Background and Summary of Regulation EE

Parties to a netting contract agree that they will pay or receive the net, rather than the gross, payment due under the netting contract. FDICIA ensures that netting contracts will be enforced, even if one of the parties becomes insolvent. The netting provisions of the act, effective December 19, 1991, apply to bilateral netting contracts between two financial institutions and multilateral netting contracts among members of a clearing organization. Section 402(9) of the act defines financial institution to include a depository institution, a securities broker or dealer, a futures commission merchant, and any other institution as determined by the Board. In addition, the act’s definition of broker or dealer (§ 402(1)(B)) includes any affiliate of a registered broker or dealer, to the extent consistent with the act, as determined by the Board.

A person would qualify as a financial institution if it represents that it will engage in financial contracts as a counterparty on both sides of one or more financial markets and meets one of the quantitative thresholds in section 231.3(a) of Regulation EE. The netting provisions of the act will apply only to those netting contracts entered into after a person qualifies as a financial institution. A person will continue to be considered a financial institution for the purposes of any contract entered into during the period in which it qualifies, even if the person subsequently fails to qualify during the life of the contract. Also, the Board has grandfathered those netting contracts in existence on March 7, 1994, the effective date of the regulation. Any person that qualifies as a financial institution on that date will be considered a financial institution for the purposes of any outstanding contract entered into on an earlier date.