Recordkeeping Requirements for Qualified Financial Contracts

Federal Register: December 22, 2008 (Volume 73, Number 246)

Rules and Regulations

Page 78162-78173

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr22de08-6

FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 371

RIN 3064-AD30

Recordkeeping Requirements for Qualified Financial Contracts

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

SUMMARY: The FDIC is adopting a final rule establishing recordkeeping requirements for qualified financial contracts (QFCs) held by insured depository institutions in a troubled condition as defined in this rule. The appendix to the rule requires an institution in a troubled condition, upon written notification by the FDIC, to produce immediately at the close of processing of the institution's business day, for a period provided in the notification, the electronic files for certain position level and counterparty level data; electronic or written lists of QFC counterparty and portfolio location identifiers, certain affiliates of the institution and the institution's counterparties to QFC transactions, contact information and organizational charts for key personnel involved in QFC activities, and contact information for vendors for such activities; and copies of key agreements and related documents for each QFC.

DATES: This final rule is effective January 21, 2009.

FOR FURTHER INFORMATION CONTACT: R. Penfield Starke, Counsel,

Litigation and Resolutions Branch, Legal Division, (703) 562-2422 or

RStarke@FDIC.gov; Michael B. Phillips, Counsel, Supervision and

Legislation Branch, Legal Division, (202) 898-3581 or

MPhillips@FDIC.gov; Craig C. Rice, Senior Capital Markets Specialist,

Division of Resolutions and Receiverships, (202) 898-3501 or

Crrice@FDIC.gov; Marc Steckel, Section Chief, Capital Markets Branch,

Division of Supervision and Consumer Protection, (202) 898-3618 or

MSteckel@FDIC.gov; Steve Burton, Section Chief, Division of Insurance and Research, (202) 898-3539 or Sburton@FDIC.gov, Federal Deposit

Insurance Corporation, 550 17th Street, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

1. Background

   QFCs are certain financial contracts that have been defined in the

   Federal Deposit Insurance Act (FDI Act) and receive special treatment by the FDIC in the event of the failure of an insured depository institution (institution). The special treatment of QFCs after the

   FDIC's appointment as receiver or conservator for a failed institution initially was codified in the FDI Act as part of the Financial

   Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) \1\ and places certain restrictions on the FDIC as receiver \2\ for a failed institution that held QFCs.

   \1\ Public Law No. 101-73, 103 Stat. 514 (August 9, 1989).

   \2\ Most of the restrictions applicable to the treatment of QFCs by an FDIC receiver also apply to the FDIC in its conservatorship capacity. See U.S.C. 1821(e)(8), (9), (10), and (11). While the treatment of QFCs by an FDIC conservator is not identical to the treatment of QFCs in a receivership, see 12 U.S.C. 1821(e)(8)(E) and

   (10)(B)(i) and (ii), for purposes of this preamble we intend reference to the FDIC in its receivership capacity to include its role as conservator under this statutory authority.

   The FDI Act identifies QFCs using the statutory definition of five specific financial contracts. This statutory list of QFCs consists of securities contracts, commodity contracts, forward contracts, repurchase agreements, and swap agreements.\3\ The FDIC also may define other similar agreements as QFCs by rule or order.\4\ In addition, a master agreement that governs any contracts in these five categories is treated as a QFC,\5\ as are security agreements that ensure the performance of a contract from the five enumerated categories.\6\

   \3\ 12 U.S.C. 1821(e)(8)(D)(ii)-(vi).

   \4\ 12 U.S.C. 1821(e)(8)(D)(i). The FDIC has provided clarifying definitions for repurchase agreements and swap agreements in 12 CFR 360.5.

   \5\ 12 U.S.C. 1821(e)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV),

   (v)(V), and (vi)(V).

   \6\ 12 U.S.C. 1821(e)(8)(D)(ii)(XII), (iii)(X), (iv)(V),

   (v)(VI), and (vi)(VI).

   Under the FDI Act and other U.S. insolvency statutes, a party to

   QFCs with the insolvent entity can exercise its contractual right to terminate QFCs and offset or net out any amounts due between the parties and apply any pledged collateral for payment.\7\ Under the

   Bankruptcy Code, this right is immediate upon initiation of bankruptcy proceedings, while under the FDI Act, counterparties cannot exercise this contractual right until after 5 p.m. (Eastern Time) on the business day following the appointment of the FDIC as receiver.\8\ By contrast, parties to most other contracts with insured institutions cannot terminate the contracts based upon the appointment of the FDIC as receiver.\9\ The special rights granted by the FDI Act to QFC counterparties are designed to protect the stability of the financial system and to reduce the potential for cascading interrelated defaults.

   \7\ 12 U.S.C. 1821(e)(8); 11 U.S.C. 555 (securities contracts), 556 (commodities and forward contracts), 559 (repurchase agreements), 560 (swap agreements), and 561 (master netting agreements).

   \8\ See 12 U.S.C. 1821(e)(10)(B).

   \9\ 12 U.S.C. 1821(e)(13).

   If QFC counterparties were unable to terminate and liquidate their positions in a timely manner after the failure of the institution, they would be exposed to market risks and uncertainty regarding the ultimate resolution of QFCs. Absent the ability to terminate a QFC in a timely manner when the counterparty becomes insolvent (which may include exercising rights to offset positions, net payments, and use collateral to cover amounts due), the potential for fluctuation in the value of the QFCs from changes in interest rates and other market factors may create market uncertainty that could lead to broader market disruptions. Consequently, while the Bankruptcy

   Page 78163

   Code and the FDI Act generally do not contain provisions covering creditor or counterparty liquidity concerns arising from insolvency proceedings, those statutes do contain safeguards for counterparties that have entered into certain financial contracts under the Bankruptcy

   Code and the FDI Act.\10\ Both of these statutes treat these types of financial contracts differently from other contracts that an entity may have entered into prior to bankruptcy or failure.\11\

   \10\ 11 U.S.C. 555, 556, 559, 560, and 561; 12 U.S.C. 1821(e)(8).

   \11\ Without such protections for financial contracts and QFCs under the Bankruptcy Code and the FDI Act, respectively, a contract generally will be subject to an automatic stay upon the filing of a bankruptcy petition or the appointment of the FDIC as receiver. See 11 U.S.C. 361; 12 U.S.C. 1821(e)(13).

   Congress, however, recognized the tension between the need of the

   FDIC as receiver to efficiently resolve a failed institution and the desire to maintain stability in the financial markets. Thus, the treatment of QFCs for failed institutions under the FDI Act provides the FDIC with limited flexibility in crafting a resolution with respect to the institution's QFC portfolio. These provisions allow the FDIC to reduce losses to the deposit insurance fund and retain the value of the failed institution's portfolio, while minimizing the potential for market disruptions that could occur with the liquidation of a large QFC portfolio.

   After its appointment as receiver, the FDIC has three options in managing the institution's QFC portfolio: (1) Transfer the QFCs to another financial institution, (2) repudiate the QFCs, or (3) retain the QFCs in the receivership. Within certain constraints, the FDIC can apply different options to QFCs with different counterparties.

   First, the receiver may transfer a QFC to any other financial institution not currently in default, including but not limited to foreign banks, uninsured banks, and bridge banks or conservatorships operated by the FDIC. If the receiver transfers a QFC to another financial institution, the counterparty cannot exercise its contractual right to terminate the QFC based solely on the transfer, the insolvency, or the appointment of the receiver.

   Second, the FDIC as receiver may repudiate a QFC, within a reasonable period of time, if the receiver determines that the contract is burdensome.\12\ If the receiver repudiates the QFC, it must pay actual direct compensatory damages, which may include the normal and reasonable costs of cover or other reasonable measure of damages used in the industry for such claims, calculated as of the date of repudiation.\13\ If the receiver determines to transfer or repudiate a

   QFC, all other QFCs entered into between the failed institution and that counterparty, as well as those QFCs entered into with any of that counterparty's affiliates, must be transferred to the same financial institution or repudiated at the same time.

   \12\ 12 U.S.C. 1821(e)(1).

