United States: Final Rule Issued On Qualified Financial Contracts: What You Need To Know


On September 1 2017 the Board of Governors of the Federal Reserve System adopted a final rule requiring US global systemically important banking institutions (GSIBs), their subsidiaries and the US operations of foreign GSIBs (covered entities) to amend many of their qualified financial contracts (QFCs) in order to restrict their counterparties' ability to immediately terminate such contracts in the event that the covered entity or an affiliate enters into bankruptcy or resolution proceedings. The final rule was first proposed in May 20161 and is intended to prevent the destabilising contagion effects of the failure of a large, interconnected financial institution (eg, Lehman Brothers). Similar requirements have been implemented, or are being implemented, in other jurisdictions. It is expected that other US banking regulators (including the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC)) will adopt substantially similar rules for GSIB subsidiaries under their jurisdictions.

The final rule contains two key provisions. First, each covered entity must amend its QFCs in order to add certain restrictions on the close out of such QFCs to be consistent with the stay and transfer provisions of the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These provisions are intended to mitigate the threat posed by QFC default rights, but allow appropriate protections for QFC counterparties of the failed entity. Second, the QFCs of covered entities and their affiliates are generally prohibited from containing a crossdefault based on an insolvency or resolution of an affiliate.

Covered entities

The covered entities under the final rule are as follows:

  •  US GSIBs,2 as identified by the Federal Reserve pursuant to Section 165 of the Dodd-Frank Act, are covered.
  •  Certain subsidiaries of a US GSIB, which generally includes any 'subsidiary' (as defined in the Bank Holding Company (BHC) Act) that is not a national bank, federal savings association, federal branch, federal agency, state savings association or state non-member bank (excluded banks). These entities are excluded from the final rule because the FDIC and the OCC have jurisdiction over them. In addition, this category of covered entity excludes certain other types of subsidiary, such as debt previously contracted (DPC) subsidiaries, merchant banking portfolio companies and portfolio companies held under Section 4(k)(4)(I) of the BHC Act, and certain public welfare investments.
  •  Almost all US operations of a foreign GSIB, which generally includes US subsidiaries, US branches and US agencies of a foreign GSIB. For this purpose, a foreign GSIB includes:
    •  any foreign banking organisation that the Federal Reserve determines has the characteristics of a GSIB under the methodology adopted by the Basel Committee on Banking Supervision; or
    •  a foreign banking organisation or intermediate holding company required to be formed under the Federal Reserve's Regulation YY (IHC) that would be a GSIB if the organisation were subject to the Federal Reserve's GSIB surcharge rule.3

Subsidiaries of foreign GSIBs not held under an IHC per a Federal Reserve order are not exempt from the final rule. Not encompassed within the definition of 'US operations of a foreign GSIB' are national banks, federal savings associations, federal branches, federal agencies, state savings associations and state non-member banks, which are expected to be subject to substantially similar OCC or FDIC rules, and certain other types of subsidiary.

Covered QFCs

Covered QFCs subject to the final rule are generally co-extensive with the scope of such term under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act. 'Covered QFCs' is defined broadly to include, among other things, swaps, repurchase and reverse repurchase transactions, securities lending and borrowing transactions, commodity contracts, and forward agreements,4 as well as guarantees and security arrangements relating to the foregoing.

Scope of required amendments

The final rule requires that a covered entity conform its QFCs to provide expressly that if the covered entity becomes subject to a US special resolution regime (ie, the Federal Deposit Insurance Act or Title II of the Dodd-Frank Act):

  •  default rights may be exercised only by the counterparty to the extent permitted under the special resolution regime; and
  •  any transfer of the QFC from the covered entity will be effective to the extent it would be effective under the special resolution regime.

Amendments are not required if the QFC is governed by US law and the counterparty is a US person.

In addition, the final rule requires that the QFC not permit the exercise of any default right relating to the insolvency or resolution of an affiliate of the covered entity. The QFC also generally may not prohibit the transfer of any security or credit enhancement provided by the affiliate on the insolvency or resolution of the affiliate. Covered entities need not amend QFCs that have no transfer restrictions, direct default rights or cross-default rights.

The restrictions do not prohibit exercise of default rights where the relevant party has failed to perform a payment or delivery obligation. Certain other credit protection provisions may apply after the defined stay period.

