FDIC Meeting on NPR for Master Netting Agreements
Federal Deposit Insurance Corporation
Open Meeting to Consider Proposed Revisions to the
Definition of Qualifying Master Netting Agreement
Wednesday, January 21, 2015
Key Topics & Takeaways
- FDIC Board Approves NPR on Netting Definition: The FDIC Board of Directors voted 4 to 1 to approve a Notice of Proposed Rulemaking to revise certain definitions of “qualifying master netting agreement” contained within the regulatory capital rules and the liquidity coverage ratio.
- Director Thomas Curry, Comptroller of the Currency, said he was “not in a position to vote for” the NPR “given the exigency” that led the OCC and Fed to approve an interim final rule
- Consistent Regulatory Treatment: Chairman Gruenberg said the NPR would “help ensure consistent regulatory capital and liquidity treatment” of derivatives and related transactions covered by foreign resolution regimes if they are “substantially similar” to U.S. law.
- BRRD Phase-In: Director Norton expressed concern with Europe’s BRRD and the lack of a bail-in requirement during the year 2015.
- Safe Harbor for Securitizations: FDIC staff does not have plans for revisiting its rules on safe harbors for securitizations, but said they are “always willing to reconsider” based on developments.
Board Members
- Martin Gruenberg – Chairman
- Thomas Hoenig – Vice-Chairman
- Jeremiah Norton – Director
- Thomas Curry – Director and Comptroller of the Currency
- Richard Cordray – Director of the Consumer Financial Protection Bureau
Summary Agenda Item
SafeHarbor for Securitizations
Before addressing the main agenda item on master netting agreements, Comptroller of the Currency Thomas Curry asked the staff of the Federal Deposit Insurance Corporation (FDIC) about the technical adjustments to the safe harbor rule for securitizations listed on the Board’s summary agenda. He noted that the adjustments are intended to clarify risk retention provisions and asked if the FDIC plans to conduct a broader review of the “substantive securitization provisions of the safe harbor rule” to conform “more broadly with other statutory reforms” completed through Dodd-Frank rulemakings.
Staff explained the notice of proposal rulemaking is “just making sure everyone is fully informed” of the way that the existing safe harbor will work with the new regulation for credit risk retention under Section 941 of the Dodd-Frank Act. They added that the FDIC does “not have any specific plans for revisiting the rule” but noted that staff is “always willing to reconsider” based on any developments. They also pointed out that “this regulation and all receivership regulations” will be reviewed under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) responsibilities of the FDIC.
Staff Presentation of NPR
NPR to Revise Certain Definitions of Netting Agreement
FDIC staff presented a notice of proposed rulemaking (NPR) to revise certain definitions of “qualifying master netting agreement” contained within the regulatory capital rules and the liquidity coverage ratio (LCR) rule and the definitions of “collateral arrangement,” “eligible margin loan,” and “repo style transaction” under regulatory capital rules. They noted that the transactions covered by these definitions include derivatives, repo style transactions, and margin loans.
Staff explained that the current definition does not recognize termination stays imposed by foreign jurisdictions, which became problematic after publication and adoption of the early termination stay protocol created by the International Swaps and Derivatives Association (ISDA). They highlighted that 18 global financial institutions, including five of the largest U.S. banking organizations, have agreed to the protocol.
The Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC) recently issued an interim final rule that is “identical in substance” to the FDIC’s NPR, staff said. They continued that without this interim final rule, the voluntary adherence to the ISDA protocol would have directly impacted the capital and liquidity requirements of the banks under Fed and OCC supervision as of January 1, 2015 because banks would not have been able to net their exposures associated with derivatives.
The FDIC chose not to issue an interim final rule, staff said, because there is not the type of “exigent need” that the Fed and OCC faced, as no banks that are primarily regulated by the FDIC have yet agreed to the ISDA protocol.
They concluded that the revised definitions would “extend eligibility” of limited stays to jurisdictions where the laws are “substantially similar” to the U.S. laws under the FDIC Act and Dodd-Frank’s Title II and that this determination would be based on a “joint evaluation” by the FDIC, Fed, and OCC.
