Board of Governors of the Federal Reserve System (“Board”)
Interim final rule with request for comment.
The Board invites comment on an interim final rule that treats an uninsured U.S. branch or agency of a foreign bank as an insured depository institution for purposes of section 716 of the Dodd-Frank Act and establishes a process by which a state member bank or uninsured state branch or agency of a foreign bank may request a transition period to conform its swaps activities to the requirements of section 716.
This rule is effective on June 10, 2013. Comments must be received on or before August 4, 2013.
You may submit comments, identified by Docket No. R–1458 and RIN No. 7100–AD96, by any of the following methods:
Agency Web site:
Laurie Schaffer, Associate General Counsel, (202) 452–2272, Christopher Paridon, Counsel, (202) 452–3264, Victoria Szybillo, Counsel (202) 475–6325, or Christine Graham, Senior Attorney, (202) 452–3005, Legal Division; or Jordan Bleicher, Supervisory Financial Analyst, (202) 973–6123, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. Users of Telecommunication Device for Deaf (TDD) only, call (202) 263–4869.
Section 716 of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) generally prohibits the provision of “Federal assistance” to any “swaps entity” with regard to any swap, security-based swap, or other activity of the swaps entity.
Section 716 provides a specific exclusion from the definition of “swaps entity” for any insured depository institution that is a major swap participant or major security-based swap participant.
Section 716 provides insured depository institutions with a transition period to facilitate compliance with the requirements of the section. By its terms, the prohibitions of section 716 apply to insured depository institutions only with respect to swaps and security-based swaps entered into after the expiration of the transition period. The provisions of section 716 become effective on July 16, 2013.
The interim final rule addresses the application of section 716 to swaps entities that are uninsured U.S. branches or agencies of a foreign bank and establishes a process by which a state member bank and an uninsured state branch or agency of a foreign bank may request a transition period to conform its swaps activities to the requirements of section 716. In particular, the interim final rule treats uninsured U.S. branches and agencies of foreign banks as insured depository institutions for purposes of section 716.
Section 716(d) of the Dodd-Frank Act provides that the prohibition on Federal assistance does not apply to the provision of Federal assistance to insured depository institutions that limit their swap and security-based swap activities to activities identified in that section.
Moreover, section 716 provides insured depository institutions with a transition period to conform their activities to those permissible under section 716.
The structure, language, and purpose of section 716 create an ambiguity regarding the definition of “insured depository institution” for purposes of the various provisions of section 716, including, in particular, regarding the scope of the exceptions and transition period granted to insured depository institutions. The term “insured depository institution” is not defined for purposes of these provisions. Section 2 of the Dodd-Frank Act provides that “except as the context otherwise requires . . .,”
In the context of section 716, uninsured U.S. branches and agencies of foreign banks would appear to be properly considered to be insured depository institutions. By statute, both uninsured and insured U.S. branches and agencies of foreign banks may receive Federal Reserve advances on the same terms and conditions that apply to domestic insured state member banks.
Treating uninsured U.S. branches and agencies of foreign banks as insured depository institutions is also consistent with the purpose and legislative history of section 716. Section 716 and Title VII of the Dodd-Frank Act generally are intended to reduce systemic risks from derivatives activities. Treating uninsured U.S. branches and agencies as insured depository institutions furthers these objectives by providing sufficient opportunity for uninsured U.S. branches and agencies to conform or cease their swaps activities in an orderly manner and to continue the same risk-mitigating hedging and other activities permitted for insured depository institutions under section 716. This approach is also consistent with the legislative history, which suggests Congress intended to treat uninsured branches and agencies as insured depository institutions.
The interim final rule provides that, for purposes of section 716 of the Dodd-Frank Act and the interim final rule, the term “insured depository institution” includes any insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) and any uninsured U.S. branch or agency of a foreign bank.
Section 716 provides insured depository institutions with a transition period to conform their activities.
In establishing the length of the transition period for an insured depository institution, the Board is required by statute to take into account and make written findings regarding the potential impact of divestiture or cessation of swap or security-based swaps activities on the insured depository institution's: (i) Mortgage lending; (ii) small business lending; (iii) job creation; (iv) capital formation versus the potential negative impact on insured depositors and the Deposit Insurance Fund of the FDIC; and (v) any other factor that the Board believes appropriate to consider.
