On September 20, 2016, the FDIC approved:

The final FDIC rule revises the definition of "qualified master netting agreement" under FDIC regulatory capital rules and the liquidity coverage ratio (LCR). The changes are substantially identical to those proposed in January 2015 (see Legal Update, FDIC Proposes Revisions to "Qualified Master Netting Agreement" and Related Definitions). The revisions are designed to conform this definition to the interim final rule (IFR) on resolution of qualified financial contracts (QFCs) jointly issued by the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC) in December 2014 (see Legal Update, US Bank Regulators Accommodate Stay on Early Termination of Derivatives Contracts).

Qualified master netting agreements qualify for more favorable regulatory capital treatment under FDIC rules. The final rule permits a master netting agreement (MNA) that meets the requirements of a "qualified master netting agreement" to be included within the scope of the definition and qualify for favored netting treatment if either:

Qualified MNAs permit measurement of exposure under contracts covered by the MNA on a net basis, rather than a gross basis, which results in a lower measure of exposure and thus a lower regulatory capital requirement.

Prior to these revisions, default rights under a MNA could be stayed if the financial company was in receivership, conservatorship, or resolution under Title II of the Dodd-Frank Act (orderly resolution authority or "OLA") or under the FDIA. However, the old definition of "qualified master netting agreement" did not include stays under foreign special resolution regimes or where counterparties have agreed through contract, such as the ISDA Resolution Stay Jurisdictional Modular Protocol, that a special resolution regime applies (see Legal Update, ISDA Launches Resolution Stay Jurisdictional Modular Protocol).

The final rule therefore maintains existing treatment while recognizing the recent changes in special resolution regimes instituted by the EU's Bank Recovery and Resolution Directive (BRRD) and the 2015 Universal ISDA Resolution Stay Protocol.

The final rule also revises three related definitions under FDIC regulatory capital rules to provide that a counterparty's default rights may be stayed either under a non-US special resolution regime or under a special resolution regime agreed to by contract. The revised definitions include:

The final rule is effective upon publication in the Federal Register.

For more information on the ISDA Resolution Stay Jurisdictional Modular Protocol (RSJMP), see Legal Update, ISDA Launches Resolution Stay Jurisdictional Modular Protocol.

For more information on the Bank Recovery and Resolution Directive, see Practice Note: BRRD.

The proposed FDIC rule would place:

The proposed rule is a corollary to a May 3, 2016 proposed rule issued by the FRB, which sought to establish certain restrictions on termination and other rights under the QFCs of G-SIBs and foreign G-SIBs that operate in the US (collectively, covered entities) (see Legal Update, Fed Proposes Limit on Termination Rights in Certain Financial Contracts of Large Banks).

Under the proposed rule, a new part 382 would be added to the FDIC rules to provide for restrictions on certain state savings associations and state-chartered banks that are not members of the Federal Reserve System (collectively, FSIs). FSIs include any state savings association or state non-member bank that is a direct or indirect subsidiary of a G-SIB or foreign G-SIB, and any subsidiary of a covered FSI.

The proposed rule would:

The proposed FDIC rule is substantively identical to the requirements under the FRB proposal, as well as the requirements in a similar August 19, 2016 OCC proposed rule on "covered banks" (see Legal Update, Fed Proposes Limit on Termination Rights in Certain Financial Contracts of Large Banks).

The proposed FDIC rule will be open for public comment once it is published in the Federal Register.