12 U.S.C. § 4402 — Definitions

Page 1633 TITLE 12—BANKS AND BANKING § 4402 1 See References in Text note below. Sec. 4402. Definitions. 4403. Bilateral netting. 4404. Clearing organization netting. 4405. Preemption. 4406. Relationship to other payments systems. 4406a. Treatment of contracts with uninsured na- tional banks, uninsured Federal branches and agencies, certain uninsured State mem- ber banks, and Edge Act corporations. 4407. National emergencies. SUBCHAPTER II—MULTILATERAL CLEARING ORGANIZATIONS 4421, 4422. Repealed. SUBCHAPTER I—BILATERAL AND CLEARING ORGANIZATION NETTING § 4401. Findings and purpose The Congress finds that— (1) many financial institutions engage daily in thousands of transactions with other finan- cial institutions directly and through clearing organizations; (2) the efficient processing of such trans- actions is essential to a smoothly functioning economy; (3) such transactions can be processed most efficiently if, consistent with applicable con- tractual terms, obligations among financial institutions are netted; (4) such netting procedures would reduce the systemic risk within the banking system and financial markets; and (5) the effectiveness of such netting proce- dures can be assured only if they are recog- nized as valid and legally binding in the event of the closing of a financial institution par- ticipating in the netting procedures. (Pub. L. 102–242, title IV, § 401, Dec. 19, 1991, 105 Stat. 2371.) Statutory Notes and Related Subsidiaries SEPARABILITY If any provision of Pub. L. 102–242 or any application of any provision thereof to any person or circumstance is held invalid, the remainder of Pub. L. 102–242 and the application of any remaining provision of such Act to any other person or circumstance not to be affected by such holding, see section 481 of Pub. L. 102–242, set out as a note under section 1811 of this title. § 4402. Definitions For purposes of this subchapter— (1) Broker or dealer The term ‘‘broker or dealer’’ means— (A) any company that is registered or li- censed 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 Gov- ernors of the Federal Reserve System, any company that is an affiliate of a company described in subparagraph (A) and that is en- gaged in the business of entering into net- ting contracts. (2) Clearing organization The term ‘‘clearing organization’’ means a clearinghouse, clearing association, clearing corporation, or similar organization— (A) that provides clearing, netting, or set- tlement services for its members and— (i) in which all members other than the clearing organization itself are financial institutions or other clearing organiza- tions; 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 Se- curities 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 de- fined in section 4421 1 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 en- titlement’’ means— (A) an entitlement of a financial institu- tion to receive a payment, subject to a net- ting contract from another financial institu- tion; and (B) an entitlement of a member of a clear- ing organization to receive payment, subject to a netting contract, from another member of a clearing organization of a covered clear- ing obligation. (5) Covered contractual payment obligation The term ‘‘covered contractual payment ob- ligation’’ means— (A) an obligation of a financial institution to make payment, subject to a netting con- tract 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 unin- sured 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 Inter- national 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 Page 1634 TITLE 12—BANKS AND BANKING § 4402 (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, reorga- nization, receivership (including the ap- pointment of a receiver), conservatorship, or similar proceedings; or (C) has generally ceased to meet its obliga- tions when due. (8) Failed member The term ‘‘failed member’’ means any mem- ber that— (A) fails to satisfy a covered clearing obli- gation when due, (B) has commenced or had commenced against it insolvency, liquidation, reorga- nization, receivership (including the ap- pointment of a receiver), conservatorship, or similar proceedings, or (C) has generally ceased to meet its obliga- tions when due. (9) Financial institution The term ‘‘financial institution’’ means a broker or dealer, a depository institution, a futures commission merchant, or any other in- stitution as determined by the Board of