The interim final rule provides that a state member bank and an uninsured state branch and agency of foreign bank may seek a transition period of up to 24 months from July 16, 2013 (for an entity
Under the interim final rule, the Board may also request additional information that it believes is necessary in order to act on a request for a transition period. The Board will seek to act on a request for a transition period expeditiously after the receipt of a complete request. The interim final rule would allow the Board to impose conditions on any transition period granted if the Board determines such conditions are necessary and appropriate. Consistent with section 716(f), the interim final rule also permits the Board, in consultation with the SEC and CFTC, as appropriate, to extend the transition period for up to one additional year. To request an extension of the transition period, an insured depository institution must submit a written request no later than 60 days before the end of the transition period.
The Board is interested in receiving comments on all aspects of the interim final rule. In particular:
This interim final rule is effective immediately. Pursuant to the Administrative Procedure Act (APA), at 5 U.S.C. 553(b)(B), notice and comment are not required prior to the issuance of a final rule if an agency, for good cause, finds that “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”
Consistent with section 553(b)(B) of the APA, the Board finds that issuing this rule as an interim final rule is necessary to avoid significant disruptions in the swaps activities of the uninsured U.S. branches and agencies of foreign banks, and that obtaining notice and comment prior to issuing the interim final rule would be impracticable and contrary to the public interest. Furthermore, the Board finds that there is good cause to publish the interim final rule with an immediate effective date.
The Board views the scope of section 716's prohibition as closely related to the application of the Title VII framework to the cross-border activities of foreign banks. The CFTC and SEC both have issued proposals regarding the cross-border application of Title VII.
Although the Title VII regulatory structure is still being developed, section 716 goes into effect on July 16, 2013. Accordingly, the Board is seeking to provide clarity to uninsured U.S. branches and agencies of foreign banks regarding the availability of the transition period and the exceptions available for insured depository institutions. Absent clarity regarding the availability of the transition period, uninsured U.S. branches and agencies of foreign banks arguably would have to terminate their swaps activities by July 16, 2013 in order to continue to be eligible for access to the discount window. Terminating swaps activities by this date may result in foreign banks and their counterparties winding down their swaps activities in an inefficient and disorderly fashion that could present significant operational and other risks.
There is also good cause to provide clarity on the availability of the exceptions set forth in section 716 through this interim final rule because notice and public procedure would be impracticable and contrary to the public interest. Without such clarity, uninsured branches and agencies would be required to begin terminating all their swap activities during the transition period, even those that qualified for the exceptions. The novation of existing swaps may require the branch or agency to enter quickly into new master swap agreements with each customer, which could present operational risks to the branch or agency and its customers. In the Board's view, the potential harm to these entities and their counterparties that may result from not providing clarity on the availability of the exceptions warrants a departure from the notice and comment rulemaking procedure.
Last, the Board finds that there is good cause to establish the process for applying for transition period relief through this interim final rule because notice and comment would be unnecessary and contrary to the public interest. The interim final rule establishes a procedure of obtaining a statutory transition period and reduces burden on applying institutions by narrowing and clarifying the information that must be provided to obtain this statutory benefit. State member banks are eligible for the transition period under section 716(f) absent implementing regulations, and the Board has already received applications from state member banks requesting transition period relief. In addition, this portion of the interim final rule is appropriately characterized as a rule of procedure, and therefore would not normally be subject to notice and comment requirements. The Board has determined to publish the transition period procedures in this interim final rule in order to provide notice to all state member banks regarding these procedures.
Although notice and comment are not required prior to the effective date of this interim final rule, the Board invites comment on all aspects of this rulemaking and will revise this interim final rule if necessary or appropriate in light of the comments received.
In accordance with section 4 of the Regulatory Flexibility Act (“RFA”), 5 U.S.C. 601
The Board is adopting this interim final rule to treat an uninsured U.S. branch or agency of a foreign bank as an insured depository institution for purposes of section 716 of the Dodd-Frank Act and establish a process by which a state member bank and uninsured branch or agency of a foreign bank may request a transition period to conform its swaps activities to the requirements of section 716.
Under regulations issued by the Small Business Administration (“SBA”), a “small entity” includes those firms within the “Finance and Insurance” sector with asset sizes that vary from $7 million or less to $175 million or less.
As discussed in the Supplementary Information, the interim final rule would apply to an uninsured U.S. branch or agency of a foreign bank and a state member bank that is registered with the CFTC or SEC as a swap dealer or security-based swap dealer, respectively. Regulations issued by the CFTC and SEC provide that a person shall not be deemed a swap dealer if its swap dealing activity over the preceding 12 months results in swap positions with an aggregate gross notional amount of no more than $3 billion, and an aggregate gross notional amount of no more than $25 million with regard to swaps with a “special entity” (which includes municipalities, other political subdivisions and employee benefit plans).
