[Federal Register Volume 61, Number 13 (Friday, January 19, 1996)]
[Rules and Regulations]
[Pages 1273-1274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-506]
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FEDERAL RESERVE SYSTEM
12 CFR Part 231
[Regulation EE; Docket No. R-0912]
Netting Eligibility for Financial Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board has amended Regulation EE to clarify that, for
purposes of qualifying as a financial institution under Regulation EE,
a person may represent that it is a financial market intermediary
either orally or in writing. This amendment is intended to remove
uncertainty in the financial markets as to the form of such
representations.
EFFECTIVE DATE: February 20, 1996.
FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General
Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division. For users of Telecommunications Device for the
Deaf, please contact Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
The Federal Deposit Insurance Corporation Improvement Act of 1991
(Act) (Pub. L. 102-242, Secs. 401-407; 105 Stat. 2236, 2372-3; 12
U.S.C. 4401-4407) validates netting contracts among financial
institutions. Parties to a netting contract agree that they will pay or
receive the net, rather than the gross, payment due under the netting
contract. The Act provides certainty that netting contracts will be
enforced, even in the event of the insolvency of one of the parties.
The Act's netting provisions are designed to promote efficiency and
reduce systemic risk within the banking system and financial markets.
The netting provisions apply to bilateral netting contracts between
two financial institutions and multilateral netting contracts among
members of a clearing organization. Section 402(9) of the Act defines
``financial institution'' to include a depository institution, a
securities broker or dealer, a futures commission merchant, and any
other institution as determined by the Board. In addition, the Act's
definition of ``broker or dealer'' (section 402(1)(B)) includes any
affiliate of a registered broker or dealer, to the extent consistent
with the Act, as determined by the Board.
In 1994, the Board adopted Regulation EE (12 CFR part 231) to
expand the application of the Act's netting provisions to a broader
range of financial market participants (59 FR 4780, February 2, 1994).
Under Regulation EE, persons meeting certain tests based on market
activity will qualify as ``financial institutions'' under the Act. The
tests were designed to capture institutions that are significant market
participants whose coverage could enhance market liquidity and whose
failure without coverage could have systemic risk implications.
The Regulation EE tests have both a qualitative and a quantitative
aspect. First, to qualify as a financial institution under the rule, a
person 1 must represent that it will engage in financial contracts
as a counterparty on both sides of one or more financial markets.
Second, the person must meet one of two quantitative thresholds: It
must have either (1) had 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 (2) had 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
[[Page 1274]]
with counterparties that are not its affiliates.
\1\ ``Person'' is defined broadly to include any legal entity,
such as a corporation, partnership, or individual.
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Form of Representation
Regulation EE does not require a person to make the ``market
intermediary'' representation in any particular form. Some market
participants, however, have requested that the Board clarify that the
representation can be made orally or in writing. The Board has amended
Sec. 231.3(a) of Regulation EE accordingly. The regulation does not
require written representations (either as part of a financial contract
or outside of the contract). Representations can be made orally and
need not be made to a particular counterparty. This amendment should
remove any lingering uncertainty in the financial markets as to the
form of the representation as well as reduce the burden on any
institutions that assumed the representation had to be in writing.
Regulatory Flexibility Act Certification
In accordance with the Regulatory Flexibility Act (5 U.S.C.
605(b)), the Board certifies that this rule will not have a significant
economic impact on a substantial number of small entities. The rule
applies only to entities with a large volume of financial contracts
and, in any case, does not impose any additional requirements on
entities affected by the regulation.
Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed
the rule under the authority delegated to the Board by the Office of
Management and Budget. No collections of information pursuant to the
Paperwork Reduction Act are contained in the rule.
Administrative Procedure Act
The Administrative Procedure Act generally requires agencies to
publish a notice of proposed rule making before adopting a final rule
(5 U.S.C. 553(b)). In certain circumstances, however, the Act allows an
agency to forego to the notice-and-comment process. These circumstances
include when the agency for good cause finds that notice and comment
are unnecessary or contrary to the public interest (5 U.S.C.
553(b)(B)). The amendment to Regulation EE does not make a substantive
change to the rule but rather clarifies that by not specifying a form
of representation in the original rule, the Board intended that the
representations could be made orally or in writing. The amendment
clarifies a market uncertainty and may reduce burden for any
institutions that assumed the representation had to be in writing. For
these reasons, the Board finds that public comment is unnecessary and
contrary to the public interest. Therefore, the Board finds that this
amendment fits within the Act's exceptions from the notice-and-comment
procedure.
List of Subjects in 12 CFR Part 231
Banks, banking, Federal Reserve System.
For the reasons set out in the preamble, 12 CFR Part 231 is amended
as set forth below:
PART 231--NETTING ELIGIBILITY FOR FINANCIAL INSTITUTIONS
(REGULATION EE)
1. The authority citation for Part 231 continues to read as
follows:
Authority: 12 U.S.C. 4402(1)(B) and 4402(9).
2. In Sec. 231.3, the introductory text of paragraph (a) is revised
to read as follows:
Sec. 231.3 Qualification as a financial institution.
(a) A person qualifies as a financial institution for purposes of
sections 401-407 of the Act if it represents, orally or in writing,
that it will engage in financial contracts as a counterparty on both
sides of one or more financial markets and either--
* * * * *
By order of the Board of Governors of the Federal Reserve
System, January 11, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-506 Filed 1-18-96; 8:45 am]
BILLING CODE 6210-01-P
