[Federal Register Volume 60, Number 183 (Thursday, September 21, 1995)]
[Proposed Rules]
[Pages 48935-48937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23479]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AB69
Definition of Qualified Financial Contracts
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC or
Corporation) is publishing for notice and public comment a proposed
rule defining spot and other short-term foreign exchange agreements and
repurchase agreements on qualified foreign government securities to be
``qualified financial contracts'' (QFCs) under the Federal Deposit
Insurance Act, 12 U.S.C. 1811 et seq. (FDI Act). In the interest of
providing a measure of protection to the financial markets, the FDI Act
provides special rules for the treatment of QFCs held by an insured
depository institution in default for which the FDIC is appointed
conservator or receiver. The FDIC believes that the market's use of
these agreements to obtain liquidity in order to manage financial risk
indicates that they should be included as QFCs. Promulgation of the
proposed regulation to include spot and other short-term foreign
exchange contracts and repurchase agreements on qualified foreign
government securities within the definition of QFC is not intended to
exclude other agreements that may otherwise qualify to be QFCs.
DATES: Comments must be received by November 20, 1995.
ADDRESSES: Send comments to Jerry L. Langley, Executive Secretary,
FDIC, 550 17th Street, N.W., Washington, D.C. 20429. Comments may be
hand-delivered to Room 400, 1776 F Street, N.W., Washington, D.C. 20429
on business days between 8:30 a.m. and 5 p.m. [FAX number: (202) 898-
3838; Internet: comments@fdic.gov]. Comments will be available for
inspection or photocopying at the FDIC's Reading Room, Room 7118, 550
17th Street, N.W., Washington, D.C. 20429, between 9:00 a.m. and 4:30
p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Sharon Powers Sivertsen, Assistant
General Counsel, Legal Division, (202) 736-0112; Keith A. Ligon, Senior
Counsel, Legal Division, (202) 736-0160; or Christine M. Bradley,
Attorney, Legal Division, (202) 736-0106, FDIC,
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550 17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Paperwork Reduction Act
No collection of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the
proposed rule. Consequently, no information was submitted to the Office
of Management and Budget for review.
II. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), it is certified that the proposed rule will not
have a significant economic impact on a substantial number of small
business entities.
III. Discussion
A. The QFC Provisions
Sections 11(e) (8) through (10) of the FDI Act, 12 U.S.C. 1821(e)
(8) through (10), provide special rules for the treatment of QFCs in
the event the FDIC is appointed receiver or conservator for an insured
depository institution in default. The statute seeks, among other
things, to protect parties to QFCs by allowing for the liquidation,
termination, and netting of their agreements. The statute identifies
securities contracts, commodity contracts, forward contracts,
repurchase agreements and swap agreements as QFCs.
Section 11(e)(8)(D) of the FDI Act identifies in some detail the
types of contracts to be treated as QFCs, but additionally affords the
FDIC express authority to adopt regulations extending the definition to
any similar agreements. 12 U.S.C. 1821(e)(8)(D)(i). As discussed below,
the Corporation is proposing rules that would extend the QFC definition
to spot and other short-term foreign exchange agreements and to
repurchase agreements on securities issued or guaranteed by the central
governments belonging to the Organization for Economic Cooperation and
Development (OECD). Promulgation of the proposed regulation to include
spot and other short-term foreign exchange contracts and repurchase
agreements on qualified foreign government securities within the
definition of QFC is not intended to be interpreted so as to exclude
other agreements that may otherwise qualify to be QFCs under the
language of section 11(e)(8)(D) itself.
As the Board of Directors of the FDIC has previously recognized,
QFCs occupy a unique and important position in the financial markets,
allowing appropriate liquidity, hedging and financial intermediation
operations in financial institutions, and are generally conducted
within a highly supervised industry. FDIC Statement of Policy on
Qualified Financial Contracts (Dec. 12, 1989). See 55 FR 7027 (1990).
The Corporation believes that these goals would be well served by
expressly extending QFC treatment to spot and other short-term foreign
exchange agreements and repurchase agreements on foreign government
securities issued or guaranteed by the central governments of the OECD-
based group of countries.