   \13\ 12 U.S.C. 1821(e)(3)(C).

   Third, the FDIC as receiver may retain a QFC in the receivership.

   This option would allow the counterparty to terminate the contract. If a QFC is terminated by the counterparty or repudiated by the receiver, the counterparty may exercise any contractual right to net any payment the counterparty owes to the receiver on a QFC against any payment owed by the receiver to the counterparty on a different QFC.

   The FDIC as receiver has very little time to choose among these three options. Under the FDI Act, the FDIC as receiver has until 5 p.m.

   (Eastern Time) on the business day following the date of its appointment as receiver to make its decision to transfer any QFCs.

   During this period, counterparties are prohibited from terminating or otherwise exercising any contractual rights triggered by the appointment of the receiver under the QFC agreements. In effect, the same time limitation applies to repudiation because, after the expiration of this brief stay, counterparties are free to exercise any contractual right to terminate the QFCs and avoid the FDIC's power to repudiate. If the FDIC as receiver decides to transfer any QFCs, it must take steps reasonably calculated to provide notice of the transfer of the QFCs of the failed institution to the relevant counterparties, who are prohibited from exercising such rights thereafter.\14\

   \14\ See 12 U.S.C. 1821(e)(10)(B). This limited time frame in which QFC counterparties are stayed from acting is in contrast to parties to other contracts with a failed institution which may be required to continue to perform by a receiver, and the receiver may stay a party from terminating such other contracts subject to monetary damages or default for up to 90 days.

   To make a well-informed decision on these three options, the FDIC needs access to information such as the types of QFCs, the counterparties and their affiliates, the notional amount and net position on the contracts, the purpose of the contracts, the maturity dates, and the collateral pledged for the contracts. Given the FDI

   Act's short time frame for such decision by the FDIC in the case of a

   QFC portfolio of any significant size or complexity, it may be difficult to obtain and process the large amount of information necessary for an informed decision by the FDIC as receiver unless that information is readily available to the FDIC in a format that permits the FDIC to quickly and efficiently carry out an appropriate financial and legal analysis. The absence of adequate information for decision- making by the FDIC as receiver increases the likelihood that, in a failed bank situation, QFCs will be left in the receivership or repudiated, instead of transferred to open institutions or a bridge bank.

   In light of the large volume of information concerning QFCs that a receiver must process in the limited time frame set forth in the FDI

   Act, the FDIC is establishing QFC recordkeeping requirements for institutions in a troubled condition, as described below.

2. The Proposed Rule

   In 2005, the Bankruptcy Abuse Prevention and Consumer Protection

   Act \15\ was enacted, with section 908 of the Act authorizing the FDIC, in consultation with the other Federal banking agencies, to set recordkeeping requirements for QFCs held in institutions determined to be in a ``troubled condition.'' \16\ Consistent with this statutory authority, the FDIC issued a Notice of Proposed Rulemaking for recordkeeping requirements for QFCs (NPR), which was published in the

   Federal Register on July 28, 2008. See 73 FR 43635. The NPR invited comments from the public on all aspects of the proposal and in response to certain specific questions. In issuing the NPR, the FDIC stated that the QFC recordkeeping requirements in the proposed rule included position and counterparty data fields that likely were maintained by institutions as part of their risk management of capital markets activities. Given the financial exposures presented by QFCs and related counterparty risks and supervisory considerations, and after consultation with the other Federal banking agencies, the FDIC determined that the recordkeeping requirements in the proposed rule were consistent with safe and sound banking practices by insured depository institutions holding QFCs.

   \15\ Public Law No. 109-8, 119 Stat. 23 (April 20, 2005); H.R.

   Rep. No. 106-834, section 9, at 35 (2000).

   \16\ 12 U.S.C. 1821(e)(8)(H).

   Page 78164

3. Summary of Comments

   The American Bankers Association (ABA), The Clearing House

   Association (The Clearing House), the Independent Community Bankers of

   America (ICBA), and the International Swaps and Derivatives Association

   (ISDA) submitted comments on the NPR. These comments focused on issues regarding the (1) the institutions covered by the rule, (2) the requirement that QFC ``position level'' data be reported under the data fields in Table A1 of Appendix A, (3) the requirement that QFC counterparty level data be reported under the data fields in Table A2 of Appendix A, (4) the requirement of a standardized reporting format for the reporting of both position level and counterparty-specific data, (5) the proposed time frame for compliance, and (6) the differences between the QFC reporting requirements for purposes of the

   Basel II Advanced Approaches final rule and the QFC reporting requirements under Tables A1 and A2 of the proposed rule.

   1. Institutions Covered under the Rule. Certain comment letters on the proposed rule suggested that the FDIC exclude from the definition of ``troubled condition'' institutions with a composite supervisory rating of 3 under the Uniform Financial Institution Rating System, because complying with the requirements of the rule could signal to employees, other institutions, and eventually the public that the institution is in financial distress. It was suggested by one commenter that ``3'' rated institutions not be required to comply with the rule unless the institution either holds more than $10 billion in assets or its primary federal regulator agrees that the institution should be required to comply. Another comment letter suggested that the rule apply only to institutions that have been found to have poor QFC risk management practices in place for their portfolios, or unsustainable

      QFC concentrations. Another comment letter suggested that because the use of QFCs by smaller community banks is limited, the rule should not apply to institutions with less than $5 billion in assets, or with fewer than ten open QFC positions on the balance sheet at any one time.

      Under section 370.1(c) of the proposed rule, consistent with the

      Congressional directive, the FDIC provided that only institutions that were in a ``troubled condition'' would be covered by the rule. The FDIC based its definition of that term in the proposed rule on its current definition of ``troubled condition'' in 12 CFR 303.101(c), which was promulgated to implement 12 U.S.C. 1831i, regarding the Federal banking agencies' approval of the appointment of directors and senior executive officers of institutions. The proposed rule added one new criterion to that definition and expanded another criterion in the current definition to reflect the FDIC's data needs in its role as receiver under the FDI Act. The new criterion was that, notwithstanding the composite rating of the institution by that agency in its most recent report of examination, the institution is determined by the appropriate

      Federal banking agency, or the FDIC in consultation with the appropriate Federal banking agency, to be experiencing a significant deterioration of capital or significant funding difficulties or liquidity stress. Another criterion was expanded to include institutions with a 3 composite rating and total consolidated assets over $10 billion.

      The FDIC has determined that it is appropriate to include institutions with a 3 composite rating and total consolidated assets over $10 billion, because these institutions are likely to pose risks to the deposit insurance fund arising from QFC activities. The FDIC has similar concerns regarding risks to the deposit insurance fund arising from any insured depository institution with QFCs that is experiencing a significant deterioration of capital or significant funding difficulties or liquidity stress, irrespective of the institution's supervisory rating. Based on its experience in its receivership capacity, the FDIC believes it is prudent to give institutions facing deteriorating conditions sufficient time to comply with this rule.

      Accordingly, the FDIC believes it is imperative that institutions with a supervisory rating of 3 and total assets of $10 billion or greater and/or experiencing a significant deterioration of capital or significant funding difficulties or liquidity stress develop and maintain the QFC position level and counterparty-specific data fields shown in Tables A1 and A2 of the Appendix to this rule.

      The FDIC does not believe that the ``signaling'' problem expressed in certain comment letters justifies exempting certain institutions in a troubled condition from maintaining QFC information consistent with safe and sound practices as required by this rule. The FDIC's request for information would be non-public, as are many other supervisory directives. Also, the recordkeeping requirements in this final rule do not impose any restrictions on the business operations of institutions covered by this rule.

