Notice2021-27733
Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 4, 2022
Issuing agencies
Treasury Department
Abstract
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").
Full Text
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<title>Federal Register, Volume 87 Issue 2 (Tuesday, January 4, 2022)</title>
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[Federal Register Volume 87, Number 2 (Tuesday, January 4, 2022)]
[Notices]
[Pages 271-274]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-27733]
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DEPARTMENT OF THE TREASURY
Qualified Financial Contracts Recordkeeping Related to Orderly
Liquidation Authority
AGENCY: Department of the Treasury.
ACTION: Notice 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 applicable January 4, 2022.
FOR FURTHER INFORMATION CONTACT: 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, 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\ 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\ The written request for an
exemption must: (i) Identify the records entity or records entities or
the types of records entities to which the exemption would apply; (ii)
specify the requirements from which the records entities would be
exempt; (iii) 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 (iv) 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.\3\
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\2\ 31 CFR 148.3(c)(3). The term ``records entity'' is defined
at 31 CFR 148.2(n).
\3\ 12 U.S.C. 5390(c)(8), (9), and (10).
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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, that takes into consideration each of the factors referenced
in section 210(c)(8)(H)(iv) of the Act \4\ and any other factors the
FDIC considers appropriate, 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.\5\ 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.
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\4\ Id. Sec. 5390(c)(8)(H)(iv).
\5\ 31 CFR 148.3(c)(4)(i).
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Request for Exemption
On January 7, 2020, RBC US Group Holdings LLC (``RIHC'') submitted,
on behalf of its subsidiary City National Securities Inc. (``CNS''), a
request for an exemption from the rule to the Treasury, the FDIC, and,
as the primary financial regulatory agency for CNS, the Securities and
Exchange Commission
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(``SEC''), which RIHC supplemented with information provided on March
18, 2020.\6\ RIHC requested an exemption for CNS from compliance with
sections 148.3 and 148.4 of the rule for the current and any future QFC
portfolio of CNS. Such an exemption would in effect cover all QFCs that
CNS may enter into, without any limitation as to the type of QFC, the
nature of the counterparty, or any other factor. The request stated
that CNS's current and anticipated future QFC portfolio consists
predominantly of client activity QFCs, meaning cash market transactions
CNS enters into on behalf of its retail customers and that are executed
on standardized terms. Without an exemption, RIHC stated that CNS's
cost of recordkeeping would impose an undue burden relative to the
characteristics of its QFC portfolio, and submitted that, in the event
the FDIC was appointed receiver of CNS under Title II of the Act, the
records that CNS already maintains under current law and regulatory
requirements should be sufficient to permit the FDIC to exercise its
rights and fulfill its statutory obligations pursuant to its resolution
authority under the Act. Further, RIHC stated that all of CNS's clients
are ``customers'' as defined under the Securities Investor Protection
Act of 1970 (``SIPA''). As such, RIHC stated that granting the
requested exemption would not impair or impede the FDIC from exercising
its rights or fulfilling its responsibilities under the Act and would
be consistent with exemptions Treasury previously granted with respect
to Morgan Stanley Smith Barney LLC (``MSSB'') \7\ as well as with
respect to Wells Fargo Clearing Services, LLC (``WFCS'') and Wells
Fargo Advisors Financial Network, LLC (``FiNet,'' and together with
WFCS, ``WFCS-FiNet'').\8\
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\6\ RIHC is a U.S. intermediate holding company subsidiary of
Royal Bank of Canada, and is a records entity under the rule. CNS 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.
\7\ See 83 FR 66618 (Dec. 27, 2018).
\8\ See 85 FR 1 (Jan. 2, 2020).
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In support of its request, RIHC submitted information pertaining to
the QFCs to which CNS is a party. RIHC represented that CNS's QFC
portfolio is relatively small, poses low risk, has little complexity,
has low trading frequency, has no leverage, and entails limited
interconnectedness with the financial system. The request stated that
CNS's QFC portfolio consists primarily of three types of QFCs to which
it is a party, each of which is analogous to a type of QFC covered by
the previous exemptions with respect to MSSB and WFCS-FiNet.
