The Dodd-Frank Regulations and QFCs

As you are aware, the Dodd-Frank Act requires financial institutions (including bank holding companies, intermediate holding companies and non-bank affiliates) to submit certain reports describing their swaps, repo and reverse repo transactions, commodity contracts and forward agreements. This regulation, called QFC, is intended to provide the FDIC with the most current information possible when executing its Orderly Liquidation Authority in the event that a large U.S. financial institution is deemed too big to fail. This will require a lot of work, especially for those entities that have significant trading activities in these areas.

To meet the regulatory requirements, a firm will need to identify all QFCs it has entered into and ensure that they are amended in a timely manner. In addition, firms will need to develop processes and systems for the collection of QFC data and compliance reporting. Finally, many trading counterparties may need to sign bilateral amendments to the QFC rules.

A “QFC” is any financial contract that meets the definition of a qualified financial contract in the Dodd-Frank Act. The term is broadly defined and includes any securities contract, commodity contract, forward contract, repurchase agreement or swap agreement. It also includes credit enhancements, such as collateral support annexes, guarantees or reimbursement obligations, related to contracts meeting the definition of a QFC.

QFCs that contain default rights or transfer restrictions are in-scope QFCs under the new rules. The rules allow the FDIC to transfer a QFC to another solvent financial institution, including foreign counterparties, notwithstanding any contractual restrictions on transfer in the original QFC.

The new rules require covered entities to conform all of their in-scope QFCs to the new provisions by Jan. 1, 2019. Covered entities include U.S. top-tier bank holding companies identified by the Federal Reserve as global systemically important banking organizations (GSIBs), U.S. subsidiaries of foreign GSIBs and certain other U.S. and foreign banks considered to be highly systemically important by their supervisory authorities.

To assist with the conformation process, ISDA has published separate forms of bilateral amendments based on whether you are a GSIB or not. These amendments are designed to amend all in-scope QFCs that are in place as of the date of the bilateral agreement. However, it is critical that you seek advice about your status as a GSIB and the availability of any exemptions before adhering to these amendments. It is equally important to understand the impact of the amendments on the default rights, transfer restrictions and creditor protections in your trading relationships. QFC

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