   2. QFC Position Level-Specific Data Fields (Table A1 of Appendix

      A). The ISDA and The Clearing House comment letters indicated that institutions usually do not maintain and aggregate the position-level information requested in Table A1 of Appendix A of the proposed rule, but instead aggregate information by counterparty. As noted in these comment letters, the FDIC's receivership authority under section 11(e)(9) of the FDI Act, 12 U.S.C. Sec. 1821(e)(9), requires that the

      FDIC treat all QFC contracts with a single counterparty and its affiliates similarly when deciding whether to transfer, repudiate or retain the QFC portfolio of a failed institution. Accordingly, in their view, transaction-level QFC position information should be unnecessary for the FDIC's decision-making process. These comment letters also indicated that the ``purpose of the position'' field be eliminated from

      Table A1 because institutions typically do not record this information for specific QFC positions and the purpose of a QFC position can change in dynamic markets. The Clearing House also indicated that providing a full transaction-level understanding of the broad range of QFCs would entail different recordkeeping requirements for specific QFCs, thereby resulting in increased implementation complexity and associated costs.

      The FDIC has determined that the position-level QFC data fields in

      Table A1 of the Appendix to this final rule provide information necessary to enable the FDIC to meet its obligations under the least cost test for closed bank resolutions under section 13(c)(4) of the FDI

      Act, 12 U.S.C. Sec. 1823(c)(4). The information required in Table A1

      (e.g., the current market value of the QFC position, the type and purpose of the position, and the notional or principal amount of the position) are important to the evaluation of the costs associated with the FDIC as receiver's decision to (1) transfer the QFCs to another financial institution, (2) repudiate the QFCs, or (3) retain the QFCs in the receivership.

      As an example of the importance of position-level QFC data to the

      FDIC's least-cost resolution decisions in its receivership capacity, if one of the counterparty's QFC positions is a forward sale contract (a contract that allows the institution to sell assets at a set price in the future), and the institution has amassed a $50 million ``pipeline'' of assets for future delivery under the contract, the FDIC as receiver may realize significant financial benefits by transferring the forward contract together with the mortgage loan pipeline

      Page 78165

      that it hedges. These financial benefits may, on the whole, exceed the savings that the receivership might realize if all of that counterparty's QFCs remained with the receivership and the loan pipeline were sold without the hedge. In another example, information identifying the ``booking location'' of individual QFCs would enable the FDIC to classify QFCs by foreign branch location and thereby allow the FDIC to evaluate the potential effect of ``ring-fencing,'' whereby foreign governments use foreign assets held by a failed U.S. institution to satisfy claims of depositors and creditors in that same jurisdiction. Identifying the type and purpose of QFCs on both an individual transaction level and on an aggregate basis will permit the

      FDIC to assess the impact that QFC determinations may have on a counterparty's other banking relationships with a failed institution.

      For example, knowledge of how particular QFCs fit into a counterparty's business with the institution might lead the FDIC to transfer the QFCs to a bridge bank in order to maintain the value of a customer relationship that otherwise would be destroyed if QFC determinations were made without regard to a QFC's purpose. As a specific illustration, a QFC might include an interest rate swap between an institution and a borrower, which is designed to tailor the interest payment due on the loan. Position-level QFC data would permit the FDIC to make an informed judgment concerning the least-cost disposition of the customer relationship. Also, position-level data would enable the

      FDIC to consider clearinghouse arrangements used for settling trades, which may influence the disposition of other QFCs settled through the same clearinghouse.

      Information provided in Table A1 also may be needed by the FDIC as receiver to determine how to react to the termination of contracts by a counterparty in the event that such contracts are not transferred. A counterparty is under no obligation to terminate all of its contracts with the FDIC as receiver. Accordingly, in this situation, counterparty level data will be of little value, and the FDIC as receiver must obtain position-level data in order to satisfy the termination provisions of the contract.

      As discussed below, the FDIC has addressed concerns related to the position-specific data fields in Table A1 through a more flexible approach for institutions' formats for reporting the QFC position- specific data fields in Table A1. In support of this approach, The

      Clearing House comment letter provided that:

      Except as noted above, each piece of data set forth in the

      Proposal is generally maintained by each institution in some form.

      However, there is no reason that an institution would need to assemble all of the information required by the Proposal into a single, centralized database, whether upon demand or on an on-going basis.\17\

      \17\ Letter to the FDIC from The Clearing House, dated October 30, 2008, p. 10. Similar comments were provided in the letter to the

      FDIC from ISDA dated October 31, 2008, p. 2; and the letter to the

      FDIC from the American Bankers Association dated September 26, 2008, p. 2.

      The introduction to Table A1 in the Appendix has been revised to state that no later than three business days after the institution's receipt of the written notification from the FDIC under section 371.1(c) of this Part, the institution must provide the FDIC with (i) a directory of the electronic files that will be used by the institution to maintain the position level data found in Table A1 and (ii) a point of contact at the institution should the FDIC have follow-up questions concerning this information.

      In response to certain comment letters regarding whether the FDIC needs the data field in Table A1 that covers the ``purpose of the position'' for QFCs (e.g., whether the QFC position is being used for hedging or trading purposes), the FDIC has determined that this data field is necessary for it to quickly ascertain the potential impact of its receivership options regarding certain QFC positions.\18\

      \18\ The information required for the ``purpose of position'' field is similar to information required under Financial Accounting

      Standards Board (FASB) Statements No. 133 and 161. Under these

      Statements, disclosures must be made as to whether derivatives are held for speculative purposes or risk mitigation, the types of risk mitigation strategies implemented, and how the use of derivatives affects the institutions financial position and performance.

      Accordingly, institutions should be able to identify the purpose of entering into QFC contracts to meet these accounting requirements.

   3. QFC Counterparty-Specific Data Fields (Table A2 of Appendix A).

      The Clearing House and ISDA comment letters acknowledged the significance of the counterparty-specific data fields in Table A2 of

      Appendix A of the proposed rule. On this point, The Clearing House comment letter stated:

      A focus on counterparty-level data is also consistent with the way in which institutions manage exposure and risk in their QFC portfolios. Financial institutions generally manage trading relationships on a counterparty-by-counterparty basis rather than on a trade-by-trade basis. To assess the risks and benefits that a trading relationship presents to an institution, the institution must be able to evaluate, on an on-going basis, aggregate information for that particular counterparty. In other words, while credit and market risk and other aspects of a trading relationship with a single counterparty are, of course, monitored through various systems, the primary factor a depository institution must assess in evaluating the immediate loss that it would suffer if a counterparty were to default is the institution's aggregate position vis-

      agrave

      -vis that counterparty. Existing information systems are already built with this objective in mind.\19\

      \19\ Letter to the FDIC from The Clearing House, dated October 30, 2008.

      The ISDA comment letter provided similar justification for the data fields required in Table A2 of Appendix A of the proposed rule.

   4. Reporting Format for Data Fields Required in the Rule. The ABA commented that since banking organizations currently maintain QFC position-specific data in various formats and across various databases, the requirements in Table A1 and A2 of the Appendix of the proposed rule would require costly system upgrades and potential contract renegotiations with service providers. The ABA recommended instead that covered institutions be allowed to provide the FDIC the information in its existing format and include a ``roadmap'' of where the required information can be found.

      The proposed rule did not mandate a specific format for the reporting by institutions in a troubled condition of the position level specific data fields in Table A1; instead, the FDIC provided a functional criterion that the data fields must be accessible for FDIC's monitoring purposes. In conjunction with the appropriate Federal banking agency, the FDIC will discuss with such institutions whether the existing electronic data files maintained by the respective institutions are in a suitable format to produce information required under the data fields in Table A1. Similarly, for purposes of the counterparty-level data fields in Table A2, the final rule requires that such data fields must be maintained in an electronic file in a format acceptable to the FDIC.

      The FDIC also notes that its data maintenance requirements for QFCs are consistent with recommendations that have been developed by industry participants to measure and safeguard risks to financial institutions arising from the OTC derivatives market. The recent report from the Counterparty Risk Management Policy Group III (CRMPG III) recommends various measures to safeguard risks to financial institutions arising from counterparty credit risk.\20\ Significantly, the CRMPG III report stated:

      \20\ CRMPG III, Containing Systemic Risk: The Road to Reform

      (August 6, 2008).