Specifically, CNS primarily engages in client brokerage agreements,
cash market QFCs governed by the client brokerage agreements and
entered into on behalf of retail customers, and a master clearing
agreement with CNS's clearing firm, an unaffiliated broker-dealer. RIHC
represented that the cash market QFCs offered by CNS are limited to
standard cash products, including common and preferred stocks,
municipal, corporate, and agency bonds, U.S. Treasuries, commercial
paper, structured notes, brokered certificates of deposit, mutual
funds, and options. The request stated that CNS does not offer as part
of its brokerage investment options or otherwise make available to its
brokerage clients the types of QFCs that would exclude its clients from
meeting the SIPA definition of ``customer,'' namely, currency
contracts, commodity or related contracts, futures contracts, or any
warrants or rights to purchase or subscribe to such contracts. Similar
to MSSB and WFCS-FiNet, CNS is not registered with the Commodity
Futures Trading Commission (``CFTC'') as a swap dealer or futures
commission merchant, thus restricting its ability to transact in
certain types of QFCs. Finally, RIHC represented that CNS's
interconnectedness to the rest of the financial system is limited based
on its relatively small size and, like MSSB and WFCS-FiNet, its focus
on non-institutional clients.
Evaluation of the Exemption Request
In evaluating the exemption request, Treasury considered the
representations made by RIHC with respect to CNS's QFC portfolio in
terms of its size, risk, and complexity; trading frequency and
leverage; and interconnectedness to the financial system. Treasury also
considered RIHC's statement that granting an exemption to CNS from the
recordkeeping requirements of the rule would not impair or impede the
ability of the FDIC to exercise its rights or fulfill its statutory
obligations under Title II of the Act. RIHC's views in this regard
centered on its representation that all of CNS's clients are
``customers'' as that term is defined under SIPA, and an assertion of
how such customers and their QFCs would be handled by the FDIC in the
event of a Title II resolution of CNS.
As discussed more fully in the preamble to the final rule,\9\ as
well as in the determinations of exemption Treasury provided to MSSB
and WFCS-FiNet, 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,\10\
unless certain conditions are met,\11\ 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\ Treasury further
discussed that the requirements of section 210(a)(1)(O) of the Act in
combination with the ``all or none rule'' \13\ mean that, if the FDIC
were to transfer a customer account that held QFCs between a covered
broker-dealer and its 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. In the case of either (i) or (ii),
the transfer would include, due to the all or none rule, any QFCs of
the type that would not make the client a customer under SIPA, such as
an FX spot agreement.
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\9\ See 81 FR at 75624-25.
\10\ 12 U.S.C. 5390(a)(1)(O).
\11\ Section 210(a)(1)(O)(i) of the Act stipulates 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. If neither such condition
is met, the FDIC must transfer to a bridge financial company any
QFCs entered into by the broker-dealer with its clients who are
customers under SIPA.
\12\ 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\ Under the ``all or none rule'' of the Act, if the FDIC
determines to transfer, disaffirm or repudiate any QFC with a
particular counterparty, it must transfer, disaffirm or repudiate
(i) all QFCs between the covered financial company and such
counterparty and (ii) all QFCs between the covered financial company
and any affiliate of such counterparty. See, 12 U.S.C. 5390(c)(9)(A)
and 5390(c)(11).
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However, RIHC stated that CNS does not engage in the types of QFCs
that would exclude its clients from the SIPA definition of customer.
RIHC stated that CNS offers its retail customers only standard cash
products as described above. Further, as CNS is not registered with the
CFTC as a swap dealer or futures commission merchant, its ability to
transact in certain types of QFCs is restricted. As represented by
RIHC, CNS's QFCs with its retail customers are
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of a small size, present little complexity and leverage, have low
trading frequency, and impose little risk.
Treasury received a final recommendation from the FDIC regarding
the exemption request, prepared in consultation with the SEC, and,
after consultation with the FDIC, Treasury is making the determinations
discussed below.\14\
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\14\ 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
governmental agencies. Exemptions to 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, process, and policy
considerations. References to the FDIC in this notice should not be
taken to imply that the FDIC has determined that similar exemptions
under Part 371 would be available.
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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 \15\ from a broker-dealer, the
limited nature of CNS's business, and the limited types of QFCs entered
into by CNS with its clients, Treasury has determined to grant CNS an
exemption from the recordkeeping requirements of the rule with respect
to any QFCs of CNS with clients that are customers \16\ of CNS under
SIPA with respect to any transactions or accounts they have with CNS,
subject to the terms and conditions stipulated below. Treasury does not
expect that granting this conditional exemption will unduly hinder the
FDIC as receiver in exercising its rights and fulfilling its
obligations under the Act or interfere with the FDIC's ability to avoid
or mitigate serious adverse effects on financial stability or economic
conditions in the United States. In CNS's case, 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.
