TITLE 12 - US CODE - CHAPTER 45 - PAYMENT SYSTEM RISK REDUCTION

TITLE 12 - US CODE - SUBCHAPTER I - BILATERAL AND CLEARING ORGANIZATION NETTING

12 USC 4401 - Findings and purpose

The Congress finds that
(1) many financial institutions engage daily in thousands of transactions with other financial institutions directly and through clearing organizations;
(2) the efficient processing of such transactions is essential to a smoothly functioning economy;
(3) such transactions can be processed most efficiently if, consistent with applicable contractual terms, obligations among financial institutions are netted;
(4) such netting procedures would reduce the systemic risk within the banking system and financial markets; and

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(5) the effectiveness of such netting procedures can be assured only if they are recognized as valid and legally binding in the event of the closing of a financial institution participating in the netting procedures.

12 USC 4402 - Definitions

For purposes of this subchapter
(1) Broker or dealer 
The term broker or dealer means
(A) any company that is registered or licensed under Federal or State law to engage in the business of brokering, underwriting, or dealing in securities in the United States; and
(B) to the extent consistent with this title,[1] as determined by the Board of Governors of the Federal Reserve System, any company that is an affiliate of a company described in subparagraph (A) and that is engaged in the business of entering into netting contracts.
(2) Clearing organization 
The term clearing organization means a clearinghouse, clearing association, clearing corporation, or similar organization
(A) that provides clearing, netting, or settlement services for its members and
(i) in which all members other than the clearing organization itself are financial institutions or other clearing organizations; or
(ii) which is registered as a clearing agency under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], or is exempt from such registration by order of the Securities and Exchange Commission; or
(B) that is registered as a derivatives clearing organization under section 7a–1 of title 7, that has been granted an exemption under section 6 (c)(1) of title 7, or that is a multilateral clearing organization (as defined in section 4421 of this title).
(3) Covered clearing obligation 
The term covered clearing obligation means an obligation of a member of a clearing organization to make payment to another member of a clearing organization, subject to a netting contract.
(4) Covered contractual payment entitlement 
The term covered contractual payment entitlement means
(A) an entitlement of a financial institution to receive a payment, subject to a netting contract from another financial institution; and
(B) an entitlement of a member of a clearing organization to receive payment, subject to a netting contract, from another member of a clearing organization of a covered clearing obligation.
(5) Covered contractual payment obligation 
The term covered contractual payment obligation means
(A) an obligation of a financial institution to make payment, subject to a netting contract to another financial institution; and
(B) a covered clearing obligation.
(6) Depository institution 
The term depository institution means
(A) a depository institution as defined in section 19(b)(1)(A) of the Federal Reserve Act [12 U.S.C. 461 (b)(1)(A)] (other than clause (vii));
(B) an uninsured national bank or an uninsured State bank that is a member of the Federal Reserve System, if the national bank or State member bank is not eligible to make application to become an insured bank under section 1815 of this title;
(C) a branch or agency of a foreign bank, a foreign bank and any branch or agency of the foreign bank, or the foreign bank that established the branch or agency, as those terms are defined in section 1(b) of the International Banking Act of 1978 [12 U.S.C. 3101];
(D) a corporation chartered under section 25(a)1 of the Federal Reserve Act [12 U.S.C. 611 et seq.]; or
(E) a corporation having an agreement or undertaking with the Board of Governors of the Federal Reserve System under section 25 of the Federal Reserve Act [12 U.S.C. 601 et seq.].
(7) Failed financial institution 
The term failed financial institution means a financial institution that
(A) fails to satisfy a covered contractual payment obligation when due;
(B) has commenced or had commenced against it insolvency, liquidation, reorganization, receivership (including the appointment of a receiver), conservatorship, or similar proceedings; or
(C) has generally ceased to meet its obligations when due.
(8) Failed member 
The term failed member means any member that
(A) fails to satisfy a covered clearing obligation when due,
(B) has commenced or had commenced against it insolvency, liquidation, reorganization, receivership (including the appointment of a receiver), conservatorship, or similar proceedings, or
(C) has generally ceased to meet its obligations when dud.
(9) Financial institution 
The term financial institution means a broker or dealer, a depository institution, a futures commission merchant, or any other institution as determined by the Board of Governors of the Federal Reserve System.
(10) Futures commission merchant 
The term futures commission merchant means a company that is registered or licensed under Federal law to engage in the business of selling futures and options in commodities.
(11) Member 
The term member means a member of or participant in a clearing organization, and includes the clearing organization and any other clearing organization with which such clearing organization has a netting contract.
(12) Net entitlement 
The term net entitlement means the amount by which the covered contractual payment entitlements of a financial institution or member exceed the covered contractual payment obligations of the institution or member after netting under a netting contract.
(13) Net obligation 
The term net obligation means the amount by which the covered contractual payment obligations of a financial institution or member exceed the covered contractual payment entitlements of the institution or member after netting under a netting contract.
(14) Netting contract 

