[Federal Register Volume 86, Number 3 (Wednesday, January 6, 2021)]
[Rules and Regulations]
[Pages 708-745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27046]
[[Page 707]]
Vol. 86
Wednesday,
No. 3
January 6, 2021
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
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12 CFR Part 3
Federal Reserve System
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12 CFR Parts 217 and 252
Federal Deposit Insurance Corporation
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12 CFR Part 324
Regulatory Capital Treatment for Investments in Certain Unsecured Debt
Instruments of Global Systemically Important U.S. Bank Holding
Companies, Certain Intermediate Holding Companies, and Global
Systemically Important Foreign Banking Organizations; Total Loss-
Absorbing Capacity Requirements; Final Rule
Federal Register / Vol. 86 , No. 3 / Wednesday, January 6, 2021 /
Rules and Regulations
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2018-0019]
RIN 1557-AE38
FEDERAL RESERVE SYSTEM
12 CFR Parts 217 and 252
[Regulation Q; Docket No. R-1655]
RIN 7100-AF43
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE79
Regulatory Capital Treatment for Investments in Certain Unsecured
Debt Instruments of Global Systemically Important U.S. Bank Holding
Companies, Certain Intermediate Holding Companies, and Global
Systemically Important Foreign Banking Organizations; Total Loss-
Absorbing Capacity Requirements
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); the
Board of Governors of the Federal Reserve System (Board); and the
Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are
adopting a final rule that applies to advanced approaches banking
organizations with the aim of reducing both interconnectedness within
the financial system and systemic risks. The final rule requires
deduction from a banking organization's regulatory capital for certain
investments in unsecured debt instruments issued by foreign or U.S.
global systemically important banking organizations (GSIBs) for the
purposes of meeting minimum total loss-absorbing capacity (TLAC)
requirements and, where applicable, long-term debt requirements, or for
investments in unsecured debt instruments issued by GSIBs that are pari
passu or subordinated to such debt instruments. In addition, the Board
is adopting changes to its TLAC rules to clarify requirements and
correct drafting errors.
DATES: The final rule is effective on April 1, 2021.
FOR FURTHER INFORMATION CONTACT:
OCC: Andrew Tschirhart, Risk Expert (202) 649-6370, Capital and
Regulatory Policy; or Carl Kaminski, Special Counsel, or Jean Xiao,
Attorney, Chief Counsel's Office, (202) 649-5490, for persons who are
deaf or hearing impaired, TTY, (202) 649-5597, Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Assistant Director, (202) 872-7526; Mark Handzlik,
Manager, (202) 475-6636; Sean Healey, Lead Financial Institution Policy
Analyst, (202) 912-4611; Division of Supervision and Regulation; or
Benjamin McDonough, Assistant General Counsel (202) 452-2036; or Mark
Buresh, Senior Counsel (202) 452-5270, Legal Division, Board of
Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263-4869.
FDIC: Benedetto Bosco, Chief, Capital Policy Section;
[email protected]; Richard Smith, Capital Markets Policy Analyst,
[email protected]; [email protected]; Capital Markets Branch,
Division of Risk Management Supervision, (202) 898-6888; or Michael
Phillips, Counsel, [email protected]; Catherine Wood, Counsel,
[email protected]; or Ryan Rappa, Counsel, [email protected], Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Capital Requirements
B. TLAC Rule
III. Overview of the Notice of Proposed Rulemaking and Comments
IV. Summary of the Final Rule
V. Regulatory Capital Treatment for Advanced Approaches Banking
Organizations' Investments in Covered Debt Instruments
A. Scope of Application
B. Deduction From Tier 2 Capital
C. Amendments to Definitions
D. Investments in Covered Banking Organizations' Own Covered
Debt Instruments and Reciprocal Cross Holdings
E. Significant and Non-Significant Investments in Covered Debt
Instruments
F. Corresponding Deduction Approach
G. Net Long Position Calculation
VI. Technical Amendment and Other Comments
VII. Amendments to the Board's TLAC Rule
VIII. Changes to Regulatory Reporting
A. Deductions From Tier 2 Capital Related to Investments in
Covered Debt Instruments and Excluded Covered Debt Instruments
B. Public Disclosure of Long-Term Debt and TLAC by Covered BHCs
and Covered IHCs
IX. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act Analysis
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995 Determination
E. Riegle Community Development and Regulatory Improvement Act
of 1994
F. Congressional Review Act
I. Introduction
The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and Federal Deposit
Insurance Corporation (FDIC) (together, the agencies) are issuing a
final rule to revise the regulatory capital rule in a manner
substantially consistent with a proposed rule issued in April 2019
(proposal).\1\ The final rule addresses the regulatory capital
treatment of investments by advanced approaches banking organizations
in unsecured debt instruments issued by foreign or U.S. global
systemically important banking organizations (GSIBs) for the purposes
of meeting minimum total loss-absorbing capacity (TLAC) requirements
and, as applicable, long-term debt requirements, or of investments in
unsecured debt instruments issued by GSIBs that are pari passu or
subordinated to such debt instruments (covered debt instruments).\2\
Consistent with the proposal, the exposures of an advanced approaches
banking organization to covered debt instruments generally are subject
to deduction from the banking
[[Page 709]]
organization's regulatory capital. The final rule includes certain
adjustments to the proposal in response to comments. The final rule
aims to reduce both interconnectedness within the financial system and
systemic risks.
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\1\ See 84 FR 13814 (April 8, 2019).
\2\ When the proposal was issued, a banking organization was an
``advanced approaches banking organization'' if it had total assets
of at least $250 billion, or if it had consolidated on-balance sheet
foreign exposures of at least $10 billion, or if it was a subsidiary
of a depository institution, bank holding company, savings and loan
holding company or intermediate holding company that was an advanced
approaches banking organization. See 78 FR 62018, 62204 (October 11,
2013), 78 FR 55340, 55523 (September 10, 2013). See also 12 CFR part
3 (OCC); 12 CFR part 217 (Board); and 12 CFR part 324 (FDIC). In
November 2019, the agencies issued a final rule to revise the
criteria for determining the applicability of regulatory capital and
liquidity requirements for large U.S. banking organizations and the
U.S. intermediate holding companies of certain foreign banking
organizations, including the application of the advanced approaches
(interagency tailoring final rule). Under this final rule, advanced
approaches banking organizations include those banking organizations
subject to Category I standards (those banking organizations that
qualify as U.S. GSIBs) or Category II standards (banking
organizations with (1) at least $700 billion in total consolidated
assets or (2) at least $75 billion in cross-jurisdictional activity
and more than $100 billion in total consolidated assets), and a
subsidiary depository institution of such a banking organization.
See 84 FR 59230 (November 1, 2019).
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II. Background
A. Capital Requirements
The agencies' regulatory capital rule (capital rule) imposes
minimum capital requirements on banking organizations measured through
risk-based and leverage capital ratios.\3\ These regulatory capital
ratios consist of regulatory capital measures relative to risk-weighted
assets and total assets, respectively.\4\ The numerators of the
regulatory capital ratios include various adjustments and deductions to
balance-sheet-based regulatory capital components.
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\3\ Banking organizations subject to the agencies' capital rule
include national banks, state member banks, insured state nonmember
banks, savings associations, and top-tier bank holding companies,
intermediate holding companies, and savings and loan holding
companies domiciled in the United States, but exclude banking
organizations subject to the Board's Small Bank Holding Company and
Savings and Loan Holding Company Policy Statement (12 CFR part 225,
appendix C), qualifying community banking organizations that elect
to comply with the agencies' community bank leverage ratio
framework, and certain savings and loan holding companies that are
substantially engaged in insurance underwriting or commercial
activities or that are estate trusts, and bank holding companies and
savings and loan holding companies that are employee stock ownership
plans.
\4\ See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); and 12
CFR 324.10(a) (FDIC). In addition to the generally applicable
leverage ratio, advanced approaches banking organizations are
subject to a supplementary leverage ratio, which measures a banking
organization's tier 1 capital relative to its on-balance sheet and
certain off-balance sheet exposures.
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The capital rule includes two broad categories of deductions from
regulatory capital related to investments in the capital instruments of
financial institutions by advanced approaches banking organizations.\5\
First, it requires a banking organization to deduct any investment in
its own regulatory capital instruments and any investment in regulatory
capital instruments held reciprocally with another financial
institution (reciprocal cross holding).\6\ Second, it requires a
banking organization to deduct investments in capital instruments
issued by unconsolidated financial institutions that would qualify as
regulatory capital if issued by the banking organization itself.\7\ For
the purpose of the latter deduction, a banking organization may be
required to deduct the entire amount of the investment, or it may be
required to deduct only the portion of the investment that exceeds a
certain threshold.\8\ These deductions are intended to reduce
interconnectedness and contagion risk among financial institutions by
discouraging banking organizations from investing in the capital of
other financial institutions.
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\5\ A different deduction framework applies to non-advanced
approaches banking organizations. See 84 FR 35234 (July 22, 2019).
\6\ See 12 CFR 3.22(c)(1) (OCC); 12 CFR 217.22(c)(1) (Board);
and 12 CFR 324.22(c)(1) (FDIC).
\7\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board);
and 12 CFR 324.22(c)(2) (FDIC).
\8\ See 12 CFR 3.22(c)(3), (c)(5), and (c)(6) (OCC); 12 CFR
217.22(c)(3), (c)(5), and (c)(6) (Board); and 12 CFR 324.22(c)(3),
(c)(5), and (c)(6) (FDIC).
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For deductions related to investments in the capital of
unconsolidated financial institutions, a banking organization must
deduct from the component of regulatory capital for which the
instrument qualifies or would qualify if it were issued by the banking
organization that is holding the exposure.\9\ For example, an advanced
approaches banking organization that owns 10 percent or less of the
common stock of an unconsolidated financial institution is said to have
a ``non-significant investment'' in the capital of the unconsolidated
financial institution. If the advanced approaches banking organization
invests in tier 2 instruments issued by the unconsolidated financial
institution, then it must deduct from its own tier 2 capital the
amount, if any, by which the investment, combined with other non-
significant investments in the capital of other unconsolidated
financial institutions, exceeds 10 percent of the sum of the banking
organization's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under section __.22(a) through __.22(c)(3), net of
associated deferred tax liabilities (DTLs) (10 percent threshold for
non-significant investments). Any non-significant investments in the
capital of unconsolidated financial institutions that are not deducted
from regulatory capital are risk-weighted in accordance with the
capital rule.\10\
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\9\ See 12 CFR part 3, subparts D, E, or F, as applicable (OCC);
12 CFR part 217, subparts D, E, and F, as applicable (Board); and 12
CFR part 324, subparts D, E, or F, as applicable (FDIC).
\10\ See 12 CFR part 3, subparts D, E, or F, as applicable
(OCC); 12 CFR part 217, subparts D, E, and F, as applicable (Board);
and 12 CFR part 324, subparts D, E, or F, as applicable (FDIC).
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B. TLAC Rule
In December 2016, the Board issued a final rule to require the
largest domestic and foreign banking organizations operating in the
United States to maintain a minimum amount of total loss-absorbing
capacity (TLAC), consisting of tier 1 capital (excluding minority
interest) and certain long-term debt instruments (TLAC rule).\11\ The
TLAC rule applies to a U.S. top-tier bank holding company identified
under the Board's rules as a global systemically important bank holding
company (covered BHC) or a top-tier U.S. intermediate holding company
subsidiary of a global systemically important foreign banking
organization (foreign GSIB) with $50 billion or more in U.S. non-branch
assets (covered IHC) (collectively, covered banking organizations).
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\11\ See 82 FR 8266 (January 24, 2017); 12 CFR part 252,
subparts G and P. The TLAC rule's TLAC and long-term debt
requirements took effect on January 1, 2019.
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The objective of the TLAC rule is to enhance financial stability by
reducing the impact of the failure of covered banking organizations by
requiring such organizations to have sufficient loss-absorbing capacity
on both a going-concern and a gone-concern basis. The TLAC rule
includes requirements that a covered banking organization maintain
outstanding minimum levels of TLAC and long-term debt.\12\ TLAC is the
sum of the tier 1 capital instruments issued directly by the covered
banking organization (excluding minority interest) and the long-term
debt issued directly by the covered banking organization. Under the
TLAC rule, long-term debt is generally unsecured debt that is issued
directly by a covered banking organization, has no features that would
interfere with an orderly resolution proceeding, has a remaining
maturity of at least one year, and is governed by U.S. law, among other
provisions.\13\
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\12\ See 12 CFR 252.62 and 252.63; 12 CFR 252.162 and 252.165.
The requirements applicable under the TLAC rule to covered BHCs and
covered IHCs are similar but not identical.
\13\ Long-term debt issued by a covered IHC to affiliates of the
covered IHC is subject to notable additional requirements, including
the inclusion of a provision allowing the Board to order the
conversion of the debt into common equity tier 1 capital of the
covered IHC. See 12 CFR 252.163.
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Long-term debt instruments under the TLAC rule are capable of
absorbing losses in resolution (i.e., on a gone-concern basis). This is
because the debt holders' claim on a banking organization's assets may
not receive full payment in a resolution, receivership, insolvency, or
similar proceeding.\14\ This potential loss-
[[Page 710]]
absorbing capacity of long-term debt is part of the rationale for the
deduction approach for investments in such debt instruments under this
final rule.\15\
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\14\ The internal debt conversion provision included in covered
IHC long-term debt issued to affiliates performs a similar function
outside of a resolution proceeding.
\15\ Long-term debt under the TLAC rule may also qualify as tier
2 capital under the capital rule, if it satisfies the eligibility
criteria for tier 2 capital.
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Given the ability of long-term debt to absorb the losses of a
covered banking organization in a resolution, receivership, insolvency,
or similar proceeding, the Board proposed regulatory capital deductions
for investments by Board-regulated banking organizations in long-term
debt issued under the TLAC rule when it initially proposed the TLAC
rule in 2015.\16\ The Board did not finalize these limitations when it
issued the final TLAC rule because it needed additional time to work
with the OCC and the FDIC to develop a proposed interagency approach
regarding the regulatory capital treatment for investments in certain
debt instruments issued by covered banking organizations.
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\16\ The proposal of the TLAC rule in 2015 was issued solely by
the Board. Therefore, the proposed regulatory capital deductions in
that proposal would have only applied to Board-regulated banking
organizations, which include bank holding companies, intermediate
holding companies, savings and loan holdings companies, and state
member banks.
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III. Overview of Notice of Proposed Rulemaking and Comments
In April 2019, the agencies issued a proposal to address, for
purposes of the capital rule, the systemic risks posed by an advanced
approaches banking organization's investments in covered debt
instruments and to create an incentive for advanced approaches banking
organizations to limit their exposure to GSIBs. The deductions required
under the proposal would have affected the capital ratios of advanced
approaches banking organizations. Without the proposed changes,
investments in covered debt instruments issued by covered BHCs, foreign
GSIBs, and covered IHCs are generally not subject to deduction and
would generally be subject to a risk weight of 100 percent.
An investment in a covered debt instrument, as defined in the
proposal, by an advanced approaches banking organization would have
been treated as an investment in a tier 2 capital instrument for
purposes of the existing deduction framework. As a result, an
investment in a covered debt instrument would have been subject to
deduction from the advanced approaches banking organization's own tier
2 capital.
The existing corresponding deduction approach in the capital rule
would have been amended to apply any required deduction by advanced
approaches banking organizations of an investment in a covered debt
instrument that exceeded certain thresholds, consistent with the
deduction framework for investments in the capital of unconsolidated
financial institutions. In addition, the existing deduction approaches
under the capital rule would have been amended to apply to an advanced
approaches banking organization's reciprocal cross holdings of covered
debt instruments; that is, an advanced approaches banking organization
would have deducted from its own tier 2 capital any reciprocal cross
holdings of covered debt instruments with another banking organization.
The existing deduction approaches under the capital rule would have
also been amended to apply to a covered BHC's investments in its own
covered debt instruments. Similarly, the existing deduction approaches
under the capital rule would have also been amended to apply to a
covered IHC subject to the advanced approaches (advanced approaches
covered IHC) and its investments in its own covered debt instruments.
The proposal also included certain exclusions from deduction.
Importantly, the proposal would have allowed advanced approaches
banking organizations to exclude from deduction investments in covered
debt instruments, subject to certain qualifying and measurement
criteria, that are five percent or less of the sum of advanced
approaches banking organization's common equity tier 1 capital elements
minus all deductions from and adjustments to common equity tier 1
capital elements required under section __.22(a) through __.22(c)(3),
net of associated DTLs (five percent exclusion). As discussed in the
preamble to the proposal, the agencies designed the exclusion from
deduction to support deep and liquid markets for covered debt
instruments issued by GSIBs. In the case of a U.S. GSIB, it would have
applied the proposed exclusion only to ``excluded covered debt
instruments,'' which were defined in the proposal as covered debt
instruments held for 30 business days or less and held for the purpose
of short-term resale or with the intent of benefiting from actual or
expected short-term price movements, or to lock in arbitrage profits.
This provision was intended to limit the five percent exclusion for
U.S. GSIBs to covered debt instruments held in connection with market
making activities. Advanced approaches banking organizations that are
not U.S. GSIBs would not have been subject to this limit on the use of
the five percent exclusion. Under the proposal's five percent
exclusion, all advanced approaches banking organizations could exclude
covered debt instruments measured on a gross long basis from the
deduction framework up to a cap of five percent of the banking
organization's common equity tier 1 capital.
The proposal would have revised section __.22(c), (f), and (h) of
the capital rule to incorporate the proposed deduction approach for
investments in covered debt instruments, and added several new
definitions to section __.2 to effectuate these deductions. Further,
the definition of ``investment in the capital of an unconsolidated
financial institution'' would have been amended to correct a
typographical error.
Collectively, the agencies received ten public comment letters from
trade associations, public interest groups, private individuals, and
other interested parties. As further detailed below, commenters
generally supported the overarching goal of the proposal to reduce
interconnectedness by creating an incentive for advanced approaches
banking organizations to limit their exposure to GSIBs. However,
commenters also expressed certain general concerns with the proposal
and noted specific concerns with certain technical aspects of it.
The agencies are jointly finalizing a regulatory capital treatment
for investments in covered debt instruments that applies to advanced
approaches banking organizations. The final rule is substantially
consistent with the proposal, with certain modifications in response to
comments as well as some technical clarifications.
IV. Summary of the Final Rule
The final rule applies to advanced approaches banking organizations
and generally requires deductions from capital for direct, indirect,
and synthetic exposures to covered debt instruments and any other
unsecured debt instruments pari passu or subordinated to covered debt
instruments.\17\ Under the final rule, an advanced approaches banking
organization treats investments in covered debt instruments as
investments in tier 2 capital instruments for purposes of applying the
corresponding deduction approach in
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the capital rule. Deduction from capital is required for:
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\17\ As discussed further in section V.C.2 below, the final rule
excludes certain unsecured debt instruments issued by foreign GSIBs
from the scope of the final rule. Specifically, the final rule
generally excludes from the definition of covered debt instrument an
unsecured debt instrument that cannot be written down or converted
into equity (i.e., bailed in) under a special resolution regime.
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Investments in a covered BHC's or advanced approaches
covered IHC's own covered debt instruments, as applicable;
Reciprocal cross holdings with another financial
institution of covered debt instruments;
Investments in covered debt instruments of a financial
institution while also holding 10 percent or more of the financial
institution's common stock; and
Investments in covered debt instruments that, together
with investments in the capital of unconsolidated financial
institutions, exceed 10 percent of the investing advanced approaches
banking organization's common equity tier 1 capital.
Under the final rule, an advanced approaches banking
organization may exclude from deduction investments in certain covered
debt instruments up to five percent of its common equity tier 1
capital, as measured on a gross long basis.\18\ Usage of the five
percent exclusion is tailored, depending on whether the advanced
approaches banking organization is a U.S. GSIB.
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\18\ See 12 CFR 3.22(h)(2) (OCC); 12 CFR 217.22(h)(2) (Board);
12 CFR 324.2(h)(2) (FDIC).
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For U.S. GSIBs, only ``excluded covered debt instruments'' are
eligible for the five percent exclusion in the final rule. Generally,
``excluded covered debt instruments'' in the final rule are investments
in covered debt instruments that are held in accordance with market
making activities, as identified using criteria from the regulations
implementing section 13 of the Bank Holding Company Act (commonly known
as the Volcker Rule) as discussed in more detail in section V.E. below.
A U.S. GSIB's direct or indirect exposure to a covered debt instrument
is an excluded covered debt instrument if the exposure is held for 30
or fewer business days and held in connection with market making-
related activities. A U.S. GSIB's holding of a synthetic exposure to a
covered debt instrument is not limited to 30 business days in order to
qualify as an excluded covered debt instrument.
For advanced approaches banking organizations that are not U.S.
GSIBs, any direct, indirect, or synthetic exposure to a covered debt
instrument issued by an unconsolidated financial institution that is a
non-significant investment is eligible for the five percent exclusion
in the final rule.
