Final rule limits scope of QFCs to counter ‘threat to financial stability’

Moving to hinder any “threat to financial stability in times of market stress,” the Federal Deposit Insurance Corp. (FDIC) Board Wednesday adopted a rule on qualified financial contracts (QFCs) to ensure that the compacts do not allow for immediate cancellation or termination, under certain circumstances.

The final rule also amends the definitions of “qualifying master netting agreement” and related terms in the FDIC’s capital and liquidity rules to account for the final rule.

“QFCs include derivatives, securities lending, and short-term funding transactions, such as repurchase agreements,” the deposit insurer said in a release. “These transactions can pose a threat to financial stability in times of market stress.”

The final rule adopted by the board requires that QFCs of covered FDIC-supervised institutions, including those with foreign counterparties, clarify that they are subject to temporary stays under U.S. resolution regimes. “In addition, QFCs of covered FDIC-supervised institutions are prohibited from allowing the exercise of default rights against, or imposing transfer restrictions on, the covered FDIC-supervised institution based on the entry of an affiliate of the covered FDIC-supervised institution into bankruptcy,” the agency said.

The FDIC issued a proposed rule on this issue last year; the agency said the final reflects changes made to the proposal in response to comments it received.

Requirements of this final rule are substantively identical to those contained in the final rule recently adopted by the Federal Reserve Board

Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions

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