements from which the records entities would be 
exempt; (iii) 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 (iv) 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.\3\
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    \2\ 31 CFR 148.3(c)(3). The term ``records entity'' is defined 
at 31 CFR 148.2(n).
    \3\ 12 U.S.C. 5390(c)(8), (9), and (10).
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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, that takes into consideration each of the factors referenced 
in section 210(c)(8)(H)(iv) of the Act \4\ and any other factors the 
FDIC considers appropriate, the Secretary may grant, in whole or in 
part, a conditional or unconditional exemption from compliance with one 
or more of the requirements of the rule to one or more records 
entities.\5\ 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.
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    \4\ Id. Sec. 5390(c)(8)(H)(iv).
    \5\ 31 CFR 148.3(c)(4)(i).
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Request for Exemption

    On January 7, 2020, RBC US Group Holdings LLC (``RIHC'') submitted, 
on behalf of its subsidiary City National Securities Inc. (``CNS''), a 
request for an exemption from the rule to the Treasury, the FDIC, and, 
as the primary financial regulatory agency for CNS, the Securities and 
Exchange Commission

[[Page 272]]

(``SEC''), which RIHC supplemented with information provided on March 
18, 2020.\6\ RIHC requested an exemption for CNS from compliance with 
sections 148.3 and 148.4 of the rule for the current and any future QFC 
portfolio of CNS. Such an exemption would in effect cover all QFCs that 
CNS may enter into, without any limitation as to the type of QFC, the 
nature of the counterparty, or any other factor. The request stated 
that CNS's current and anticipated future QFC portfolio consists 
predominantly of client activity QFCs, meaning cash market transactions 
CNS enters into on behalf of its retail customers and that are executed 
on standardized terms. Without an exemption, RIHC stated that CNS's 
cost of recordkeeping would impose an undue burden relative to the 
characteristics of its QFC portfolio, and submitted that, in the event 
the FDIC was appointed receiver of CNS under Title II of the Act, the 
records that CNS already maintains under current law and regulatory 
requirements should be sufficient to permit the FDIC to exercise its 
rights and fulfill its statutory obligations pursuant to its resolution 
authority under the Act. Further, RIHC stated that all of CNS's clients 
are ``customers'' as defined under the Securities Investor Protection 
Act of 1970 (``SIPA''). As such, RIHC stated that granting the 
requested exemption would not impair or impede the FDIC from exercising 
its rights or fulfilling its responsibilities under the Act and would 
be consistent with exemptions Treasury previously granted with respect 
to Morgan Stanley Smith Barney LLC (``MSSB'') \7\ as well as with 
respect to Wells Fargo Clearing Services, LLC (``WFCS'') and Wells 
Fargo Advisors Financial Network, LLC (``FiNet,'' and together with 
WFCS, ``WFCS-FiNet'').\8\
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    \6\ RIHC is a U.S. intermediate holding company subsidiary of 
Royal Bank of Canada, and is a records entity under the rule. CNS 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.
    \7\ See 83 FR 66618 (Dec. 27, 2018).
    \8\ See 85 FR 1 (Jan. 2, 2020).
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    In support of its request, RIHC submitted information pertaining to 
the QFCs to which CNS is a party. RIHC represented that CNS's QFC 
portfolio is relatively small, poses low risk, has little complexity, 
has low trading frequency, has no leverage, and entails limited 
interconnectedness with the financial system. The request stated that 
CNS's QFC portfolio consists primarily of three types of QFCs to which 
it is a party, each of which is analogous to a type of QFC covered by 
the previous exemptions with respect to MSSB and WFCS-FiNet. 
Specifically, CNS primarily engages in client brokerage agreements, 
cash market QFCs governed by the client brokerage agreements and 
entered into on behalf of retail customers, and a master clearing 
agreement with CNS's clearing firm, an unaffiliated broker-dealer. RIHC 
represented that the cash market QFCs offered by CNS are limited to 
standard cash products, including common and preferred stocks, 
municipal, corporate, and agency bonds, U.S. Treasuries, commercial 
paper, structured notes, brokered certificates of deposit, mutual 
funds, and options. The request stated that CNS does not offer as part 
of its brokerage investment options or otherwise make available to its 
brokerage clients the types of QFCs that would exclude its clients from 
meeting the SIPA definition of ``customer,'' namely, currency 
contracts, commodity or related contracts, futures contracts, or any 
warrants or rights to purchase or subscribe to such contracts. Similar 
to MSSB and WFCS-FiNet, CNS is not registered with the Commodity 
Futures Trading Commission (``CFTC'') as a swap dealer or futures 
commission merchant, thus restricting its ability to transact in 
certain types of QFCs. Finally, RIHC represented that CNS's 
interconnectedness to the rest of the financial system is limited based 
on its relatively small size and, like MSSB and WFCS-FiNet, its focus 
on non-institutional clients.