The final rule revises section __.22(c), (f), and (h) of the
capital rule to incorporate the deduction approach for investments in
covered debt instruments. As with the proposal, several new definitions
are added to section __.2 in the final rule to effectuate these
deductions. More information on these specific revisions to the capital
rule are provided below.
V. Regulatory Capital Treatment for Advanced Approaches Banking
Organizations' Investments in Covered Debt Instruments
A. Scope of Application
The proposal would have applied the deduction framework for covered
debt instruments to advanced approaches banking organizations. Since
the proposal was issued, the agencies issued the interagency tailoring
final rule that included revisions to the scope of advanced approaches
banking organizations.\19\ As a result of the interagency tailoring
final rule, ``advanced approaches banking organizations'' include those
banking organizations subject to Category I standards (i.e., those
banking organizations that qualify as U.S. GSIBs), Category II
standards (i.e., banking organizations with (1) at least $700 billion
in total consolidated assets or (2) at least $75 billion in cross-
jurisdictional activity and at least $100 billion in total consolidated
assets), or a subsidiary depository institution of a banking
organization subject to Category I or II standards. Some commenters
suggested that the agencies should apply the proposal to all banking
organizations subject to the capital rule. Other commenters suggested
the agencies apply the proposal to all banking organizations subject to
Category I through IV standards, as defined in the interagency
tailoring final rule.\20\
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\19\ See 84 FR 59230 (November 1, 2019).
\20\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC).
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After considering the comments, the agencies are continuing to
limit the scope of this rule to advanced approaches banking
organizations, as revised by the interagency tailoring final rule. As
explained in the proposal, the systemic risks associated with banking
organizations' investments in covered debt instruments is greatest for
the banking organizations covered by the proposal. However, the
agencies acknowledge the possibility of potential systemic risks
associated with other banking organizations' investments in covered
debt instruments and will continue to evaluate whether additional steps
are warranted to address such risks.
B. Deduction From Tier 2 Capital
Under the agencies' capital rule, a banking organization must
deduct from regulatory capital any investments in its own capital
instruments and in the capital of other financial institutions that it
holds reciprocally. Other investments in the capital of unconsolidated
financial institutions are subject to deduction to the extent they
exceed certain thresholds.
Under the proposal, an investment in a covered debt instrument by
an advanced approaches banking organization would have been treated as
an investment in a tier 2 capital instrument for purposes of the
deduction framework, and therefore, would have been subject to
deduction from the advanced approaches banking organization's own tier
2 capital. The existing corresponding deduction approach in the capital
rule would have been amended to apply to any deduction by advanced
approaches banking organizations of an investment in a covered debt
instrument that exceeded certain thresholds, as if the covered debt
instrument were a tier 2 capital instrument. In addition, the existing
deduction approaches under the capital rule would have been amended to
apply to a covered BHC's or advanced approaches covered IHC's
investments in its own covered debt instruments, and to advanced
approaches banking organizations' reciprocal cross holdings of covered
debt instruments with other financial institutions. Such investments
and cross holdings would be deducted from an advanced approaches
banking organization's own tier 2 capital, as applicable.
Some commenters expressed concerns that deducting a covered debt
instrument from an advanced approaches banking organization's own tier
2 capital is insufficiently restrictive. As an alternative, these
commenters recommended that advanced approaches banking organizations
deduct investments in covered debt instruments from their own common
equity tier 1 capital. Some commenters suggested that the prohibition
of all holdings of covered debt instruments by advanced approaches
banking organizations would be more appropriate. Other commenters
expressed concerns that deducting a covered debt instrument from an
advanced approaches banking organization's own tier 2 capital is overly
restrictive. These commenters asserted that a covered BHC or advanced
approaches covered IHC should be able to effectuate deductions
[[Page 712]]
from its own TLAC-eligible long-term debt rather than its own tier 2
capital.
Requiring deduction of a covered debt instrument from tier 2
capital should be a sufficiently prudent and simple approach that
discourages advanced approaches banking organizations' investments in
such instruments and thereby supports the objectives of reducing both
interconnectedness within the financial system and systemic risks.
Effectuating deductions from a covered BHC's or advanced approaches
covered IHC's own TLAC-eligible debt, rather than own tier 2 capital,
could disproportionately favor the largest and most internationally
active banking organizations. A less complex banking organization, such
as a non-GSIB advanced approaches banking organization, would make all
deductions related to an investment in a covered debt instrument from
its own tier 2 capital, since non-GSIBs are not required to issue TLAC-
eligible debt. Further, allowing covered BHCs and advanced approaches
covered IHCs to deduct from their own TLAC-eligible debt creates
additional balance sheet capacity for these banking organizations to
invest in covered debt instruments issued by other GSIBs relative to
non-GSIB advanced approaches banking organizations, thereby undermining
a goal of the final rule to reduce interconnectedness among large and
internationally active banking organizations. The disproportionate
effects of allowing deduction from own TLAC-eligible debt would be
further exacerbated if the agencies were to expand the scope of the
final rule in the future as described above.
As such, the agencies are finalizing, as proposed, the requirement
that an advanced approaches banking organization treat an investment in
a covered debt instrument as an investment in a tier 2 capital
instrument, and therefore, deduct such investment from its own tier 2
capital.
C. Amendments to Definitions
The proposal would have added or amended certain definitions in
section __.2 of the capital rule to implement the proposed deduction
approach.
1. Definition of ``Covered Debt Instrument'' for Covered BHC and
Covered IHC Issuance
Under the proposal, a ``covered debt instrument'' would have been
defined to include an unsecured debt instrument that is:
(1) Issued by a covered BHC and that is an ``eligible debt
security'' for purposes of the TLAC rule,\21\ or that is pari passu or
subordinated to any ``eligible debt security'' issued by the covered
BHC; or
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\21\ See 12 CFR 252.61.
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(2) Issued by a covered IHC and that is an ``eligible Covered IHC
debt security'' for purposes of the TLAC rule,\22\ or that is pari
passu or subordinated to any ``eligible Covered IHC debt security''
issued by the covered IHC.
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\22\ See 12 CFR 252.161.
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Under the proposal, a covered debt instrument would not have
included a debt instrument that qualifies as tier 2 capital under the
capital rule.
Some commenters requested that pari passu or subordinated unsecured
debt instruments be excluded from the definition of ``covered debt
instrument.'' Commenters argued that it is not practical to determine
whether a given instrument is pari passu or subordinated to TLAC-
eligible debt issued by a covered BHC or covered IHC and whether a
given debt instrument was an eligible long-term debt instrument under
the TLAC rule. Further, commenters argued that because the TLAC rule
limits the amount of debt that a covered BHC or covered IHC can issue
that is not TLAC-eligible but is pari passu with or subordinated to
TLAC-eligible debt, significant amounts of such debt should not be
outstanding.
Treating unsecured debt instruments that are pari passu or
subordinated to TLAC-eligible debt instruments as ``covered debt
instruments'' is important, given that these liabilities will incur
losses ahead of or proportionally with TLAC-eligible debt. Excluding
these pari passu and subordinated instruments from the regulatory
deduction treatment would understate the degree of risk of these
investments. Advanced approaches banking organizations should be able
to determine whether an instrument qualifies as TLAC under applicable
standards, or whether an instrument is pari passu or subordinated to a
company's TLAC-eligible debt instruments based on public information
and routine due diligence. Accordingly, the agencies are finalizing as
proposed the above prongs of the definition of covered debt instrument
for covered BHC and covered IHC debt issuances.
2. Definition of ``Covered Debt Instrument'' for Foreign GSIB Issuance
A ``covered debt instrument'' also would have included any
unsecured debt instrument issued by a foreign GSIB or any of its
subsidiaries, other than its covered IHC, for the purpose of absorbing
losses or recapitalizing the issuer or any of its subsidiaries in
connection with a resolution, receivership, insolvency, or similar
proceeding of the issuer or any of its subsidiaries (foreign TLAC-
eligible debt). Further, covered debt instruments would have also
included any debt instrument that is pari passu or subordinated to any
foreign TLAC-eligible debt, other than an unsecured debt instrument
that is included in the regulatory capital of the issuer.
Commenters suggested that the scope of the definition of ``covered
debt instrument'' should be revised to include only foreign TLAC-
eligible debt as determined under applicable home-country
standards.\23\ Commenters stated that the proposed scope of the
definition is broader than necessary because the issuance of such
liabilities is subject to the Financial Stability Board (FSB)'s TLAC
term sheet's limitation on issuance of excluded liabilities.\24\ Some
commenters suggested that liabilities issued by foreign GSIBs that are
``excluded liabilities'' under the FSB's TLAC term sheet should be
excluded from the proposal's definition of covered debt instrument and
therefore exempted from the deduction framework.\25\
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\23\ The Basel Committee's TLAC Holdings standard excludes from
the definition of ``other TLAC liabilities'' instruments that are
pari passu to (1) excluded liabilities and (2) other instruments
that are eligible for recognition as external TLAC by virtue of the
exemptions to the subordination requirements in the Financial
Stability Board's TLAC term sheet. See section 66.c of the TLAC
Holdings standard. Only a proportion of instruments that are
eligible to be recognized as external TLAC by virtue of the
subordination exemptions may be considered TLAC under the TLAC
Holdings standard. The proportion equals the ratio of (1) the debt
instruments issued by a GSIB that rank pari passu to excluded
liabilities and that are recognized as external TLAC by the GSIB, to
(2) the debt instruments issued by the GSIB that rank pari passu to
excluded liabilities and that would be recognized as external TLAC
if the subordination requirement was not applied. As stated in the
proposal, the agencies believe that implementation of the
proportional deduction approach used in the Basel Committee's TLAC
Holdings standard would have introduced too much complexity and
operational burden to the capital rule; the final rule does not
implement the proportional deduction approach. See Basel Committee
for Banking Supervision and Regulation, ``TLAC Holdings'' (October
12, 2016), available at https://www.bis.org/bcbs/publ/d387.pdf.
(TLAC Holdings standard).
\24\ See Financial Stability Board, ``Principles on Loss-
absorbing and Recapitalisation Capacity of G-SIBs in Resolution--
Total Loss-absorbing Capacity (TLAC) Term Sheet,'' (November 9,
2015), available at https://www.fsb.org/wp-content/uploads/TLAC-Principles-and-Term-Sheet-for-publication-final.pdf.
\25\ Under the FSB's TLAC term sheet, ``excluded liabilities''
do not qualify as TLAC and therefore are not subject to deduction
under the TLAC Holdings standard, even if they rank pari passu or
subordinated to a TLAC instrument. Excluded liabilities include
deposits, liabilities arising from derivatives, and structured
notes, among other items. The TLAC rule prohibits or limits covered
banking organizations from entering into financial arrangements that
may compromise an orderly resolution process, including limiting the
amount of liabilities to unaffiliated companies.
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[[Page 713]]
Some commenters reiterated that it is not practical for banking
organizations to determine whether a given instrument is pari passu or
subordinated to foreign TLAC-eligible debt as such a determination
requires complex analyses of foreign law with respect to insolvency
regimes and creditor hierarchies. Commenters also asserted that there
could be unintended consequences of including instruments that are pari
passu or subordinated to foreign TLAC-eligible debt, including
interference with ordinary interbank transactions. As a result, banking
organizations would make conservative assumptions and treat all
unsecured debt instruments issued by foreign GSIBs as subject to the
deduction framework. Therefore, commenters suggested that the final
rule should not include instruments pari passu or subordinated to
foreign TLAC-eligible debt in the definition of ``covered debt
instruments.''
For the same reasons discussed above with respect to instruments
issued by covered BHCs and covered IHCs, the final rule defines debt
instruments that are pari passu or subordinated to foreign TLAC-
eligible debt as ``covered debt instruments.'' As discussed, such
instruments would incur losses ahead of or proportionally with foreign
TLAC-eligible debt and therefore should be subject to the deduction
framework.
However, the agencies recognize the commenters' concerns and revise
in two ways the definition of covered debt instruments issued by
foreign GSIBs and their subsidiaries, other than covered IHCs. First,
the final rule provides that an instrument is a covered debt instrument
if it is ``eligible for use to comply with an applicable law or
regulation'' requiring the issuance of a minimum amount of instruments
to absorb losses or to recapitalize the issuer or any of its
subsidiaries in connection with a resolution, receivership, insolvency,
or similar proceeding. The proposal's definition would not have
explicitly considered whether the instrument is eligible for use to
comply with such a law or regulation.
Second, the final rule revises the definition of a covered debt
instrument to exclude certain unsecured debt instruments from the scope
of the definition. If the issuer may be subject to a special resolution
regime, in its jurisdiction of incorporation or organization, that
addresses the failure or potential failure of a financial company and
foreign TLAC-eligible debt is eligible under that special resolution
regime to be written down or converted into equity or any other capital
instrument, then an instrument is pari passu or subordinated to foreign
TLAC-eligible debt if that instrument is eligible to be written down or
converted into equity or another capital instrument under that special
resolution regime ahead of or proportionally with any foreign TLAC-
eligible debt. These revisions reflect the FSB's TLAC term sheet's
focus on having instruments and liabilities that should be readily
available for bail-in, and that instruments that cannot be bailed in
effectively rank senior to foreign TLAC-eligible debt in bail-in.\26\
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\26\ Generally, a resolution regime that is consistent with the
FSB's Key Attributes of Effective Resolution Regimes for Financial
Institutions would be a special resolution regime that addresses the
failure or potential failure of a financial company. See Financial
Stability Board, ``Key Attributes of Effective Resolution Regimes
for Financial Institutions,'' (October 15, 2014), https://www.fsb.org/wp-content/uploads/r_141015.pdf. Current examples of
special resolution regimes that address the failure or potential
failure of a financial company are those included in the
International Swaps and Derivatives Association (ISDA) 2015
Universal Resolution Stay Protocol and the ISDA 2018 U.S. Resolution
Stay Protocol. See ISDA 2015 Universal Resolution Stay Protocol
(November 4, 2015), http://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf; ISDA 2018 U.S. Resolution Stay Protocol (July 31,
2018), https://www.isda.org/a/CIjEE/3431552_40ISDA-2018-U.S.-Protocol-Final.pdf.
---------------------------------------------------------------------------
These revisions should reduce the burden associated with
determining whether unsecured debt instruments are pari passu or
subordinated to foreign TLAC-eligible debt. For purposes of the final
rule, an advanced approaches banking organization can rely on the terms
of any special resolution regime and other applicable laws or
regulations for purposes of determining the applicability of the final
rule's deduction framework for an unsecured debt instrument. For
example, if the applicable law or regulation specifies the seniority of
instruments that must be issued, the advanced approaches banking
organization can rely on that specification of seniority in determining
whether a different instrument is pari passu or subordinated to TLAC-
eligible debt instruments.
These revisions also address concerns raised by commenters that the
proposal could have interfered with ordinary interbank transactions.
For example, if the special resolution regime applicable to a foreign
GSIB provides that deposits are excluded from bail-in, those deposits
are not covered debt instruments subject to the final rule's deduction
framework.
3. Other Definitions
Similar to the measurement of investments in the capital of
unconsolidated financial institutions, an ``investment in a covered
debt instrument'' would have been defined in the proposal as a net long
position in a covered debt instrument, including direct, indirect, and
synthetic exposures to such covered debt instruments. Investments in
covered debt instruments would have excluded underwriting positions
held for five business days or less. In addition, the proposal would
have amended the definitions of ``indirect exposure'' and ``synthetic
exposure'' in the capital rule to add exposures to covered debt
instruments.\27\ The agencies received no comments on these technical
elements of the proposal, and are finalizing, as proposed, the
definitions for ``investment in a covered debt instrument,'' ``indirect
exposure,'' and ``synthetic exposure.''
---------------------------------------------------------------------------
\27\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR
324.2 (FDIC) (``investment in the capital of an unconsolidated
financial institution,'' ``investment in the banking organization's
own capital instrument,'' ``indirect exposure,'' and ``synthetic
exposure'').
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D. Investments in Covered Banking Organizations' Own Covered Debt
Instruments and Reciprocal Cross Holdings
Under the agencies' capital rule, a banking organization must
deduct from regulatory capital an investment in its own capital
instruments and investments in the capital of other financial
institutions that it holds reciprocally under sections __.22(c)(1) and
(3), respectively. The proposal would have amended section 217.22(c)(1)
to require a covered BHC or a covered IHC to deduct from tier 2 capital
its investments in its own covered debt instruments. The proposal also
would have amended section __.22(c)(3) to require advanced approaches
banking organizations to deduct from tier 2 capital any investment in a
covered debt instrument that is held reciprocally with another
financial institution.
As described earlier, some commenters expressed concerns that
deducting a covered debt instrument from an advanced approaches banking
organization's own tier 2 capital is overly restrictive, including in
cases of deductions for investments in its own covered debt
instruments, as applicable,
[[Page 714]]
and reciprocal cross holdings with other financial institutions. These
commenters asserted that a covered BHC or a covered IHC should be able
to effectuate deductions from its own TLAC-eligible long-term debt
rather than its own tier 2 capital for these investments.
Requiring a deduction of a covered debt instrument from tier 2
capital for deductions related to investments in an advanced approaches
banking organization's own covered debt instruments and reciprocal
cross holdings should be a sufficiently prudent and simple approach
that discourages advanced approaches banking organizations' investments
in such instruments, as applicable, and thereby supports the objectives
of reducing both interconnectedness within the financial system and
systemic risks. As mentioned earlier, effectuating deductions from a
covered BHC's or a covered IHC's own TLAC-eligible debt, rather than
its own tier 2 capital, could disproportionately favor the largest and
most internationally active banking organizations. As such, the
agencies are finalizing, as proposed, that an advanced approaches
banking organization will generally deduct investments in own covered
debt instruments, as applicable, and reciprocal cross holdings with
other financial institutions in covered debt instruments from its own
tier 2 capital.
Commenters asked that the final rule include a separate deduction
threshold for market making activities in an advanced approaches
banking organization's own covered debt instruments capped at five
percent of a covered BHC's or advanced approaches covered IHC's own
common equity tier 1 capital. Commenters stated that such a threshold
is necessary to better facilitate deep and liquid markets for TLAC-
eligible debt instruments. Further, commenters claimed that GSIBs are
often the biggest market makers in their own covered debt instruments
and, under the U.S. GAAP accounting standard, their own holdings of
covered debt instruments are not always eliminated in full in
consolidation. In cases where a GSIB's investments in its own covered
debt instruments are not fully extinguished, the exposure amount can be
greater than zero and therefore subject to deduction from tier 2
capital under the proposal.
Commenters stated that a separate five percent threshold for market
making in an advanced approaches banking organization's own covered
debt instruments in the final rule would prevent a capital deduction
for such investments. However, finalizing the rule with a separate
threshold for investments in an advanced approaches banking
organization's own covered debt instruments could create additional
balance sheet capacity for covered BHCs and advanced approaches covered
IHCs to increase their investments in covered debt instruments issued
by other GSIBs. Such an approach would not align with the proposal's
goal of reducing interconnectedness and systemic risks among large and
internationally active banking organizations. Therefore, the final rule
does not implement this suggested change.
E. Significant and Non-Significant Investments in Covered Debt
Instruments
Under sections __.22(c)(5) and (6) of the capital rule, an advanced
approaches banking organization must deduct from regulatory capital
certain investments in the capital of unconsolidated financial
institutions. The calculation of the deduction depends on whether the
banking organization has a ``significant'' or a ``non-significant''
investment, with ``significant'' defined as ownership of more than 10
percent of the common stock of the unconsolidated financial institution
and ``non-significant'' defined as ownership of 10 percent or less of
the common stock of the unconsolidated financial institution.\28\ When
a banking organization has a ``significant investment'' in an
unconsolidated financial institution, the banking organization must
deduct from regulatory capital any investment in the capital of the
unconsolidated financial institution that is not in the form of common
stock as measured on a net long basis, and the banking organization
must also deduct from regulatory capital any investment in the capital
of the unconsolidated financial institution in the form of common stock
that exceeds 10 percent of the advanced approaches banking
organization's own common equity tier 1 capital as measured on a net
long basis.\29\ If an advanced approaches banking organization has one
or more ``non-significant investments'' in unconsolidated financial
institutions, it must aggregate such investments and deduct from
regulatory capital any amount that exceeds the 10 percent threshold for
non-significant investments, as measured on a net long basis.\30\
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\28\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC) (``significant investment in the capital of an unconsolidated
financial institution'' and ``non-significant investment in the
capital of an unconsolidated financial institution'').
\29\ See 12 CFR 3.22(c)(6) and (d)(2)(i)(C) (OCC); 12 CFR
217.22(c)(6) and (d)(2)(i)(C) (Board); and 12 CFR 324.22(c)(6) and
(d)(2)(i)(C) (FDIC). In addition to the 10 percent threshold, a
banking organization could be subject to additional deductions for
significant investments in financial institutions in the form of
common stock, if the amount not deducted under the 10 percent limit,
combined with mortgage servicing assets and deferred tax assets that
are not deducted, exceed 15 percent of the banking organization's
common equity tier 1 capital. See 12 CFR 3.22(d) (OCC); 12 CFR
217.22(d) (Board); and 12 CFR 324.22(d) (FDIC).