As noted above, because the interim final rule is not likely to apply to any company with assets of $175 million or less, it is not expected to apply to any small entity for purposes of the RFA. The Board does not believe that the interim final rule duplicates, overlaps, or conflicts with any other Federal rules. In light of the foregoing, the Board does not believe that the interim final rule, if adopted in final form, would have a significant economic impact on a substantial number of small entities supervised. Nonetheless, the Board seeks comment on whether the interim final rule would impose undue burdens on, or have unintended consequences for, small organizations, and whether there are ways such potential burdens or consequences could be minimized in a manner consistent with section 716 of the Dodd-Frank Act.
Section 722 of the Gramm-Leach-Bliley Act required the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Federal banking agencies invite comment on how to make this interim final rule easier to understand. For example:
• Has the Board organized the material to suit your needs? If not, how could the rule be more clearly stated?
• Are the requirements in the rule clearly stated? If not, how could the rule be more clearly stated?
• Do the regulations contain technical 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 regulation easier to understand? If so, what changes would make the regulation easier to understand?
• Would more, but shorter, sections be better? If so, which sections should be changed?
• What else could the Board do to make the regulation easier to understand?
In accordance with section 3512 of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3521) (“PRA”), the Board may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (“OMB”) control number. The OMB control number for this information collection will be assigned. The Board reviewed the interim final rule under the authority delegated to the Board by OMB.
The interim final rule contains requirements subject to the PRA. The reporting requirements are found in sections 237.22(a)1 and 237.22(e). This information collection requirement would implement section 716 of the Dodd-Frank Act.
Section 237.22(a)(1) would enable an insured depository institution for which the Board is the appropriate Federal banking agency to request a transition period of up to 24 months from the later of July 16, 2013, or the date on which it becomes a swaps entity, during which to conform its swaps activities to the requirements of this section by submitting a request in writing to the
Section 237.22(e) would allow the Board to extend a transition period for a period of up to one additional year. To request an extension of the transition period, an insured depository institution must submit a request containing the information set forth in paragraph (a) of this section. The insured depository institution must submit the request no later than 60 days before the end of the transition period.
Comments are invited on:
(a) Whether the proposed collections of information are necessary for the proper performance of the Federal Reserve's functions, including whether the information has practical utility;
(b) The accuracy of the Federal Reserve's estimate of the burden of the proposed information collections, including the validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and
(e) Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.
The Board has a continuing interest in the public's opinions of collections of information. At any time, comments regarding the burden estimate, or any other aspect of this collection of information, including suggestions for reducing the burden, may be sent to: Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551; and to the Office of Management and Budget, Paperwork Reduction Project, Washington, DC 20503.
Administrative practice and procedure, Banks and banking, Capital, Derivatives, Foreign banking, Holding companies, Margin requirements, Reporting and recordkeeping requirements, Risk.
For the reasons stated in the Supplementary Information, the Board amends 12 CFR Chapter II by adding new part 237 to read as follows:
15 U.S.C. 8305, 12 U.S.C. 343–350, 12 U.S.C. 1818, 12 U.S.C. 3101
Unless otherwise specified, for purposes of this subpart:
For purposes of section 716 of the Dodd-Frank Act (15 U.S.C. 8305) and this subpart, the term “insured depository institution” includes any insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) and any uninsured U.S. branch or agency of a foreign bank. The terms branch, agency, and foreign bank are defined in section 1 of the International Banking Act of 1978 (12 U.S.C. 3101).
(a)
(i) The length of the transition period requested;
(ii) A description of the quantitative and qualitative impacts of divestiture or cessation of swap or security-based swaps activities on the insured depository institution, including information that addresses the factors in paragraph (d) of this section; and
(iii) A detailed explanation of the insured depository institution's plan for conforming its activities to the requirements of section 716 of the Dodd-Frank Act (15 U.S.C. 8305) and this part.
(2) The Board may, at any time, request additional information that it believes is necessary for its decision.
(b)
(c)
(1) The potential impact of divestiture or cessation of swap or security-based swaps activities on the insured depository institution's:
(i) Mortgage lending;
(ii) Small business lending;
(iii) Job creation; and
(iv) Capital formation versus the potential negative impact on insured depositors and the Deposit Insurance Fund of the Federal Deposit Insurance Corporation; and
(2) Any other factor that the Board believes appropriate.
(d)
(e)
(f)
(g)