Gov- ernors of the Federal Reserve System. (10) Futures commission merchant The term ‘‘futures commission merchant’’ means a company that is registered or li- censed under Federal law to engage in the business of selling futures and options in com- modities. (11) Member The term ‘‘member’’ means a member of or participant in a clearing organization, and in- cludes the clearing organization and any other clearing organization with which such clear- ing organization has a netting contract. (12) Net entitlement The term ‘‘net entitlement’’ means the amount by which the covered contractual pay- ment entitlements of a financial institution or member exceed the covered contractual pay- ment 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 pay- ment obligations of a financial institution or member exceed the covered contractual pay- ment entitlements of the institution or mem- ber after netting under a netting contract. (14) Netting contract (A) In general The term ‘‘netting contract’’— (i) means a contract or agreement be- tween 2 or more financial institutions, clearing organizations, or members that provides for netting present or future pay- ment obligations or payment entitlements (including liquidation or close out values relating to such obligations or entitle- ments) among the parties to the agree- ment; and (ii) includes the rules of a clearing orga- nization. (B) Invalid contracts not included The term ‘‘netting contract’’ does not in- clude any contract or agreement that is in- valid 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. (Pub. L. 102–242, title IV, § 402, Dec. 19, 1991, 105 Stat. 2372; Pub. L. 102–550, title XVI, § 1606(a), Oct. 28, 1992, 106 Stat. 4087; Pub. L. 106–554, § 1(a)(5) [title I, §§ 112(a)(2), 123(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A–391, 2763A–411; Pub. L. 109–8, title IX, § 906(a), Apr. 20, 2005, 119 Stat. 167.) Editorial Notes REFERENCES IN TEXT This title, referred to in par. (1)(B), means title IV of Pub. L. 102–242, Dec. 19, 1991, 105 Stat. 2371. For com- plete classification of title IV to the Code, see Tables. The Securities Exchange Act of 1934, referred to in par. (2)(A)(ii), is act June 6, 1934, ch. 404, 48 Stat. 881, which is classified principally to chapter 2B (§ 78a et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see section 78a of Title 15 and Tables. Section 4421 of this title, referred to in par. (2)(B), was repealed by Pub. L. 111–203, title VII, § 740, July 21, 2010, 124 Stat. 1729. Section 25(a) of the Federal Reserve Act, referred to in par. (6), which is classified to subchapter II (§ 611 et seq.) of chapter 6 of this title, was renumbered section 25A of that act by Pub. L. 102–242, title I, § 142(e)(2), Dec. 19, 1991, 105 Stat. 2281. Section 25 of the Federal Reserve Act is classified to subchapter I (§ 601 et seq.) of chapter 6 of this title. AMENDMENTS 2005—Par. (2)(A)(ii). Pub. L. 109–8, § 906(a)(1)(A), in- serted before semicolon ‘‘, or is exempt from such reg- istration by order of the Securities and Exchange Com- mission’’. Par. (2)(B). Pub. L. 109–8, § 906(a)(1)(B), inserted before period at end ‘‘, 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)’’. Par. (6)(B). Pub. L. 109–8, § 906(a)(2)(B), added subpar. (B). Former subpar. (B) redesignated (C). Par. (6)(C). Pub. L. 109–8, § 906(a)(2)(A), (C), redesig- nated subpar. (B) as (C) and amended it generally. Prior to amendment, subpar. (C) read as follows: ‘‘a branch or agency as defined in section 1(b) of the International Banking Act of 1978;’’. Former subpar. (C) redesignated (D). Par. (6)(D), (E). Pub. L. 109–8, § 906(a)(2)(A), redesig- nated subpars. (C) and (D) as (D) and (E), respectively. Par. (11). Pub. L. 109–8, § 906(a)(3), inserted before pe- riod at end ‘‘and any other clearing organization with which such clearing organization has a netting con- tract’’. Par. (14)(A)(i). Pub. L. 109–8, § 906(a)(4), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: Page 1635 TITLE 12—BANKS AND BANKING § 4403 ‘‘means a contract or agreement between 2 or more fi- nancial institutions or members, that— ‘‘(I) is governed by the laws of the United States, any State, or any political subdivision of any State, and ‘‘(II) provides for netting present or future payment obligations or payment entitlements (including liq- uidation or close-out values relating to the obliga- tions or entitlements) among the parties to the agreement; and’’. Par. (15). Pub. L. 109–8, § 906(a)(5), added par. (15). 