\30\ See 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board);
and 12 CFR 324.2(c)(5) (FDIC).
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The proposal would have amended the capital rule to require an
advanced approaches banking organization with an investment in a
covered debt instrument issued by an unconsolidated financial
institution to deduct the investment from tier 2 capital if the
advanced approaches banking organization has a significant investment
in the capital of the unconsolidated financial institution. The
agencies received no comments on deductions for significant investments
in the capital of an unconsolidated financial institution and are
finalizing this aspect of the rule as proposed.
The proposal would have amended the capital rule to require an
advanced approaches banking organization with an investment in a
covered debt instrument in a financial institution in which the
advanced approaches banking organization does not also have a
significant investment in the form of common stock to include such
investment in the covered debt instrument in the aggregate amount of
non-significant investments in the capital of unconsolidated financial
institutions. As under the existing capital rule, the proposal would
have required an advanced approaches banking organization to deduct
from regulatory capital the amount by which the aggregate amount of
non-significant investments in the capital of unconsolidated financial
institutions and such covered debt instruments exceeds the 10 percent
threshold for non-significant investments. Any investment in a covered
debt instrument subject to deduction would have been deducted according
to the corresponding deduction approach described below in section V.F.
Any investment in a covered debt instrument not subject to deduction
would have been included in risk-weighted assets, generally with a 100
percent risk weight.
Some commenters suggested that the agencies recalibrate the 10
percent threshold for non-significant investments in consideration of
the expanded scope of instruments that would be included within that
threshold under the proposal. For
[[Page 715]]
example, some commenters asked the agencies to expand the non-
significant investments threshold to 10 percent of an advanced
approaches banking organization's own total capital from 10 percent of
its own common equity tier 1 capital. Changing the non-significant
investments threshold in the manner the commenters suggested could
undermine a main goal of the proposal--to reduce interconnectedness
among large and internationally active banking organizations.
Accordingly, the final rule requires an advanced approaches banking
organization with an investment in a covered debt instrument in a
financial institution in which the advanced approaches banking
organization does not have a significant investment to include such
investment in the aggregate amount of non-significant investments in
the capital of unconsolidated financial institutions, as proposed.
Further, the final rule requires an advanced approaches banking
organization to deduct from regulatory capital the amount by which the
aggregate amount of non-significant investments in the capital of
unconsolidated financial institutions exceeds the 10 percent threshold
for non-significant investments, as proposed.
The proposal would have included limited exclusions from the 10
percent threshold for non-significant investments' deduction approach.
The exclusions would have depended on whether an advanced approaches
banking organization is a U.S. GSIB or a subsidiary of a U.S. GSIB
(U.S. GSIB banking organization). To help support a deep and liquid
market for covered debt instruments, the proposal would have permitted
U.S. GSIB banking organizations to exclude limited amounts of market
making exposures (``excluded covered debt instruments'') from the 10
percent threshold for non-significant investments deduction. For
example, a U.S. GSIB could have excluded covered debt instruments from
the aggregate amount of non-significant investments in the capital of
unconsolidated financial institutions. The aggregate amount of the
exclusion, measured on a gross long basis, was limited to five percent
of the GSIB's own common equity tier 1 capital (market making
exclusion). If the aggregate amount of excluded covered debt
instruments were more than five percent of the common equity tier 1
capital, then the excess over five percent would have been subject to
deduction from tier 2 capital on a gross long basis. In addition, if an
excluded covered debt instrument were held for more than 30 business
days or ceased to be held in connection with market making activities,
then the excluded covered debt instrument would have been subject to
deduction from tier 2 capital on a gross long basis. Finally, in order
to dissuade regulatory arbitrage, the proposal would not have allowed
U.S. GSIB banking organizations to subsequently move ``excluded covered
debt instruments'' from the market making exclusion to the 10 percent
threshold for non-significant investments.
Commenters stressed the importance of derivatives to market making
activities in securities, particularly covered debt instruments issued
by GSIBs. In market making transactions, U.S. GSIBs will often act as
financial intermediaries between clients, transferring risks related to
covered debt instruments. This risk transfer is often conducted through
offsetting derivative transactions or directly buying and selling
covered debt instruments. Commenters stated that this market making
activity supports deep and liquid markets for covered debt instruments
by allowing investors to reduce (or gain) exposure to covered debt
instruments without actually selling (or buying) the securities.
Derivatives are essential to such activities because they allow market
makers to establish and hedge these exposures.
As such, these commenters asserted that the agencies should
eliminate the proposed 30-business-day requirement because it would
make the proposed market making exclusion unavailable for many market
making activities that support the depth and liquidity of the markets
for TLAC-eligible debt, in particular synthetic exposures from
derivatives used in market making activities. These commenters noted
that bona fide market making activities, including derivative- and
hedging-related activities, often involve holding exposures for longer
than 30 business days. Commenters further indicated that the 30-
business-day requirement would also create incentives for U.S. GSIB
banking organizations to arbitrage the final rule by exiting and
reestablishing hedge positions to avoid a mandatory deduction from tier
2 capital if the position is held for more than 30 business days.
Commenters indicated that re-establishing hedge positions would result
in costs to banking organizations and clients without reducing the
risks associated with the transactions. Additionally, these commenters
indicated that the vast majority of market making activity in covered
debt instruments is in the form of derivative exposures. Therefore,
retaining the 30-business-day requirement would arguably make the five
percent exclusion inoperable for most market making activities in
covered debt instruments. As an alternative to the proposed market
making standard and the proposed 30-business-day requirement,
commenters suggested the agencies use the regulatory framework
implementing the Volcker Rule to identify which positions in covered
debt instruments are held for market making purposes and eliminate the
30-business-day requirement. These commenters stated that this approach
would promote effectiveness, simplicity, and efficiency in the
regulation.
After considering commenters' suggestions to eliminate the proposed
30-business-day requirement for market making in covered debt
instruments, the agencies have revised the proposal by removing the 30-
business-day requirement for market making in the form of ``synthetic
exposures'' as defined in the agencies' capital rule.\31\ Synthetic
market making exposures, such as derivatives, may frequently be held
for more than 30 business days. Removing the 30-business-day
requirement for synthetic exposures would, relative to the proposal,
better align with the proposal's goal of supporting deep and liquid
markets for covered debt instruments by allowing synthetic exposures
arising from market making activities to be included in the market
making exclusion, subject to limits. As discussed, this exclusion is
limited to five percent of common equity tier 1 capital, measured on a
gross long basis. These limits are consistent with financial stability
goals of avoiding asset fire sales in times of stress, encouraging
risk-mitigating hedges, and reducing interconnectedness while still
supporting deep and liquid markets for TLAC-eligible debt instruments.
Accordingly, the final rule reflects this change. However, the agencies
continue to believe that the 30-business-day requirement is an
appropriate metric to identify market making positions in ``direct''
investments in covered debt instruments (i.e., holding the instrument
on the banking organization's balance sheet) and ``indirect''
investments in covered debt instruments (i.e., exposure to the
instrument through investment funds).\32\ Direct investments in covered
[[Page 716]]
debt instruments held in connection with market making should turn over
regularly and the agencies seek to dis-incentivize long-term direct and
indirect exposures to covered debt instruments, given the risk of
write-down or conversion to equity of such instruments.
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\31\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC) (``synthetic exposure'').
\32\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC) (``investment in the capital of an unconsolidated financial
institution'' and ``indirect exposure'').
---------------------------------------------------------------------------
Therefore, the final rule retains the 30-business-day requirement
for ``direct'' and ``indirect'' investments in excluded covered debt
instruments, but not for ``synthetic'' investments in excluded covered
debt instruments. This change from the proposal should balance the
goals of limiting interconnectedness among the largest and most
internationally active banking organizations and promoting the
liquidity of TLAC-eligible debt instruments. Additionally, the agencies
clarify that there is no requirement under the final rule to assign
investments in covered debt instruments held in connection with market
making as ``excluded covered debt instruments.'' To the extent a U.S.
GSIB banking organization has available capacity, all investments in
covered debt instruments could be held on a net long basis as non-
significant investments in the capital of an unconsolidated financial
institution subject to the 10 percent threshold for non-significant
investments.
After consideration of comments, the agencies also have revised the
rule to use the Volcker Rule exemption for market making activities to
identify covered debt instruments held for market making for purposes
of qualifying for the final rule's market making exclusion. Relative to
the proposal, this change should decrease compliance burden by allowing
banking organizations to use a single methodology for identifying
market making activities, rather than two similar, but non-identical
regulatory standards.
This approach would capture essentially the same set of exposures
as the proposal's standard. However, the final rule's definition of
``excluded covered debt instrument'' differs from the proposal by
referring to the relevant provisions of each agency's rule implementing
the market making exemption in the Volcker Rule.\33\
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\33\ See 12 CFR 44.4 (OCC); 12 CFR 248.4 (Board); 12 CFR 351.4
(FDIC).
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The proposal also included a simpler deduction approach for
advanced approaches banking organizations that are not U.S. GSIB
banking organizations given that these banking organizations pose less
systemic risks than U.S. GSIBs. Unlike a U.S. GSIB, these banking
organizations can include any non-significant investments in covered
debt instruments of unconsolidated financial institutions in the five
percent exclusion (i.e., use of the exclusion is not restricted to only
those investments held in connection to market making activities). Any
amount in excess of this five percent exclusion would be subject to the
10 percent threshold for non-significant investments deduction on a net
long basis. The agencies did not receive comments on this provision of
the proposal. Therefore, the final rule implements the five percent
exclusion for advanced approaches banking organizations that are not
U.S. GSIBs as proposed.
As noted above, an advanced approaches banking organization could
exclude certain investments in covered debt instruments, as applicable,
from the 10 percent threshold for non-significant investments
calculation and potential deduction under section __.22(c)(4) if the
aggregate amount of covered debt instruments, measured by gross long
position, were five percent or less of its common equity tier 1
capital. To achieve consistency with the TLAC Holdings standard and
with the calculation of the 10 percent threshold for non-significant
investments deduction, the agencies are modifying the calculation for
determining the amount of covered debt instruments that can be omitted
from the 10 percent threshold for non-significant investments
calculation. Under the final rule, an advanced approaches banking
organization can omit covered debt instruments from the 10 percent
threshold calculation and potential deduction under section __.22(c)(4)
if the aggregate amount of covered debt instruments, measured by gross
long position, is five percent or less of the sum of the banking
organization's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under section __.22(a) through __.22(c)(3), net of
associated deferred tax liabilities (DTLs). This includes, for example,
deductions related to goodwill, intangibles, and deferred tax assets,
and adjustments related to accumulated net gains and losses on cash
flow hedges. The agencies believe that to achieve consistency and
clarity throughout the deduction framework, the amount of covered debt
instruments that can be omitted from the 10 percent threshold for non-
significant investments calculation should be computed using the same
basis as the 10 percent threshold for non-significant investments
calculation itself.
The agencies intend to monitor advanced approaches banking
organizations' holdings of covered debt instruments in the form of
synthetic exposures to ensure that the capital held for these positions
is commensurate with risk and that such holdings do not raise safety
and soundness concerns. Further, to better understand advanced
approaches banking organizations' risk from exposures to the capital of
unconsolidated financial institutions, the agencies may issue an
information collection proposal to collect quarterly data on advanced
approaches banking organizations' non-significant investments in the
capital of unconsolidated financial institutions and excluded covered
debt instruments, as applicable.
Some commenters disagreed with the proposal's design of the
exclusions for covered debt instruments, which measures positions on a
gross long basis. These commenters suggested that the measurement of
the exclusions for covered debt instruments be based on the ``net long
position,'' in accordance with the agencies' capital rule, which allows
gross long positions to be offset against qualifying short
positions.\34\ The commenters noted that the 10 percent threshold for
non-significant investments is based on the ``net long position'' and
suggested that the exclusions for covered debt instrument be consistent
with that standard. Further, commenters stated that finalizing the
exclusions for covered debt instruments based on a net long position
measurement basis would allow advanced approaches banking organizations
to better support the depth and liquidity of market making in TLAC-
eligible debt instruments, because market making activities are
typically well hedged and a ``net long position'' would allow more
positions to qualify for the exclusions.
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\34\ See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h) (Board); 12 CFR
324.22(h) (FDIC).
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The final rule maintains measurement of the exclusions for covered
debt instruments based on the gross long position. Moving to a ``net
long position'' measurement could undermine the agencies' goal of
reducing interconnectedness among large and internationally active
banking organizations as it would allow such banking organizations to
accumulate exposure to covered debt instruments significantly beyond
the threshold envisioned in the proposal. Further, advanced approaches
banking
[[Page 717]]
organizations are able to assign hedged covered debt instrument
exposures to the 10 percent threshold for non-significant investments
on a net long basis. The optional exclusions remain available to
support market making activities such as accumulating short term cash
positions to meet customer demand and to acquire additional long
positions in covered debt instruments to facilitate market
stabilization during times of stress. Such an approach is consistent
with financial stability goals of avoiding asset fire sales in times of
stress, encouraging risk-mitigating hedges, and reducing
interconnectedness while still supporting deep and liquid markets for
TLAC-eligible debt instruments.
F. Corresponding Deduction Approach
Under the corresponding deduction approach, a banking organization
must apply any required deduction to the component of capital for which
the underlying instrument would qualify if it were issued by the
banking organization.\35\ If the banking organization does not have
enough of the component of capital to fully effect the deduction, the
corresponding deduction approach provides that any amount of the
investment that has not already been deducted would be deducted from
the next, more subordinated component of capital.\36\ If, for example,
a banking organization has insufficient amounts of tier 2 capital and
additional tier 1 capital to effect a required deduction, the banking
organization would need to deduct from common equity tier 1 capital the
amount of the investment that exceeds the tier 2 and additional tier 1
capital of the banking organization.\37\ The proposal would have
amended the corresponding deduction approach in section __.22(c)(2) of
the capital rule to specify that an investment in a covered debt
instrument by an advanced approaches banking organization would have
been subject to the corresponding deduction approach, with the covered
debt instrument treated as a tier 2 capital instrument. Some commenters
disagreed with this approach and, instead, asked the agencies to treat
investments in covered debt instruments as a common equity tier 1
capital instrument or, as applicable, allow deductions under the
corresponding deduction approach from own TLAC-eligible debt
instruments.
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\35\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board);
and 12 CFR 324.22(c)(2) (FDIC).
\36\ See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 217.22(c)(2)
and (f) (Board); and 12 CFR 324.22(c)(2) and (f) (FDIC).
\37\ See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); and 12
CFR 324.22(f) (FDIC).
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As stated earlier, requiring a deduction of a covered debt
instrument from tier 2 capital should serve as a sufficiently prudent
and simple approach that dis-incentivizes advanced approaches banking
organizations' investments in such instruments and thereby supports the
objectives of reducing both interconnectedness within the financial
system and systemic risks. Accordingly, the agencies are finalizing the
proposal's amendments to the corresponding deduction approach in
section __.22(c)(2) of the capital rule
G. Net Long Position Calculation
The proposal would have followed the same general approach as
currently provided under the agencies' capital rule regarding the
calculation of the amount of any deduction and the treatment of
guarantees and indirect investments for purposes of the deductions.
Under the capital rule, the amount of a banking organization's
investment in its own capital instrument or in the capital of an
unconsolidated financial institution subject to deduction is the
banking organization's net long position in the capital instrument as
calculated under section __.22(h) of the capital rule. Under section
__.22(h), a banking organization may net certain qualifying short
positions in a capital instrument against a gross long position in the
same instrument to determine the net long position.
The proposal would have modified section __.22(h) of the capital
rule such that an advanced approaches banking organization would
determine its net long position in an exposure to its own covered debt
instrument, as applicable, or in a covered debt instrument issued by an
unconsolidated financial institution in the same manner as currently
provided for investments in an institution's own capital instruments or
investments in the capital of an unconsolidated financial institution,
respectively. Consistent with the capital rule, the calculation of a
net long position under the proposal would have taken into account
direct investments in covered debt instruments as well as indirect
exposures to covered debt instruments held through investment funds.
A banking organization has three options under the capital rule to
measure its gross long position in a capital instrument held indirectly
through an investment fund.\38\ The proposal would have amended section
__.22(h)(2)(iii) of the capital rule to provide the same three options
to determine the gross long position in a covered debt instrument held
through an investment fund. The agencies received no comments on this
aspect of the proposal and the final rule adopts the changes as
proposed.
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\38\ See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR 217.12(h)(2)(iii)
(Board); and 12 CFR 324.22(h) (2)(iii) (FDIC).
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The agencies' capital rule sets qualifying criteria for recognizing
short positions that can be netted against gross long positions;
specifically, a short position must be in the ``same instrument'' as
the gross long position and must meet minimum maturity requirements,
among other requirements.\39\ The proposal would not have changed these
operational criteria for recognizing short positions in the calculation
of a net long position. Some commenters advocated for changes to the
capital rule's requirements for recognizing a short position under
section __.22(h)(3). These commenters argued that the capital rule
should be modified to not require short positions to be in the ``same
instrument'' as the gross long position when calculating the net long
position. Instead, commenters recommended that the final rule allow
recognized short positions to be in any instrument that is pari passu
or subordinated to the gross long position's instrument. These
commenters recommended that this change should also apply to
calculating the net long position of investments in covered debt
instruments in the final rule.
---------------------------------------------------------------------------
\39\ See 12 CFR 3.22(h)(3) (OCC); 12 CFR 217.12(h)(3) (Board);
and 12 CFR 324.22(h)(3) (FDIC).
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The agencies have consistently maintained that recognition of short
positions under the net long position calculation are required to be in
the ``same instrument'' as a matter of prudent risk management and
hedging practices. To recognize short positions in other than the
``same instrument'' would potentially undermine the effectiveness of
risk mitigating hedges. Accordingly, the final rule adopts the
calculation of the net long position as proposed.
Under the proposal, for purposes of any deduction required for an
advanced approaches banking organization's investment in the capital of
an unconsolidated financial institution, the amount of a covered debt
instrument would have included any contractual obligations the advanced
approaches banking organization has to purchase such covered debt
instruments. The
[[Page 718]]
agencies received no comment on this aspect of the proposal, and the
final rule adopts this change as proposed.
VI. Technical Amendment and Other Comments
The agencies proposed amending the definition of ``investment in
the capital of an unconsolidated financial institution'' in section
__.2 of the capital rule to correct a drafting error in that
definition. The agencies did not receive any comment with regard to the
proposed technical amendment. However, in the period between the
issuance of the proposal and this final rule, this technical amendment
was implemented by the agencies' final rule to simplify the capital
rule.\40\
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\40\ See 84 FR 35234 (July 22, 2019).
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A few commenters suggested that the proposal should go further in
limiting the exposure of advanced approaches banking organizations to
GSIBs, given their size and the risk their failure could pose to the
financial system. These commenters argued that the final rule should
ensure that the cost of TLAC debt better reflect heightened risks of
GSIBs and that the agencies should require U.S. GSIBs to hold more
common equity tier 1 capital. Other commenters suggested that the
agencies consider existing elements of the regulatory framework--such
as the single counterparty credit limit and the GSIB surcharge--when
finalizing the deduction framework.
Under the capital rule, each agency has the authority to require a
banking organization to hold additional capital based on the banking
organization's risk profile.\41\ Similarly, while other elements of the
regulatory framework address the systemic risks of large,
internationally active banking organizations or concentrations of
exposures to counterparties, no existing regulation specifically
address the risks associated with investments in TLAC-eligible debt
instruments. The agencies, therefore, are finalizing the proposal to
establish a regulatory capital treatment for investments in covered
debt instruments with certain modifications, as previously described.
---------------------------------------------------------------------------
\41\ See 12 CFR 3.1(d)(1) (OCC); 12 CFR 217.1(d)(1) (Board); 12
CFR 324.1(d)(1) (FDIC).
---------------------------------------------------------------------------
The proposal did not contemplate providing a transition period for
implementation of the final rule by advanced approaches banking
organizations. Some commenters requested that the agencies provide
banking organizations with a transition period to ease compliance
burden. Specifically, commenters requested that the agencies provide 18
months before banking organizations must effectuate the deduction
treatment. These commenters asserted that a transition period would
give banking organizations more time to build out systems to track
which instruments are covered debt instruments and therefore subject to
the deduction framework. A commenter requested that the agencies not
require deduction of any unsecured debt instrument issued by a GSIB
until the information necessary to determine whether the instrument is
a covered debt instrument is available.
The agencies maintain the supervisory expectation that large and
internationally active banking organizations should be deeply
knowledgeable of the securities exposures on their own balance sheets,
if only for the purposes of prudent risk management. The final rule
will become effective on April 1, 2021. The agencies believe this
effective date provides sufficient time for advanced approaches banking
organizations to evaluate investments in covered debt instruments and
apply the final rule's deduction treatment.