(A) In general 
The term netting contract
(i) means a contract or agreement between 2 or more financial institutions, clearing organizations, or members that provides for netting present or future payment obligations or payment entitlements (including liquidation or close out values relating to such obligations or entitlements) among the parties to the agreement; and
(ii) includes the rules of a clearing organization.
(B) Invalid contracts not included 
The term netting contract does not include any contract or agreement that is invalid under or precluded by Federal law.
(15) Payment 
The term payment means a payment of United States dollars, another currency, or a composite currency, and a noncash delivery, including a payment or delivery to liquidate an unmatured obligation.
[1] See References in Text note below.

12 USC 4403 - Bilateral netting

(a) General rule 
Notwithstanding any other provision of State or Federal law (other than section 1821 (e) of this title, section 1787 (c) of this title, or any order authorized under section 78eee (b)(2) of title 15), the covered contractual payment obligations and the covered contractual payment entitlements between any 2 financial institutions shall be terminated, liquidated, accelerated, and netted in accordance with, and subject to the conditions of, the terms of any applicable netting contract (except as provided in section 561 (b)(2) of title 11).
(b) Limitation on obligation to make payment 
The only obligation, if any, of a financial institution to make payment with respect to covered contractual payment obligations to another financial institution shall be equal to its net obligation to such other financial institution, and no such obligation shall exist if there is no net obligation.
(c) Limitation on right to receive payment 
The only right, if any, of a financial institution to receive payments with respect to covered contractual payment entitlements from another financial institution shall be equal to its net entitlement with respect to such other financial institution, and no such right shall exist if there is no net entitlement.
(d) Payment of net entitlement of failed financial ­institution 
The net entitlement of any failed financial institution, if any, shall be paid to the failed financial institution in accordance with, and subject to the conditions of, the applicable netting contract.
(e) Effectiveness notwithstanding status as financial institution 
This section shall be given effect notwithstanding that a financial institution is a failed financial institution.
(f) Enforceability of security agreements 
The provisions of any security agreement or arrangement or other credit enhancement related to one or more netting contracts between any 2 financial institutions shall be enforceable in accordance with their terms (except as provided in section 561 (b)(2) of title 11), and shall not be stayed, avoided, or otherwise limited by any State or Federal law (other than section 1821 (e) of this title, section 1787 (c) of this title, and section 78eee (b)(2) of title 15).

