2017 Annual Report

C. IMPLEMENTATION OF KEY REGULATIONS

During 2017, the FDIC undertook a number of initiatives to implement regulations or clarify supervisory expectations.

Swap Margin Guidance

In February 2017, the FDIC, the Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC) issued a joint release explaining how supervisors should examine for compliance with the swap margin rule, which requires the prudent posting of collateral for swaps that are not cleared through a clearinghouse. The guidance explains that swap entities covered by the rule were expected to prioritize their compliance efforts surrounding the March 1, 2017 variation margin deadline according to the size and risk of their counterparties. Furthermore, the guidance clarifies that swap entities’ compliance with counterparties that present significant credit and market risk exposures is expected to be in place on the due date, as laid out in the final rule. For other counterparties that do not present significant credit and market risks, swap entities were expected to make good faith efforts to comply with the final rule in a timely manner, but not later than September 1, 2017. At this time, a number of FDIC-supervised institutions are affected by the rule in their capacity as swaps counterparties, but none are “covered swaps entities” as defined by the rule.

Qualified Financial Contracts

Recordkeeping

In July 2017, the FDIC approved a final rule amending its regulations regarding Recordkeeping Requirements for Qualified Financial Contracts (QFCs). The final rule enhances and updates recordkeeping requirements relating to the QFCs of insured depository institutions (IDIs) in a troubled condition. Among other things, the final rule ensures that the FDIC has access to expanded QFC data to facilitate the orderly resolution of IDIs with more complex QFC portfolios. The changes to both the formatting and the quantity of information will enable the FDIC, as receiver, to make better informed and efficient decisions during the one business day stay period for the transfer of QFCs. The effective date of the final rule is October 1, 2017.

Restrictions on Certain FDIC-Supervised Institutions

During 2017, the FDIC, FRB, and OCC coordinated on the issuance of rules applying to QFCs of systemically important U.S. banking organizations and systemically important foreign banking organizations in order to improve their resolvability and protect the financial stability of the United States. Together the agencies’ final rules promote orderly resolution by preventing large-scale early terminations of derivatives portfolios of an institution in resolution. Early terminations of QFCs, as illustrated by the failure of Lehman Brothers in September 2008, contribute to financial instability by promoting fire sales of assets and spreading contagion within the financial system.

In October 2017, the FDIC approved its final rule, which also enhances the resilience and the safety and soundness of certain state savings associations and state-chartered nonmember banks for which the FDIC is the primary federal regulator (FDIC- Supervised Institutions). This final rule requires FDIC supervised institutions that are affiliated with a systemically important financial institution (SIFI) to ensure that covered QFCs to which they are a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Federal Deposit Insurance (FDI) Act. In addition, SIFIs are generally prohibited from being party to QFCs that would allow a QFC counterparty to exercise default rights against the SIFI based on the entry into a resolution proceeding under the FDI Act or any other resolution proceeding of an affiliate of the SIFI. The final rule also amends the definition of ‘‘qualifying master netting agreement’’ in the FDIC’s capital and liquidity rules and certain related terms in the FDIC’s capital rules. These amendments are intended to ensure that the regulatory capital and liquidity treatment of QFCs to which a SIFI is party would not be affected by the implementation of the rule.

Guidelines for Appeals of Material Supervisory Determinations

In July 2017, the FDIC adopted revised Guidelines for Appeals of Material Supervisory Determinations. The revised guidelines expand the circumstances under which banks may appeal a material supervisory determination and improves the consistency of the appeals processes among the FDIC, FRB, and OCC. Specifically, the revised guidelines:

• Permit the appeal of the level of compliance with an existing formal enforcement action, the initiation of an informal enforcement action, and matters requiring board attention;
• Specify that formal enforcement-related actions or decisions do not affect a pending appeal, and expand the opportunities for appeal available in certain circumstances; and
• Require annual reports of Division Directors’ decisions with respect to material supervisory determinations.

In September 2017, the FDIC issued financial institution letter (FIL) 42-2017 to distribute the revised guidelines to the industry.

Current Expected Credit Losses Accounting Standard Frequently Asked Questions

In September 2017, the FDIC, FRB, OCC, and National Credit Union Administration (NCUA) issued a second set of frequently asked questions (FAQs) on the application of the Financial Accounting Standards Board’s new accounting standard on credit losses and related supervisory expectations. This accounting standard, which will apply to all institutions, introduces the current expected credit losses (CECL) methodology for estimating credit loss allowances on loans and certain other exposures. The second set of FAQs address a variety of technical issues and questions related to the implementation of the new accounting standard. The second set of FAQs was combined with those issued in December 2016 to form a single self-contained document to assist institutions and examiners.

Securities Transaction Settlement Cycle

In September 2017, the FDIC and OCC jointly issued a Notice of Proposed Rulemaking (NPR) titled Securities Transaction Settlement Cycle that was published in the Federal Register for a 30-day comment period, with comments due October 11, 2017. The NPR would shorten the standard settlement cycle from three to two days for securities purchased or sold by FDIC-supervised institutions, national banks, and federal savings associations, thereby aligning the FDIC’s and OCC’s regulations with the new industry standard settlement cycle as implemented by the U.S. Securities and Exchange Commission (SEC). The three-day settlement cycle is referred to as the “trade date plus three days”, or “T+3”, and is the current standard for the U.S. securities industry. The NPR is part of an industry-wide shift to a T+2 days settlement cycle. For many FDIC-supervised institutions, the majority of the changes needed to implement T+2 will be completed by third-party industry custodians, systems and service providers, and broker-dealers through which institutions trade for themselves or on behalf of their fiduciary.

Net Stable Funding Ratio

During the financial crisis, a number of large banking organizations failed, or experienced serious difficulties, in part because of severe liquidity problems. In May 2016, the FDIC and other banking agencies proposed a rule that would reduce the vulnerability of large banking organizations to liquidity risk. The Net Stable Funding Ratio (NSFR) Rule would require certain large banks to maintain sufficient levels of stable funding, including capital, long-term debt, and other stable sources over a one-year window, to account for the liquidity risks arising from their assets, derivatives, and off-balance sheet activities. Comments received and reviewed about the proposed NSFR rule concerned the stable funding requirements for assets, liabilities and off-balance sheet exposures, as well as the estimated costs and benefits and the empirical foundation and underpinnings supporting the proposal. The federal banking agencies are reviewing these comments and considering how to proceed with the proposed rule.