In adopting the final rule, the Federal Reserve rejected requests to exempt QFCs involving physical commodities and QFCs with sovereign entities and central banks. The final rule has special provisions addressing foreign GSIB multi-branch master agreements permitting QFCs to be entered into by one or more US branches or agencies.5

The final rule exempts certain categories of QFC, including:

  •  QFCs that are centrally cleared (although the final rule would apply to the client-facing leg of a cleared transaction);
  •  QFCs where the only counterparty is a financial market utility;
  •  investment advisory contracts with retail advisory customers; and
  •  existing warrants providing the right to acquire a security of a covered entity or its subsidiary.

In addition, the final rule provides that the Federal Reserve may exempt one or more covered entities from conforming certain QFCs or types of QFC to the final rule after considering, among other factors that the Federal Reserve deems relevant, the relief of burden and the potential impact of the exemption on the resolvability of the covered entity or its affiliates.

Compliance with final rule and timing

Covered entities must amend their QFCs to comply with the final rule in accordance with the phase-in schedule detailed below.

As with other amendments required by US regulators, it is anticipated that covered entities will rely on industry protocols. Specifically, the final rule states that covered entities may comply with the final rule by adhering to the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol (the Universal Protocol). At present, the Universal Protocol covers ISDA Master Agreements and certain other master agreements, including the Global Master Repurchase Agreement, the Global Master Securities Lending Agreement, the Master Equity and Fixed Interest Stock Lending Agreement, the Master Gilt Edged Stock Lending Agreement, the Master Repurchase Agreement, the Master Securities Loan Agreement and the Overseas Securities Lender's Agreement.

In addition, the final rule outlines the requirements for a separate, US-specific protocol which may also be used to comply with the final rule.6 It is anticipated that ISDA will develop a version of the Resolution Stay Jurisdictional Modular Protocol (US JMP) that will meet the requirements of the final rule. For all other agreements not covered by the Universal Protocol or the US JMP, or for parties that do not wish to adhere to either protocol, the parties will have to seek bilateral amendments to such QFCs to ensure compliance with the final rule.

There will be a phased-in approach to comply with the final rule in order to facilitate its implementation. Covered entities must conform covered QFCs to the requirements of the final rule by:

  •  January 1 2019 for QFCs where each party is a either a covered entity or an excluded bank;
  •  June 1 2019 for QFCs where each party (other than the covered entity) is a financial counterparty7 that is not a covered entity or an excluded bank; and
  •  January 1 2020 for QFCs where each party (other than the covered entity) is a non-financial counterparty or a small financial institution.8


The final rule is largely consistent with the proposed rule. Although it is expected that covered entities (and their counterparties) will be able to comply in large part with the final rule through adherence to the Universal Protocol or the US JMP, the requirements may be burdensome for some parties. Market participants will also need to assess the extent to which the final rule will affect their potential rights and remedies in a default situation, as compared to existing documentation and law. The final rule is available here.


(1) More information on the proposed rule is available here.

(2) According to the Federal Reserve's GSIB surcharge rule's methodology, the existing US GSIBs are Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc, Goldman Sachs Group, Inc, JPMorgan Chase & Co, Morgan Stanley Inc, State Street Corporation and Wells Fargo & Company. This list is subject to change.

(3) A complete list of foreign GSIBs is available here.

(4) As defined in Section 210(c)(8)(D) of the Dodd-Frank Act.

(5) Foreign GSIB multi-branch master agreements will not be covered merely because payment or delivery is made at a US branch or agency; however, such agreements will be considered QFCs with respect to such agreements or transactions booked in US branches.

(6) See Section 252.85(a)(3)(ii)(A)-(F) of the final rule.

(7) The definition of 'financial counterparty' includes a wide range of regulated financial institutions, including banks, other lenders, broker-dealers, swap dealers, futures commission merchants, investment advisers, investment companies, commodity pool operators and commodity trading advisers, as well as private funds and similar entities. See Section 252.81 of the final rule. This definition does not include counterparties that are sovereign entities, multilateral development banks or The Bank for International Settlements.

(8) 'Small financial institution' is defined as a company that is either organised as a bank, a savings association or an insured federal credit union or state-chartered credit union with total assets of $10 billion or less on the last day of the company's most recent fiscal year. See section 252.81 of the final rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions