US Agencies Announce Rules to Reflect ISDA Protocol in Regulatory Capital and Liquidity Coverage Ratio Rules

The Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency today issued an interim final rule to ensure that the treatment of over-the-counter (OTC) derivatives, eligible margin loans, and repo-style transactions under the two agencies’ regulatory capital and liquidity coverage ratio rules would be unaffected by the implementation of certain foreign special resolution regimes for financial companies or by a banking organization’s adherence to the International Swaps and Derivatives Association’s Resolution Stay Protocol. In addition, the interim final rule ensures that the lending limits of affected national banks and Federal savings association would be unchanged.

The regulatory capital and liquidity coverage ratio rules for banking organizations recognize netting or collateral agreements for OTC derivatives and certain securities financing transactions, so long as the banking organization may terminate positions upon an event of default of the counterparty. The rules provide that the transactions may receive this treatment even though certain U.S. laws, including Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act, may temporarily stay the termination rights. The interim final rule ensures that these transactions may continue to qualify for the current treatment under the two agencies’ capital and liquidity rules if the transactions become subject to potential stays under foreign special resolution regimes similar to those of the United States or under contractual provisions that incorporate stays of special resolution regimes.

The interim final rule, which applies to banking organizations other than state nonmember banks, will be effective as of January 1, 2015.

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