In addition to the above, the agencies are making certain technical
amendments to section __.10 of the capital rule to more clearly
differentiate between requirements applicable to advanced approaches
banking organizations and those applicable to Category III banking
organizations. In section __.10 of the capital rule, as amended by the
recent interagency tailoring rule,\42\ paragraphs (c)(1)-(3) describe
the capital ratio calculations applicable to advanced approaches
banking organizations, whereas paragraph 10(c)(4) of the capital rule
describes the supplementary leverage ratio calculations applicable to
both advanced approaches banking organizations and Category III banking
organizations. To avoid confusion, the agencies are amending section
__.10 of the capital rule such that paragraph (c) will provide only the
supplementary leverage ratio requirements. The advanced approaches
capital calculations will be moved to revised paragraph (d) of section
__.10 of the capital rule. Current paragraph (d), Capital adequacy,
will be re-designated as paragraph (e) of section __.10 of the capital
rule. The agencies are also amending language in sections __.2 and
__.121 of the capital rule to correct cross-references in light of the
amendments described above. These technical amendments do not amend any
substantive requirements applicable to banking organizations.
---------------------------------------------------------------------------
\42\ 84 FR 59230 (November 1, 2019).
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VII. Amendments to the Board's TLAC Rule
In 2018, the Board issued a notice of proposed rulemaking that,
among other items, included minor proposed amendments to the Board's
TLAC rule.\43\ The proposal included revisions to ensure that the
external TLAC risk-weighted buffer level, TLAC leverage buffer level,
and the TLAC buffer level for covered IHCs would be amended to use the
same haircuts applicable to LTD instruments that are currently used to
calculate outstanding minimum required TLAC amounts, which do not
include a 50 percent haircut on LTD instruments with a remaining
maturity of between one and two years. Another proposed amendment was
to ensure that the term ``external TLAC risk-weighted buffer'' is used
consistently in the TLAC rule. The proposal also would have provided
that a new covered IHC would always have three years to conform to most
of the requirements of the TLAC rule, and to align the articulation of
the methodology for calculating the covered IHC's LTD instrument amount
with the same methodology used for GSIBs.
---------------------------------------------------------------------------
\43\ 83 FR 17317, 17322 (April 19, 2018).
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The Board received minimal comments on these proposed revisions to
the TLAC rule within the comments received on its proposal overall and
the comments received were supportive of the specific proposed
revisions. As a result, the Board is issuing these revisions in the
final rule without change from the proposal.
VIII. Changes to Regulatory Reporting
A. Deductions From Tier 2 Capital Related to Investments in Covered
Debt Instruments and Excluded Covered Debt Instruments
In the April 2019 rulemaking, the Board proposed to modify the
instructions to the Consolidated Financial Statements for Holding
Companies (FR Y-9C), Schedule HC-R, Part I and Part II, to effectuate
the deductions from regulatory capital for Board-regulated advanced
approaches banking organizations related to investments in covered debt
instruments and excluded covered debt instruments as described in the
proposal.
Specifically, the Board would have modified the instructions of the
FR Y-9C for Schedule HC-R, Part I, item 33, ``Tier 2 capital
deductions.'' On the FR Y-9C, a covered BHC would have been required to
deduct from tier 2 capital
[[Page 719]]
the aggregate amount of its investments in covered debt instruments
that, when combined with the banking organization's other non-
significant investments in the capital of unconsolidated financial
institutions, exceed 10 percent of the common equity tier 1 capital of
the banking organization. Also, if an excluded covered debt instrument
were held by a covered BHC for more than 30 business days, or no longer
held in connection with market making-related activities, the excluded
covered debt instrument would have been deducted from tier 2 capital.
In addition, for purposes of the deduction requirements related to
non-significant investments in the capital of unconsolidated financial
institutions, Board-regulated advanced approaches banking organizations
that are not covered BHCs would have been required to deduct from tier
2 capital those investments in covered debt instruments that exceed
five percent of common equity tier 1 capital, and that also, when
combined with the banking organization's other non-significant
investments in unconsolidated financial institutions, exceed 10 percent
of the common equity tier 1 capital of the banking organization. The
Board also would have modified the instructions for calculating other
deduction-related and risk-weighted asset line items to incorporate
investments in covered debt instruments and excluded covered debt
instruments, as applicable, by Board-regulated advanced approaches
banking organizations.
In October 2019, the Federal Financial Institutions Examination
Council (FFIEC) separately proposed to modify the Consolidated Reports
of Condition and Income for a Bank with Domestic and Foreign Offices
(FFIEC 031), Consolidated Reports of Condition and Income for a Bank
with Domestic Offices Only (FFEIC 041) (collectively with the FFIEC
031, the Call Report),\44\ and Regulatory Capital Reporting for
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC
101) in a manner consistent with the changes described above to the FR
Y-9C to effectuate the proposal's deduction approach for investments in
covered debt instruments and excluded covered debt instruments, as
applicable.\45\
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\44\ The proposed modifications would not affect the
Consolidated Reports of Condition and Income for a Bank with
Domestic Offices Only and Total Assets Less than $1 Billion (FFIEC
051) because banks and savings associations that are advanced
approaches banking organizations are not eligible to file the FFIEC
051 report.
\45\ See 84 FR 53227 (October 4, 2019).
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In March 2020, the Board separately proposed conforming changes to
the FR Y-14 to effectuate the proposed deduction framework for
investments in covered debt instruments.\46\
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\46\ See 85 FR 15776 (March 19, 2020).
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With respect to the FR Y-9C proposed changes, one commenter
requested clarification on the sequencing of reporting changes related
to effectuating deductions for covered debt instruments and the
effective date of the final rule. Specifically, this commenter
requested that the effective date of the final rule should precede any
requirement to begin effectuating deductions related to investments in
covered debt instruments on regulatory reports. The agencies confirm
that the effective date of the final rule will precede any reporting
requirements related to implementing the deduction framework for
covered debt instruments. The Board received no comments on the FR Y-14
proposed changes.
As described above, reporting changes to effectuate the deduction
framework for investments in covered debt instruments described in the
proposal were proposed separately for the (1) FR Y-9C, (2) FFIEC 101
and Call Report, and (3) FR Y-14. The Board is finalizing as proposed,
changes to the FR Y-9C and FR Y-14, to effectuate the deduction
framework for investments in covered debt instruments in this Federal
Register notice. The agencies will address comments submitted in
connection with the FFIEC's October 2019 proposal when those forms and
instructions are finalized in a separate Federal Register notice,
consistent with the final rule.
B. Public Disclosure of Long-Term Debt and TLAC by Covered BHCs and
Covered IHCs
In the April 2019 rulemaking, the Board also proposed to modify
Schedule HC-R, Part I of the FR Y-9C by adding new data items that
would publicly disclose: (1) The long-term debt and TLAC for covered
BHCs and covered IHCs; (2) these banking organizations' long-term debt
and TLAC ratios to ensure compliance with the TLAC rule; (3) TLAC
buffers; and (4) amendments to the instructions for the calculation of
eligible retained income (item 47), institution-specific capital buffer
(items 46.a and 46.b), and distributions and discretionary bonus
payments (item 48) for covered BHCs and covered IHCs.\47\ Commenters
suggested that the Board clarify in the final rule when changes to FR
Y-9C related to long-term debt and TLAC reporting disclosures will
become effective. Reporting changes for deductions related to
investments in covered debt instruments on the FR Y-9C will not go into
effect until after the final rule's effective date.
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\47\ See 84 FR 13823-13824 (April 8, 2019).
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In March 2020, the Board separately proposed conforming changes to
the FR Y-14 to disclose new items related to long-term debt and TLAC,
as described above.\48\
---------------------------------------------------------------------------
\48\ See 85 FR 15776 (March 19, 2020).
---------------------------------------------------------------------------
In response to the proposal, commenters requested that the Board
clarify how U.S. GSIBs are to calculate the TLAC rule's leverage ratios
on the FR Y-9C report. More specifically, commenters suggested the
Board clarify that U.S. GSIBs should not be required to report long-
term debt and TLAC leverage ratios based on total assets because U.S.
GSIBs' applicable long-term debt and TLAC leverage requirement is based
on the denominator for the supplementary leverage ratio. Commenters
noted that only covered IHCs are required to report the long-term debt
and TLAC leverage ratios based on total assets. The Board confirms that
reporting of the long-term debt and TLAC leverage requirement for U.S.
GSIBs will only be based upon the supplementary leverage ratio
denominator, consistent with the TLAC rule's leverage requirement. The
Board received no comments on the FR Y-14 proposed changes.
The Board is finalizing the proposed changes to the FR Y-9C and FR
Y-14 to require covered BHCs and covered IHCs to report their long-term
debt and TLAC resources, with modifications in response to comment as
described above, in this Federal Register notice.
Some commenters suggested the Board develop a more robust
disclosure regime related to TLAC so that the level of risk is
appropriately priced into these instruments. They stated that
disclosures will incentivize GSIBs to meet their TLAC requirements with
equity rather than debt instruments. Commenters offered suggestions for
improving disclosures by noting that the agencies should collaborate
with the Securities and Exchange Commission to require plain-language
warnings regarding risk of bail-in to investors (1) when purchasing a
TLAC instrument in their brokerage account and (2) in offering
materials published by pension and mutual funds that invest in TLAC
instruments. The Board does not have the authority to change
disclosures required by the Securities and Exchange Commission related
to securities issuances or sales to retail investors. The interagency
statement on retail sales of nondeposit investments
[[Page 720]]
products should ensure certain disclosures for retail sales programs
involving mutual funds, annuities and other nondeposit investment
products.\49\ Further, the Board does not have the authority to mandate
disclosures by pension or mutual funds. The final rule does not
incorporate these suggestions.
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\49\ See ``Interagency Statement on Retail Sales of Nondeposit
Investment Products.'' OCC Bulletin 1994-13 (OCC); SR 94-11 (FIS)
(Board); and FIL-9-94 (FDIC).
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IX. Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the final rule contain ``collection of
information'' within the meaning of the Paperwork Reduction Act of 1995
(PRA).\50\ In accordance with the requirements of the PRA, the agencies
may not conduct or sponsor, and the respondent is not required to
respond to, an information collection unless it displays a currently-
valid Office of Management and Budget (OMB) control number.
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\50\ 44 U.S.C. 3501-3521.
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The final rule revises section __.22(c), (f), and (h) of the
capital rule to incorporate the proposed deduction approach for
investments in covered debt instruments. Several new definitions are
added to section __.2 to effectuate these deductions.
Each agency has an information collection related to its regulatory
capital rules. The OMB control number for the OCC is 1557-0318, Board
is 7100-0313, and FDIC is 3064-0153. The final rule will not, however,
result in changes to burden under these information collections and
therefore no submissions will be made under section 3507(d) of the PRA
(44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing
regulations (5 CFR 1320) for each of the agencies' regulatory capital
rules.
In addition, the final rule requires changes to the Call Reports
(OMB No. 1557-0081 (OCC), 7100-0036 (Board), and 3064-0052 (FDIC)), and
the FFIEC 101 (OMB No. 1557-0239 (OCC), 7100-0319 (Board), and 3064-
0159 (FDIC)), which will be addressed in one or more separate Federal
Register notices.
The final rule requires changes to the Consolidated Financial
Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128) and the
Capital Assessments and Stress Testing Reports (FR Y-14A/Q/M; OMB No.
7100-0341). The Board reviewed the final rule under the authority
delegated to the Board by OMB.
Revised Collection (Board only)
Title of Information Collection: Consolidated Financial Statements
for Holding Companies.
Agency form number: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR
Y-9CS.
OMB control number: 7100-0128.
Effective date: June 30, 2021.
Frequency: Quarterly, semiannually, and annually.
Affected Public: Businesses or other for-profit.
Respondents: Bank holding companies (BHCs), savings and loan
holding companies (SLHCs), securities holding companies (SHCs), and
U.S. Intermediate Holding Companies (IHCs) (collectively, holding
companies (HCs)).
Estimated number of respondents: FR Y-9C (non-advanced approaches
(AA) HCs community bank leverage ratio (CBLR)) with less than $5
billion in total assets--71, FR Y-9C (non AA HCs CBLR) with $5 billion
or more in total assets--35, FR Y-9C (non AA HCs non-CBLR) with less
than $5 billion in total assets--84, FR Y-9C (non AA HCs non-CBLR) with
$5 billion or more in total assets--154, FR Y-9C (AA HCs)--19, FR Y-
9LP--434, FR Y-9SP--3,960, FR Y-9ES--83, FR Y-9CS--236.
Estimated average hours per response:
Reporting
FR Y-9C (non AA HCs CBLR) with less than $5 billion in total
assets--29.17, FR Y-9C (non AA HCs CBLR) with $5 billion or more in
total assets--35.14, FR Y-9C (non AA HCs non-CBLR) with less than $5
billion in total assets--41.01, FR Y-9C (non AA HCs non-CBLR) with $5
billion or more in total assets--46.98, FR Y-9C (AA HCs)--49.30, FR Y-
9LP--5.27, FR Y-9SP--5.40, FR Y-9ES--0.50, FR Y-9CS--0.50.
Recordkeeping
FR Y-9C (non-advanced approaches HCs with less than $5 billion in
total assets), FR Y-9C (non-advanced approaches HCs with $5 billion or
more in total assets), FR Y-9C (advanced approaches HCs), and FR Y-9LP:
1.00 hour; FR Y-9SP, FR Y-9ES, and FR Y-9CS: 0.50 hours.
Estimated annual burden hours:
Reporting
FR Y-9C (non AA HCs CBLR) with less than $5 billion in total
assets--8,284, FR Y-9C (non AA HCs CBLR) with $5 billion or more in
total assets--4,920, FR Y-9C (non AA HCs non-CBLR) with less than $5
billion in total assets--13,779, FR Y-9C (non AA HCs non-CBLR) with $5
billion or more in total assets--28,940, FR Y-9C (AA HCs)--3,747, FR Y-
9LP--9,149, FR Y-9SP--42,768, FR Y-9ES--42, FR Y-9CS--472.
Recordkeeping
FR Y-9C--1,452, FR Y-9LP--1,736, FR Y-9SP--3,960, FR Y-9ES--42, FR
Y-9CS--472.
General description of report: The FR Y-9 family of reporting forms
continues to be the primary source of financial data on holding
companies (HCs) on which examiners rely between on-site inspections.
Financial data from these reporting forms is used to detect emerging
financial problems, review performance, conduct pre-inspection
analysis, monitor and evaluate capital adequacy, evaluate HC mergers
and acquisitions, and analyze an HC's overall financial condition to
ensure the safety and soundness of its operations. The FR Y-9C serves
as the standardized financial statements for certain consolidated
holding companies. The Board requires HCs to provide standardized
financial statements to fulfill the Board's statutory obligation to
supervise these organizations. HCs file the FR Y-9C on a quarterly
basis.
Legal authorization and confidentiality: The reporting and
recordkeeping requirements associated with the FR Y-9 series of reports
are authorized for BHCs pursuant to section 5 of the Bank Holding
Company Act (``BHC Act''); for SLHCs pursuant to section 10(b)(2) and
(3) of the Home Owners' Loan Act, 12 U.S.C. 1467a(b)(2) and (3), as
amended by sections 369(8) and 604(h)(2) of the Dodd-Frank Wall Street
and Consumer Protection Act (``Dodd-Frank Act''); for IHCs pursuant to
section 5 of the BHC Act, as well as pursuant to sections 102(a)(1) and
165 of the Dodd-Frank Act; and for securities holding companies
pursuant to section 618 of the Dodd-Frank Act. Except for the FR Y-9CS
report, which is expected to be collected on a voluntary basis, the
obligation to submit the remaining reports in the FR Y-9 series of
reports and to comply with the recordkeeping requirements set forth in
the respective instructions to each of the other reports, is mandatory.
With respect to the FR Y-9C report, Schedule HI's Memoranda item
7(g) ``FDIC deposit insurance assessments,'' Schedule HC-P's item 7(a)
``Representation and warranty reserves for 1-4 family residential
mortgage loans sold to U.S. government agencies and government
sponsored agencies,'' and Schedule HC-P's item 7(b) ``Representation
and warranty reserves for 1-4 family residential mortgage loans sold to
other parties'' are considered confidential commercial and
[[Page 721]]
financial information. Such treatment is appropriate under exemption 4
of the Freedom of Information Act (``FOIA''), because these data items
reflect commercial and financial information that is both customarily
and actually treated as private by the submitter, and which the Board
has previously assured submitters will be treated as confidential. It
also appears that disclosing these data items may reveal confidential
examination and supervisory information, and in such instances, the
information also would be withheld pursuant to exemption 8 of the FOIA,
which protects information related to the supervision or examination of
a regulated financial institution.
In addition, for both the FR Y-9C report and the FR Y-9SP report,
Schedule HC's Memoranda item 2.b., the name and email address of the
external auditing firm's engagement partner, is considered confidential
commercial information and protected by exemption 4 of the FOIA, if the
identity of the engagement partner is treated as private information by
HCs. The Board has assured respondents that this information will be
treated as confidential since the collection of this data item was
proposed in 2004.
Additionally, items on the FR Y-9C, Schedule HC-C for loans
modified under Section 4013, data items Memorandum items 16.a, ``Number
of Section 4013 loans outstanding''; and Memorandum items 16.b,
``Outstanding balance of Section 4013 loans'' are considered
confidential. While the Board generally makes institution-level FR Y-9C
report data publicly available, the Board is collecting Section 4013
loan information as part of condition reports for the impacted HCs and
the Board considers disclosure of these items at the HC level would not
be in the public interest. Such information is permitted to be
collected on a confidential basis, consistent with 5 U.S.C. 552(b)(8).
In addition, holding companies may be reluctant to offer modifications
under Section 4013 if information on these modifications made by each
holding company is publicly available, as analysts, investors, and
other users of public FR Y-9C report information may penalize an
institution for using the relief provided by the CARES Act. The Board
may disclose Section 4013 loan data on an aggregated basis, consistent
with confidentiality or as otherwise required by law.
Aside from the data items described above, the remaining data items
collected on the FR Y-9C report and the FR Y-9SP report are generally
not accorded confidential treatment. The data items collected on FR Y-
9LP, FR Y-9ES, and FR Y-9CS reports, are also generally not accorded
confidential treatment. As provided in the Board's Rules Regarding
Availability of Information, however, a respondent may request
confidential treatment for any data items the respondent believes
should be withheld pursuant to a FOIA exemption. The Board will review
any such request to determine if confidential treatment is appropriate,
and will inform the respondent if the request for confidential
treatment has been granted or denied.
To the extent the instructions to the FR Y-9C, FR Y-9LP, FR Y-9SP,
and FR Y-9ES reports each respectively direct the financial institution
to retain the workpapers and related materials used in preparation of
each report, such material would only be obtained by the Board as part
of the examination or supervision of the financial institution.
Accordingly, such information is considered confidential pursuant to
exemption 8 of the FOIA. In addition, the workpapers and related
materials may also be protected by exemption 4 of the FOIA, to the
extent such financial information is treated as confidential by the
respondent.
Current Actions: As discussed in detail in section VIII above,
several comments were received on the proposed changes to the FR Y-9C.
Commenters requested that the effective date of the final rule precede
proposed changes to regulatory reports. The agencies confirmed that the
final rule will be effective before changes are implemented to
regulatory reports. The final rule is effective April 1, 2021, and the
changes to the FR Y-9C are effective June 30, 2021. Also, commenters
requested that the Board clarify that U.S. GSIBs will report long-term
debt and TLAC leverage requirements based upon the supplementary
leverage ratio denominator. The Board agreed and clarified this
requirement. Finally, some commenters suggested that the Board develop
a more robust disclosure regime related to TLAC, including
collaborating with the SEC. The Board did not accept this comment for
the reasons noted above. Some of the item numbers below have changed
since the proposed rule due to other FR Y-9C reporting changes to
Schedule HC-R that have been implemented since that time.
To implement the reporting requirements of the final rule, the
Board revises the FR Y-9C, Schedule HC-R, Part I, Regulatory Capital
Components and Ratios, to amend instructions for line items 11, 17, 24,
and 43 to effectuate the deductions from regulatory capital for
advanced approaches holding companies related to investments in covered
debt instruments and excluded covered debt instruments as described
above. Further, the Board proposes to revise the FR Y-9C, Schedule HC-
R, Part II, Risk-Weighted Assets, to amend instructions for line items
2(a), 2(b), 7, and 8 to incorporate investments in covered debt
instruments and excluded debt instruments, as applicable, by advanced
approaches holding companies in their calculation of risk-weighted
assets.