Board Comments and Questions
Chairman Gruenberg
FDIC Chairman Martin Gruenberg noted that FDIC regulatory capital and liquidity rules currently provide for the netting of derivatives transactions and certain related truncations covered by a master netting agreement, even if the agreement is subject to stays imposed by U.S. law. He said the NPR would “help ensure consistent regulatory capital and liquidity treatment” of derivatives and related transactions covered by foreign resolution regimes if they are “substantially similar” to U.S. law.
Gruenberg agreed with the staff that there was not an “exigent need” for an interim final rule, like the one put forth by the Fed and OCC, because “none of the institutions primarily supervised by the FDIC have initially joined the ISDA protocol.”
Vice-Chair Hoenig
Vice-Chairman Thomas Hoenig supported the NPR and said that comments would be important to get a view on possible outcomes that the FDIC might expect to see and what the impact on the industry may be.
Director Norton
Director Jeremiah Norton asked if foreign jurisdictions can use a bail-in to re-capitalize a failing firm under the Bank Recovery and Resolution Directive (BRRD) in the year 2015. Staff replied that they are not required to do so until 2016.
Norton then asked what resources and strategy would be used to re-capitalize a firm in the event of a failure in 2015, if bail-in is not required. Staff explained that it is “a little hard to say” but noted that tools under the BRRD include use of a bridge institution, purchase and assumption authority, and bail-in options. Norton and staff also noted that national funding authority will not be implemented until 2024.
Norton added that some other questions the FDIC should consider in the NPR comment period should include how the “joint evaluation” process will work, what “substantially similar” means, and if the FDIC Board will opine on all foreign jurisdictions’ resolution regimes.
Comptroller Curry
Director Thomas Curry, Comptroller of the Currency, said he was “not in a position to vote for” the NPR “given the exigency” that led the OCC and Fed to approve an interim final rule. However he said he is hopeful that the three agencies can “end up in the same place” because the rules of the FDIC, Fed, and OCC are identical in text, and that the timings of the comment periods are similar.
Vote Result
The FDIC Board of Directors voted 4 to 1 to approve the NPR on Regulatory Capital Rules, Liquidity Coverage Ratio, Proposed Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions.
For more information on the meeting, including rulemaking text and materials, please click here.
For an archived webcast of this meeting, please click here.
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Federal Deposit Insurance Corporation
Open Meeting to Consider Proposed Revisions to the
Definition of Qualifying Master Netting Agreement
Wednesday, January 21, 2015
Key Topics & Takeaways
- FDIC Board Approves NPR on Netting Definition: The FDIC Board of Directors voted 4 to 1 to approve a Notice of Proposed Rulemaking to revise certain definitions of “qualifying master netting agreement” contained within the regulatory capital rules and the liquidity coverage ratio.
- Director Thomas Curry, Comptroller of the Currency, said he was “not in a position to vote for” the NPR “given the exigency” that led the OCC and Fed to approve an interim final rule
- Consistent Regulatory Treatment: Chairman Gruenberg said the NPR would “help ensure consistent regulatory capital and liquidity treatment” of derivatives and related transactions covered by foreign resolution regimes if they are “substantially similar” to U.S. law.
- BRRD Phase-In: Director Norton expressed concern with Europe’s BRRD and the lack of a bail-in requirement during the year 2015.
- Safe Harbor for Securitizations: FDIC staff does not have plans for revisiting its rules on safe harbors for securitizations, but said they are “always willing to reconsider” based on developments.
Board Members
- Martin Gruenberg – Chairman
- Thomas Hoenig – Vice-Chairman
- Jeremiah Norton – Director
- Thomas Curry – Director and Comptroller of the Currency
- Richard Cordray – Director of the Consumer Financial Protection Bureau
Summary Agenda Item
SafeHarbor for Securitizations
Before addressing the main agenda item on master netting agreements, Comptroller of the Currency Thomas Curry asked the staff of the Federal Deposit Insurance Corporation (FDIC) about the technical adjustments to the safe harbor rule for securitizations listed on the Board’s summary agenda. He noted that the adjustments are intended to clarify risk retention provisions and asked if the FDIC plans to conduct a broader review of the “substantive securitization provisions of the safe harbor rule” to conform “more broadly with other statutory reforms” completed through Dodd-Frank rulemakings.
