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May 16, 2019

Federal Reserve Proposes Broadened Application of FDICIA Netting Provisions

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On May 2, 2019, the Board of Governors of the Federal Reserve System Board proposed amendments[1] to Regulation EE,[2] which implements the netting provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).[3] The proposed amendments would expand the definition of “financial institution” for purposes of the netting provisions to more clearly cover certain categories of entities and would clarify how the activities-based test under Regulation EE applies following the consolidation of legal entities.

The bilateral netting provisions of FDICIA ensure that netting contracts between financial institutions will be enforced, even in the event of the insolvency of one of the parties. The proposal would amend Regulation EE expressly to include the following additional categories of entities as financial institutions:

  • Swap dealers and security-based swap dealers;
  • Major swap participants and major security-based swap participants;
  • Nonbank systemically important financial institutions;
  • Certain financial market utilities, which includes derivatives clearing organizations, clearing agencies and designated financial market utilities;
  • Foreign banks, including those that do not have a U.S. branch or agency;
  • Bridge institutions; and
  • Federal Reserve Banks.[4]

In addition, the amendments would clarify the existing quantitative activities-based alternative test in Regulation EE[5] in the context of a consolidation of legal entities. Under the proposal, the surviving entity could aggregate either 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; such total amounts would then be used to determine whether the surviving entity exceeds the quantitative thresholds of the activities-based test.

Comments on the proposal must be received on or before July 1, 2019.

Footnotes

[1]  Netting Eligibility for Financial Institutions, 84 Fed. Reg. 18741 (May 2, 2019).
[2]  12 C.F.R. 231.
[3]  P.L. 102–242; 105 Stat. 2236, 2372–3; 12 U.S.C. 4401–4407.
[4]  The Board acknowledged 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.
[5]  The quantitative component requires that the person have either (i) 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 (ii) 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.

Authors and Contributors

Donna Parisi

Partner

Derivatives & Structured Products

+1 212 848 7367

+1 212 848 7367

New York

Geoffrey Goldman

Partner

Derivatives & Structured Products

+1 212 848 4867

+1 212 848 4867

New York

Azam Aziz

Partner

Derivatives & Structured Products

+1 212 848 8154

+1 212 848 8154

New York