In addition, the Board revises the FR Y-9C, Schedule HC-R, Part I,
Regulatory Capital Components and Ratios, to create new line items and
instructions to allow the BHCs of U.S. GSIBs and the IHCs of foreign
GSIBs to publicly report their long-term debt (LTD) and total loss-
absorbing capacity (TLAC) in accordance, respectively, with 12 CFR part
252, subpart G and 12 CFR part 252, subpart P. Specifically, new line
items are created to report, as applicable, BHCs of U.S GSIBs' and IHCs
of foreign GSIBs' (1) outstanding eligible LTD (item 50); (2) TLAC
(item 51); (3) LTD standardized risk-weighted asset ratio (item 52,
column A); (4) TLAC standardized risk-weighted asset ratio (item 52,
column B); (5) LTD advanced approaches risk-weighted asset ratio (item
53, column A); (6) TLAC advanced approaches risk-weighted asset ratio
(item 53, column B); (7) IHCs of foreign GSIBs only: LTD leverage ratio
(item 54, column A); (8) IHCs of foreign GSIBs only: TLAC leverage
ratio (item 54, column B); (9) LTD supplementary leverage ratio (item
55, column A); (10) TLAC supplementary leverage ratio (item 55, column
B); (11) institution-specific TLAC risk-weighted asset buffer necessary
to avoid limitations on distributions and discretionary bonus payments
(item 57(a)); and (12) TLAC leverage buffer necessary to avoid
limitations on distributions and discretionary bonus payments (item
57(b)). Existing line items 50(a), 50(b), 51, 52, and 53 are re-
numbered to 56(a), 56(b), 58, 59, and 60, respectively, and
instructions' references updated, to account for the proposed inclusion
of the new data collection items described above. Finally, the
instructions for re-numbered line item 59, ``Distributions and
discretionary bonus payments during the quarter,'' are amended for the
BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to reflect maximum
payout amounts that take into account a firm's TLAC risk-weighted and
leverage buffers reported in line items 57(a) and 57(b), respectively.
The final
[[Page 722]]
reporting forms and instructions will become available in the near
future on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
Revised Collection (Board only)
Title of Information Collection: Capital Assessments and Stress
Testing Reports.
Agency form number: FR Y-14A/Q/M.
OMB control number: 7100-0341.
Effective date: June 30, 2021.
Frequency: Annually, quarterly, and monthly.
Respondents: These collections of information are applicable to
bank holding companies (BHCs), U.S. intermediate holding companies
(IHCs), and savings and loan holding companies (SLHCs) \51\ with $100
billion or more in total consolidated assets, as based on: (i) The
average of the firm's total consolidated assets in the four most recent
quarters as reported quarterly on the firm's Consolidated Financial
Statements for Holding Companies (FR Y-9C; OMB No. 7100- 0128); or (ii)
if the firm has not filed an FR Y-9C for each of the most recent four
quarters, then the average of the firm's total consolidated assets in
the most recent consecutive quarters as reported quarterly on the
firm's FR Y-9Cs. Reporting is required as of the first day of the
quarter immediately following the quarter in which the respondent meets
this asset threshold, unless otherwise directed by the Board.
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\51\ SLHCs with $100 billion or more in total consolidated
assets became members of the FR Y- 14Q and FR Y-14M panels effective
June 30, 2020, and will join the FR Y-14A panel effective December
31, 2020. See 84 FR 59032 (November 1, 2019).
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Estimated number of respondents: FR Y-14A/Q: 36; FR Y-14M: 34.\52\
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\52\ The estimated number of respondents for the FR Y-14M is
lower than for the FR Y-14Q and FR Y- 14A because, in recent years,
certain respondents to the FR Y-14A and FR Y-14Q have not met the
materiality thresholds to report the FR Y-14M due to their lack of
mortgage and credit activities. The Board expects this situation to
continue for the foreseeable future.
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Estimated average hours per response: FR Y-14A: 929 hours; FR Y-
14Q: 2,201 hours; FR Y-14M: 1,072 hours.
On-going Automation Revisions: 480 hours; FR Y-14 Attestation On-
going Attestation: 2,560 hours.
Estimated annual burden hours: FR Y-14A: 33,444 hours; FR Y-14Q:
316,944 hours; FR Y-14M: 437,376 hours; FR Y-14 On-going Automation
Revisions: 17,280 hours; FR Y-14 Attestation On-going Attestation:
33,280 hours.
General description of report: This family of information
collections is composed of the following three reports:
The FR Y-14A collects quantitative projections of balance
sheet, income, losses, and capital across a range of macroeconomic
scenarios and qualitative information on methodologies used to develop
internal projections of capital across scenarios.\53\
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\53\ On October 10, 2019, the Board issued a final rule that
eliminated the requirement for firms subject to Category IV
standards to conduct and publicly disclose the results of a company-
run stress test. See 84 FR 59032 (Nov. 1, 2019). That final rule
maintained the existing FR Y-14 substantive reporting requirements
for these firms in order to provide the Board with the data it needs
to conduct supervisory stress testing and inform the Board's ongoing
monitoring and supervision of its supervised firms. However, as
noted in the final rule, the Board intends to provide greater
flexibility to banking organizations subject to Category IV
standards in developing their annual capital plans and consider
further change to the FR Y-14 forms as part of a separate proposal.
See 84 FR 59032, 59063.
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The quarterly FR Y-14Q collects granular data on various
asset classes, including loans, securities, trading assets, and PPNR
for the reporting period.
The monthly FR Y-14M is comprised of three retail
portfolio- and loan-level schedules, and one detailed address-matching
schedule to supplement two of the portfolio and loan-level schedules.
The data collected through the FR Y-14A/Q/M reports provide the
Board with the information needed to help ensure that large firms have
strong, firm-wide risk measurement and management processes supporting
their internal assessments of capital adequacy and that their capital
resources are sufficient given their business focus, activities, and
resulting risk exposures. The reports are used to support the Board's
annual Comprehensive Capital Analysis and Review (CCAR) and Dodd Frank
Act Stress Test (DFAST) exercises, which complement other Board
supervisory efforts aimed at enhancing the continued viability of large
firms, including continuous monitoring of firms' planning and
management of liquidity and funding resources, as well as regular
assessments of credit, market and operational risks, and associated
risk management practices. Information gathered in this data collection
is also used in the supervision and regulation of respondent financial
institutions. Respondent firms are currently required to complete and
submit up to 17 filings each year: One annual FR Y-14A filing, four
quarterly FR Y-14Q filings, and 12 monthly FR Y-14M filings. Compliance
with the information collection is mandatory.
Current actions: On March 19, 2020, the Board proposed to revise
the FR Y-14 reports to collect TLAC and LTD information.\54\ The Board
did not receive any comments on the proposed TLAC and LTD revisions.
The Board has modified the Capital Assessments and Stress Testing (FR
Y-14A and Q; OMB No. 7100-0341) in a manner consistent with the changes
described above to the FR Y-9C. In addition, the Board has renumbered
items in the FR Y-14A, Schedule A.1.d (Capital) instructions to
correspond with related items on the FR Y-9C. The Board has adopted, as
proposed, the following revisions to FR Y-14A, Schedule A.1.d, and FR
Y-14Q, Schedule D, effective for the June 30, 2021, as of date:
---------------------------------------------------------------------------
\54\ See 85 FR 15776 (March 19, 2020).
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FR Y-14A, Schedule A.1.d (Capital)
In order to align Schedule A.1.d with the FR Y-9C, the Board has
added the following items to Schedule A.1.d:
``Outstanding eligible long-term debt'';
``Total loss-absorbing capacity'';
``LTD and TLAC total risk-weighted assets ratios'';
``IHCs of foreign GSIBs only: LTD and TLAC leverage
ratios'';
``LTD and TLAC supplementary leverage ratios'';
``Institution-specific TLAC buffer necessary to avoid
limitations on distributions discretionary bonus payments'';
``TLAC risk-weighted buffer''; and
``TLAC leverage buffer.''
FR Y-14Q, Schedule D (Regulatory Capital)
The Board has revised the instructions for item 1 (``Aggregate
amount of non-significant investments in the capital of unconsolidated
financial institutions'') to require banking organizations subject to
Category I and II standards to include covered debt instruments.
B. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency either to provide a final regulatory flexibility
analysis with a final rule for which a general notice of proposed
rulemaking is required or to certify that the final rule will not have
a significant, economic impact on a substantial number of small
entities. The Small Business Administration (SBA) establishes size
standards that define which entities are small businesses for purposes
of the RFA to
[[Page 723]]
include commercial banks and savings institutions with total assets of
$600 million or less and trust companies with total assets of $41.5
million of less) or to certify that the final rule would not have a
significant economic impact on a substantial number of small entities.
As of December 31, 2019, the OCC supervises 745 small entities.\55\
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\55\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $600 million and $41.5 million,
respectively. Consistent with the General Principles of Affiliation,
13 CFR 121.103(a), the OCC counted the assets of affiliated
financial institutions when determining whether to classify a
national bank or Federal savings association as a small entity.
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As part of the OCC's analysis, we consider whether the final rule
will have a significant economic impact on a substantial number of
small entities, pursuant to the RFA Because the final rule only applies
to advanced approaches banking organizations it will not impact any
OCC-supervised small entities. Therefore, the final rule will not have
a significant economic impact on a substantial number of small
entities.
Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
Board: The Regulatory Flexibility Act (RFA) generally requires
that, in connection with a final rulemaking, an agency prepare and make
available for public comment a final regulatory flexibility analysis
describing the impact of the proposed rule on small entities. However,
a final regulatory flexibility analysis is not required if the agency
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities. The Small Business
Administration (SBA) has defined ``small entities'' to include banking
organizations with total assets of less than or equal to $600 million
that are independently owned and operated or owned by a holding company
with less than or equal to $600 million in total assets.\56\ For the
reasons described below and under section 605(b) of the RFA, the Board
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.\57\ As of December
31, 2019, there were 2,799 bank holding companies, 171 savings and loan
holding companies, and 497 state member banks that would fit the SBA's
current definition of ``small entity'' for purposes of the RFA.
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\56\ See 13 CFR 121.201. Effective August 19, 2019, the SBA
revised the size standards for banking organizations to $600 million
in assets from $550 million in assets. 84 FR 34261 (July 18, 2019).
\57\ 5 U.S.C. 605(b).
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The Board has considered the potential impact of the final rule on
small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this final rule
will not have a significant economic impact on a substantial number of
small entities.
As discussed in detail above, the final rule amends the capital
rule to require advanced approaches banking organizations to deduct
exposures to covered debt instruments issued by covered BHCs, covered
IHCs, and foreign GSIBs and their subsidiaries. These deductions are
subject to regulatory thresholds, as described above. Deductions
related to investments in and exposures to covered debt instruments are
effectuated by deduction from tier 2 capital according to the
corresponding deduction approach, subject to applicable deduction
thresholds. However, the assets of institutions subject to this final
rule substantially exceed the $600 million asset threshold under which
a banking organization is considered a ``small entity'' under SBA
regulations.\58\ Because the final rule is not likely to apply to any
depository institution or company with assets of $600 million or less,
it is not expected to apply to any small entity for purposes of the
RFA. In light of the foregoing, the Board certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities supervised.
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\58\ With respect to the revisions to the Board's total loss-
absorbing capacity rule, the scope of impacted institutions is
different--Covered BHCs and Covered IHCs--but also only applies to
institutions significantly above the threshold to be considered a
``small entity.''
---------------------------------------------------------------------------
FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires an agency, in connection with a final rule, to
prepare and make available for public comment a final regulatory
flexibility analysis that describes the impact of a final rule on small
entities.\59\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The Small Business Administration (SBA) has defined ``small entities''
to include banking organizations with total assets of less than or
equal to $600 million who are independently owned and operated or owned
by a holding company with less than $600 million in total assets.\60\
Generally, the FDIC considers a significant effect to be a quantified
effect in excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total noninterest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions. For the reasons
described below and under section 605(b) of the RFA, the FDIC certifies
that the final rule will not have a significant economic impact on a
substantial number of small entities.
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\59\ 5 U.S.C. 601 et seq.
\60\ The SBA defines a small banking organization as having $600
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See 13 CFR
121.201 (as amended, effective August 19, 2019). ``SBA counts the
receipts, employees, or other measure of size of the concern whose
size is at issue and all of its domestic and foreign affiliates.''
See 13 CFR 121.103. Following these regulations, the FDIC uses a
covered entity's affiliated and acquired assets, averaged over the
preceding four quarters, to determine whether the covered entity is
``small'' for the purposes of RFA.
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The FDIC supervises 3,270 institutions,\61\ of which 2,492 are
considered small entities for the purposes of RFA.\62\
---------------------------------------------------------------------------
\61\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\62\ Call Report data, June 30, 2020.
---------------------------------------------------------------------------
This final rule will affect all institutions subject to the
Category I and Category II capital standards, and their subsidiaries.
The FDIC supervises one institution that is a subsidiary of an
institution that is subject to the Category I capital standards, and no
FDIC-supervised institutions are subsidiaries of institutions that are
subject to the Category II capital standards.\63\ The one FDIC-
supervised institution that would be subject to this final rule is not
considered a small entity for the purposes of the RFA since it is owned
by a holding company with over $600 million in total assets. Since this
final rule does not affect any FDIC-supervised institutions that are
defined as small entities for the purposes of the RFA, the FDIC
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.
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\63\ Call Report data, June 30, 2020.
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C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \64\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the final rule in a simple and straightforward manner and did not
receive any
[[Page 724]]
comments on the use of plain language in the proposed rule.
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\64\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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D. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the proposed rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA).\65\ Under this
analysis, the OCC considered whether the final rule includes a Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). Because the
rule does not specifically require banks to modify their policies and
procedures, the OCC has determined that there are no expenditures for
the purposes of UMRA. Therefore, the OCC concludes that this final rule
will not result in expenditures of $100 million or more annually by
State, local, and Tribal governments, or by the private sector.\66\
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\65\ 2 U.S.C. 1532.
\66\ Based on available supervisory information, the OCC
determined that no OCC-supervised advanced approaches institutions
currently hold TLAC instruments. Thus, there would no cost of
capital associated with the implementation of this proposal. The OCC
estimates that, if implemented, non-mandated, but anticipated
compliance costs associated with activities such as modifying
procedures and internal audit would be less than $1 million.
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E. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\67\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), each Federal banking agency
must consider, consistent with principles of safety and soundness and
the public interest, any administrative burdens that such regulations
would place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\68\
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\67\ 12 U.S.C. 4802(a).
\68\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
The Federal banking agencies considered the administrative burdens
and benefits of the final rule and its elective framework in
determining its effective date and administrative compliance
requirements. As such, the final rule will be effective on April 1,
2021.
F. Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\69\ If a rule is deemed a ``major rule'' by the Office of
Management and Budget (OMB), the Congressional Review Act generally
provides that the rule may not take effect until at least 60 days
following its publication.\70\
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\69\ 5 U.S.C. 801 et seq.
\70\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in (A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\71\ As required by the Congressional Review Act, the
agencies will submit the final rule and other appropriate reports to
Congress and the Government Accountability Office for review.
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\71\ 5 U.S.C. 804(2).
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List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Risk.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies.
12 CFR Part 252
Administrative practice and procedure, Banks, banking, Credit,
Federal Reserve System, Holding companies, Investments, Qualified
financial contracts, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
Office of the Comptroller of the Currency
For the reasons set out in the joint preamble, the OCC amends 12
CFR part 3 as follows.
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, 5412(b)(2)(B), and
Pub. L. 116-136, 134 Stat. 281.
0
2. In Sec. 3.2:
0
a. Add definitions in alphabetical order for ``Covered debt
instrument'' and ``Excluded covered debt instrument'';
0
b. In the definition of ``Fiduciary or custodial and safekeeping
accounts'', remove ``Sec. 3.10(c)(4)(ii)(J)'' and add ``Sec.
3.10(c)(2)(x)'' in its place;
0
c. Revise the definition of ``Indirect exposure'';
0
d. Add a definition in alphabetical order for ``Investment in a covered
debt instrument'';
0
e. Revise the definition of ``Synthetic exposure''; and
0
f. In the definition of ``Total leverage exposure'', remove ``Sec.
3.10(c)(4)(ii)'' and add ``Sec. 3.10(c)(2)'' in its place.
The additions and revisions read as follows:
Sec. 3.2 Definitions.
* * * * *
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC, as defined in 12
CFR 217.2, and that is an eligible debt security, as defined in 12 CFR
252.61, or that is pari passu or subordinated to any eligible debt
security issued by the global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161,
or that is pari passu or subordinated to any eligible Covered IHC debt
security issued by the Covered IHC; or
(3) Issued by a global systemically important banking organization,
as defined in 12 CFR 252.2 other than a global systemically important
BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global
systemically important banking organization that is not a global
systemically important BHC, other than a Covered IHC, as defined in 12
CFR 252.161; and where
[[Page 725]]
(i) The instrument is eligible for use to comply with an applicable
law or regulation requiring the issuance of a minimum amount of
instruments to absorb losses or recapitalize the issuer or any of its
subsidiaries in connection with a resolution, receivership, insolvency,
or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument
described in paragraph (3)(i) of this definition; for purposes of this
paragraph (3)(ii) of this definition, if the issuer may be subject to a
special resolution regime, in its jurisdiction of incorporation or
organization, that addresses the failure or potential failure of a
financial company and any instrument described in paragraph (3)(i) of
this definition is eligible under that special resolution regime to be
written down or converted into equity or any other capital instrument,
then an instrument is pari passu or subordinated to any instrument
described in paragraph (3)(i) of this definition if that instrument is
eligible under that special resolution regime to be written down or
converted into equity or any other capital instrument ahead of or
proportionally with any instrument described in paragraph (3)(i) of
this definition; and
(4) Provided that, for purposes of this definition, covered debt
instrument does not include a debt instrument that qualifies as tier 2
capital pursuant to 12 CFR 3.20(d) or that is otherwise treated as
regulatory capital by the primary supervisor of the issuer.
* * * * *
Excluded covered debt instrument means an investment in a covered
debt instrument held by a national bank or Federal savings association
that is a subsidiary of a global systemically important BHC, as defined
in 12 CFR 252.2, that:
(1) Is held in connection with market making-related activities
permitted under 12 CFR 44.4, provided that a direct exposure or an
indirect exposure to a covered debt instrument is held for 30 business
days or less; and
(2) Has been designated as an excluded covered debt instrument by
the national bank or Federal savings association that is a subsidiary
of a global systemically important BHC, as defined in 12 CFR 252.2,
pursuant to 12 CFR 3.22(c)(5)(iv)(A).
* * * * *
Indirect exposure means an exposure that arises from the national
bank's or Federal savings association's investment in an investment
fund which holds an investment in the national bank's or Federal
savings association's own capital instrument, or an investment in the
capital of an unconsolidated financial institution. For an advanced
approaches national bank or Federal savings association, indirect
exposure also includes an investment in an investment fund that holds a
covered debt instrument.
* * * * *
Investment in a covered debt instrument means a national bank's or
Federal savings association's net long position calculated in
accordance with Sec. 3.22(h) in a covered debt instrument, including
direct, indirect, and synthetic exposures to the debt instrument,
excluding any underwriting positions held by the national bank or
Federal savings association for five or fewer business days.
* * * * *
Synthetic exposure means an exposure whose value is linked to the
value of an investment in the national bank or Federal savings
association's own capital instrument or to the value of an investment
in the capital of an unconsolidated financial institution. For an
advanced approaches national bank or Federal savings association,
synthetic exposure includes an exposure whose value is linked to the
value of an investment in a covered debt instrument.
* * * * *
0
3. Section 3.10 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as (e); and
0
c. Adding new paragraph (d).
The revision and addition read as follows:
Sec. 3.10 Minimum capital requirements.
* * * * *
(c) Supplementary leverage ratio. (1) A Category III national bank
or Federal savings association or advanced approaches national bank or
Federal savings association must determine its supplementary leverage
ratio in accordance with this paragraph, beginning with the calendar
quarter immediately following the quarter in which the national bank or
Federal savings association is identified as a Category III national
bank or Federal savings association. An advanced approaches national
bank's or Federal savings association's or a Category III national
bank's or Federal savings association's supplementary leverage ratio is
the ratio of its tier 1 capital to total leverage exposure, the latter
of which is calculated as the sum of:
(i) The mean of the on-balance sheet assets calculated as of each
day of the reporting quarter; and
(ii) The mean of the off-balance sheet exposures calculated as of
the last day of each of the most recent three months, minus the
applicable deductions under Sec. 3.22(a), (c), and (d).