12 USC 4404 - Clearing organization netting

(a) General rule 
Notwithstanding any other provision of State or Federal law (other than section 1821 (e) of this title, section 1787 (c) of this title, and any order authorized under section 78eee (b)(2) of title 15), the covered contractual payment obligations and the covered contractual payment entitlements of a member of a clearing organization to and from all other members of a clearing organization shall be terminated, liquidated, accelerated, and netted in accordance with and subject to the conditions of any applicable netting contract (except as provided in section 561 (b)(2) of title 11).
(b) Limitation of obligation to make payment 
The only obligation, if any, of a member of a clearing organization to make payment with respect to covered contractual payment obligations arising under a single netting contract to any other member of a clearing organization shall be equal to its net obligation arising under that netting contract, and no such obligation shall exist if there is no net obligation.
(c) Limitation on right to receive payment 
The only right, if any, of a member of a clearing organization to receive payment with respect to a covered contractual payment entitlement arising under a single netting contract from other members of a clearing organization shall be equal to its net entitlement arising under that netting contract, and no such right shall exist if there is no net entitlement.
(d) Entitlement of failed members 
The net entitlement, if any, of any failed member of a clearing organization shall be paid to the failed member in accordance with, and subject to the conditions of, the applicable netting contract.
(e) Obligations of failed members 
The net obligation, if any, of any failed member of a clearing organization shall be determined in accordance with, and subject to the conditions of, the applicable netting contract.
(f) Limitation on claims for entitlement 
A failed member of a clearing organization shall have no recognizable claim against any member of a clearing organization for any amount based on such covered contractual payment entitlements other than its net entitlement.
(g) Effectiveness notwithstanding status as member 
This section shall be given effect notwithstanding that a member is a failed member.
(h) Enforceability of security agreements 
The provisions of any security agreement or arrangement or other credit enhancement related to one or more netting contracts between any 2 members of a clearing organization shall be enforceable in accordance with their terms (except as provided in section 561 (b)(2) of title 11), and shall not be stayed, avoided, or otherwise limited by any State or Federal law (other than section 1821 (e) of this title, section 1787 (c) of this title, and section 78eee (b)(2) of title 15).

12 USC 4405 - Preemption

No stay, injunction, avoidance, moratorium, or similar proceeding or order, whether issued or granted by a court, administrative agency, or otherwise, shall limit or delay application of otherwise enforceable netting contracts in accordance with sections 4403 and 4404 of this title.

12 USC 4406 - Relationship to other payments systems

This chapter shall have no effect by implication or otherwise on the validity or legal enforceability of a netting arrangement of any payment system which is not subject to this chapter.

12 USC 4406a - Treatment of contracts with uninsured national banks, uninsured Federal branches and agencies, certain uninsured State member banks, and Edge Act corporations

(a) In general 
Notwithstanding any other provision of law, paragraphs (8), (9), (10), and (11) of section 11(e) of the Federal Deposit Insurance Act [12 U.S.C. 1821 (e)] shall apply to an uninsured national bank or uninsured Federal branch or Federal agency, a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.], or an uninsured State member bank which operates, or operates as, a multilateral clearing organization pursuant to section 4422 of this title, except that for such purpose
(1) any reference to the Corporation as receiver or the receiver or the Corporation shall refer to the receiver appointed by the Comptroller of the Currency in the case of an uninsured national bank or uninsured Federal branch or agency, or to the receiver appointed by the Board of Governors of the Federal Reserve System in the case of a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.] or an uninsured State member bank;
(2) any reference to the Corporation (other than in section 11(e)(8)(D) of such Act [12 U.S.C. 1821 (e)(8)(D)]), the Corporation, whether acting as such or as conservator or receiver, a receiver, or a conservator shall refer to the receiver or conservator appointed by the Comptroller of the Currency in the case of an uninsured national bank or uninsured Federal branch or agency, or to the receiver or conservator appointed by the Board of Governors of the Federal Reserve System in the case of a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.] or an uninsured State member bank; and
(3) any reference to an insured depository institution or depository institution shall refer to an uninsured national bank, an uninsured Federal branch or Federal agency, a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.], or an uninsured State member bank which operates, or operates as, a multilateral clearing organization pursuant to section 4422 of this title.
(b) Liability 
The liability of a receiver or conservator of an uninsured national bank, uninsured Federal branch or agency, a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.], or an uninsured State member bank which operates, or operates as, a multilateral clearing organization pursuant to section 4422 of this title, shall be determined in the same manner and subject to the same limitations that apply to receivers and conservators of insured depository institutions under section 11(e) of the Federal Deposit Insurance Act [12 U.S.C. 1821 (e)].
(c) Regulatory authority 