      Page 78166

      The Policy Group recommends that large integrated financial intermediaries ensure that their credit systems are adequate to compile detailed exposures to each of their institutional counterparties on an end-of-day basis by the opening of business the subsequent morning. In addition, the Policy Group recommends that large integrated financial intermediaries ensure their credit systems are capable of compiling, on an ad hoc basis and within a matter of hours, detailed and accurate estimates of market and credit risk exposure data across all counterparties and the risk parameters set out below. Within a slightly longer time frame this information should be expandable to include: (1) The directionality of the portfolio and of individual trades; (2) the incorporation of additional risk types, including contingent exposures and second and third order exposures (for example, SIVs, ABS, etc.); and (3) such other information as would be required to optimally manage risk exposures to a troubled counterparty.\21\

      \21\ Id. at 81.

      The FDIC views the recordkeeping requirements contained in part 371 as consistent with the Policy Group's recommendation.

      For purposes of minimizing the recordkeeping burdens for community banks under this final rule, we have provided in the Appendix of the final rule that for institutions in a troubled condition with less than twenty open QFC positions upon receipt of the written notification from the FDIC under part 371 and the Appendix, the data required in Tables

      A1 and A2 may be recorded and maintained in a written format so long as the data are capable of being updated on a daily basis.

   5. Time Period for Compliance. Three of the four comment letters stated that the proposed 30-day time period to comply after being notified of being in a troubled condition would be too short, especially if institutions had to change their systems or renegotiate contracts with third party service providers. One suggestion was to allow a ``roadmap'' compliance system, as discussed above, in which an institution would provide the FDIC a roadmap as to how the information could be collected when needed rather than actually assembling and providing the information on a regular basis. A second suggestion was to permit an institution to formally request an extension of time for compliance. In addition, the ABA comment letter recommended that the

      QFC data be updated only weekly because many of the large broker dealers operate global, around-the-clock operations and would have difficulty updating their files daily.

      In response to these comments, in order to meet the statutory deadlines for decisions on QFCs upon the appointment of the FDIC as receiver for an institution in a troubled condition under section 11(e)(10) of the FDI Act, FDIC staff has determined that an initial 60 day compliance deadline. However, the FDIC will permit institutions to request additional extensions of this deadline, which the FDIC may grant after review on a case-by-case basis. Institutions should submit a request for an extension to the FDIC at least 15 days prior to the deadline for its compliance with the requirements of this rule, and the institution's request should contain the reasons why the extension is needed.

   6. Conflict with Basel II implementation. The ABA comment letter suggested that implementing the QFC recordkeeping rule and the Basel II

      Advanced Approaches final rule at the same time would be overly burdensome and ineffective; therefore, either the QFC rules should

      ``piggyback'' the Basel II rules or institutions should be able to use the same information systems for both.

      The FDIC and the other Federal banking agencies have developed reporting schedules for purposes of implementing the Basel II Advanced

      Approaches final rule. The FDIC has determined that the relevant schedules that have been developed for Basel II implementation do not contain counterparty-level data that Table A2 would require nor the specific data fields presented in Table A1 of Appendix A.\22\ Instead, these schedules report information aggregated across multiple transactions and counterparties. Accordingly, the interagency Basel II schedules for derivative contract exposures are neither duplicative nor appropriate for the FDIC's data needs in its receivership capacity under the FDI Act. In addition, several of the QFC categories under the

      FDI Act are not covered explicitly under the Basel II reporting schedules. It also is likely that fewer than twenty banks in the United

      States will implement the Basel II Advanced Approaches final rule for purposes of their risk-based capital requirements. Accordingly, the

      FDIC has determined not to change the proposed rule in this respect.

      \22\ See Federal Financial Institutions Examination Council,

      Risk-Based Reporting for Institutions Subject to the Advanced

      Capital Adequacy Framework--FFIEC 101, Schedule H (Wholesale

      Exposure--Eligible Margin Loans, Repo-Style Transactions and OTC

      Derivatives, with Cross-Product Netting); Schedule I--Wholesale

      Exposure--Eligible Margin Loans and Repo-Style Transactions, No

      Cross-Product Netting); and Schedule J (Wholesale Exposure--OTC

      Derivatives, No Cross-Product Netting).

4. The Final Rule

   The final rule differs from the proposal by providing in section 371.1(c) that the institutions subject to this rule must comply within 60 days after they receive written notification from their appropriate

   Federal banking agency or the FDIC. The FDIC may, at its discretion, grant one or more extensions of time for compliance with this rule. No single extension may be for a period of more than 30 days. Such institutions may request an extension of time by submitting a written request to the FDIC at least 15 days prior to the deadline for its compliance with the requirements of this part. In addition, the final rule provides that not later than three business days after the institution's receipt of the written notification from the FDIC under section 371.1(c) of this part, the institution must provide the FDIC with (i) a directory of the electronic files that will be used by the institution to maintain the position level data found in Table A1 and

   (ii) a point of contact at the institution should the FDIC have follow- up questions concerning this information. Section 371.5 has been added to clarify that violating the terms or requirements of part 371 and

   Appendix A constitutes a violation of a regulation and may subject the institution to enforcement actions under section 8 of the FDI Act (12

   U.S.C. 1818).

   Furthermore, a ``de minimus'' provision has been included to provide that for institutions in a troubled condition with less than twenty open QFC positions upon receipt of the written notification from the FDIC or the institution's appropriate Federal banking agency under

   Part 371 and this Appendix, the data required in Tables A1 and A2 is not required to be recorded and maintained in electronic form as would otherwise be required by this part, so long as all required information is capable of being updated on a daily basis. If at any point in time after receiving such notification an institution has twenty or more open QFC positions, it must within 60 days after that first occurs, comply with all provisions of part 371.

   Other changes to the proposed rule are: (1) The change of the designated part of the FDIC's codified regulations for this rule from part 370 for the proposed to part 371 for the final rule; (2) as recommended in ISDA's comment letter, the penultimate data field in

   Table A2 will read: ``Counterparty's collateral excess or deficiency with respect to all of the institution's positions with each counterparty, as determined under each applicable

   Page 78167

   agreement including thresholds and haircuts where applicable;'' and (3) also as recommended in ISDA's comment letter, the second bullet item under section B.1 will read: ``A list of the affiliates of the counterparties that are also counterparties to QFC transactions with the institution or its affiliates, and the specific master netting agreements, if any, under which they are counterparties.''

   Section 371.1 provides that this part applies to insured depository institutions that are in a troubled condition, as defined in section 371.2(f), and that such institutions shall comply with this part (1) within 60 days after written notification by the institution's appropriate Federal banking agency or the FDIC that it is in a troubled condition, or (2) within a period requested by the institution and approved by the FDIC for an extension of this compliance deadline at least 15 days prior to the deadline.

   Section 371.2 provides definitions for purposes of this part. In particular, ``troubled condition'' means any insured depository institution that (1) has a composite rating, as determined by its appropriate Federal banking agency in its most recent report of examination, of 3 (only for insured depository institutions with total consolidated assets of ten billion dollars or greater), 4, or 5 under the Uniform Financial Institution Rating System, or in the case of an insured branch of a foreign bank, an equivalent rating; (2) is subject to a proceeding initiated by the FDIC for termination or suspension of deposit insurance; (3) is subject to a cease-and-desist order or written agreement issued by the appropriate Federal banking agency, as defined in 12 U.S.C. 1813(q), that requires action to improve the financial condition of the insured depository institution or is subject to a proceeding initiated by the appropriate Federal banking agency which contemplates the issuance of an order that requires action to improve the financial condition of the insured depository institution, unless otherwise informed in writing by the appropriate Federal banking agency; (4) is informed in writing by the insured depository institution's appropriate Federal banking agency that it is in troubled condition for purposes of 12 U.S.C. 1831i on the basis of the institution's most recent report of condition or report of examination, or other information available to the institution's appropriate Federal banking agency; or (5) is determined by the appropriate Federal banking agency or the FDIC in consultation with the appropriate Federal banking agency to be experiencing a significant deterioration of capital or significant funding difficulties or liquidity stress, notwithstanding the composite rating of the institution by its appropriate Federal banking agency in its most recent report of examination.