(2) For purposes of this part, total leverage exposure means the
sum of the items described in paragraphs (c)(2)(i) through (viii) of
this section, as adjusted pursuant to paragraph (c)(2)(ix) of this
section for a clearing member national bank and Federal savings
association and paragraph (c)(2)(x) of this section for a custody bank:
(i) The balance sheet carrying value of all of the national bank or
Federal savings association's on-balance sheet assets, plus the value
of securities sold under a repurchase transaction or a securities
lending transaction that qualifies for sales treatment under GAAP, less
amounts deducted from tier 1 capital under Sec. 3.22(a), (c), and (d),
and less the value of securities received in security-for-security
repo-style transactions, where the national bank or Federal savings
association acts as a securities lender and includes the securities
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received, and, for a national bank or
Federal savings association that uses the standardized approach for
counterparty credit risk under Sec. 3.132(c) for its standardized
risk-weighted assets, less the fair value of any derivative contracts;
(ii)(A) For a national bank or Federal savings association that
uses the current exposure methodology under Sec. 3.34(b) for its
standardized risk-weighted assets, the potential future credit exposure
(PFE) for each derivative contract or each single-product netting set
of derivative contracts (including a cleared transaction except as
provided in paragraph (c)(2)(ix) of this section and, at the discretion
of the national bank or Federal savings association, excluding a
forward agreement treated as a derivative contract that is part of a
repurchase or reverse repurchase or a securities borrowing or lending
transaction that qualifies for sales treatment under GAAP), to which
the national bank or Federal savings association is a counterparty as
determined under Sec. 3.34, but without regard to Sec. 3.34(c),
provided that:
(1) A national bank or Federal savings association may choose to
exclude the PFE of all credit derivatives or other similar instruments
through which it provides credit protection when calculating the PFE
under Sec. 3.34, but
[[Page 726]]
without regard to Sec. 3.34(c), provided that it does not adjust the
net-to-gross ratio (NGR); and
(2) A national bank or Federal savings association that chooses to
exclude the PFE of credit derivatives or other similar instruments
through which it provides credit protection pursuant to this paragraph
(c)(2)(ii)(A) must do so consistently over time for the calculation of
the PFE for all such instruments; or
(B)(1) For a national bank or Federal savings association that uses
the standardized approach for counterparty credit risk under section
Sec. 3.132(c) for its standardized risk-weighted assets, the PFE for
each netting set to which the national bank or Federal savings
association is a counterparty (including cleared transactions except as
provided in paragraph (c)(2)(ix) of this section and, at the discretion
of the national bank or Federal savings association, excluding a
forward agreement treated as a derivative contract that is part of a
repurchase or reverse repurchase or a securities borrowing or lending
transaction that qualifies for sales treatment under GAAP), as
determined under Sec. 3.132(c)(7), in which the term C in Sec.
3.132(c)(7)(i) equals zero, and, for any counterparty that is not a
commercial end-user, multiplied by 1.4. For purposes of this paragraph
(c)(2)(ii)(B)(1), a national bank or Federal savings association may
set the value of the term C in Sec. 3.132(c)(7)(i) equal to the amount
of collateral posted by a clearing member client of the national bank
or Federal savings association in connection with the client-facing
derivative transactions within the netting set; and
(2) A national bank or Federal savings association may choose to
exclude the PFE of all credit derivatives or other similar instruments
through which it provides credit protection when calculating the PFE
under Sec. 3.132(c), provided that it does so consistently over time
for the calculation of the PFE for all such instruments;
(iii)(A)(1) For a national bank or Federal savings association that
uses the current exposure methodology under Sec. 3.34(b) for its
standardized risk-weighted assets, the amount of cash collateral that
is received from a counterparty to a derivative contract and that has
offset the mark-to-fair value of the derivative asset, or cash
collateral that is posted to a counterparty to a derivative contract
and that has reduced the national bank or Federal savings association's
on-balance sheet assets, unless such cash collateral is all or part of
variation margin that satisfies the conditions in paragraphs
(c)(2)(iii)(C) through (G) of this section; and
(2) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
3.34(b), and not the PFE; and
(3) For the purpose of the calculation of the NGR described in
Sec. 3.34(b)(2)(ii)(B), variation margin described in paragraph
(c)(2)(iii)(A)(2) of this section may not reduce the net current credit
exposure or the gross current credit exposure; or
(B)(1) For a national bank or Federal savings association that uses
the standardized approach for counterparty credit risk under Sec.
3.132(c) for its standardized risk-weighted assets, the replacement
cost of each derivative contract or single product netting set of
derivative contracts to which the national bank or Federal savings
association is a counterparty, calculated according to the following
formula, and, for any counterparty that is not a commercial end-user,
multiplied by 1.4:
Replacement Cost = max{V-CVMr + CVMp;0{time}
Where:
V equals the fair value for each derivative contract or each
single-product netting set of derivative contracts (including a
cleared transaction except as provided in paragraph (c)(2)(ix) of
this section and, at the discretion of the national bank or Federal
savings association, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse
repurchase or a securities borrowing or lending transaction that
qualifies for sales treatment under GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section,
or, in the case of a client-facing derivative transaction, the
amount of collateral received from the clearing member client; and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section,
or, in the case of a client-facing derivative transaction, the
amount of collateral posted to the clearing member client;
(2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a national bank or Federal savings association must apply
the formula for replacement cost provided in Sec. 3.132(c)(10)(i),
in which the term CMA may only include cash collateral
that satisfies the conditions in paragraphs (c)(2)(iii)(C) through
(G) of this section; and
(3) For purposes of paragraph (c)(2)(iii)(B)(1), a national bank
or Federal savings association must treat a derivative contract that
references an index as if it were multiple derivative contracts each
referencing one component of the index if the national bank or
Federal savings association elected to treat the derivative contract
as multiple derivative contracts under Sec. 3.132(c)(5)(vi);
(C) For derivative contracts that are not cleared through a
QCCP, the cash collateral received by the recipient counterparty is
not segregated (by law, regulation, or an agreement with the
counterparty);
(D) Variation margin is calculated and transferred on a daily
basis based on the mark-to-fair value of the derivative contract;
(E) The variation margin transferred under the derivative
contract or the governing rules of the CCP or QCCP for a cleared
transaction is the full amount that is necessary to fully extinguish
the net current credit exposure to the counterparty of the
derivative contracts, subject to the threshold and minimum transfer
amounts applicable to the counterparty under the terms of the
derivative contract or the governing rules for a cleared
transaction;
(F) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(2)(iii)(F), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master
netting agreement, or in the governing rules for a cleared
transaction; and
(G) The derivative contract and the variation margin are
governed by a qualifying master netting agreement between the legal
entities that are the counterparties to the derivative contract or
by the governing rules for a cleared transaction, and the qualifying
master netting agreement or the governing rules for a cleared
transaction must explicitly stipulate that the counterparties agree
to settle any payment obligations on a net basis, taking into
account any variation margin received or provided under the contract
if a credit event involving either counterparty occurs;
(iv) The effective notional principal amount (that is, the
apparent or stated notional principal amount multiplied by any
multiplier in the derivative contract) of a credit derivative, or
other similar instrument, through which the national bank or Federal
savings association provides credit protection, provided that:
(A) The national bank or Federal savings association may reduce
the effective notional principal amount of the credit derivative by
the amount of any reduction in the mark-to-fair value of the credit
derivative if the reduction is recognized in common equity tier 1
capital;
(B) The national bank or Federal savings association may reduce
the effective notional principal amount of the credit derivative by
the effective notional principal amount of a purchased credit
derivative or other similar instrument, provided that the remaining
maturity of the purchased credit derivative is equal to or greater
than the remaining maturity of the credit derivative through which
the national bank or Federal savings
[[Page 727]]
association provides credit protection and that:
(1) With respect to a credit derivative that references a single
exposure, the reference exposure of the purchased credit derivative
is to the same legal entity and ranks pari passu with, or is junior
to, the reference exposure of the credit derivative through which
the national bank or Federal savings association provides credit
protection; or
(2) With respect to a credit derivative that references multiple
exposures, the reference exposures of the purchased credit
derivative are to the same legal entities and rank pari passu with
the reference exposures of the credit derivative through which the
national bank or Federal savings association provides credit
protection, and the level of seniority of the purchased credit
derivative ranks pari passu to the level of seniority of the credit
derivative through which the national bank or Federal savings
association provides credit protection;
(3) Where a national bank or Federal savings association has
reduced the effective notional amount of a credit derivative through
which the national bank or Federal savings association provides
credit protection in accordance with paragraph (c)(2)(iv)(A) of this
section, the national bank or Federal savings association must also
reduce the effective notional principal amount of a purchased credit
derivative used to offset the credit derivative through which the
national bank or Federal savings association provides credit
protection, by the amount of any increase in the mark-to-fair value
of the purchased credit derivative that is recognized in common
equity tier 1 capital; and
(4) Where the national bank or Federal savings association
purchases credit protection through a total return swap and records
the net payments received on a credit derivative through which the
national bank or Federal savings association provides credit
protection in net income, but does not record offsetting
deterioration in the mark-to-fair value of the credit derivative
through which the national bank or Federal savings association
provides credit protection in net income (either through reductions
in fair value or by additions to reserves), the national bank or
Federal savings association may not use the purchased credit
protection to offset the effective notional principal amount of the
related credit derivative through which the national bank or Federal
savings association provides credit protection;
(v) Where a national bank or Federal savings association acting
as a principal has more than one repo-style transaction with the
same counterparty and has offset the gross value of receivables due
from a counterparty under reverse repurchase transactions by the
gross value of payables under repurchase transactions due to the
same counterparty, the gross value of receivables associated with
the repo-style transactions less any on-balance sheet receivables
amount associated with these repo-style transactions included under
paragraph (c)(2)(i) of this section, unless the following criteria
are met:
(A) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(B) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership,
insolvency, liquidation, or similar proceeding; and
(C) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement, (that is, the
cash flows of the transactions are equivalent, in effect, to a
single net amount on the settlement date), where both transactions
are settled through the same settlement system, the settlement
arrangements are supported by cash or intraday credit facilities
intended to ensure that settlement of both transactions will occur
by the end of the business day, and the settlement of the underlying
securities does not interfere with the net cash settlement;
(vi) The counterparty credit risk of a repo-style transaction,
including where the national bank or Federal savings association
acts as an agent for a repo-style transaction and indemnifies the
customer with respect to the performance of the customer's
counterparty in an amount limited to the difference between the fair
value of the security or cash its customer has lent and the fair
value of the collateral the borrower has provided, calculated as
follows:
(A) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for
transactions with a counterparty must be calculated on a transaction
by transaction basis, such that each transaction i is treated as its
own netting set, in accordance with the following formula, where
Ei is the fair value of the instruments, gold, or cash
that the national bank or Federal savings association has lent, sold
subject to repurchase, or provided as collateral to the
counterparty, and Ci is the fair value of the
instruments, gold, or cash that the national bank or Federal savings
association has borrowed, purchased subject to resale, or received
as collateral from the counterparty:
Ei* = max {0, [Ei - Ci]{time} ; and
(B) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as
the greater of zero and the total fair value of the instruments,
gold, or cash that the national bank or Federal savings association
has lent, sold subject to repurchase or provided as collateral to a
counterparty for all transactions included in the qualifying master
netting agreement ([Sigma]Ei), less the total fair value
of the instruments, gold, or cash that the national bank or Federal
savings association borrowed, purchased subject to resale or
received as collateral from the counterparty for those transactions
([Sigma]Ci), in accordance with the following formula:
E* = max {0, [[Sigma]Ei - [Sigma]Ci]{time}
(vii) If a national bank or Federal savings association acting
as an agent for a repo-style transaction provides a guarantee to a
customer of the security or cash its customer has lent or borrowed
with respect to the performance of the customer's counterparty and
the guarantee is not limited to the difference between the fair
value of the security or cash its customer has lent and the fair
value of the collateral the borrower has provided, the amount of the
guarantee that is greater than the difference between the fair value
of the security or cash its customer has lent and the value of the
collateral the borrower has provided;
(viii) The credit equivalent amount of all off-balance sheet
exposures of the national bank or Federal savings association,
excluding repo-style transactions, repurchase or reverse repurchase
or securities borrowing or lending transactions that qualify for
sales treatment under GAAP, and derivative transactions, determined
using the applicable credit conversion factor under Sec. 3.33(b),
provided, however, that the minimum credit conversion factor that
may be assigned to an off-balance sheet exposure under this
paragraph is 10 percent; and
(ix) For a national bank or Federal savings association that is
a clearing member:
(A) A clearing member national bank or Federal savings
association that guarantees the performance of a clearing member
client with respect to a cleared transaction must treat its exposure
to the clearing member client as a derivative contract for purposes
of determining its total leverage exposure;
(B) A clearing member national bank or Federal savings
association that guarantees the performance of a CCP with respect to
a transaction cleared on behalf of a clearing member client must
treat its exposure to the CCP as a derivative contract for purposes
of determining its total leverage exposure;
(C) A clearing member national bank or Federal savings
association that does not guarantee the performance of a CCP with
respect to a transaction cleared on behalf of a clearing member
client may exclude its exposure to the CCP for purposes of
determining its total leverage exposure;
(D) A national bank or Federal savings association that is a
clearing member may exclude from its total leverage exposure the
effective notional principal amount of credit protection sold
through a credit derivative contract, or other similar instrument,
that it clears on behalf of a clearing member client through a CCP
as calculated in accordance with paragraph (c)(2)(iv) of this
section; and
(E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this
section, a national bank or Federal savings association may exclude
from its total leverage exposure a clearing member's exposure to a
clearing member client for a derivative contract, if the clearing
member client and the clearing member are affiliates and
consolidated for financial reporting purposes on the national bank's
or Federal savings association's balance sheet.
(x) A custodial bank shall exclude from its total leverage
exposure the lesser of:
(A) The amount of funds that the custody bank has on deposit at
a qualifying central bank; and
(B) The amount of funds that the custody bank's clients have on
deposit at the custody bank that are linked to fiduciary or
custodial and safekeeping accounts. For purposes of this paragraph
(c)(2)(x), a deposit account is linked to a fiduciary or custodial
and safekeeping account if the deposit account is provided to a
client that maintains a
[[Page 728]]
fiduciary or custodial and safekeeping account with the custody
bank, and the deposit account is used to facilitate the
administration of the fiduciary or custody and safekeeping account.
(d) Advanced approaches capital ratio calculations. An advanced
approaches national bank or Federal savings association that has
completed the parallel run process and received notification from
the OCC pursuant to Sec. 3.121(d) must determine its regulatory
capital ratios as described in paragraphs (d)(1) through (3) of this
section.
(1) Common equity tier 1 capital ratio. The national bank's or
Federal savings association's common equity tier 1 capital ratio is
the lower of:
(i) The ratio of the national bank's or Federal savings
association's common equity tier 1 capital to standardized total
risk-weighted assets; and
(ii) The ratio of the national bank's or Federal savings
association's common equity tier 1 capital to advanced approaches
total risk-weighted assets.
(2) Tier 1 capital ratio. The national bank's or Federal savings
association's tier 1 capital ratio is the lower of:
(i) The ratio of the national bank's or Federal savings
association's tier 1 capital to standardized total risk-weighted
assets; and
(ii) The ratio of the national bank's or Federal savings
association's tier 1 capital to advanced approaches total risk-
weighted assets.
(3) Total capital ratio. The national bank's or Federal savings
association's total capital ratio is the lower of:
(i) The ratio of the national bank's or Federal savings
association's total capital to standardized total risk-weighted
assets; and
(ii) The ratio of the national bank's or Federal savings
association's advanced-approaches-adjusted total capital to advanced
approaches total risk-weighted assets. A national bank's or Federal
savings association's advanced-approaches-adjusted total capital is
the national bank's or Federal savings association's total capital
after being adjusted as follows:
(A) An advanced approaches national bank or Federal savings
association must deduct from its total capital any allowance for
loan and lease losses or adjusted allowance for credit losses, as
applicable, included in its tier 2 capital in accordance with Sec.
3.20(d)(3); and
(B) An advanced approaches national bank or Federal savings
association must add to its total capital any eligible credit
reserves that exceed the national bank's or Federal savings
association's total expected credit losses to the extent that the
excess reserve amount does not exceed 0.6 percent of the national
bank's or Federal savings association's credit risk-weighted assets.
(4) Federal savings association tangible capital ratio. A
Federal savings association's tangible capital ratio is the ratio of
the Federal savings association's core capital (tier 1 capital) to
average total assets as calculated under this subpart B. For
purposes of this paragraph (d)(4), the term ``total assets'' means
``total assets'' as defined in part 6, subpart A of this chapter,
subject to subpart G of this part.
* * * * *
0
4. In Sec. 3.22, revise paragraphs (c), (f), and (h) to read as
follows:
Sec. 3.22 Regulatory capital adjustments and deductions.
* * * * *
(c) Deductions from regulatory capital related to investments in
capital instruments or covered debt instruments \23\--(1) Investment in
the national bank's or Federal savings association's own capital
instruments. A national bank or Federal savings association must deduct
an investment in the national bank's or Federal savings association's
own capital instruments, as follows:
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\23\ The national bank or Federal savings association must
calculate amounts deducted under paragraphs (c) through (f) of this
section after it calculates the amount of ALLL or AACL, as
applicable, includable in tier 2 capital under Sec. 3.20(d)(3).
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(i) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
common stock instruments from its common equity tier 1 capital elements
to the extent such instruments are not excluded from regulatory capital
under Sec. 3.20(b)(1);
(ii) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
additional tier 1 capital instruments from its additional tier 1
capital elements; and
(iii) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
tier 2 capital instruments from its tier 2 capital elements.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section),
investments in the capital of unconsolidated financial institutions for
a national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association (as described
in paragraph (c)(4) of this section), non-significant investments in
the capital of unconsolidated financial institutions for an advanced
approaches national bank or Federal savings association (as described
in paragraph (c)(5) of this section), and non-common stock significant
investments in the capital of unconsolidated financial institutions for
an advanced approaches national bank or Federal savings association (as
described in paragraph (c)(6) of this section). Under the corresponding
deduction approach, a national bank or Federal savings association must
make deductions from the component of capital for which the underlying
instrument would qualify if it were issued by the national bank or
Federal savings association itself, as described in paragraphs
(c)(2)(i) through (iii) of this section. If the national bank or
Federal savings association does not have a sufficient amount of a
specific component of capital to effect the required deduction, the
shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the national bank or Federal savings association must treat the
instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in a liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 3.20, the national bank or Federal savings
association must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP
equity but considered regulatory capital by the primary supervisor of
the financial institution; and
(D) For an advanced approaches national bank or Federal savings
association, a tier 2 capital instrument if it is a covered debt
instrument.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 3.300(c)), the national bank or Federal
savings association must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
[[Page 729]]
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. (i) A national bank or Federal savings association must
deduct an investment in the capital of other financial institutions
that it holds reciprocally with another financial institution, where
such reciprocal cross holdings result from a formal or informal
arrangement to swap, exchange, or otherwise intend to hold each other's
capital instruments, by applying the corresponding deduction approach
in paragraph (c)(2) of this section.
(ii) An advanced approaches national bank or Federal savings
association must deduct an investment in any covered debt instrument
that the institution holds reciprocally with another financial
institution, where such reciprocal cross holdings result from a formal
or informal arrangement to swap, exchange, or otherwise intend to hold
each other's capital or covered debt instruments, by applying the
corresponding deduction approach in paragraph (c)(2) of this section.
(4) Investments in the capital of unconsolidated financial
institutions. A national bank or Federal savings association that is
not an advanced approaches national bank or Federal savings association
must deduct its investments in the capital of unconsolidated financial
institutions (as defined in Sec. 3.2) that exceed 25 percent of the
sum of the national bank or Federal savings association's common equity
tier 1 capital elements minus all deductions from and adjustments to
common equity tier 1 capital elements required under paragraphs (a)
through (c)(3) of this section by applying the corresponding deduction
approach in paragraph (c)(2) of this section.\24\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, with the prior written
approval of the OCC, a national bank or Federal savings association
that underwrites a failed underwriting, for the period of time
stipulated by the OCC, is not required to deduct an investment in the
capital of an unconsolidated financial institution pursuant to this
paragraph (c) to the extent the investment is related to the failed
underwriting.\25\
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\24\ With the prior written approval of the OCC, for the period
of time stipulated by the OCC, a national bank or Federal savings
association is not required to deduct a non-significant investment
in the capital instrument of an unconsolidated financial institution
or an investment in a covered debt instrument pursuant to this
paragraph if the financial institution is in distress and if such
investment is made for the purpose of providing financial support to
the financial institution, as determined by the OCC.
\25\ Any non-significant investments in the capital of an
unconsolidated financial institution that is not required to be
deducted under this paragraph (c)(4) or otherwise under this section
must be assigned the appropriate risk weight under subparts D, E, or
F of this part, as applicable.