Evaluation of the Exemption Request

    In evaluating the exemption request, Treasury considered the 
representations made by RIHC with respect to CNS's QFC portfolio in 
terms of its size, risk, and complexity; trading frequency and 
leverage; and interconnectedness to the financial system. Treasury also 
considered RIHC's statement that granting an exemption to CNS from the 
recordkeeping requirements of the rule would not impair or impede the 
ability of the FDIC to exercise its rights or fulfill its statutory 
obligations under Title II of the Act. RIHC's views in this regard 
centered on its representation that all of CNS's clients are 
``customers'' as that term is defined under SIPA, and an assertion of 
how such customers and their QFCs would be handled by the FDIC in the 
event of a Title II resolution of CNS.
    As discussed more fully in the preamble to the final rule,\9\ as 
well as in the determinations of exemption Treasury provided to MSSB 
and WFCS-FiNet, 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,\10\ 
unless certain conditions are met,\11\ 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\ Treasury further 
discussed that the requirements of section 210(a)(1)(O) of the Act in 
combination with the ``all or none rule'' \13\ mean that, if the FDIC 
were to transfer a customer account that held QFCs between a covered 
broker-dealer and its 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. In the case of either (i) or (ii), 
the transfer would include, due to the all or none rule, any QFCs of 
the type that would not make the client a customer under SIPA, such as 
an FX spot agreement.
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    \9\ See 81 FR at 75624-25.
    \10\ 12 U.S.C. 5390(a)(1)(O).
    \11\ Section 210(a)(1)(O)(i) of the Act stipulates 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. If neither such condition 
is met, the FDIC must transfer to a bridge financial company any 
QFCs entered into by the broker-dealer with its clients who are 
customers under SIPA.
    \12\ 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\ Under the ``all or none rule'' of the Act, if the FDIC 
determines to transfer, disaffirm or repudiate any QFC with a 
particular counterparty, it must transfer, disaffirm or repudiate 
(i) all QFCs between the covered financial company and such 
counterparty and (ii) all QFCs between the covered financial company 
and any affiliate of such counterparty. See, 12 U.S.C. 5390(c)(9)(A) 
and 5390(c)(11).
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    However, RIHC stated that CNS does not engage in the types of QFCs 
that would exclude its clients from the SIPA definition of customer. 
RIHC stated that CNS offers its retail customers only standard cash 
products as described above. Further, as CNS is not registered with the 
CFTC as a swap dealer or futures commission merchant, its ability to 
transact in certain types of QFCs is restricted. As represented by 
RIHC, CNS's QFCs with its retail customers are

[[Page 273]]