2000—Pub. L. 106–554, § 1(a)(5) [title I, § 112(a)(2)], sub- stituted ‘‘this subchapter’’ for ‘‘this chapter’’ in intro- ductory provisions. Par. (2)(B). Pub. L. 106–554, § 1(a)(5) [title I, § 123(b)], added subpar. (B) and struck out former subpar. (B) which read as follows: ‘‘that performs clearing func- tions for a contract market designated pursuant to the Commodity Exchange Act.’’ 1992—Par. (14)(B). Pub. L. 102–550 substituted ‘‘Fed- eral law’’ for ‘‘Federal commodities law’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under Title 11, Bankruptcy, before such ef- fective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of Title 11. EFFECTIVE DATE OF 1992 AMENDMENT Amendment by Pub. L. 102–550 effective as if included in the Federal Deposit Insurance Corporation Improve- ment Act of 1991, Pub. L. 102–242, as of Dec. 19, 1991, see section 1609(a) of Pub. L. 102–550, set out as a note under section 191 of this title. § 4403. Bilateral netting (a) General rule Notwithstanding any other provision of State or Federal law (other than section 1821(e) of this title, section 5390(c) of this title, section 4617 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 obli- gations and the covered contractual payment entitlements between any 2 financial institu- tions shall be terminated, liquidated, acceler- ated, 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 in- stitution to make payment with respect to cov- ered contractual payment obligations to an- other financial institution shall be equal to its net obligation to such other financial institu- tion, 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 institu- tion to receive payments with respect to covered contractual payment entitlements from another financial institution shall be equal to its net en- titlement 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 in- stitution, if any, shall be paid to the failed fi- nancial institution in accordance with, and sub- ject to the conditions of, the applicable netting contract. (e) Effectiveness notwithstanding status as fi- nancial institution This section shall be given effect notwith- standing 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 re- lated to one or more netting contracts between any 2 financial institutions shall be enforceable in accordance with their terms (except as pro- vided 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). (Pub. L. 102–242, title IV, § 403, Dec. 19, 1991, 105 Stat. 2374; Pub. L. 109–8, title IX, § 906(b), Apr. 20, 2005, 119 Stat. 168; Pub. L. 109–390, § 4(a), Dec. 12, 2006, 120 Stat. 2695; Pub. L. 111–203, title II, § 211(c), July 21, 2010, 124 Stat. 1514.) Editorial Notes AMENDMENTS 2010—Subsec. (a). Pub. L. 111–203 inserted ‘‘section 5390(c) of this title, section 4617 of this title,’’ after ‘‘section 1821(e) of this title,’’. 2006—Subsec. (a). Pub. L. 109–390 struck out ‘‘para- graphs (8)(E), (8)(F), and (10)(B) of’’ before ‘‘section 1821(e)’’ and ‘‘section 1787(c)’’ and inserted ‘‘terminated, liquidated, accelerated, and’’ after ‘‘institutions shall be’’. Subsec. (f). Pub. L. 109–390, § 4(a)(1), struck out ‘‘para- graphs (8)(E), (8)(F), and (10)(B) of’’ before ‘‘section 1821(e)’’ and ‘‘section 1787(c)’’. 2005—Subsec. (a). Pub. L. 109–8, § 906(b)(1), added sub- sec. (a) and struck out heading and text of former sub- sec. (a). Text read as follows: ‘‘Notwithstanding any other provision of law, the covered contractual pay- ment obligations and the covered contractual payment entitlements between any 2 financial institutions shall be netted in accordance with, and subject to the condi- tions of, the terms of any applicable netting contract.’’ Subsec. (f). Pub. L. 109–8, § 906(b)(2), added subsec. (f). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2010 AMENDMENT Amendment by Pub. L. 111–203 effective 1 day after July 21, 2010, except as otherwise provided, see section 4 of Pub. L. 111–203, set out as an Effective Date note under section 5301 of this title. EFFECTIVE DATE OF 2006 AMENDMENT Amendment by Pub. L. 109–390 not applicable to any cases commenced under Title 11, Bankruptcy, or to ap- pointments made under any Federal or State law, be- fore Dec. 12, 2006, see section 7 of Pub. L. 109–390, set out as a note under section 101 of Title 11. EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under Title 11, Bankruptcy, before such ef- fective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as a note under section 101 of Title 11.