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(5) Non-significant investments in the capital of unconsolidated
financial institutions. (i) An advanced approaches national bank or
Federal savings association must deduct its non-significant investments
in the capital of unconsolidated financial institutions (as defined in
Sec. 3.2) that, in the aggregate and together with any investment in a
covered debt instrument (as defined in Sec. 3.2) issued by a financial
institution in which the national bank or Federal savings association
does not have a significant investment in the capital of the
unconsolidated financial institution (as defined in Sec. 3.2), exceeds
10 percent of the sum of the advanced approaches national bank's or
Federal savings association's common equity tier 1 capital elements
minus all deductions from and adjustments to common equity tier 1
capital elements required under paragraphs (a) through (c)(3) of this
section (the 10 percent threshold for non-significant investments) by
applying the corresponding deduction approach in paragraph (c)(2) of
this section.\26\ The deductions described in this paragraph are net of
associated DTLs in accordance with paragraph (e) of this section. In
addition, with the prior written approval of the OCC, an advanced
approaches national bank or Federal savings association that
underwrites a failed underwriting, for the period of time stipulated by
the OCC, is not required to deduct from capital a non-significant
investment in the capital of an unconsolidated financial institution or
an investment in a covered debt instrument pursuant to this paragraph
(c)(5) to the extent the investment is related to the failed
underwriting.\27\ For any calculation under this paragraph (c)(5)(i),
an advanced approaches national bank or Federal savings association may
exclude the amount of an investment in a covered debt instrument under
paragraph (c)(5)(iii) or (iv) of this section, as applicable.
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\26\ With the prior written approval of the OCC, for the period
of time stipulated by the OCC, an advanced approaches a national
bank or Federal savings association is not required to deduct a non-
significant investment in the capital instrument of an
unconsolidated financial institution or an investment in a covered
debt instrument pursuant to this paragraph if the financial
institution is in distress and if such investment is made for the
purpose of providing financial support to the financial institution,
as determined by the OCC.
\27\ Any non-significant investment in the capital of an
unconsolidated financial institution or any investment in a covered
debt instrument that is not required to be deducted under this
paragraph (c)(4) or otherwise under this section must be assigned
the appropriate risk weight under subpart D, E, or F of this part,
as applicable.
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(ii) For an advanced approaches national bank or Federal savings
association, the amount to be deducted under this paragraph (c)(5) from
a specific capital component is equal to:
(A) The advanced approaches national bank's or Federal savings
association's aggregate non-significant investments in the capital of
an unconsolidated financial institution and, if applicable, any
investments in a covered debt instrument subject to deduction under
this paragraph (c)(5), exceeding the 10 percent threshold for non-
significant investments, multiplied by
(B) The ratio of the advanced approaches national bank's or Federal
savings association's aggregate non-significant investments in the
capital of an unconsolidated financial institution (in the form of such
capital component) to the national bank's or Federal savings
association's total non-significant investments in unconsolidated
financial institutions, with an investment in a covered debt instrument
being treated as tier 2 capital for this purpose.
(iii) For purposes of applying the deduction under paragraph
(c)(5)(i) of this section, an advanced approaches national bank or
Federal savings association that is not a subsidiary of a global
systemically important banking organization, as defined in 12 CFR
252.2, may exclude from the deduction the amount of the national bank's
or Federal savings association's gross long position, in accordance
with Sec. 3.22(h)(2), in investments in covered debt instruments
issued by financial institutions in which the national bank or Federal
savings association does not have a significant investment in the
capital of the unconsolidated financial institutions up to an amount
equal to 5 percent of the sum of the national bank's or Federal savings
association's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under paragraphs (a) through (c)(3) of this section,
net of associated DTLs in accordance with paragraph (e) of this
section.
(iv) Prior to applying the deduction under paragraph (c)(5)(i) of
this section:
(A) A national bank or Federal savings association that is a
subsidiary of a global systemically important BHC, as defined in 12 CFR
252.2, may designate
[[Page 730]]
any investment in a covered debt instrument as an excluded covered debt
instrument, as defined in Sec. 3.2.
(B) A national bank or Federal savings association that is a
subsidiary of a global systemically important BHC, as defined in 12 CFR
252.2, must deduct according to the corresponding deduction approach in
paragraph (c)(2) of this section, its gross long position, calculated
in accordance with paragraph (h)(2) of this section, in a covered debt
instrument that was originally designated as an excluded covered debt
instrument, in accordance with paragraph (c)(5)(iv)(A) of this section,
but no longer qualifies as an excluded covered debt instrument.
(C) A national bank or Federal savings association that is a
subsidiary of a global systemically important BHC, as defined in 12 CFR
252.2, must deduct according to the corresponding deduction approach in
paragraph (c)(2) of this section the amount of its gross long position,
calculated in accordance with paragraph (h)(2) of this section, in a
direct or indirect investment in a covered debt instrument that was
originally designated as an excluded covered debt instrument, in
accordance with paragraph (c)(5)(iv)(A) of this section, and has been
held for more than thirty business days.
(D) A national bank or Federal savings association that is a
subsidiary of a global systemically important BHC, as defined in 12 CFR
252.2, must deduct according to the corresponding deduction approach in
paragraph (c)(2) of this section its gross long position, calculated in
accordance with paragraph (h)(2) of this section, of its aggregate
investment in excluded covered debt instruments that exceeds 5 percent
of the sum of the national bank's or Federal savings association's
common equity tier 1 capital elements minus all deductions from and
adjustments to common equity tier 1 capital elements required under
paragraphs (a) through (c)(3) of this section, net of associated DTLs
in accordance with paragraph (e) of this section.
(6) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. If an
advanced approaches national bank or Federal savings association has a
significant investment in the capital of an unconsolidated financial
institution, the advanced approaches national bank or Federal savings
association must deduct from capital any such investment issued by the
unconsolidated financial institution that is held by the national bank
or Federal savings association other than an investment in the form of
common stock, as well as any investment in a covered debt instrument
issued by the unconsolidated financial institution, by applying the
corresponding deduction approach in paragraph (c)(2) of this
section.\28\ The deductions described in this section are net of
associated DTLs in accordance with paragraph (e) of this section. In
addition, with the prior written approval of the OCC, for the period of
time stipulated by the OCC, an advanced approaches national bank or
Federal savings association that underwrites a failed underwriting is
not required to deduct the significant investment in the capital of an
unconsolidated financial institution or an investment in a covered debt
instrument pursuant to this paragraph (c)(6) if such investment is
related to such failed underwriting.
---------------------------------------------------------------------------
\28\ With prior written approval of the OCC, for the period of
time stipulated by the OCC, an advanced approaches national bank or
Federal savings association is not required to deduct an investment
in a covered debt instrument under this paragraph (c)(5) or
otherwise under this section if such investment is made for the
purpose of providing financial support to the financial institution
as determined by the OCC.
---------------------------------------------------------------------------
* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if a
national bank or Federal savings association does not have a sufficient
amount of a specific component of capital to effect the full amount of
any deduction from capital required under paragraph (d) of this
section, the national bank or Federal savings association must deduct
the shortfall amount from the next higher (that is, more subordinated)
component of regulatory capital. Any investment by an advanced
approaches national bank or Federal savings association in a covered
debt instrument must be treated as an investment in the tier 2 capital
for purposes of this paragraph. Notwithstanding any other provision of
this section, a qualifying community banking organization (as defined
in Sec. 3.12) that has elected to use the community bank leverage
ratio framework pursuant to Sec. 3.12 is not required to deduct any
shortfall of tier 2 capital from its additional tier 1 capital or
common equity tier 1 capital.
* * * * *
(h) Net long position--(1) In general. For purposes of calculating
the amount of a national bank's or Federal savings association's
investment in the national bank's or Federal savings association's own
capital instrument, investment in the capital of an unconsolidated
financial institution, and investment in a covered debt instrument
under this section, the institution's net long position is the gross
long position in the underlying instrument determined in accordance
with paragraph (h)(2) of this section, as adjusted to recognize any
short position by the national bank or Federal savings association in
the same instrument subject to paragraph (h)(3) of this section.
(2) Gross long position. A gross long position is determined as
follows:
(i) For an equity exposure that is held directly by the national
bank or Federal savings association, the adjusted carrying value of the
exposure as that term is defined in Sec. 3.51(b);
(ii) For an exposure that is held directly and that is not an
equity exposure or a securitization exposure, the exposure amount as
that term is defined in Sec. 3.2;
(iii) For each indirect exposure, the national bank's or Federal
savings association's carrying value of its investment in an investment
fund or, alternatively:
(A) A national bank or Federal savings association may, with the
prior approval of the OCC, use a conservative estimate of the amount of
its indirect investment in the national bank's or Federal savings
association's own capital instruments, its indirect investment in the
capital of an unconsolidated financial institution, or its indirect
investment in a covered debt instrument held through a position in an
index, as applicable; or
(B) A national bank or Federal savings association may calculate
the gross long position for an indirect exposure to the national bank's
or Federal savings association's own capital the capital in an
unconsolidated financial institution, or a covered debt instrument by
multiplying the national bank's or Federal savings association's
carrying value of its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for an
investment in the national bank's or Federal savings association's own
capital instruments, an investment in the capital of an unconsolidated
financial institution, or an investment in a covered debt instrument,
as applicable, as stated in the prospectus, partnership agreement, or
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings (in percent) of the
investment in the national bank's or Federal savings association's own
capital instruments, investment in the capital of an unconsolidated
financial institution, or investment in a covered debt instrument, as
applicable; and
[[Page 731]]
(iv) For a synthetic exposure, the amount of the national bank's or
Federal savings association's loss on the exposure if the reference
capital instrument or covered debt instrument were to have a value of
zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument under paragraph (h)(1) of this section, the following
criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position must have a residual maturity
of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the national bank's
or Federal savings association's Call Report, if the national bank or
Federal savings association has a contractual right or obligation to
sell the long position at a specific point in time and the counterparty
to the contract has an obligation to purchase the long position if the
national bank or Federal savings association exercises its right to
sell, this point in time may be treated as the maturity of the long
position such that the maturity of the long position and short position
are deemed to match for purposes of the maturity requirement, even if
the maturity of the short position is less than one year; and
(iii) For an investment in a national bank's or Federal savings
association's own capital instrument under paragraph (c)(1) of this
section, an investment in the capital of an unconsolidated financial
institution under paragraphs (c)(4) through (6) and (d) of this section
(as applicable), and an investment in a covered debt instrument under
paragraphs (c)(1), (5), and (6) of this section:
(A) The national bank or Federal savings association may only net a
short position against a long position in an investment in the national
bank's or Federal savings association's own capital instrument under
paragraph (c)(1) of this section if the short position involves no
counterparty credit risk;
(B) A gross long position in an investment in the national bank's
or Federal savings association's own capital instrument, an investment
in the capital of an unconsolidated financial institution, or an
investment in a covered debt instrument due to a position in an index
may be netted against a short position in the same index;
(C) Long and short positions in the same index without maturity
dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or
synthetic position in an investment in the national bank's or Federal
savings association's own capital instrument, an investment in the
capital instrument of an unconsolidated financial institution, or an
investment in a covered debt instrument can be decomposed to provide
recognition of the hedge. More specifically, the portion of the index
that is composed of the same underlying instrument that is being hedged
may be used to offset the long position if both the long position being
hedged and the short position in the index are reported as a trading
asset or trading liability (whether on- or off-balance sheet) on the
national bank's or Federal savings association's Call Report, and the
hedge is deemed effective by the national bank's or Federal savings
association's internal control processes, which have not been found to
be inadequate by the OCC.
Sec. 3.121 [Amended]
0
5. Section 3.121 is amended by removing ``Sec. 3.10(c)(1) through
(3)'' and adding ``Sec. 3.10(d)(1) through (3)'' in its place in
paragraph (c).
Sec. 3.132 [Amended]
0
6. Section 3.132 is amended by removing ``Sec. 3.10(c)(4)(ii)(B)'' and
adding ``Sec. 3.10(c)(2)(ii)(B)'' in paragraphs (c)(7)(iii) and (iv).
Sec. 3.304 [Amended]
0
7. Section 3.304 is amended by:
0
a. Removing ``Sec. 3.10(c)(4)'' and adding in its place ``Sec.
3.10(d)'' in paragraph (a) introductory text; and
0
b. Removing ``Sec. 3.10(c)(4)(ii)(J)(1)'' and adding in its place
``Sec. 3.10(c)(2)(x)(A)'' in paragraph (e).
Board of Governors of the Federal Reserve System
For the reasons set forth in the joint preamble, the Board amends
part 217 of chapter II of title 12 of the Code of Federal Regulations
as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).
0
8. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371, and 5371 note; Pub. L. 116-136,
134 Stat. 281.
0
9. In Sec. 217.2:
0
a. Add definitions in alphabetical order for ``Covered debt
instrument'' and ``Excluded covered debt instrument'';
0
b. In the definition of ``Fiduciary or custodial and safekeeping
accounts'', remove ``Sec. 217.10(c)(4)(ii)(J)'' and add ``Sec.
217.10(c)(2)(x)'' in its place;
0
c. Revise the definition of ``Indirect exposure'';
0
d. Add a definition in alphabetical order for ``Investment in a covered
debt instrument'';
0
e. Revise the definition of ``Synthetic exposure''; and
0
f. In the definition of ``Total leverage exposure'', remove ``Sec.
217.10(c)(4)(ii)'' and add ``Sec. 217.10(c)(2)'' in its place.
The additions and revisions read as follows:
Sec. 217.2 Definitions.
* * * * *
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC and that is an
eligible debt security, as defined in 12 CFR 252.61, or that is pari
passu or subordinated to any eligible debt security issued by the
global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161,
or that is pari passu or subordinated to any eligible Covered IHC debt
security issued by the Covered IHC; or
(3) Issued by a global systemically important banking organization,
as defined in 12 CFR 252.2 other than a global systemically important
BHC; or issued by a subsidiary of a global systemically important
banking organization that is not a global systemically important BHC,
other than a Covered IHC, as defined in 12 CFR 252.161; and where,
(i) The instrument is eligible for use to comply with an applicable
law or regulation requiring the issuance of a minimum amount of
instruments to absorb losses or recapitalize the issuer or any of its
subsidiaries in connection with a resolution, receivership, insolvency,
or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument
described in paragraph (3)(i) of this definition; for purposes of this
paragraph (3)(ii) of this definition, if the issuer may be subject to a
special resolution regime, in its jurisdiction of incorporation or
organization, that addresses the failure or potential failure of a
financial company and any
[[Page 732]]
instrument described in paragraph (3)(i) of this definition is eligible
under that special resolution regime to be written down or converted
into equity or any other capital instrument, then an instrument is pari
passu or subordinated to any instrument described in paragraph (3)(i)
of this definition if that instrument is eligible under that special
resolution regime to be written down or converted into equity or any
other capital instrument ahead of or proportionally with any instrument
described in paragraph (3)(i) of this definition; and
(4) Provided that, for purposes of this definition, covered debt
instrument does not include a debt instrument that qualifies as tier 2
capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as
regulatory capital by the primary supervisor of the issuer.
* * * * *
Excluded covered debt instrument means an investment in a covered
debt instrument held by a global systemically important BHC or a Board-
regulated institution that is a subsidiary of a global systemically
important BHC that:
(1) Is held in connection with market making-related activities
permitted under 12 CFR 248.4, provided that a direct exposure or an
indirect exposure to a covered debt instrument is held for 30 business
days or less; and
(2) Has been designated as an excluded covered debt instrument by
the global systemically important BHC or the subsidiary of a global
systemically important BHC pursuant to 12 CFR 217.22(c)(5)(iv)(A).
* * * * *
Indirect exposure means an exposure that arises from the Board-
regulated institution's investment in an investment fund which holds an
investment in the Board-regulated institution's own capital instrument
or an investment in the capital of an unconsolidated financial
institution. For an advanced approaches Board-regulated institution,
indirect exposure also includes an investment in an investment fund
that holds a covered debt instrument.
* * * * *
Investment in a covered debt instrument means a Board-regulated
institution's net long position calculated in accordance with Sec.
217.22(h) in a covered debt instrument, including direct, indirect, and
synthetic exposures to the debt instrument, excluding any underwriting
positions held by the Board-regulated institution for five or fewer
business days.
* * * * *
Synthetic exposure means an exposure whose value is linked to the
value of an investment in the Board-regulated institution's own capital
instrument or to the value of an investment in the capital of an
unconsolidated financial institution. For an advanced approaches Board-
regulated institution, synthetic exposure includes an exposure whose
value is linked to the value of an investment in a covered debt
instrument.
* * * * *
0
10. Section 217.10 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as (e); and
0
c. Adding new paragraph (d).
The revision and addition read as follows:
Sec. 217.10 Minimum capital requirements.
* * * * *
(c) Supplementary leverage ratio. (1) A Category III Board-
regulated institution or advanced approaches Board-regulated
institution must determine its supplementary leverage ratio in
accordance with this paragraph, beginning with the calendar quarter
immediately following the quarter in which the Board-regulated
institution is identified as a Category III Board-regulated
institution. An advanced approaches Board-regulated institution's or a
Category III Board-regulated institution's supplementary leverage ratio
is the ratio of its tier 1 capital to total leverage exposure, the
latter of which is calculated as the sum of:
(i) The mean of the on-balance sheet assets calculated as of each
day of the reporting quarter; and
(ii) The mean of the off-balance sheet exposures calculated as of
the last day of each of the most recent three months, minus the
applicable deductions under Sec. 217.22(a), (c), and (d).
(2) For purposes of this part, total leverage exposure means the
sum of the items described in paragraphs (c)(2)(i) through (viii) of
this section, as adjusted pursuant to paragraph (c)(2)(ix) of this
section for a clearing member Board-regulated institution and paragraph
(c)(2)(x) of this section for a custodial banking organization:
(i) The balance sheet carrying value of all of the Board-regulated
institution's on-balance sheet assets, plus the value of securities
sold under a repurchase transaction or a securities lending transaction
that qualifies for sales treatment under GAAP, less amounts deducted
from tier 1 capital under Sec. 217.22(a), (c), and (d), and less the
value of securities received in security-for-security repo-style
transactions, where the Board-regulated institution acts as a
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities
received, and, for a Board-regulated institution that uses the
standardized approach for counterparty credit risk under Sec.
217.132(c) for its standardized risk-weighted assets, less the fair
value of any derivative contracts;
(ii)(A) For a Board-regulated institution that uses the current
exposure methodology under Sec. 217.34(b) for its standardized risk-
weighted assets, the potential future credit exposure (PFE) for each
derivative contract or each single-product netting set of derivative
contracts (including a cleared transaction except as provided in
paragraph (c)(2)(ix) of this section and, at the discretion of the
Board-regulated institution, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse repurchase
or a securities borrowing or lending transaction that qualifies for
sales treatment under GAAP), to which the Board-regulated institution
is a counterparty as determined under Sec. 217.34, but without regard
to Sec. 217.34(c), provided that:
(1) A Board-regulated institution may choose to exclude the PFE of
all credit derivatives or other similar instruments through which it
provides credit protection when calculating the PFE under Sec. 217.34,
but without regard to Sec. 217.34(c), provided that it does not adjust
the net-to-gross ratio (NGR); and
(2) A Board-regulated institution that chooses to exclude the PFE
of credit derivatives or other similar instruments through which it
provides credit protection pursuant to paragraph (c)(2)(ii)(A) of this
section must do so consistently over time for the calculation of the
PFE for all such instruments; or
(B)(1) For a Board-regulated institution that uses the standardized
approach for counterparty credit risk under section Sec. 217.132(c)
for its standardized risk-weighted assets, the PFE for each netting set
to which the Board-regulated institution is a counterparty (including
cleared transactions except as provided in paragraph (c)(2)(ix) of this
section and, at the discretion of the Board-regulated institution,
excluding a forward agreement treated as a derivative contract that is
part of a repurchase or reverse repurchase or a securities borrowing or
lending transaction that qualifies for sales treatment under GAAP), as
determined under Sec. 217.132(c)(7), in which the term C in
[[Page 733]]
Sec. 217.132(c)(7)(i) equals zero, and, for any counterparty that is
not a commercial end-user, multiplied by 1.4. For purposes of this
paragraph (c)(2)(ii)(B)(1), a Board-regulated institution may set the
value of the term C in Sec. 217.132(c)(7)(i) equal to the amount of
collateral posted by a clearing member client of the Board-regulated
institution in connection with the client-facing derivative
transactions within the netting set; and
(2) A Board-regulated institution may choose to exclude the PFE of
all credit derivatives or other similar instruments through which it
provides credit protection when calculating the PFE under Sec.
