Proposed Rules Regarding Restrictions on Qualified Financial Contracts

SIFMA AMG provided comments on the notice of proposed rulemaking promulgated by the Board regarding a proposed rule that would restrict the contractual provisions of qualified financial contracts entered into by systemically important U.S. banking organizations and the U.S. operations of systemically important foreign banking organizations.

For the reasons described in our letter, SIFMA AMG recommends that the Board should make the following changes to improve the proposed rule:

• Narrow the Proposed Rule’s Requirements for Cross-Border Recognition of U.S. SRRs.  The Board should limit QFCs that are subject to its cross-border recognition requirements to those that both are governed by the laws of a non-U.S. jurisdiction and contain default rights.  It should also revise those provisions to state expressly that the required default provisions must operate only in the context of a Covered Entity actually becoming subject to resolution proceedings under one of the two U.S. SRRs.
• Not Impose Contractual Restrictions on Cross-Default Rights or, Alternatively, Permit Appropriate Creditor Protections, Not Impose Any Burden of Proof on Contracting Parties, and Limit Restrictions to QFCs with Cross-Default Rights.  The Board should not adopt the proposed Cross-Default Restrictions in any form.  However, if the Board moves forward with the Cross-Default Restrictions, it should ensure that the final rule includes at least those minimum creditor protections established by the Universal Protocol for interbank transactions.  It should not require Covered QFCs to include provisions addressing burden of proof in respect of the exercise of default rights.  And it should limit the Cross-Default Restrictions to QFCs providing for relevant cross-default rights.
• Provide for Compliance Alternatives that Include a JMP Module Suitable for Use by Fiduciaries and a Less Burdensome and More Flexible General Approval Process.  The Board should expand § 252.85(a) to provide a safe harbor, applicable to requirements under the final rule generally, for a module to the JMP that would be based on, but more narrowly-tailored than, the Universal Protocol.  In addition, § 252.85(b) should be modified to permit counterparties of Covered Entities, and appropriate trade associations, to make requests for enhanced creditor protection conditions.  The requirement for a legal opinion should be eliminated.  And the approval process should not be limited to “enhanced creditor protection conditions,” but should permit the Board to consider any appropriate alternative to compliance with the final rule.
• The Board Should Make Additional Changes to Narrow and Clarify the Proposed Rule.  The final rule should clearly state that a Covered Entity’s failure to comply with its requirements in connection with one or more Covered QFCs will not affect the enforceability of Covered QFCs.  The Proposed Rule’s requirements should be triggered only by QFC transactions between a Covered Entity and a counterparty, not transactions with an affiliate of the counterparty.  The compliance deadline for the final rule should be extended by addition of a phase-in schedule that distinguishes among counterparties.

See also:

Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Proposed Rules