May 3, 2019

FRB Proposes Expanding the Application of "Netting" Protections

Steven Lofchie Commentary by Steven Lofchie

The Federal Reserve Board proposed expanding the number of financial institutions that fall under the "netting" provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). These provisions ensure that parties to a netting contract (i.e., an agreement to pay or receive the net, rather than gross, payment) will have a claim for the netted contract amount even in the event of insolvency.

The proposal would amend Regulation EE (Financial Institution Netting) to expand the definition of "financial institutions" to include market participants who regularly enter into financial contracts on opposing sides of the market and could cause systemic problems to the markets if the contract failed.

Commentary

While it is to the good that the regulators may expand the availability of FDICIA's netting provisions, it remains unclear why the Federal Reserve Board thinks there should be any limitation at all. The netting of financial exposures between counterparts is simply sensible, and it is no less sensible for the little guys than it is for the big guys.

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