Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority

Published date02 January 2020
Citation85 FR 1
Record Number2019-27801
SectionRules and Regulations
CourtTreasury Department
Federal Register, Volume 85 Issue 1 (Thursday, January 2, 2020)
[Federal Register Volume 85, Number 1 (Thursday, January 2, 2020)]
                [Rules and Regulations]
                [Pages 1-3]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2019-27801]
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                Rules and Regulations
                 Federal Register
                ________________________________________________________________________
                This section of the FEDERAL REGISTER contains regulatory documents
                having general applicability and legal effect, most of which are keyed
                to and codified in the Code of Federal Regulations, which is published
                under 50 titles pursuant to 44 U.S.C. 1510.
                The Code of Federal Regulations is sold by the Superintendent of Documents.
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                Federal Register / Vol. 85, No. 1 / Thursday, January 2, 2020 / Rules
                and Regulations
                [[Page 1]]
                DEPARTMENT OF THE TREASURY
                31 CFR Part 148
                Qualified Financial Contracts Recordkeeping Related to Orderly
                Liquidation Authority
                AGENCY: Department of the Treasury.
                ACTION: Notification of exemption.
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                SUMMARY: The Secretary of the Treasury (the ``Secretary''), as
                Chairperson of the Financial Stability Oversight Council, after
                consultation with the Federal Deposit Insurance Corporation (the
                ``FDIC''), is issuing a determination regarding a request for an
                exemption from certain requirements of the rule implementing the
                qualified financial contracts (``QFC'') recordkeeping requirements of
                Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
                Act (the ``Dodd-Frank Act'' or the ``Act'').
                DATES: The exemption granted is effective January 2, 2020.
                FOR FURTHER INFORMATION CONTACT: Peter Phelan, Deputy Assistant
                Secretary for Capital Markets, (202) 622-1746; Daniel Harty, Director,
                Office of Capital Markets, (202) 622-0509; Peter Nickoloff, Financial
                Economist, Office of Capital Markets, (202) 622-1692; or Stephen T.
                Milligan, Deputy Assistant General Counsel (Banking & Finance), (202)
                622-4051.
                SUPPLEMENTARY INFORMATION:
                Background
                 On October 31, 2016, the Secretary published a final rule pursuant
                to section 210(c)(8)(H) of the Dodd-Frank Act requiring certain
                financial companies to maintain records with respect to their QFC
                positions, and the associated counterparties, legal documentation, and
                collateral, that would assist the FDIC as receiver in exercising its
                rights and fulfilling its obligations under Title II of the Act (the
                ``rule'').\1\
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                 \1\ See 31 CFR part 148; 81 FR 75624 (Oct. 31, 2016).
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                 Section 148.3(c)(3) of the rule provides that one or more records
                entities may request an exemption from one or more of the requirements
                of the rule by writing to the Department of the Treasury
                (``Treasury''), the FDIC, and the applicable primary financial
                regulatory agency or agencies, if any.\2\ Among other things, the
                written request for an exemption must provide details as to the size,
                risk, complexity, leverage, frequency and dollar amount of QFCs, and
                interconnectedness to the financial system of each records entity, to
                the extent appropriate, and any other relevant factors and specify the
                reasons why granting the exemption will not impair or impede the FDIC's
                ability to exercise its rights or fulfill its statutory obligations
                under sections 210(c)(8), (9), and (10) of the Act.
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                 \2\ See 31 CFR 148.3(c)(3).
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                 The rule provides that, upon receipt of a written recommendation
                from the FDIC, prepared in consultation with the primary financial
                regulatory agency or agencies for the applicable records entity or
                entities, the Secretary may grant, in whole or in part, a conditional
                or unconditional exemption from compliance with one or more of the
                requirements of the rule to one or more records entities.\3\ The rule
                further provides that, in determining whether to grant an exemption,
                the Secretary will consider any factors deemed appropriate by the
                Secretary, including whether application of one or more requirements of
                the rule is not necessary to achieve the purpose of the rule.\4\
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                 \3\ See 31 CFR 148.3(c)(4)(i).
                 \4\ See 31 CFR 148.3(c)(4)(ii).
