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.
- Regulation EE, also known as 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. At the time of its enactment, 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 May of 2019, 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.
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.