Staff explained the notice of proposal rulemaking is “just making sure everyone is fully informed” of the way that the existing safe harbor will work with the new regulation for credit risk retention under Section 941 of the Dodd-Frank Act. They added that the FDIC does “not have any specific plans for revisiting the rule” but noted that staff is “always willing to reconsider” based on any developments. They also pointed out that “this regulation and all receivership regulations” will be reviewed under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) responsibilities of the FDIC.
Staff Presentation of NPR
NPR to Revise Certain Definitions of Netting Agreement
FDIC staff presented a notice of proposed rulemaking (NPR) to revise certain definitions of “qualifying master netting agreement” contained within the regulatory capital rules and the liquidity coverage ratio (LCR) rule and the definitions of “collateral arrangement,” “eligible margin loan,” and “repo style transaction” under regulatory capital rules. They noted that the transactions covered by these definitions include derivatives, repo style transactions, and margin loans.
Staff explained that the current definition does not recognize termination stays imposed by foreign jurisdictions, which became problematic after publication and adoption of the early termination stay protocol created by the International Swaps and Derivatives Association (ISDA). They highlighted that 18 global financial institutions, including five of the largest U.S. banking organizations, have agreed to the protocol.
The Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC) recently issued an interim final rule that is “identical in substance” to the FDIC’s NPR, staff said. They continued that without this interim final rule, the voluntary adherence to the ISDA protocol would have directly impacted the capital and liquidity requirements of the banks under Fed and OCC supervision as of January 1, 2015 because banks would not have been able to net their exposures associated with derivatives.
The FDIC chose not to issue an interim final rule, staff said, because there is not the type of “exigent need” that the Fed and OCC faced, as no banks that are primarily regulated by the FDIC have yet agreed to the ISDA protocol.
They concluded that the revised definitions would “extend eligibility” of limited stays to jurisdictions where the laws are “substantially similar” to the U.S. laws under the FDIC Act and Dodd-Frank’s Title II and that this determination would be based on a “joint evaluation” by the FDIC, Fed, and OCC.
Board Comments and Questions
Chairman Gruenberg
FDIC Chairman Martin Gruenberg noted that FDIC regulatory capital and liquidity rules currently provide for the netting of derivatives transactions and certain related truncations covered by a master netting agreement, even if the agreement is subject to stays imposed by U.S. law. He said the NPR would “help ensure consistent regulatory capital and liquidity treatment” of derivatives and related transactions covered by foreign resolution regimes if they are “substantially similar” to U.S. law.
Gruenberg agreed with the staff that there was not an “exigent need” for an interim final rule, like the one put forth by the Fed and OCC, because “none of the institutions primarily supervised by the FDIC have initially joined the ISDA protocol.”
Vice-Chair Hoenig
Vice-Chairman Thomas Hoenig supported the NPR and said that comments would be important to get a view on possible outcomes that the FDIC might expect to see and what the impact on the industry may be.
Director Norton
Director Jeremiah Norton asked if foreign jurisdictions can use a bail-in to re-capitalize a failing firm under the Bank Recovery and Resolution Directive (BRRD) in the year 2015. Staff replied that they are not required to do so until 2016.
Norton then asked what resources and strategy would be used to re-capitalize a firm in the event of a failure in 2015, if bail-in is not required. Staff explained that it is “a little hard to say” but noted that tools under the BRRD include use of a bridge institution, purchase and assumption authority, and bail-in options. Norton and staff also noted that national funding authority will not be implemented until 2024.
Norton added that some other questions the FDIC should consider in the NPR comment period should include how the “joint evaluation” process will work, what “substantially similar” means, and if the FDIC Board will opine on all foreign jurisdictions’ resolution regimes.
Comptroller Curry
Director Thomas Curry, Comptroller of the Currency, said he was “not in a position to vote for” the NPR “given the exigency” that led the OCC and Fed to approve an interim final rule. However he said he is hopeful that the three agencies can “end up in the same place” because the rules of the FDIC, Fed, and OCC are identical in text, and that the timings of the comment periods are similar.
Vote Result
The FDIC Board of Directors voted 4 to 1 to approve the NPR on Regulatory Capital Rules, Liquidity Coverage Ratio, Proposed Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions.
For more information on the meeting, including rulemaking text and materials, please click here.
For an archived webcast of this meeting, please click here.