   As required by the statutory authority for the FDIC's promulgation of this final rule for QFC recordkeeping by insured depository institutions in a ``troubled condition,'' we have determined that the definition of ``troubled condition'' in this final rule is consistent with the current definition of ``troubled condition'' in 12 CFR 303.101(c), and supplements the criteria in that definition with certain additional criteria that reflect the FDIC's concern that institutions in a troubled condition need to produce necessary QFC data for purposes of the FDIC meeting its statutory obligations under section 11(e) of the FDI Act, in the event of the failure of any such institution. The third and fourth criteria of the term ``troubled condition'' as defined in final rule are similar to criteria for the definition of that term in other FDIC rules and the rules of the other

   Federal banking agencies (which generally implement 12 U.S.C. 1831i, regarding the Federal banking agencies' approval of appointment of directors and senior executive officers of institutions).\23\ However, the first, second, and fifth criteria for the definition of ``troubled condition'' in the proposed rule differ from the other agencies' rules that implement 12 U.S.C. 1831i.

   \23\ See 12 CFR 303.101(c) (FDIC), 12 CFR. 5.51(c)(6) (OCC), 12

   CFR 225.71(d) (FRB); and 12 CFR 563.555 (OTS).

   Consistent with the FDIC's and the other Federal banking agencies' definition of ``troubled condition'' for purposes of 12 U.S.C. 1831i, the first criterion of the definition of ``troubled condition'' in this proposed rule includes institutions with a composite rating, as determined by its appropriate Federal banking agency in its most recent examination, of 4 or 5 under the Uniform Financial Institution Rating

   System, or in the case of an insured branch of a foreign bank, an equivalent rating. However, for purposes of this first criterion for

   ``troubled condition'' in this proposed rule, the FDIC has included any insured depository institution with total consolidated assets of ten billion dollars or greater and a composite rating, as determined by its appropriate Federal banking agency in its most recent examination, of 3 under the Uniform Financial Institution Rating System. The inclusion of institutions of such asset size with a composite rating of 3 reflects the risks to the deposit insurance fund arising from large institutions with QFC portfolios for which the appropriate Federal banking agency has assigned a composite rating of 3.

   The second criterion of the definition of ``troubled condition'' in this proposed rule reflects the FDIC's responsibility to terminate the deposit insurance of institutions that pose unreasonable risk to the deposit insurance fund. Similarly, the fifth criterion of this definition is based on circumstances that create a significant risk that an institution may require the appointment of the FDIC as receiver.

   Section 371.3 provides that the records required to be maintained by an insured depository institution for QFCs under this part (except for records that must be maintained through electronic files under

   Appendix A of this part) may be maintained in any form, including in an electronic file, provided that the records are updated at least daily.

   Records not maintained in written form must be capable of being reproduced or printed in written form. Records must be made available upon written request by the institution's appropriate Federal banking agency or the FDIC immediately at the close of processing of the institution's business day, for a period provided in that written request. The report will contain information as of the close of business on the report day. Insured depository institutions that are in a troubled condition as defined in section 371.2(f) shall continue to maintain records required to comply with this part for a period of one year after the date that the appropriate Federal banking agency notifies the institution that it is no longer in a troubled condition as defined in section 371.2(f). If an insured depository institution that has been determined by the appropriate Federal banking agency to be in a troubled condition ceases to exist as an insured depository institution as a result of a merger or a similar transaction into an insured depository institution that is not in a troubled condition immediately following the acquisition, the obligation to comply with this part will terminate when the institution in a troubled condition ceases to exist as an insured depository institution.

   Section 371.4 provides that for each QFC for which an insured depository institution is a party or is subject to a master netting agreement involving the QFC, that institution must maintain records as listed under Appendix A of this part.

   Section 371.5 was added to the final rule to clarify that violating the terms or

   Page 78168

   requirements of part 371 and Appendix A constitutes a violation of a regulation and subjects the participating entity to enforcement actions under section 8 of the FDI Act (12 U.S.C. 1818).

5. Appendix A of the Final Rule: QFC Recordkeeping Requirements

   Appendix A to part 371 sets forth the specific QFC recordkeeping requirements proposed in this NPR. These QFC recordkeeping requirements are organized into three categories as provided in Appendix A: (1)

   Position level data (Table A1), (2) counterparty level data (Table A2), and (3) certain contracts and lists of counterparty affiliates and identifiers, affiliates of the institution that are counterparties to

   QFC transactions, organizational charts involving the institution and its affiliates, and supporting vendors (Section B). An institution in a troubled condition is required to maintain the position level data and counterparty data listed under Tables A1 and A2 in electronic files in a format acceptable to the FDIC, and such institutions are required to demonstrate the ability to produce this information immediately at the close of processing of the institution's business day, for a period provided in a written notification by the FDIC. The files required under Section B are less quantitative and may be maintained in electronic format, in written format, or in a combination of those two formats. Nonetheless, the nature of this information requires that it be updated and available upon request on a daily basis. For institutions in a troubled condition with less than twenty open QFC positions upon receipt of the written notification from the FDIC or the institution's appropriate Federal banking agency under part 371 and this Appendix, the data required in Tables A1 and A2 is not required to be recorded in electronic form as otherwise would be required by this part, so long as all required information is maintained and is capable of being updated on a daily basis.

   The final rule and Appendix A are intended to facilitate the ability of the receiver to gather relevant information on QFCs in order to make business decisions within the short time frame between when a failure occurs and when the FDIC as receiver must act under 12 U.S.C. 1821(e)(9) and (10). Also, the data fields and related information required in Appendix A are important for the due diligence by institutions of their QFC agreements in conjunction with their risk management policies and procedures.

   For purposes of the final rule and Appendix A, ``position'' is defined in the final rule to mean the rights and obligations of a person or entity as party to an individual transaction. For example,

   ``position'' would include the rights and obligations of an institution under a ``Transaction'' (as such term is defined in the 2002 Master

   Agreement of ISDA), such as an interest rate swap.

   Table A1. No later than three business days after the institution's receipt of the written notification from the FDIC under section 371.1(c) of this part, the institution must provide the FDIC with (i) a directory of the electronic files that will be used by the institution to maintain the position level data found in Table A1 and (ii) a point of contact at the institution should the FDIC have follow-up questions concerning this information. Table A1 requires data that must be maintained regarding open QFC positions entered into by that institution.\24\ For such data, the institution must produce at the close of processing of the institution's business day a report that aggregates the current market value and the amount of QFCs by each of the delineated fields. The institution must produce the report within 60 days of a written notification by the FDIC for the period specified in the notification. In addition, the FDIC also may require a certain combination of recordkeeping fields from Table A1 where significant for purposes of its evaluation of risks associated with the institution's positions.

   \24\ These positions include QFCs entered into by affiliates of the insured institution that are covered by the master agreements to which the institution is a party.

   The following data fields are required in Table A1: 1. Unique position identifier. This information includes CUSIP identifiers or unique trade confirmation numbers, if available. This information is needed in order to readily track and distinguish positions. 2. Portfolio location identifier. This information is used to provide the location in which the position is booked by the institution

   (e.g., the New York or London branch of the institution). 3. Type of position. This information describes the products used, sold or traded by an institution. It includes position types such as interest rate swaps, credit default swaps, equity swaps, and foreign exchange forwards, and securities or loan repurchase agreements. 4. Purpose of the position. This information identifies the role of the QFC in the institution's business strategy. For example, it would identify whether the purpose of a position is for trading, or for hedging other exposures such as mortgage loan servicing or certificates of deposit. 5. Termination date. This date indicates when the institution's rights and obligations regarding the position are expected to end. 6. Next call, put, or cancellation date. This information indicates the next date when a call, put, or cancellation may occur with respect to the position. 7. Next payment date. This information includes payment dates for potential upcoming obligations. 8. Current market value of the position. This information covers position values as of the date of the file. It is used to determine if the institution is in- or out-of-the-money with the counterparty. 9. Unique counterparty identifier. This information is used to aggregate positions by counterparty. 10. National or principal amount of the position. This information is needed to assist in the FDIC's evaluation of the position. It includes the notional amount where applicable. 11. Documentation status of the position. This information documents whether the position was affirmed, confirmed, or neither affirmed nor confirmed. It is needed to determine the reliability of booked positions and their legal status.

