DEFINITION of Regulation EE
Regulation EE is a rule set forth by the U.S Federal Reserve Board. Regulation EE, also sometimes referred to as netting eligibility for financial institutions, gives banks permission to settle mutual obligations at their net value instead of their gross value. This form of settlement is known as contractual netting under Regulation EE.
BREAKING DOWN Regulation EE
Regulation EE expands the FDIC Improvement Act of 1991 definition of a "financial institution" for financial market participants who avail themselves of the netting provisions of the act regarding contracts in which the parties agree to pay or receive the net, rather than the gross, payment due.
Regulation EE allows banks to settle obligations they have to each other through the use of bi- or multilateral netting contracts. Securities brokers/dealers can also settle trades in this manner. Members of clearing organizations are likewise included.
Purpose and Scope of Regulation EE
The Federal Reserve’s stated purpose of Regulation EE is to enhance efficiency and reduce systemic risk in the financial markets. For this purpose, Regulation EE expands the definition of “financial institution” to allow more financial market participants to avail themselves of the netting provisions.
Who Qualifies as a Financial Institution, According to Regulation EE
A person or institution qualifies as a financial institution for purposes of sections 401-407 of the act if he or she represents, orally or in writing, that he or she will engage in financial contracts as a counterparty on both sides of one or more financial markets and either—
- Had one or more financial contracts of a total gross dollar value of at least $1 billion in notional principal amount outstanding on any day during the previous 15-month period with counterparties that are not its affiliates; or
- Had total gross mark-to-market positions of at least $100 million (aggregated across counterparties) in one or more financial contracts on any day during the previous 15-month period with counterparties that are not its affiliates.
If a person qualifies as a financial institution under paragraph (a) of this section, that person will be considered a financial institution for the purposes of any contract entered into during the period it qualifies, even if the person subsequently fails to qualify.
If a person qualifies as a financial institution under paragraph (a) of this section on March 7, 1994, that person will be considered a financial institution for the purposes of any outstanding contract entered into prior to March 7, 1994.