B. Foreign Exchange Agreements
Although section 11(e)(8)(D)(vi) of the FDI Act, defining ``swap
agreements'' which are to be included within the statutory definition
of QFCs, refers to forward foreign exchange agreements, the statute
does not explicitly mention spot or other short-term foreign exchange
agreements. The statute, in relevant part, covers any agreement,
including the terms and conditions incorporated by reference in any
such agreement, which is a forward foreign exchange agreement or any
other similar agreement. 12 U.S.C. 1821(e)(8)(D)(vi). While the FDIC
believes that spot and other short-term foreign exchange agreements
fall within the QFC definition of swap agreement even in the absence of
FDIC regulatory action, the FDIC also believes that market participants
would be best served by the certainty of an explicit rule providing
that spot foreign exchange agreements are QFCs. ``Spot'' foreign
exchange agreements, like forwards, do not settle immediately; spot
agreements are typically outstanding for one or two days. As is the
case with other QFCs, market participants tend to enter into multiple
spot agreements for both long and short positions in many products with
the same counterparty. As a result, market participants are also
creating the same termination and netting agreements as are used with
other QFCs.
The Corporation is proposing a rule to recognize the inclusion of
spot and other short-term foreign exchange agreements as QFCs. The
language of the proposed rule would extend QFC treatment to short-dated
transactions such as spots, tomorrow/next day and same day/tomorrow
transactions, thus eliminating any concern that spot and other short-
term foreign exchange agreements are not included within the definition
of QFC.
C. Repurchase Agreements on Qualified Foreign Government Securities
Although section 11(e)(8)(D)(v) of the FDI Act includes repurchase
agreements within the definition of a QFC, the statute does not cover
repurchase agreements on foreign government securities. Section
11(e)(8)(D)(v) incorporates the repurchase agreement definition under
section 101(47) of the Bankruptcy Code, 11 U.S.C. 101(47), with certain
additions not relevant here, and restricts the definition of qualified
financial contract to repurchase agreements on securities that are
direct obligations of, or that are fully guaranteed as to principal and
interest by, the United States or any agency of the United States.
Section 101(47) of the Bankruptcy Code defines a repurchase agreement
as:
an agreement, including related terms, which provides for the
transfer of certificates of deposit, eligible bankers' acceptances,
or securities that are direct obligations of, or that are fully
guaranteed as to principal and interest by, the United States or any
agency of the United States against the transfer of funds by the
transferee of such certificates of deposit, eligible bankers'
acceptances, or securities with a simultaneous agreement by such
transferee to transfer to the transferor thereof certificates of
deposit, eligible bankers' acceptances, or securities as described
above, at a date certain not later than one year after such
transfers or on demand, against the transfer of funds;
11 U.S.C. 101(47).
In the years since the QFC provisions were added to the FDI Act by
the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, Public Law 101-73, 101 Stat. 183 (1989), the market for foreign
government repurchase agreements appears to have developed to a point
that such repurchase agreements have become a recognized source of
liquidity. However, the FDIC also believes that it is appropriate to
limit the kinds of foreign government securities which may be the
subject of a repurchase agreement for QFC purposes. The FDIC proposes
to extend QFC treatment only to repurchase agreements on securities
issued or guaranteed by the central governments of countries that are
either full members of the OECD or that have concluded special lending
arrangements with the International Monetary Fund (IMF) associated with
the IMF's General Arrangements to Borrow.1
\1\The OECD is an international organization of countries which
are committed to market-oriented economic policies, including the
promotion of private enterprise and free-market prices, liberal
trade policies, and the absence of exchange controls.
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The FDIC believes that repurchase agreements on foreign government
securities issued or guaranteed by the OECD-based group of countries
are similar in nature to the repurchase agreements on securities issued
or guaranteed by the United States, which are presently included within
the statutory definition of QFC. The risk weightings recommended for
such securities by the International Convergence of Capital Measurement
and Capital Standards of July 1988 by the Basle Committee on Banking
Supervision (Basle Accord)2 reflects that the securities issued or
guaranteed by the OECD-based group of countries present similar degrees
of credit risk. Further, the FDIC's risk-based capital rules at 12 CFR
part 325, appendix A, implementing the Basle Accord, consider the
credit risk among the securities issued or guaranteed by the central
governments of the OECD-based group of countries as being equal for
purposes of determining capital requirements. And, pursuant to 12 CFR
part 325, appendix A, section II.B.2, securities issued or guaranteed
by the central governments of the OECD-based group of countries are
among the limited forms of collateral which are formally recognized by
the FDIC's risk-based capital framework. Accordingly, repurchase
agreements on securities issued or guaranteed by the OECD-based group
of countries are treated consistently under the risk-based capital
rules. See 12 CFR part 325, appendix A, section II.C.