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                Request for Exemption
                 On August 14, 2018, Wells Fargo & Company submitted, on behalf of
                its subsidiaries Wells Fargo Clearing Services, LLC (``WFCS'') and
                Wells Fargo Advisors Financial Network, LLC (``FiNet''), a request for
                an exemption from the rule to Treasury, the FDIC, and, as the primary
                financial regulatory agencies for WFCS and FiNet, the Securities and
                Exchange Commission (``SEC'') and the Commodity Futures Trading
                Commission (``CFTC''), which Wells Fargo supplemented with information
                provided on March 5, 2019, in response to questions from the FDIC, and
                on June 26, 2019, and August 30, 2019, in response to questions from
                Treasury.\5\ Wells Fargo requested an exemption for WFCS and FiNet from
                compliance with sections 148.3 and 148.4 of the rule for WFCS' and
                FiNet's current and future QFC portfolio consisting of QFCs entered
                into by WFCS or FiNet with or on behalf of clients, referred to herein
                as ``client activity QFCs,'' and QFCs entered into by WFCS or FiNet in
                connection with or in support of client activity QFCs. As an
                alternative, Wells Fargo requested an exemption for QFCs, and all
                credit enhancements related to such QFCs, entered into by WFCS and
                FiNet with, on behalf of, or for the benefit of clients for which any
                of their transactions would be defined as being with a ``customer''
                under the Securities Investor Protection Act, as amended (``SIPA''),\6\
                and transactions entered into in order to facilitate or complete
                transactions with such a customer. Wells Fargo also asked for an
                exemption from certain guarantees WFCS enters into for the benefit of a
                futures commission merchant in connection with WFCS' introduction of
                customer trades to such futures commission merchant.
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                 \5\ Each of WFCS and FiNet is registered with the SEC as a
                broker-dealer under the Securities Exchange Act of 1934 and as an
                investment adviser under the Investment Advisers Act of 1940 and is
                registered with the CFTC as an introducing broker under the
                Commodity Exchange Act.
                 \6\ 15 U.S.C. 78aaa et seq.
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                 In support of its request, Wells Fargo submitted information
                detailing the types, volume, and complexity of client activity and
                related QFCs to which WFCS and FiNet are a party. Wells Fargo stated
                that WFCS and FiNet's primary business activities comprise retail
                securities and commodities brokerage, investment advisory services,
                asset management, estate planning, retirement planning, and portfolio
                analysis and monitoring services and that WFCS, as a self-clearing
                broker-dealer, also carries the customer accounts of and provides
                clearing services on a fully disclosed basis to FiNet and various
                unaffiliated broker-dealers.
                 Wells Fargo represented that the client activity QFCs of WFCS and
                FiNet consist of retail cash and margin securities transactions, retail
                brokerage agreements, margin agreements, non-
                [[Page 2]]
                purpose lending agreements, and a limited number of mortgage-backed
                securities forward transactions. As to leverage, Wells Fargo
                represented that retail margin and securities-based lending is done in
                accordance with initial and maintenance margin requirements. As to
                WFCS' and FiNet's interconnectedness to the rest of the financial
                system, Wells Fargo noted that the activities of WFCS and FiNet are
                limited to certain products and types of clients and, moreover, that
                their operations, funding, and liquidity are independent from the
                separate Wells Fargo broker-dealer subsidiary, Wells Fargo Securities,
                LLC, that serves institutional clients.\7\ Furthermore, neither WFCS
                nor FiNet is registered with the CFTC as a swap dealer or a futures
                commission merchant; the lack of these registrations restricts their
                ability to transact in certain types of QFCs, including OTC
                derivatives. Finally, Wells Fargo asserted that the extent and nature
                of WFCS' and FiNet's businesses with respect to client activity QFCs,
                as described above, support its view that granting the requested
                exemption would not impair or impede the FDIC's ability to exercise its
                rights under section 210(c)(8), (9), and (10) of the Act.
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                 \7\ Wells Fargo Securities, LLC was not included within the
                exemption request.
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                 Treasury received a final recommendation from the FDIC, prepared in
                consultation with the SEC and CFTC, regarding the exemption request,
                and, after consultation with the FDIC, Treasury is making the
                determination discussed below.\8\
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                 \8\ All exemptions to the recordkeeping requirements of the rule
                are made at the discretion of the Secretary, and the Secretary's
                discretion is not limited by any recommendations received from other
                agencies. Exemptions from the FDIC's recordkeeping rules under 12
                CFR part 371 (Recordkeeping Requirements for Qualified Financial
                Contracts) are at the discretion of the board of directors of the
                FDIC and entail a separate request and process and different policy
                considerations. References to the FDIC in this document should not
                be taken to imply that the FDIC has determined that similar
                exemptions under part 371 would be available.
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                Evaluation of the Exemption Request
                 The FDIC has the authority under Title II to transfer the assets
                and liabilities of any financial company for which it has been
                appointed receiver under Title II (a ``covered financial company'') to
                either a bridge financial company established by the FDIC or to another
                financial institution.\9\ The FDIC generally has broad discretion under
                Title II as to which QFCs it transfers to the bridge financial company
                or to another financial institution subject to certain limitations,
                including the ``all or none rule.'' \10\
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                 \9\ See, e.g., 12 U.S.C. 5390(a)(1)(G)(i).
