On June 10, 2013, the FDIC published a final rule which establishes criteria for determining if an entity is predominantly engaged in "activities that are financial in nature or incidental thereto" for the purposes of determining whether it would be subject to the FDIC's Orderly Liquidation Authority (OLA) for non-depository financial institutions under Title II of the Dodd-Frank Act in the event of insolvency. The final rule is effective on July 10, 2013.

The OLA is important both to financial institutions potentially subject to the OLA and to parties that enter into transactions with those institutions, including swap counterparties. For example, a party to a swap entered into with a counterparty that is subject to the OLA may be subject to a delay of one business day in its ability to terminate or liquidate the swap. This is important because derivatives contracts may often be terminated and collateral liquidated immediately upon default (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: The FDIC's Orderly Liquidation Authority Under Title II and Legal Update, FDIC Issues Final Rule on Orderly Liquidation Authority).

On March 23, 2011, the FDIC published a notice of proposed rulemaking (NPR) that was intended to provide clarity on implementation of the OLA. Section 380.8 of the NPR provided criteria for determining if an entity is predominantly engaged in activities that are financial in nature or incidental thereto for purposes of determining whether or not that entity would be subject to the OLA under Title II. In July 2011, the FDIC issued a final rule implementing certain OLA provisions of the Dodd-Frank Act; however, this final rule did not include NPR Section 380.8, and therefore it remained unclear exactly which entities would be subject to the OLA. In response to comments submitted to the FDIC in response to the NPR regarding what constitutes a financial activity, the FDIC on June 18, 2012 published a supplemental NPR amending and clarifying the scope and definition of what is considered a financial activity for purposes of Title II.

The FDIC is now adopting these criteria with certain modifications. The final rule clarifies that an entity "is predominantly engaged in activities that are financial in nature or incidental thereto" and therefore subject to the OLA if either:

The rule defines "financial activity" to include most of the same activities that are considered financial in nature for purposes of Title II of the Dodd-Frank Act, including:

The final rule does not include a specific exclusion for:

These entities therefore may be subject to the OLA if it is determined that the failure of the entity and its resolution under otherwise applicable law could have serious adverse effects on US financial stability. Failed IDIs continue to be resolved by the FDIC under the FDI Act (FDIA), so the OLA does not apply to failing IDI counterparties. However, under the FDIA, swaps of an IDI that enters into FDIC receivership may be subject to a similar termination and liquidation stay.

The definition included in this final rule largely mirrors the Federal Reserve Board's definition of the same term in a final rule issued in April 2013 for purposes of determining which nonbank financial institutions may be potentially subject to designation as systemically significant financial institutions by the Financial Stability Oversight Council (see Legal Update, Federal Reserve Board Issues Final Rule Related to Designating Systemically Important Nonbank Financial Institutions).