\2\The Basle Accord established a risk-based framework for
measuring the capital adequacy of internationally active banks. The
Basle Accord was originally proposed by the Basle Committee on
Banking Supervision (Basle Supervisors' Committee) and endorsed by
the central bank governors of the Group of Ten (G-10) countries in
July 1988. See, Int'l Convergence of Capital Measurement & Capital
Standards, Comm. on Banking Regulations & Supervisory Practices,
reprinted in 30 I.L.M. 967, 989 (1991).
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The FDIC is thus proposing a rule to include repurchase agreements
on securities issued or guaranteed by the OECD-based group of countries
within the definition of a QFC. In the interests of consistency and
simplicity, the rule would incorporate by reference the definition of
``central government'' as set forth in 12 CFR part 325, appendix A,
section II.C note 173 and ``OECD-based group of countries'' as set
forth in 12 CFR part 325, appendix A, section II.B.2, note 12 (and
incorporating any changes to these definitions that should occur by
future amendment).4
\3\The definition of central government includes departments and
ministries of the central government, as well as central banks, but
does not extend to state, provincial, or local governments or
commercial enterprises owned by central governments. Nor does it
extend to securities of local government entities or commercial
enterprises guaranteed by the central government. 12 CFR part 325,
section II.C., note 17 (1995).
\4\The Corporation has recently issued a Notice of Proposed
Rulemaking proposing to amend the existing definition of ``OECD-
based group of countries.'' 60 FR 8582 (Feb. 15, 1995).
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List of Subjects in 12 CFR Part 360
Banks, Banking, Savings Associations.
For the reasons set out in the preamble, the FDIC Board of
Directors proposes to amend 12 CFR part 360 as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
1. The authority citation for part 360 is revised to read as
follows:
Authority: 12 U.S.C. 1821(d)(11), 1821(e)(8)(D)(i), 1823(c)(4);
Sec. 401(h), Pub. L. 101-73, 103 Stat. 357.
2. Section 360.5 is added to Part 360 as follows:
Sec. 360.5 Definition of qualified financial contracts.
(a) Authority and purpose. Sections 11(e)(8) through (10) of the
Federal Deposit Insurance Act, 12 U.S.C. 1821(e)(8) through (10),
provide special rules for the treatment of qualified financial
contracts of an insured depository institution for which the FDIC is
appointed conservator or receiver, including rules describing the
manner in which qualified financial contracts may be transferred or
closed out. Section 11(e)(8)(D)(i) of the Federal Deposit Insurance
Act, 12 U.S.C. 1821(e)(8)(D)(i), grants the Corporation authority to
determine by regulation whether an agreement in addition to those
identified by section 11(e)(8)(D) itself should be included in the
definition of qualified financial contract. The purpose of this section
is to identify additional agreements which the Corporation has
determined to be qualified financial contracts.
(b) The following agreements shall be deemed ``qualified financial
contracts'' under section 11(e)(8)(D)(i) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1821(e)(8)(D)(i)):
(1) Spot foreign exchange agreements. A spot foreign exchange
agreement is any agreement or combination of agreements (including
master agreements) providing for or effecting the purchase or sale of
one currency in exchange for another currency (or a unit of account
established by an intergovernmental organization such as the European
Currency Unit) with a maturity date of two days or less after the
agreement has been entered into, and includes short-dated transactions
such as tomorrow/next day and same day/tomorrow transactions.
(2) Repurchase agreements on qualified foreign government
securities. (i) A repurchase agreement on qualified foreign government
securities is an agreement or combination of agreements (including
master agreements) which provides for the transfer of securities that
are direct obligations of, or that are fully guaranteed by, the central
governments (as set forth at 12 CFR part 325, appendix A, section II.C,
n. 17, as may be amended from time to time) of the OECD-based group of
countries (as set forth at 12 CFR part 325, appendix A, section
II.B.2., note 12 as may be amended from time to time) against the
transfer of funds by the transferee of such securities with a
simultaneous agreement by such transferee to transfer to the transferor
thereof securities as described above, at a date certain not later than
one year after such transfers or on demand, against the transfer of
funds.
(c) Nothing in this section shall be construed as limiting or
changing a party's obligation to comply with all reasonable trading
practices and requirements, non-insolvency law requirements and any
other requirements imposed by other provisions of the FDI Act. This
section in no way limits the authority of the Corporation to take
supervisory or enforcement actions, or to otherwise manage the affairs
of a financial institution for which the Corporation has been appointed
conservator or receiver.
By Order of the Board of Directors.
Dated at Washington, D.C., this 6th day of September, 1995.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-23479 Filed 9-20-95; 8:45 am]
BILLING CODE 6714-01-P