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\15\ As used in the remainder of this notice of exemption, the
term ``QFC'' means a qualified financial contract as defined for
purposes of Title II of the Act. See, 12 U.S.C. 5390(c)(8)(D).
\16\ As used in the remainder of this notice 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 CNS.
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For the avoidance of doubt, Treasury is not granting the exemption
request as presented in the RIHC request letter. There, RIHC requested
an exemption for CNS from compliance with the rule for the current and
any future QFC portfolio of CNS; that is, RIHC did not limit the
exemption request only to QFCs with SIPA customers. If granted as
requested, such an exemption would allow CNS to avoid recordkeeping for
any and all QFCs that it may enter into now or in the future, without
any limitation as to the type of QFC, the nature of the counterparty,
or any other factor, including QFCs for its own account with
counterparties who may be other broker-dealers or who may not otherwise
qualify as customers under SIPA. Treasury is granting a narrower,
limited and conditional exemption that applies only to QFCs with CNS
customers; except as described in the next paragraph, CNS's QFCs for
its own account or with non-customers, whether or not affiliated with
CNS, are not covered by this exemption and remain subject to the
recordkeeping requirements of the rule. Consistent with the
determinations of exemption Treasury provided to MSSB and WFCS-FiNet,
Treasury has determined not to provide an exemption with respect to
CNS's QFCs for its own account or with non-customers because the FDIC
would retain discretion as to whether to transfer or retain such QFCs
and because the size and risks of such QFCs at the time could be such
that the FDIC would need the records required by the rule to make a
transfer determination.
Treasury is also granting an exemption for any QFC entered into by
CNS as introducing broker with another broker-dealer as clearing broker
and that relates to the clearing of any exempted QFCs with CNS
customers as discussed above, subject to the terms and conditions
stipulated below, and provided that CNS maintains documentation of any
agreement between CNS and each such clearing broker. This exemption
would cover QFCs, such as a master clearing agreement, between CNS and
its clearing broker that relate to the clearing of any CNS customer
QFCs. For purposes of this exemption, the term ``clearing broker''
means an SEC-registered broker-dealer that is a member of the Financial
Industry Regulatory Authority (FINRA) and has authority to execute,
settle, and clear transactions and carry accounts on a fully disclosed
basis on behalf of CNS and CNS's customers pursuant to a master
clearing agreement or similar agreement. If the FDIC were to transfer
the customer QFCs to a bridge financial company or other financial
institution, it would presumably also transfer any master clearing
agreement or similar agreement entered into with a clearing broker that
facilitates the clearance or settlement of such customer QFCs.
Therefore, the records required by the rule regarding such QFCs with a
clearing broker should not be needed by the FDIC to address the
clearance of CNS's exempted customer QFCs.
Conditions of the Exemption
The exemption granted below is based on the factual representations
made by RIHC on behalf of CNS to Treasury, the FDIC, and the SEC, in
its submissions, including the factual representations regarding CNS's
registration as a broker-dealer and investment adviser, the limitations
on its business lines, the limitations on the types of clients it
serves and the types of products and services it offers its clients,
the frequency, size, and dollar amounts of QFCs with clients, the lack
of complexity of the QFCs it has with clients, the number of client
accounts it maintains, and the description of its activities as
introducing broker on behalf of its customers with its clearing
brokers.
Treasury reserves the right 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
SEC, would evaluate any material changes in the nature of CNS's
business 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 may request an updated submission
from CNS as to its business at that time. Treasury expects that it
would provide notice to CNS prior to any modification or rescission of
the exemption and that, in the event of a rescission or modification,
Treasury would grant CNS 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
CNS is hereby granted an exemption from the requirements of 31 CFR
148.3 and 148.4 for (i) any QFC entered into by CNS with or on behalf
of any customer of CNS that is booked and carried in accounts at CNS
maintained for the benefit of such customer; and (ii)
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any QFC entered into by CNS with a clearing broker that relates to the
clearing of any QFC referenced in clause (i), provided that CNS
maintains documentation of any agreement between CNS and each such
clearing broker. 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 CNS, and ``clearing
broker'' means an SEC-registered broker-dealer that is a member of
FINRA and has authority to execute, settle, and clear transactions and
carry accounts on a fully disclosed basis on behalf of CNS and CNS's
customers pursuant to a master clearing agreement or similar agreement.
This 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 CNS and to no other entities.
Nandini Ajmani,
Deputy Assistant Secretary for Capital Markets.
[FR Doc. 2021-27733 Filed 1-3-22; 8:45 am]
BILLING CODE 4810-AK-P
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