   Table A2. Table A2 requires data that must be maintained at the counterparty \25\ level for all QFCs entered into by an institution.

   For such data, the institution must demonstrate the ability to produce immediately at the close of processing of the institution's business day, for a period provided in a written notification by the FDIC, a report that (i) itemizes, by each counterparty and its affiliates with

   QFCs with the institution, the data required in each field delineated in Table A2; and (ii) aggregates by field, for each counterparty and its affiliates, the data required in each field. The following data fields are required in Table A2:

   \25\ The use of the term ``counterparty'' in Appendix A generally includes all entities (including all affiliates) that are effectively treated as a single counterparty under a master agreement.

   1. Unique counterparty identifier. This information would be used by the FDIC to aggregate positions by counterparty. 2. Current market value of all positions. This data must be aggregated and to the extent permitted under all applicable agreements, netted as of the date of the file. If one or more positions cannot be netted against others, they would be maintained as separate entries. 3. Current market value of all collateral posted by the institution. This

   Page 78169

   information would include the current market value of all collateral and the types of collateral, if any, that the institution has posted against all positions with each counterparty. 4. Current market value of all collateral posted by the counterparty. This information includes the current market value of all collateral and the types of collateral, if any, that the counterparty has posted against all positions. 5. Institution's collateral excess or deficiency. This information is provided with respect to all the positions as determined under each applicable agreement, such as master netting agreements and security agreements. If all positions are not secured by the same collateral, then separate entries should be maintained for each collateral excess and/or deficiency. This information includes thresholds and haircuts where applicable. 6. Counterparty's collateral excess or deficiency. This information is provided with respect to all the positions as determined under each applicable agreement. If all positions are not secured by the same collateral, then separate entries should be maintained for each collateral excess and/or deficiency. This information would include thresholds and haircuts where applicable. 7. Institution's collateral excess or deficiency for all positions.

   This information would be based on the aggregate market value of the positions (after netting to the extent permitted under all applicable agreements) and the aggregate market value of all collateral posted by the institution against the positions, in whole or in part.

   2. Data files and contract information required under Section B:

   Section B of Appendix A requires that other data files be maintained in either written or electronic format for QFCs and upon a written request by the FDIC, be produced immediately at the close of processing of the institution's business day, for the period provided in that written request. Each institution must maintain lists of: Counterparty identifiers with the associated counterparty and contact information; affiliates of the counterparties that are also counterparties to QFC transactions; affiliates of the institution that are counterparties to

   QFC transactions, specifically indicating which affiliates are direct or indirect subsidiaries of the institution; and portfolio location identifiers with the associated booking locations.

   For each QFC, the institution must maintain copies in a central location or data base in the United States of certain agreements, including active master netting agreements, and other QFC agreements between the institution and its counterparties that govern the QFC; active or ``open'' confirmations, if the position has been confirmed; credit support documents; and assignment documents, if applicable. The institution also must maintain a legal entity organizational chart; an organizational chart of all personnel involved in QFC-related activities at the institution, parent and affiliates; and a list of vendors supporting the QFC-related activities.

6. Regulatory Flexibility Act

   The Regulatory Flexibility Act (RFA) \26\ requires an agency publishing a final rule to prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of the final rule on small entities. Under regulations issued by the Small Business Administration,\27\ a ``small entity'' includes a bank holding company, commercial bank, or savings association with assets of $165 million or less (collectively, small banking organizations). The RFA provides that an agency is not required to prepare and publish a regulatory flexibility analysis if the agency certifies that the final rule would not have a significant economic impact on a substantial number of small entities.

   \26\ 5 U.S.C. 603(a).

   \27\ 13 CFR 121.201.

   Under section 605(b) of the Regulatory Flexibility Act,\28\ the

   FDIC certifies that the final rule would not have a significant economic impact on a substantial number of small entities. The final rule consists of requirements for institutions that have been determined to be in a troubled condition, as defined in the rule. These requirements include the maintenance of certain information regarding the institution's QFCs that it would be able to produce on short notice by the appropriate Federal banking agency or the FDIC. The rule would not have a significant economic impact on a substantial number of small entities for four reasons. First, QFCs are generally sophisticated financial instruments that are usually used by larger financial institutions to hedge assets, provide funding, or increase income.

   Because of the nature of the capital markets in which QFCs are used, smaller entities generally do not participate in such markets. Second, the number of small entities affected is further limited due to the proposed rule only being applicable to institutions that are determined to be in a troubled condition under the definition in the rule. Third, the impact on small entities that do use QFCs and are in a troubled condition further is limited by the fact that the information requested by the FDIC involves information that the institution already should have accessible if it is operated in a safe and sound manner. Fourth, the final rule minimizes recordkeeping burdens for community banks by allowing institutions in a troubled condition with less than twenty open QFC positions upon receipt of the written notification from the

   FDIC under part 371 and the Appendix, to record and maintain data required in Tables A1 and A2 in a written format instead of an electronic format so long as the data are capable of being updated on a daily basis.

   \28\ 5 U.S.C. 605(b).

7. Paperwork Reduction Act

   In accordance with the requirements of the Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501-3521, the FDIC may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of

   Management and Budget (OMB) control number. OMB has assigned the following control numbers to the recordkeeping and reporting requirements for QFCs: 3064-0163.

   In July 2008, the FDIC submitted the information collections contained in the proposed rule to OMB for review and approval. For purposes of the proposed rule, the FDIC estimated that the aggregate annual burden of complying with this rule to be 9,600 hours. This estimate assumed that 150 institutions would be subject to the requirements of the proposed rule and that such institutions would spend, on average, 24 hours annually complying with the proposed reporting requirements and 40 hours annually complying with the proposed records maintenance requirements. Factors considered in developing the burden estimate include the existing and historical average number of insured institutions with supervisory ratings of 3

   (for institutions with total consolidated assets of ten billion dollars or greater), 4, or 5; the volume of QFC activity in institutions that presently have supervisory ratings of 3 (where the asset threshold for an institution is met or exceeded), 4, or 5; the time necessary to complete other types of regulatory reports; the frequency with which the FDIC may require institutions to produce QFC information under this proposed rule; and the time necessary to update and

   Page 78170

   maintain QFC and related information as required in the proposed rule.

   The FDIC's PRA estimate for the final rule is derived from the product of the estimated number of institutions that would be subject to the final rule and the estimated hours per respondent necessary to meet the final rule's reporting and records maintenance requirements.

   The estimated number of institutions subject to the requirements of the final rule is 190, an increase of 40 since the publication of the proposed rule.

   The combined reporting and record maintenance burdens related to the final rule, consistent with estimates for the proposed rule, are estimated at 64 hours per respondent annually. This estimate consists of two components: A reporting component and a records systems maintenance component. It is estimated that reports as described in

   Table A and Section B of proposed Appendix A will require 2 hours on average to complete. This estimate is based on a number of considerations including the relatively small number of items requested, the time necessary to complete other regulatory reports, and the reported volume of QFC activity evident within the existing population of institutions that would be subject to the rule. The time necessary to produce such reports could be substantially more than 2 hours for larger institutions with greater QFC volumes.

   The FDIC may request the information required in Tables A1 and A2, and section B of Appendix A of the final rule relatively frequently or infrequently depending on such factors as the reported volume of an institution's QFC exposures, the number of QFC positions held by an institution (if known), and the near term failure prospects of an institution. For example, the FDIC would be more likely to request the information required to be maintained under this rule and Appendix A if the institution has a sizeable volume of reported QFC exposures

   (measured in carrying values or notational amounts as applicable) relative to that institution's assets or regulatory capital than an institution with a nominal volume of reported QFC exposures. Similarly, the FDIC likely would require more frequent reporting for institutions with low supervisory ratings. Based on the assumption that 12 reports would be required within a given year for such institutions, the total reporting component of the estimate would be 24 hours per respondent.

