Regulation EE

What Is Regulation EE?

Regulation EE, sometimes referred to as netting eligibility, is a rule set forth by the U.S. Federal Reserve Board. It expands the FDIC Improvement Act of 1991 definition of "financial institution" to include financial market participants who avail themselves of the act's netting provisions regarding contracts in which the parties agree to pay or receive the net, rather than the gross, payment due.

Key Takeaways

  • Regulation EE, or netting eligibility, allows financial institutions to settle mutual obligations at net value, versus gross value.
  • Regulation EE, enacted in 1994, was meant to enhance efficiency and reduce systemic risk in the financial market, per the Federal Reserve.
  • The Federal Reserve expanded the definition of financial institutions in 2019.
  • The expansion included adding swap dealers, swap participants, nonbank systematically important financial institutions, and certain financial market utilities.
  • Regulation EE lays out rules to determine whether a company is considered a financial institution, such as gross dollar amount for financial contracts or total mark-to-market position value.

How Regulation EE Works

Regulation EE allows banks, investment brokers, and clearing organizations to settle mutual obligations at their net instead of their gross value. This form of settlement is known as contractual netting. Netting offsets the value of multiple positions or payments due to be exchanged between two or more parties. Thus, if Party A owes Party B $1 million and Party B owes Party A $200,000, it would be netted to one transfer of $800,000 rather than two payments of $1 million and $200,000.

At the time of its enactment in the early 1990s, the Federal Reserve stated that the purpose of Regulation EE's expanded definition of financial institutions was to enhance efficiency and reduce systemic risk in the financial markets. In 2019 and again in 2021, the Federal Reserve further expanded the definition of financial institutions.

This expansion included expanding the definition of financial institutions, as what a "financial institution" is changed drastically from the enactment of Regulation EE in 1994, per the Federal Reserve Board of Governors. The expansion included adding swap dealers and security-based swap dealers, as well as swap participants and security-based swap participants. Other firms include nonbank systematically important financial institutions and certain financial market utilities.

Financial Institution Qualifications

A person or institution qualifies as a financial institution for purposes of sections 401-407 of the act if they represent, orally or in writing, that they will engage in financial contracts as a counter-party on both sides of one or more financial markets and either:

  • Had one or more financial contracts of the total gross dollar value of at least $1 billion in notional principal amount outstanding on any day during the previous 15-month period with counter-parties that are not its affiliates; or
  • Had total gross mark-to-market positions of at least $100 million (aggregated across counter-parties) in one or more financial contracts on any day during the previous 15-month period with counter-parties 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.

In February 2021, the Federal Reserve finalized amendments to Regulation EE to expand the definition of “financial institution” for purposes of the bilateral netting provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). This expansion added swaps dealers, foreign banks, central banks, and certain non-bank entities deemed systematically important to the financial sector.

Who Does Regulation EE Impact?

Regulation EE applies to a broad range of entities deemed "financial institutions," in dealing with the netting of swaps and other OTC derivatives or contracts. Netting entails the agreed-upon offsetting of the value of multiple positions or payments due to be exchanged between two or more parties.

What Is the Main Goal of Regulation EE?

Regulation EE's goal was to expand the definition of the term "financial institution" for purposes of integrating into the regulatory framework systemically important market participants that regularly enter into financial contracts.

What Is the Difference Between Regulation EE and Regulation E?

Regulation EE covers who is defined as a "financial institution" for the purposes of netting agreements. Regulation E, on the other hand, is a federal rule governing the transfer of electronic funds. Reg. E provides guidelines for issuers and sellers of debit cards, and protects consumers from electronic funds fraud.

Article Sources
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  1. Federal Register. "Netting Eligibility for Financial Institutions."

  2. Federal Reserve. "Federal Reserve Board announces final rule intended to reduce risk and increase efficiency in the financial system by applying netting protections to a broader range of financial institutions."

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