                 \10\ For further discussion of the FDIC's authorities and
                responsibilities addressed in this section of the document, see the
                notice of exemption issued with respect to Morgan Stanley Smith
                Barney, 83 FR 66618, 66619-20 (Dec. 27, 2018).
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                 Separately, if the FDIC is appointed receiver of a covered
                financial company that is a broker-dealer and the FDIC establishes a
                bridge financial company to assist with the resolution of that broker-
                dealer, the FDIC must, pursuant to section 210(a)(1)(O) of the Act,\11\
                unless certain conditions are met, transfer to the bridge financial
                company all ``customer accounts'' of the broker-dealer and all
                associated ``customer name securities'' and ``customer property,'' as
                those terms are defined by reference to SIPA.\12\ There are two
                conditions under which the FDIC is permitted not to transfer all such
                customer accounts, customer name securities, and customer property to
                the bridge financial company: (i) If the FDIC determines, after
                consulting with the Securities Investor Protection Corporation and the
                SEC, that such customer accounts, customer securities, and customer
                property are likely to be promptly transferred to another registered
                broker-dealer or (ii) if the transfer would materially interfere with
                the ability of the FDIC to avoid or mitigate serious adverse effects on
                financial stability or economic conditions in the United States.\13\
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                 \11\ 12 U.S.C. 5390(a)(1)(O).
                 \12\ See 15 U.S.C. 78aaa et seq. See also section 201(a)(10) of
                the Dodd-Frank Act (12 U.S.C. 5381(a)(10)) (providing that the terms
                ``customer,'' ``customer name securities,'' and ``customer
                property'' as used in Title II shall have the same meaning as
                provided in SIPA).
                 \13\ See 12 U.S.C. 5390(a)(1)(O)(i)(I)-(II).
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                 Not all of a broker-dealer's clients qualify as ``customers'' under
                SIPA. For instance, a client of a broker-dealer that engaged in an FX
                spot transaction or an FX forward would not be a ``customer'' under
                SIPA with respect to those transactions.\14\ Even if such a client were
                otherwise to have a customer relationship with the broker-dealer under
                SIPA, such as by virtue of having a brokerage account for the trading
                of securities, then, although that customer account would be required
                to be transferred pursuant to section 210(a)(1)(O) of the Act, the FX
                spot transaction or forward would not be required to be transferred
                pursuant to section 210(a)(1)(O) of the Act. However, pursuant to the
                all or none rule, if the FDIC were to transfer a customer account that
                held QFCs between the broker-dealer and the client, the FDIC would be
                required to transfer (i) all QFCs between the broker-dealer and the
                client and, if the client is a non-natural person, (ii) all QFCs
                between the broker-dealer and any affiliates of such client.
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                 \14\ See 15 U.S.C. 78lll(2) (defining ``customer'' as . . .
                ``any person (including any person with whom the debtor deals as
                principal or agent) who has a claim on account of securities
                received, acquired, or held . .'' (emphasis added); id. section
                78lll(14) (defining ``security'' to exclude currency and rights to
                buy and sell currency other than FX options and other derivatives
                executed on a national securities exchange).
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                Determination of Exemption
                 Given the above-discussed restrictions on the FDIC's discretion as
                to whether or not to transfer QFCs from a broker-dealer, the limited
                nature of WFCS and FiNet's businesses, and the limited types of QFCs
                entered into by WFCS and FiNet with their clients, Treasury has
                determined to exempt WFCS and FiNet from the recordkeeping requirements
                of the rule with respect to any QFCs with clients that are their
                respective customers under SIPA with respect to any transactions or
                accounts such customers have with WFCS and FiNet, respectively, subject
                to the conditions stipulated below.\15\ Treasury does not expect that
                granting this exemption will unduly interfere with the FDIC's ability
                to avoid or mitigate serious adverse effects on financial stability or
                economic conditions in the United States. In the case of each of WFCS
                and FiNet, the size, risk, complexity, and leverage of its QFCs with
                its customers do not present a high likelihood that the financial
                stability exception to the transfer requirement of section 210(a)(1)(O)
                of the Act would be met. If the financial stability exception is not
                met, the FDIC would likely either transfer, pursuant to section
                210(a)(1)(O), all of a broker-dealer's customer accounts, customer name
                securities, and customer property included in such customer accounts
                and any other QFCs with such customer to the bridge financial company
                or transfer all such accounts, securities, and property to another
                broker-dealer. In either case, the FDIC would not need the detailed
                records required by the rule with respect to QFCs to accomplish the
                transfer. Likewise, Treasury has determined to exempt any guarantees of
                such QFCs by a third party if the guarantor is an affiliate of the
                customer, is itself a customer of WFCS or FiNet, as applicable, or does
                not have any other QFCs with WFCS or FiNet, as applicable. In addition,
                Treasury has determined to exempt WFCS from the
                [[Page 3]]
                recordkeeping requirements of the rule with respect to any QFC entered
                into by WFCS with a clearing organization for the purpose of
                facilitating the clearance or settlement of any QFC subject to the
                exemption discussed above. As used in the exemption, the term
                ``clearing organization'' includes, among other things, clearing
                agencies registered with the SEC and derivatives clearing organizations
                registered with the CFTC.\16\
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                 \15\ As used in the remainder of this notification of exemption,
                the term ``customer'' means a person who is a customer as defined in
                SIPA with respect to any transaction or account it has with WFCS or
                FiNet.
