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