   It is further estimated that institutions subject to these requirements will spend, on average, an estimated 10 hours per quarter, or 40 hours annually updating and maintaining the records and information required by section B of proposed Appendix A. Again, larger institutions with greater QFC volumes would likely spend considerably more time updating and maintaining records pertaining to QFC activities. Combining the records maintenance and reporting component estimates results in an estimated annual burden of 64 hours per respondent.

   Section 371.1(c) of this final rule adds paperwork burden in the form of an application for an extension of time to comply with the requirements of the rule for institutions electing to make such a request. The FDIC estimates that approximately 20 institutions will file such applications and that the average time for preparing each request will be approximately 30 minutes.

   In accordance with the requirements of the PRA, the FDIC has submitted a request to OMB for approval of its revised burden estimates. The revised burden for the collection of information is as follows:

   Estimated Number of Respondents: 190 (recordkeeping/reporting); 20

   (application).

   Estimated Time per Response: 64 hours annually per respondent (24 hours--reporting; 40 hours--recordkeeping); 30 minutes (application).

   Estimated Total Annual Burden: 12,160 hours (recordkeeping/ reporting); 10 hours (application).

   Total Annual Burden: 12,170 hours.

   The FDIC has an ongoing interest in public comments on its burden estimates. Any such comments should be sent to the Paperwork Reduction

   Act Officer, FDIC Legal Division, 550 17th Street, NW., Washington, DC 20503. Written comments should address the accuracy of the burden estimates and ways to minimize burden, including the use of automated collection techniques or the use of other forms of information technology, as well as other relevant aspects of the information collection request.

8. Small Business Regulatory Enforcement Fairness Act

   The Office of Management and Budget has determined that the final rule is not a ``major rule'' within the meaning of the relevant sections of the Small Business Regulatory Enforcement Act of 1996,

   Public Law No. 110-28 (1996). As required by law, the FDIC will file the appropriate reports with Congress and the General Accounting Office so that the final rule may be reviewed.

   List of Subjects 12 CFR Part 371

   Administrative practice and procedure, Bank deposit insurance,

   Banking, Banks, Reporting and recordkeeping requirements, Savings associations, Securities, State non-member banks. 0

   For the reasons stated in the preamble, the Federal Deposit Insurance

   Corporation amends Title 12, Chapter III, Subchapter B as set forth below: 0 1. Add new part 371 to read as follows:

   PART 371--RECORDKEEPING REQUIREMENTS FOR QUALIFIED FINANCIAL

   CONTRACTS

   Sec. 371.1 Scope, purpose and applicability. 371.2 Definitions. 371.3 Form, availability and maintenance of records. 371.4 Content of records. 371.5 Enforcement actions.

   Appendix A to Part 371--File Structure for Qualified Financial

   Contract Records

   Authority: 12 U.S.C. 1819(a)(Tenth); 1820(g); 1821(e)(8)(D) and

   (H); 1831g; 1831i, and 1831s.

   Sec. 371.1 Scope, purpose, and applicability.

   (

   1. Scope. This part applies to insured depository institutions that are in a troubled condition as defined in Sec. 371.2(f).

      (b) Purpose. This part establishes recordkeeping requirements with respect to qualified financial contracts for insured depository institutions that are in a troubled condition.

      (c) Applicability. An insured depository institution shall comply with this part within 60 days after written notification by the institution's appropriate Federal banking agency or the FDIC that it is in a troubled condition under Sec. 371.2(f). The FDIC may, at its discretion, grant one or more extensions of time for compliance with this part. No single extension shall be for a period of more than 30 days. An insured depository institution may request an extension of time by submitting a written request to the FDIC at least 15 days prior to the deadline for its compliance with the requirements of this part.

      The written request for an extension must contain a statement of the reasons why the institution cannot comply by the deadline for compliance.

      Sec. 371.2 Definitions.

      For purposes of this part:

      (

   1. Affiliate means any company that controls, is controlled by, or is under common control with another company.

      Page 78171

      (b) Appropriate Federal banking agency means the agency or agencies designated under 12 U.S.C. 1813(q).

      (c) Insured depository institution means any bank or savings association, as defined in 12 U.S.C. 1813, the deposits of which are insured by the FDIC.

      (d) Position means the rights and obligations of a person or entity as a party to an individual transaction under a QFC.

      (e) Qualified financial contracts (QFCs) mean those qualified financial contracts that are defined in 12 U.S.C. 1821(e)(8)(D) to include securities contracts, commodity contracts, forward contracts, repurchase agreements, and swap agreements and any other contract determined by the FDIC to be a QFC as defined in that section.

      (f) Troubled condition means for purposes of this part, any insured depository institution that:

      (1) Has a composite rating, as determined by its appropriate

      Federal banking agency in its most recent report of examination, of 3

      (only for insured depository institutions with total consolidated assets of ten billion dollars or greater), 4, or 5 under the Uniform

      Financial Institution Rating System, or in the case of an insured branch of a foreign bank, an equivalent rating;

      (2) Is subject to a proceeding initiated by the FDIC for termination or suspension of deposit insurance;

      (3) Is subject to a cease-and-desist order or written agreement issued by the appropriate Federal banking agency, as defined in 12

      U.S.C. 1813(q), that requires action to improve the financial condition of the insured depository institution or is subject to a proceeding initiated by the appropriate Federal banking agency which contemplates the issuance of an order that requires action to improve the financial condition of the insured depository institution, unless otherwise informed in writing by the appropriate Federal banking agency;

      (4) Is informed in writing by the insured depository institution's appropriate Federal banking agency that it is in troubled condition for purposes of 12 U.S.C. 1831i on the basis of the institution's most recent report of condition or report of examination, or other information available to the institution's appropriate Federal banking agency; or

      (5) Is determined by the appropriate Federal banking agency or the

      FDIC in consultation with the appropriate Federal banking agency to be experiencing a significant deterioration of capital or significant funding difficulties or liquidity stress, notwithstanding the composite rating of the institution by its appropriate Federal banking agency in its most recent report of examination.

      Sec. 371.3 Form, availability and maintenance of records.

      (

   1. Form and availability. The records required to be maintained by an insured depository institution for QFCs under this part--

      (1) Except for records that must be maintained through electronic files under Appendix A of this part, may be maintained in any form, including in an electronic file, provided that the records are updated at least daily;

      (2) If the records are not maintained in written form, will be capable of being reproduced or printed in written form; and

      (3) Will be made available upon written request by the FDIC immediately at the close of processing of the institution's business day, for a period provided in that written request.

      (b) Maintenance of records after the institution is no longer in a troubled condition. Insured depository institutions that are in a troubled condition as defined in Sec. 371.2(f) shall continue to maintain the capacity to produce records required under this part on a daily basis for a period of one year after the date that the appropriate Federal banking agency notifies the institution that it is no longer in a troubled condition as defined in Sec. 371.2(f).

      (c) Maintenance of records after an acquisition of an institution that is in a troubled condition. If an insured depository institution that has been determined by the appropriate Federal banking agency to be in a troubled condition ceases to exist as an insured depository institution as a result of a merger or a similar transaction into an insured depository institution that is not in a troubled condition immediately following the acquisition, the obligation to maintain records under this part on a daily basis will terminate when the institution in a troubled condition ceases to exist as a separately insured depository institution.

      Sec. 371.4 Content of records.

      For each QFC for which an insured depository institution is a party or is subject to a master netting agreement involving the QFC, that institution must maintain records as listed under Appendix A of this part.

      Sec. 371.5 Enforcement actions.

      Violating the terms or requirements of the recordkeeping requirements set forth in this part constitutes a violation of a regulation and subjects the participating entity to enforcement actions under Section 8 of the FDI Act (12 U.S.C. 1818).

