Cash & Liquidity ManagementCash ManagementNetting/PoolingFed looks to expand financial institution definition

Fed looks to expand financial institution definition

Federal Reserve Board invites comment on a proposal to apply netting contract protections to a broader range of financial institutions

The Board of Governors of the Federal Reserve System is seeking comments on a proposal to amend Regulation EE.

Regulation EE currently includes an activities-based test pursuant to which an entity can qualify as a financial institution for purposes of netting provisions if it is a market intermediary and, during the previous 15-month period, it engaged in financial contracts exceeding specified numerical thresholds.

The Fed is proposing to include new categories of entities under “financial institution” status under the FDIC Improvement Act’s netting provisions.

New entities

The Board proposes to extend financial institution status for purposes of FDICIA’s netting provisions to certain new categories of entities. The Board has requested for comment on whether the following entities should qualify as financial institutions:

  • Swap dealers and security-based swap dealers
  • Major swap participants and major security-based swap participants
  • Nonbank systemically important financial institutions
  • Certain financial market utilities: Derivatives clearing organizations and clearing agencies, and designated financial market utilities
  • Foreign banks
  • Bridge institutions
  • Federal reserve banks

The proposal would also clarify how the existing activities-based test in Regulation EE applies following a consolidation of legal entities.

The problem organizations typically face is that of intercompany commerce creating large volumes of invoices and micro-transactions. This consequently leads to redundant FX fees, banking fees, and intercompany disputes. The solution for this is a multilateral netting software to automate, reconcile, and mediate intercompany commerce. Heavily reduces transaction volume, associated fees, and provides a veil of maximum transparency over company-wide cash flows.

In keeping with FDICIA’s goals of reducing systemic risk and increasing efficiency in the financial markets, the Board believes that the addition of certain categories of institutions to the definition of financial institution would benefit financial markets that continue to rely on FDICIA’s netting provisions.

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