                 \16\ The exemption cross-references the definition from section
                402 of the Federal Deposit Insurance Corporation Improvement Act of
                1991, 12 U.S.C. 4402.
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                 Treasury has determined not to exempt (i) QFCs with clients that
                are not customers under SIPA with respect to any transactions or
                accounts they have with WFCS and FiNet or (ii) WFCS's or FiNet's QFCs
                with third parties that are not customers, such as transactions with
                other broker-dealers entered into to fulfill obligations to customers
                or to hedge risk, other than the guarantees and the QFCs with clearing
                organizations discussed above. The exemption would not include any
                guarantees WFCS may enter into for the benefit of a futures commission
                merchant in connection with WFCS' introduction of customer trades to
                such futures commission merchant. Because the FDIC would retain
                discretion as to whether to transfer or retain QFCs with clients that
                are not customers under SIPA, and in consideration of the size of the
                QFCs with non-customer third parties and the risks they impose, the
                FDIC would need the detailed records required by the rule to make a
                transfer determination with respect to such transactions of WFCS and
                FiNet. To the extent the transactions excluded from this exemption
                qualify for the exemptions previously granted by Treasury with respect
                to cash market transactions and overnight transactions, WFCS or FiNet
                would only be required to maintain limited records with respect to such
                transactions.\17\
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                 \17\ See 83 FR 65509 (Dec. 21, 2018).
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                Conditions of the Exemption
                 The exemption granted below is based on the factual representations
                made by Wells Fargo on behalf of WFCS and FiNet to Treasury, the FDIC,
                the SEC, and the CFTC in its submissions. Treasury reserves the right
                to request an updated submission from WFCS and FiNet as to their
                business, and to rescind or modify the exemption, at any time. Further,
                Treasury intends to reassess the exemption in five years. At that time,
                Treasury, in consultation with the FDIC and the primary financial
                regulatory agencies, would evaluate any material changes in the nature
                of WFCS' and FiNet's businesses as well as any relevant changes to
                market structure or applicable law or other relevant factors that might
                affect the reasons for granting the exemptions. Treasury expects that
                it would provide notice to WFCS and FiNet prior to any modification or
                rescission of the exemption and that, in the event of a rescission or
                modification, Treasury would grant a limited period of time in which to
                come into compliance with the applicable recordkeeping requirements of
                the rule.
                Terms and Conditions of the Exemption
                 Each of WFCS and FiNet (each a ``records entity'') is hereby
                granted an exemption from the requirements of 31 CFR 148.3 and 148.4
                for the following: (i) Any QFC entered into by the records entity with
                or on behalf of any customer of the records entity that is booked and
                carried in accounts at the records entity maintained for the benefit of
                such customer and (ii) any guarantee of such an exempt QFC if the
                guarantor (x) is an affiliate of the customer whose obligations are
                guaranteed, (y) is itself a customer of the records entity, or (z) does
                not have any other QFCs with the records entity. In addition, WFCS is
                hereby granted an exemption from the requirements of 31 CFR 148.3 and
                148.4 for QFCs entered into by WFCS with a clearing organization in
                order to facilitate the clearance or settlement of any QFC referenced
                in clause (i) of the preceding sentence. For purposes of the exemption,
                ``customer'' means a person who is a customer as defined in 15 U.S.C.
                78lll(2) with respect to any transactions or accounts it has with the
                records entity, and ``clearing organization'' has the meaning provided
                in 12 U.S.C. 4402.
                 The exemption is subject to modification or revocation at any time
                the Secretary determines that such action is necessary or appropriate
                in order to assist the FDIC as receiver for a covered financial company
                in being able to exercise its rights and fulfill its obligations under
                sections 210(c)(8), (9), or (10) of the Act. The exemption extends only
                to WFCS and FiNet and to no other entities.
                 Dated: December 13, 2019.
                Peter Phelan,
                Deputy Assistant Secretary for Capital Markets.
                [FR Doc. 2019-27801 Filed 12-31-19; 8:45 am]
                BILLING CODE 4810-25-P
                

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