      Appendix A to Part 371--File Structure for Qualified Financial Contract

      (QFC) Records

      QFC Recordkeeping Requirements

      1. Electronic Files To Be Maintained for QFCs

         Any insured depository institution that is subject to this part

         (``institution'') must produce and maintain, in an electronic file in a format acceptable to the FDIC, the position level data found in

         Table A1 for all open positions in QFCs entered into by that institution or for which the institution is subject. To fulfill this requirement, not later than three business days after the institution's receipt of the written notification from the FDIC under Sec. 371.1(c) of this part, the institution must provide the

         FDIC with (i) a directory of the electronic files that will be used by the institution to maintain the position level data found in

         Table A1 and (ii) a point of contact at the institution should the

         FDIC have follow-up questions concerning this information. In addition, for such data, the institution must produce at the close of processing of the institution's business day a report in a format acceptable to the FDIC that aggregates the current market value and the amount of QFCs by each of the fields in Table A1. The institution must produce the report within 60 days of a written notification by the FDIC for the period specified in the notification. Notwithstanding the above requirements, for institutions in a troubled condition with less than twenty open QFC positions upon receipt of the written notification from the FDIC or the institution's appropriate Federal banking agency under part 371 and this Appendix, the data required in Table A1 are not required to be recorded and maintained in electronic form as would otherwise be required by this part, so long as all required information is capable of being updated on a daily basis. If at any time after receiving such notification an institution has twenty or more open

         QFC positions at any point in time, it must within 60 days after that first occurs, comply with all provisions of part 371.

         Page 78172

         Table A1--Position-Level Data

         Field

         Example

         Data application

         Unique position identifier and 999999999AU...... Information needed to

         CUSIP, if available.

         readily track and distinguish positions; unique trade confirmation number if available.

         Portfolio location identifier XY12Z............ Information needed to

         (to identify the headquarters

         determine the or branch where the position

         headquarters or is booked).

         branch where the position is booked

         (see section B.1 of this Appendix).

         Type of position (including

         Interest rate

         Information needed to the general nature of the

         swap, credit

         determine the extent reference asset or interest

         default swap,

         to which the rate).

         equity swap,

         institution is foreign exchange involved in any forward,

         particular QFC securities

         market. repurchase agreement, loan repurchase agreement.

         Purpose of the position (if

         Trading, hedging Information needed to the purpose consists of

         mortgage

         determine the role hedging strategies, include

         servicing,

         of the QFC in the the general category of the

         hedging

         institution's item(s) hedged).

         certificates of business strategy. deposit.

         Termination date (date the

         3/31/2010........ Information needed to position terminates or is

         determine when the expected to terminate,

         institution's rights expire, mature, or when final

         and obligations performance is required).

         regarding the position are expected to end.

         Next call, put, or

         9/30/08.......... Information needed to cancellation date.

         determine when a call, put, or cancellation may occur with respect to a position.

         Next payment date............. 9/30/08.......... Information needed to anticipate potential upcoming obligations.

         Current market value of the

         $995,000......... Information needed to position (as of the date of

         determine if the the file).

         institution is in or out-of-the money with the counterparty.

         Unique counterparty identifier AB999C........... Information needed to aggregate positions by counterparty.

         Notional or principal amount

         $1,000,000....... Information needed to of the position (this is the

         help evaluate the notional amount, where

         position. applicable).

         Documentation status of

         Affirmed,

         Information needed to position.

         confirmed, or

         determine neither affirmed reliability of a nor confirmed.

         booked position and its legal status.

         Also, the institution must maintain, in an electronic file in a format acceptable to the FDIC, the counterparty-level data found in

         Table A2 for all open positions in QFCs entered into by that institution. In addition, the institution must, at the FDIC's written request, produce immediately at the close of processing of the institution's business day, for a period provided in that written request, a report in a format acceptable to the FDIC that

         (i) itemizes, by each counterparty and by each of its affiliates, the data required in each field in Table A2, and (ii) aggregates by field, for each counterparty and its affiliates, the data required in each field in Table A2. Notwithstanding the above requirements, for institutions in a troubled condition with less than twenty open

         QFC positions upon receipt of the written notification from the FDIC or the institution's appropriate Federal banking agency under part 371 and this Appendix, the data required in Table A2 is not required to be recorded in electronic form as would otherwise be required by this part, so long as all required information is maintained and is capable of being updated on a daily basis. If at any time after receiving such notification an institution has twenty or more open

         QFC positions at any point in time, it must within 60 days after that first occurs, comply with all provisions of part 371.

         Table A2--Counterparty-Level Data

         Field

         Example

         Data Application

         Unique counterparty identifier AB999C........... Information needed to aggregate positions by counterparty.

         Current market value of all

         ($1,000,000)..... Information needed to positions, as aggregated and,

         help evaluate the to the extent permitted under

         positions. each applicable agreement, netted \29\ (as of the date of the file).

         Current market value of all

         $950,000; U.S.

         Information needed to collateral and the type of

         treasuries.

         determine the extent collateral, if any, that the

         to which the institution has posted

         institution has against all positions with

         provided collateral. each counterparty.

         Current market value of all

         $50,000; U.S.

         Information needed to collateral and the type of

         treasuries.

         determine the extent collateral, if any, that the

         to which the counterparty has posted

         counterparty has against all positions.

         provided collateral.

         Institution's collateral

         ($25,000)........ Information needed to excess or deficiency with

         determine the extent respect to all of the

         to which the institution's positions, as

         institution has determined under each

         satisfied collateral applicable agreement

         requirements under including thresholds and

         each applicable haircuts where applicable\30\.

         agreement.

         Counterparty's collateral

         $50,000.......... Information needed to excess or deficiency with

         determine the extent respect to all of the

         to which the institution's positions with

         counterparty has each counterparty, as

         satisfied collateral determined under each

         requirements under applicable agreement

         each applicable including thresholds and

         agreement. haircuts where applicable.

         Page 78173

         The institution's collateral

         ($50,000)........ Information needed to excess or deficiency with

         determine the extent respect to all the positions,

         to which the based on the aggregate market

         institution's value of the positions (after

         obligations netting to the extent

         regarding the permitted under each

         positions may be applicable agreement) and the

         unsecured. aggregate market value of all collateral posted by the institution against the positions, in whole or in part.

         \29\ If one or more positions cannot be netted against others, they should be maintained as separate entries.

         \30\ If all positions are not secured by the same collateral, then separate entries should be maintained for each position or set of positions secured by the same collateral.

      2. Other Files (in Written or Electronic Form) To Be Maintained for

         QFCs

         Within 60 days after the written notification by the FDIC, the institution must, produce the following files at the close of processing of the institution's business day, for a period provided in that written notification. 1. Each institution must maintain the following files in written or electronic form:

         A list of counterparty identifiers, with the associated counterparties and contact information;

         A list of the affiliates of the counterparties that are also counterparties to QFC transactions with the institution or its affiliates, and the specific master netting agreements, if any, under which they are counterparties;

         A list of affiliates of the institution that are counterparties to QFC transactions where such transactions are subject to a master agreement that also governs QFC transactions entered into by the institution. Such list must specify (i) which affiliates are direct or indirect subsidiaries of the institution and (ii) the specific master agreements under which those affiliates are counterparties to QFC transactions; and

         A list of portfolio identifiers (see Table A1), with the associated booking locations. 2. For each QFC, the institution must maintain in a readily- accessible format all of the following documents:

         Agreements (including master agreements and annexes, supplements or other modifications with respect to the agreements) between the institution and its counterparties that govern the QFC transactions;

         Documents related to and affirming the position;

         Active or ``open'' confirmations, if the position has been confirmed;

         Credit support documents; and

         Assignment documents, if applicable, including documents that confirm that all required consents, approvals, or other conditions precedent for such assignment(s) have been obtained or satisfied. 3. The institution must maintain:

         A legal-entity organizational chart, showing the institution, its corporate parent and all other affiliates, if any; and

         An organizational chart, including names and position titles, of all personnel significantly involved in QFC-related activities at the institution, its parent and its affiliates.

         Contact information for the primary contact person for purposes of compliance with this part by the institution. 4. The institution must maintain a list of vendors supporting the QFC-related activities and their contact information.

         Dated at Washington, DC, this 16th day of December 2008.

         By order of the Board of Directors, Federal Deposit Insurance

         Corporation.

         Robert E. Feldman,

         Executive Secretary.

         FR Doc. E8-30221 Filed 12-19-08; 8:45 am

         BILLING CODE 6714-01-P