The Board of Governors of the Federal Reserve System is inviting comment on a proposed rule to promote U.S. financial stability by improving the resolvability and resilience of systemically important U.S. banking organizations and systemically important foreign banking organizations pursuant to section 165 of the Dodd-Frank Act.

The proposed rule would require any U.S. top-tier bank holding company identified by the Board as a global systemically important banking organization, or GSIB, certain subsidiaries of any U.S. GSIB, and certain U.S. operations of any foreign GSIB to be subjected to the following restrictions regarding the terms of their non-cleared qualified financial contracts, or QFCs:

  • A covered entity would generally be required to ensure that QFCs to which it is party, including QFCs entered into outside the United States, provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Act and the Federal Deposit Insurance Act.
  • A covered entity would generally be prohibited from being party to QFCs that would allow a QFC counterparty to exercise default rights against the covered entity based on the entry into a resolution proceeding under the Dodd-Frank Act, Federal Deposit Insurance Act, or any other resolution proceeding of an affiliate of the covered entity.

GSIB’s will be determined using the Fed’s existing rule establishing risk-based capital surcharges for GSIBs.

A QFC would be defined to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act, and would include, among other things, derivatives, repos, and securities lending agreements. Subject to the exceptions, the proposal’s requirements would apply to any QFC to which a covered entity is party.

The proposal would also amend certain definitions in the Fed’s capital and liquidity rules; these amendments are intended to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered entity is party is not affected by the proposed restrictions on such QFCs.

Under the proposal, the rule would take effect on the first day of the first calendar quarter that begins at least one year after the issuance of the final rule, which is referred to as the effective date. Entities that are covered entities when the final rule is issued would be required to comply with the proposed requirements beginning on the effective date. Thus, a covered entity would be required to ensure that covered QFCs entered into on or after the effective date comply with the rule’s requirements. Moreover, a covered entity would be required to bring a preexisting covered QFC entered into prior to the effective date into compliance with the rule no later than the first date on or after the effective date on which the covered entity or an affiliate (that is also a covered entity or covered bank) enters into a new covered QFC with the counterparty to the preexisting covered QFC or an affiliate of the counterparty.

The Office of the Comptroller of the Currency, or OCC, is expected to issue a proposed rule that would subject national banks and federal savings associations that are GSIB subsidiaries to requirements substantively identical to those proposed by the Fed.