(1) In general 
The Comptroller of the Currency in the case of an uninsured national bank or uninsured Federal branch or agency and the Board of Governors of the Federal Reserve System in the case of a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.], or an uninsured State member bank that operates, or operates as, a multilateral clearing organization pursuant to section 4422 of this title, in consultation with the Federal Deposit Insurance Corporation, may each promulgate regulations solely to implement this section.
(2) Specific requirement 
In promulgating regulations, limited solely to implementing paragraphs (8), (9), (10), and (11) of section 11(e) of the Federal Deposit Insurance Act [12 U.S.C. 1821 (e)], the Comptroller of the Currency and the Board of Governors of the Federal Reserve System each shall ensure that the regulations generally are consistent with the regulations and policies of the Federal Deposit Insurance Corporation adopted pursuant to the Federal Deposit Insurance Act [12 U.S.C. 1811 et seq.].
(d) Definitions 
For purposes of this section, the terms Federal branch, Federal agency, and foreign bank have the same meanings as in section 3101 of this title.

12 USC 4407 - National emergencies

The provisions of this chapter may not be construed to limit the authority of the President under the Trading With the Enemy Act (50 App. U.S.C. 1 et seq.) or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.).

TITLE 12 - US CODE - SUBCHAPTER II - MULTILATERAL CLEARING ORGANIZATIONS

12 USC 4421 - Definitions

For purposes of this subchapter, the following definitions shall apply:
(1) Multilateral clearing organization 
The term multilateral clearing organization means a system utilized by more than two participants in which the bilateral credit exposures of participants arising from the transactions cleared are effectively eliminated and replaced by a system of guarantees, insurance, or mutualized risk of loss.
(2) Over-the-counter derivative instrument 
The term over-the-counter derivative instrument includes
(A) any agreement, contract, or transaction, including the terms and conditions incorporated by reference in any such agreement, contract, or transaction, which is an interest rate swap, option, or forward agreement, including a rate floor, rate cap, rate collar, cross-currency rate swap, basis swap, and forward rate agreement; a same day-tomorrow, tomorrow-next, forward, or other foreign exchange or precious metals agreement; a currency swap, option, or forward agreement; an equity index or equity swap, option, or forward agreement; a debt index or debt swap, option, or forward agreement; a credit spread or credit swap, option, or forward agreement; a commodity index or commodity swap, option, or forward agreement; and a weather swap, weather derivative, or weather option;
(B) any agreement, contract or transaction similar to any other agreement, contract, or transaction referred to in this clause[1] that is presently, or in the future becomes, regularly entered into by parties that participate in swap transactions (including terms and conditions incorporated by reference in the agreement) and that is a forward, swap, or option on one or more occurrences of any event, rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic or other indices or measures of economic or other risk or value;
(C) any agreement, contract, or transaction excluded from the Commodity Exchange Act [7 U.S.C. 1 et seq.] under section 2(c), 2(d), 2(f), or 2(g) of such Act [7 U.S.C. 2 (c), (d), (f), (g)], or exempted under section 2(h) or 4(c) of such Act [7 U.S.C. 2 (h), 6 (c)]; and
(D) any option to enter into any, or any combination of, agreements, contracts or transactions referred to in this subparagraph.[1]
(3) Other definitions 
The terms insured State nonmember bank, State member bank, and affiliate have the same meanings as in section 1813 of this title.
[1] So in original. Probably should be “this paragraph”.

12 USC 4422 - Multilateral clearing organizations

(a) In general 
Except with respect to clearing organizations described in subsection (b) of this section, no person may operate a multilateral clearing organization for over-the-counter derivative instruments, or otherwise engage in activities that constitute such a multilateral clearing organization unless the person is a national bank, a State member bank, an insured State nonmember bank, an affiliate of a national bank, a State member bank, or an insured State nonmember bank, or a corporation chartered under section 25A of the Federal Reserve Act [12 U.S.C. 611 et seq.].
(b) Clearing organizations 
Subsection (a) of this section shall not apply to any clearing organization that
(1) is registered as a clearing agency under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.];
(2) is registered as a derivatives clearing organization under the Commodity Exchange Act [7 U.S.C. 1 et seq.]; or
(3) is supervised by a foreign financial regulator that the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, or the Commodity Futures Trading Commission, as applicable, has determined satisfies appropriate standards.