US FSOC Proposes Qualified Financial Contract Rules and Creates a New Challenge for Large Financial Companies that are not SIFIs

March 25, 2015

The Financial Stability Oversight Council (Council) proposed regulations (Rule) on January 7, 2015, which create a new challenge for all nonbank financial companies with assets of $50 billion or more. While the four companies that have actually been designated as systemically important financial institutions (SIFIs) by the Council have assets well in excess of $50 billion, the Rule suggests that financial companies with as little as $50 billion in assets could be placed in a Dodd-Frank Act (Act) Title II receivership under the FDIC, avoiding a federal bankruptcy court process. Under the Rule, such qualifying nonbank financial companies1 would have to comply with an extensive recordkeeping regime with respect to their qualified financial contracts (QFCs).

The proposed Rule is designed to complement those adopted by the FDIC under the Act – further laying the groundwork for the resolution/liquidation of large financial companies within an FDIC receivership regime.3 The Council is authorized to act, when other agencies fail to do so, to require specified financial companies to maintain certain QFC records to enable the FDIC to make prompt decisions as to whether to transfer, retain or repudiate QFCs by 5 p.m. of the business day following the FDIC’s appointment as receiver. 

Under the proposal, QFC recordkeeping would be required by a “records entity.” A records entity is an entity that is a financial company which is a party to an open QFC, or that guarantees, supports or is linked to an open QFC. It must also meet one of the following requirements: 

  • (i) it has been designated as a SIFI; 
  • (ii) it has been designated as a financial market utility that is systemically important; 
  • (iii) it has total assets of $50 billion or greater; or 
  • (iv) it is both: (a) a party to an open QFC, or guarantees, supports, or is linked to an open QFC of an affiliate; and (b) is a member of a corporate group within which at least one affiliate meets one of the requirements in clauses (i)-(iii). 

We suggest that companies which may be impacted by this rule participate in the rulemaking proceeding, if for no other reason than to ensure that all arguments, suggestions and questions are placed on the administrative record, so that those arguments may be preserved for any potential challenges, if and when the Rule is applied. The proposal includes 75 questions for comment, including a series regarding the scope of entities that would be treated as a “records entity.” 

Comments on the proposal must be submitted by April 7, 2015. 

For further information on this general topic, please refer to a presentation (PDF) Tom Vartanian prepared for a panel, Too Big to Fail, at the UNC School of Law’s Annual Banking Institute. Dechert also maintains a hot topic website devoted to monitoring developments related to the regulation of systemically significant companies. Please check back frequently for updates and thorough analysis from us. 


1) The Secretary of the Treasury may make specified findings – including that the company’s failure would have a serious adverse impact on financial stability in the United States – and designate a financial company as a “Covered Financial Company.” Such a designation allows the Secretary of the Treasury to appoint the FDIC as receiver for that company. A “financial company” is a company incorporated or organized under Federal or state law, that is: (i) a bank holding company; (ii) a nonbank financial company designated as a systemically important financial company by the Council; (iii) a company that is predominantly engaged in activities that the Board of Governors of the Federal Reserve System has determined are financial in nature or incidental thereto for purposes of section 4(k) of the Bank Holding Company Act ("financial activities”); or (iv) any subsidiary of the foregoing that is predominantly engaged in financial activities. The FDIC has issued a regulation that implements the “predominantly engaged in financial activities” test. 12 C.F.R. § 380.8. The FDIC has effectively taken the position that a mutual fund is engaged in activities that would cause it be deemed to be predominantly engaged in financial activities. 78 Fed. Reg. 34712, 34717-8 (2013).
2) The proposed rule would not capture an entity, such as an investment adviser, that acts as agent on behalf of a client and is not a party to, or does not support, guarantee or is not otherwise linked to, that client’s QFC.
3) 12 C.F.R. Part 380.

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