of a small size, present little complexity and leverage, have low 
trading frequency, and impose little risk.
    Treasury received a final recommendation from the FDIC regarding 
the exemption request, prepared in consultation with the SEC, and, 
after consultation with the FDIC, Treasury is making the determinations 
discussed below.\14\
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    \14\ 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 
governmental agencies. Exemptions to 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, process, and policy 
considerations. References to the FDIC in this notice should not be 
taken to imply that the FDIC has determined that similar exemptions 
under Part 371 would be available.
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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 \15\ from a broker-dealer, the 
limited nature of CNS's business, and the limited types of QFCs entered 
into by CNS with its clients, Treasury has determined to grant CNS an 
exemption from the recordkeeping requirements of the rule with respect 
to any QFCs of CNS with clients that are customers \16\ of CNS under 
SIPA with respect to any transactions or accounts they have with CNS, 
subject to the terms and conditions stipulated below. Treasury does not 
expect that granting this conditional exemption will unduly hinder the 
FDIC as receiver in exercising its rights and fulfilling its 
obligations under the Act or interfere with the FDIC's ability to avoid 
or mitigate serious adverse effects on financial stability or economic 
conditions in the United States. In CNS's case, 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.
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    \15\ As used in the remainder of this notice of exemption, the 
term ``QFC'' means a qualified financial contract as defined for 
purposes of Title II of the Act. See, 12 U.S.C. 5390(c)(8)(D).
    \16\ As used in the remainder of this notice 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 CNS.
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    For the avoidance of doubt, Treasury is not granting the exemption 
request as presented in the RIHC request letter. There, RIHC requested 
an exemption for CNS from compliance with the rule for the current and 
any future QFC portfolio of CNS; that is, RIHC did not limit the 
exemption request only to QFCs with SIPA customers. If granted as 
requested, such an exemption would allow CNS to avoid recordkeeping for 
any and all QFCs that it may enter into now or in the future, without 
any limitation as to the type of QFC, the nature of the counterparty, 
or any other factor, including QFCs for its own account with 
counterparties who may be other broker-dealers or who may not otherwise 
qualify as customers under SIPA. Treasury is granting a narrower, 
limited and conditional exemption that applies only to QFCs with CNS 
customers; except as described in the next paragraph, CNS's QFCs for 
its own account or with non-customers, whether or not affiliated with 
CNS, are not covered by this exemption and remain subject to the 
recordkeeping requirements of the rule. Consistent with the 
determinations of exemption Treasury provided to MSSB and WFCS-FiNet, 
Treasury has determined not to provide an exemption with respect to 
CNS's QFCs for its own account or with non-customers because the FDIC 
would retain discretion as to whether to transfer or retain such QFCs 
and because the size and risks of such QFCs at the time could be such 
that the FDIC would need the records required by the rule to make a 
transfer determination.
    Treasury is also granting an exemption for any QFC entered into by 
CNS as introducing broker with another broker-dealer as clearing broker 
and that relates to the clearing of any exempted QFCs with CNS 
customers as discussed above, subject to the terms and conditions 
stipulated below, and provided that CNS maintains documentation of any 
agreement between CNS and each such clearing broker. This exemption 
would cover QFCs, such as a master clearing agreement, between CNS and 
its clearing broker that relate to the clearing of any CNS customer 
QFCs. For purposes of this exemption, the term ``clearing broker'' 
means an SEC-registered broker-dealer that is a member of the Financial 
Industry Regulatory Authority (FINRA) and has authority to execute, 
settle, and clear transactions and carry accounts on a fully disclosed 
basis on behalf of CNS and CNS's customers pursuant to a master 
clearing agreement or similar agreement. If the FDIC were to transfer 
the customer QFCs to a bridge financial company or other financial 
institution, it would presumably also transfer any master clearing 
agreement or similar agreement entered into with a clearing broker that 
facilitates the clearance or settlement of such customer QFCs. 
Therefore, the records required by the rule regarding such QFCs with a 
clearing broker should not be needed by the FDIC to address the 
clearance of CNS's exempted customer QFCs.

Conditions of the Exemption

    The exemption granted below is based on the factual representations 
made by RIHC on behalf of CNS to Treasury, the FDIC, and the SEC, in 
its submissions, including the factual representations regarding CNS's 
registration as a broker-dealer and investment adviser, the limitations 
on its business lines, the limitations on the types of clients it 
serves and the types of products and services it offers its clients, 
the frequency, size, and dollar amounts of QFCs with clients, the lack 
of complexity of the QFCs it has with clients, the number of client 
accounts it maintains, and the description of its activities as 
introducing broker on behalf of its customers with its clearing 
brokers.
    Treasury reserves the right 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 
SEC, would evaluate any material changes in the nature of CNS's 
business 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 may request an updated submission 
from CNS as to its business at that time. Treasury expects that it 
would provide notice to CNS prior to any modification or rescission of 
the exemption and that, in the event of a rescission or modification, 
Treasury would grant CNS 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

    CNS is hereby granted an exemption from the requirements of 31 CFR 
148.3 and 148.4 for (i) any QFC entered into by CNS with or on behalf 
of any customer of CNS that is booked and carried in accounts at CNS 
maintained for the benefit of such customer; and (ii)

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any QFC entered into by CNS with a clearing broker that relates to the 
clearing of any QFC referenced in clause (i), provided that CNS 
maintains documentation of any agreement between CNS and each such 
clearing broker. 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 CNS, and ``clearing 
broker'' means an SEC-registered broker-dealer that is a member of 
FINRA and has authority to execute, settle, and clear transactions and 
carry accounts on a fully disclosed basis on behalf of CNS and CNS's 
customers pursuant to a master clearing agreement or similar agreement.
    This 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 CNS and to no other entities.

Nandini Ajmani,
Deputy Assistant Secretary for Capital Markets.
[FR Doc. 2021-27733 Filed 1-3-22; 8:45 am]
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