217.132(c), provided that it does so consistently over time for the
calculation of the PFE for all such instruments;
(iii)(A)(1) For a Board-regulated institution that uses the current
exposure methodology under Sec. 217.34(b) for its standardized risk-
weighted assets, the amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
Board-regulated institution's on-balance sheet assets, unless such cash
collateral is all or part of variation margin that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section;
and
(2) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
217.34(b), and not the PFE; and
(3) For the purpose of the calculation of the NGR described in
Sec. 217.34(b)(2)(ii)(B), variation margin described in paragraph
(c)(2)(iii)(A)(2) of this section may not reduce the net current credit
exposure or the gross current credit exposure; or
(B)(1) For a Board-regulated institution that uses the standardized
approach for counterparty credit risk under Sec. 217.132(c) for its
standardized risk-weighted assets, the replacement cost of each
derivative contract or single product netting set of derivative
contracts to which the Board-regulated institution is a counterparty,
calculated according to the following formula, and, for any
counterparty that is not a commercial end-user, multiplied by 1.4:
Replacement Cost = max{V-CVMr + CVMp;0{time}
Where:
V equals the fair value for each derivative contract or each
single-product netting set of derivative contracts (including a
cleared transaction except as provided in paragraph (c)(2)(ix) of
this section and, at the discretion of the Board-regulated
institution, excluding a forward agreement treated as a derivative
contract that is part of a repurchase or reverse repurchase or a
securities borrowing or lending transaction that qualifies for sales
treatment under GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section,
or, in the case of a client-facing derivative transaction, the
amount of collateral received from the clearing member client; and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section,
or, in the case of a client-facing derivative transaction, the
amount of collateral posted to the clearing member client;
(2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a Board-regulated institution must apply the formula for
replacement cost provided in Sec. 217.132(c)(10)(i), in which the
term CMA may only include cash collateral that satisfies
the conditions in paragraphs (c)(2)(iii)(C) through (G) of this
section; and
(3) For purposes of paragraph (c)(2)(iii)(B)(1), a Board-
regulated institution must treat a derivative contract that
references an index as if it were multiple derivative contracts each
referencing one component of the index if the Board-regulated
institution elected to treat the derivative contract as multiple
derivative contracts under Sec. 217.132(c)(5)(vi);
(C) For derivative contracts that are not cleared through a
QCCP, the cash collateral received by the recipient counterparty is
not segregated (by law, regulation, or an agreement with the
counterparty);
(D) Variation margin is calculated and transferred on a daily
basis based on the mark-to-fair value of the derivative contract;
(E) The variation margin transferred under the derivative
contract or the governing rules of the CCP or QCCP for a cleared
transaction is the full amount that is necessary to fully extinguish
the net current credit exposure to the counterparty of the
derivative contracts, subject to the threshold and minimum transfer
amounts applicable to the counterparty under the terms of the
derivative contract or the governing rules for a cleared
transaction;
(F) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(2)(iii)(F), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master
netting agreement, or in the governing rules for a cleared
transaction; and
(G) The derivative contract and the variation margin are
governed by a qualifying master netting agreement between the legal
entities that are the counterparties to the derivative contract or
by the governing rules for a cleared transaction, and the qualifying
master netting agreement or the governing rules for a cleared
transaction must explicitly stipulate that the counterparties agree
to settle any payment obligations on a net basis, taking into
account any variation margin received or provided under the contract
if a credit event involving either counterparty occurs;
(iv) The effective notional principal amount (that is, the
apparent or stated notional principal amount multiplied by any
multiplier in the derivative contract) of a credit derivative, or
other similar instrument, through which the Board-regulated
institution provides credit protection, provided that:
(A) The Board-regulated institution may reduce the effective
notional principal amount of the credit derivative by the amount of
any reduction in the mark-to-fair value of the credit derivative if
the reduction is recognized in common equity tier 1 capital;
(B) The Board-regulated institution may reduce the effective
notional principal amount of the credit derivative by the effective
notional principal amount of a purchased credit derivative or other
similar instrument, provided that the remaining maturity of the
purchased credit derivative is equal to or greater than the
remaining maturity of the credit derivative through which the Board-
regulated institution provides credit protection and that:
(1) With respect to a credit derivative that references a single
exposure, the reference exposure of the purchased credit derivative
is to the same legal entity and ranks pari passu with, or is junior
to, the reference exposure of the credit derivative through which
the Board-regulated institution provides credit protection; or
(2) With respect to a credit derivative that references multiple
exposures, the reference exposures of the purchased credit
derivative are to the same legal entities and rank pari passu with
the reference exposures of the credit derivative through which the
Board-regulated institution provides credit protection, and the
level of seniority of the purchased credit derivative ranks pari
passu to the level of seniority of the credit derivative through
which the Board-regulated institution provides credit protection;
(3) Where a Board-regulated institution has reduced the
effective notional amount of a credit derivative through which the
Board-regulated institution provides credit protection in accordance
with paragraph (c)(2)(iv)(A) of this section, the Board-regulated
institution must also reduce the effective notional principal amount
of a purchased credit derivative used to offset the credit
derivative through which the Board-regulated institution provides
credit protection, by the amount of any increase in the mark-to-fair
value of the purchased credit derivative that is recognized in
common equity tier 1 capital; and
(4) Where the Board-regulated institution purchases credit
protection through a total return swap and records the net payments
[[Page 734]]
received on a credit derivative through which the Board-regulated
institution provides credit protection in net income, but does not
record offsetting deterioration in the mark-to-fair value of the
credit derivative through which the Board-regulated institution
provides credit protection in net income (either through reductions
in fair value or by additions to reserves), the Board-regulated
institution may not use the purchased credit protection to offset
the effective notional principal amount of the related credit
derivative through which the Board-regulated institution provides
credit protection;
(v) Where a Board-regulated institution acting as a principal
has more than one repo-style transaction with the same counterparty
and has offset the gross value of receivables due from a
counterparty under reverse repurchase transactions by the gross
value of payables under repurchase transactions due to the same
counterparty, the gross value of receivables associated with the
repo-style transactions less any on-balance sheet receivables amount
associated with these repo-style transactions included under
paragraph (c)(2)(i) of this section, unless the following criteria
are met:
(A) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(B) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership,
insolvency, liquidation, or similar proceeding; and
(C) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement, (that is, the
cash flows of the transactions are equivalent, in effect, to a
single net amount on the settlement date), where both transactions
are settled through the same settlement system, the settlement
arrangements are supported by cash or intraday credit facilities
intended to ensure that settlement of both transactions will occur
by the end of the business day, and the settlement of the underlying
securities does not interfere with the net cash settlement;
(vi) The counterparty credit risk of a repo-style transaction,
including where the Board-regulated institution acts as an agent for
a repo-style transaction and indemnifies the customer with respect
to the performance of the customer's counterparty in an amount
limited to the difference between the fair value of the security or
cash its customer has lent and the fair value of the collateral the
borrower has provided, calculated as follows:
(A) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for
transactions with a counterparty must be calculated on a transaction
by transaction basis, such that each transaction i is treated as its
own netting set, in accordance with the following formula, where
Ei is the fair value of the instruments, gold, or cash
that the Board-regulated institution has lent, sold subject to
repurchase, or provided as collateral to the counterparty, and
Ci is the fair value of the instruments, gold, or cash
that the Board-regulated institution has borrowed, purchased subject
to resale, or received as collateral from the counterparty:
Ei* = max {0, [Ei - Ci]{time} ; and
(B) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as
the greater of zero and the total fair value of the instruments,
gold, or cash that the Board-regulated institution has lent, sold
subject to repurchase or provided as collateral to a counterparty
for all transactions included in the qualifying master netting
agreement ([Sigma]Ei), less the total fair value of the
instruments, gold, or cash that the Board-regulated institution
borrowed, purchased subject to resale or received as collateral from
the counterparty for those transactions ([Sigma]Ci), in
accordance with the following formula:
E* = max {0, [[Sigma]Ei - [Sigma]Ci]{time}
(vii) If a Board-regulated institution acting as an agent for a
repo-style transaction provides a guarantee to a customer of the
security or cash its customer has lent or borrowed with respect to
the performance of the customer's counterparty and the guarantee is
not limited to the difference between the fair value of the security
or cash its customer has lent and the fair value of the collateral
the borrower has provided, the amount of the guarantee that is
greater than the difference between the fair value of the security
or cash its customer has lent and the value of the collateral the
borrower has provided;
(viii) The credit equivalent amount of all off-balance sheet
exposures of the Board-regulated institution, excluding repo-style
transactions, repurchase or reverse repurchase or securities
borrowing or lending transactions that qualify for sales treatment
under GAAP, and derivative transactions, determined using the
applicable credit conversion factor under Sec. 217.33(b), provided,
however, that the minimum credit conversion factor that may be
assigned to an off-balance sheet exposure under this paragraph is 10
percent; and
(ix) For a Board-regulated institution that is a clearing
member:
(A) A clearing member Board-regulated institution that
guarantees the performance of a clearing member client with respect
to a cleared transaction must treat its exposure to the clearing
member client as a derivative contract for purposes of determining
its total leverage exposure;
(B) A clearing member Board-regulated institution that
guarantees the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client must treat its
exposure to the CCP as a derivative contract for purposes of
determining its total leverage exposure;
(C) A clearing member Board-regulated institution that does not
guarantee the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client may exclude its
exposure to the CCP for purposes of determining its total leverage
exposure;
(D) A Board-regulated institution that is a clearing member may
exclude from its total leverage exposure the effective notional
principal amount of credit protection sold through a credit
derivative contract, or other similar instrument, that it clears on
behalf of a clearing member client through a CCP as calculated in
accordance with paragraph (c)(2)(iv) of this section; and
(E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this
section, a Board-regulated institution may exclude from its total
leverage exposure a clearing member's exposure to a clearing member
client for a derivative contract, if the clearing member client and
the clearing member are affiliates and consolidated for financial
reporting purposes on the Board-regulated institution's balance
sheet.
(x) A custodial banking organization shall exclude from its
total leverage exposure the lesser of:
(A) The amount of funds that the custodial banking organization
has on deposit at a qualifying central bank; and
(B) The amount of funds in deposit accounts at the custodial
banking organization that are linked to fiduciary or custodial and
safekeeping accounts at the custodial banking organization. For
purposes of this paragraph (c)(2)(x), a deposit account is linked to
a fiduciary or custodial and safekeeping account if the deposit
account is provided to a client that maintains a fiduciary or
custodial and safekeeping account with the custodial banking
organization, and the deposit account is used to facilitate the
administration of the fiduciary or custodial and safekeeping
account.
(d) Advanced approaches capital ratio calculations. An advanced
approaches Board-regulated institution that has completed the
parallel run process and received notification from the Board
pursuant to Sec. 217.121(d) must determine its regulatory capital
ratios as described in paragraphs (d)(1) through (3) of this
section.
(1) Common equity tier 1 capital ratio. The Board-regulated
institution's common equity tier 1 capital ratio is the lower of:
(i) The ratio of the Board-regulated institution's common equity
tier 1 capital to standardized total risk-weighted assets; and
(ii) The ratio of the Board-regulated institution's common
equity tier 1 capital to advanced approaches total risk-weighted
assets.
(2) Tier 1 capital ratio. The Board-regulated institution's tier
1 capital ratio is the lower of:
(i) The ratio of the Board-regulated institution's tier 1
capital to standardized total risk-weighted assets; and
(ii) The ratio of the Board-regulated institution's tier 1
capital to advanced approaches total risk-weighted assets.
(3) Total capital ratio. The Board-regulated institution's total
capital ratio is the lower of:
(i) The ratio of the Board-regulated institution's total capital
to standardized total risk-weighted assets; and
(ii) The ratio of the Board-regulated institution's advanced-
approaches-adjusted total capital to advanced approaches total risk-
weighted assets. A Board-regulated institution's advanced-
approaches-adjusted total capital is the Board-regulated
institution's total capital after being adjusted as follows:
[[Page 735]]
(A) An advanced approaches Board-regulated institution must
deduct from its total capital any allowance for loan and lease
losses or adjusted allowance for credit losses, as applicable,
included in its tier 2 capital in accordance with Sec.
217.20(d)(3); and
(B) An advanced approaches Board-regulated institution must add
to its total capital any eligible credit reserves that exceed the
Board-regulated institution's total expected credit losses to the
extent that the excess reserve amount does not exceed 0.6 percent of
the Board-regulated institution's credit risk-weighted assets.
* * * * *
0
11. In Sec. 217.22, revise paragraphs (c), (f) and (h) to read as
follows:
Sec. 217.22 Regulatory capital adjustments and deductions.
* * * * *
(c) Deductions from regulatory capital related to investments in
capital instruments or covered debt instruments \23\--(1) Investment in
the Board-regulated institution's own capital or covered debt
instruments. A Board-regulated institution must deduct an investment in
the Board-regulated institution's own capital instruments, and an
advanced approaches Board-regulated institution also must deduct an
investment in the Board-regulated institution's own covered debt
instruments, as follows:
\23\ The Board-regulated institution must calculate amounts
deducted under paragraphs (c) through (f) of this section after it
calculates the amount of ALLL or AACL, as applicable, includable in
tier 2 capital under Sec. 217.20(d)(3).
(i) A Board-regulated institution must deduct an investment in the
Board-regulated institution's own common stock instruments from its
common equity tier 1 capital elements to the extent such instruments
are not excluded from regulatory capital under Sec. 217.20(b)(1);
(ii) A Board-regulated institution must deduct an investment in the
Board-regulated institution's own additional tier 1 capital instruments
from its additional tier 1 capital elements;
(iii) A Board-regulated institution must deduct an investment in
the Board-regulated institution's own tier 2 capital instruments from
its tier 2 capital elements; and
(iv) An advanced approaches Board-regulated institution must deduct
an investment in the institution's own covered debt instruments from
its tier 2 capital elements, as applicable. If the advanced approaches
Board-regulated institution does not have a sufficient amount of tier 2
capital to effect this deduction, the institution must deduct the
shortfall amount from the next higher (that is, more subordinated)
component of regulatory capital.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section),
investments in the capital of unconsolidated financial institutions for
a Board-regulated institution that is not an advanced approaches Board-
regulated institution (as described in paragraph (c)(4) of this
section), non-significant investments in the capital of unconsolidated
financial institutions for an advanced approaches Board-regulated
institution (as described in paragraph (c)(5) of this section), and
non-common stock significant investments in the capital of
unconsolidated financial institutions for an advanced approaches Board-
regulated institution (as described in paragraph (c)(6) of this
section). Under the corresponding deduction approach, a Board-regulated
institution must make deductions from the component of capital for
which the underlying instrument would qualify if it were issued by the
Board-regulated institution itself, as described in paragraphs
(c)(2)(i) through (iii) of this section. If the Board-regulated
institution does not have a sufficient amount of a specific component
of capital to effect the required deduction, the shortfall must be
deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the Board-regulated institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in a liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 217.20, the Board-regulated institution must
treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP
equity but considered regulatory capital by the primary supervisor of
the financial institution; and
(D) For an advanced approaches Board-regulated institution, a tier
2 capital instrument if it is a covered debt instrument.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 217.300(c)), the Board-regulated
institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. (i) A Board-regulated institution must deduct an
investment in the capital of other financial institutions that it holds
reciprocally, where such reciprocal cross holdings result from a formal
or informal arrangement to swap, exchange, or otherwise intend to hold
each other's capital instruments, by applying the corresponding
deduction approach in paragraph (c)(2) of this section.
(ii) An advanced approaches Board-regulated institution must deduct
an investment in any covered debt instrument that the institution holds
reciprocally with another financial institution, where such reciprocal
cross holdings result from a formal or informal arrangement to swap,
exchange, or otherwise intend to hold each other's capital or covered
debt instruments, by applying the corresponding deduction approach in
paragraph (c)(2) of this section.
(4) Investments in the capital of unconsolidated financial
institutions. A Board-regulated institution that is not an advanced
approaches Board-regulated institution must deduct its investments in
the capital of unconsolidated financial institutions (as defined in
Sec. 217.2) that exceed 25 percent of the sum of the Board-regulated
institution's common equity tier 1 capital elements minus all
deductions from and adjustments to
[[Page 736]]
common equity tier 1 capital elements required under paragraphs (a)
through (c)(3) of this section by applying the corresponding deduction
approach in paragraph (c)(2) of this section.\24\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, with the prior written
approval of the Board, a Board-regulated institution that underwrites a
failed underwriting, for the period of time stipulated by the Board, is
not required to deduct an investment in the capital of an
unconsolidated financial institution pursuant to this paragraph (c) to
the extent the investment is related to the failed underwriting.\25\
\24\ With the prior written approval of the Board, for the
period of time stipulated by the Board, a Board-regulated
institution that is not an advanced approaches Board-regulated
institution is not required to deduct an investment in the capital
of an unconsolidated financial institution pursuant to this
paragraph if the financial institution is in distress and if such
investment is made for the purpose of providing financial support to
the financial institution, as determined by the Board.
\25\ Any investments in the capital of unconsolidated financial
institutions that do not exceed the 25 percent threshold for
investments in the capital of unconsolidated financial institutions
under this section must be assigned the appropriate risk weight
under subparts D or F of this part, as applicable.
(5) Non-significant investments in the capital of unconsolidated
financial institutions. (i) An advanced approaches Board-regulated
institution must deduct its non-significant investments in the capital
of unconsolidated financial institutions (as defined in Sec. 217.2)
that, in the aggregate and together with any investment in a covered
debt instrument (as defined in Sec. 217.2) issued by a financial
institution in which the Board-regulated institution does not have a
significant investment in the capital of the unconsolidated financial
institution (as defined in Sec. 217.2), exceeds 10 percent of the sum
of the advanced approaches Board-regulated institution's common equity
tier 1 capital elements minus all deductions from and adjustments to
common equity tier 1 capital elements required under paragraphs (a)
through (c)(3) of this section (the 10 percent threshold for non-
significant investments) by applying the corresponding deduction
approach in paragraph (c)(2) of this section.\26\ The deductions
described in this paragraph are net of associated DTLs in accordance
with paragraph (e) of this section. In addition, with the prior written
approval of the Board, an advanced approaches Board-regulated
institution that underwrites a failed underwriting, for the period of
time stipulated by the Board, is not required to deduct from capital a
non-significant investment in the capital of an unconsolidated
financial institution or an investment in a covered debt instrument
pursuant to this paragraph (c)(5) to the extent the investment is
related to the failed underwriting.\27\ For any calculation under this
paragraph (c)(5)(i), an advanced approaches Board-regulated institution
may exclude the amount of an investment in a covered debt instrument
under paragraph (c)(5)(iii) or (iv) of this section, as applicable.
\26\ With the prior written approval of the Board, for the
period of time stipulated by the Board, an advanced approaches
Board-regulated institution is not required to deduct a non-
significant investment in the capital of an unconsolidated financial
institution or an investment in a covered debt instrument pursuant
to this paragraph if the financial institution is in distress and if
such investment is made for the purpose of providing financial
support to the financial institution, as determined by the Board.
\27\ Any non-significant investment in the capital of an
unconsolidated financial institution or any investment in a covered
debt instrument that is not required to be deducted under this
paragraph (c)(5) or otherwise under this section must be assigned
the appropriate risk weight under subparts D, E, or F of this part,
as applicable.
(ii) For an advanced approaches Board-regulated institution, the
amount to be deducted under this paragraph (c)(5) from a specific
capital component is equal to:
(A) The advanced approaches Board-regulated institution's aggregate
non-significant investments in the capital of an unconsolidated
financial institution and, if applicable, any investments in a covered
debt instrument subject to deduction under this paragraph (c)(5),
exceeding the 10 percent threshold for non-significant investments,
multiplied by
(B) The ratio of the advanced approaches Board-regulated
institution's aggregate non-significant investments in the capital of
an unconsolidated financial institution (in the form of such capital
component) to the advanced approaches Board-regulated institution's
total non-significant investments in unconsolidated financial
institutions, with an investment in a covered debt instrument being
treated as tier 2 capital for this purpose.
(iii) For purposes of applying the deduction under paragraph
(c)(5)(i) of this section, an advanced approaches Board-regulated
institution that is not a global systemically important BHC or a
subsidiary of a global systemically important banking organization, as
defined in 12 CFR 252.2, may exclude from the deduction the amount of
the Board-regulated institution's gross long position, in accordance
with Sec. 217.22(h)(2), in investments in covered debt instruments
issued by financial institutions in which the Board-regulated
institution does not have a significant investment in the capital of
the unconsolidated financial institutions up to an amount equal to 5
percent of the sum of the Board-regulated institution's common equity
tier 1 capital elements minus all deductions from and adjustments to
common equity tier 1 capital elements required under paragraphs (a)
through (c)(3) of this section, net of associated DTLs in accordance
with paragraph (e) of this section.
(iv) Prior to applying the deduction under paragraph (c)(5)(i) of
this section:
(A) A global systemically important BHC or a Board-regulated
institution that is a subsidiary of a global systemically important BHC
may designate any investment in a covered debt instrument as an
excluded covered debt instrument, as defined in Sec. 217.2.
(B) A global systemically important BHC or a Board-regulated
institution that is a subsidiary of a global systemically important BHC
must deduct, according to the corresponding deduction approach in
paragraph (c)(2) of this section, its gross long position, calculated
in accordance with paragraph (h)(2) of this section, in a covered debt
instrument that was originally designated as an excluded covered debt
instrument, in accordance with paragraph (c)(5)(iv)(A) of this section,
but no longer qualifies as an excluded covered debt instrument.
(C) A global systemically important BHC or a Board-regulated
institution that is a subsidiary of a global systemically important BHC
must deduct according to the corresponding deduction approach in
paragraph (c)(2) of this section the amount of its gross long position,
calculated in accordance with paragraph (h)(2) of this section, in a
direct or indirect investment in a covered debt instrument that was
originally designated as an excluded covered debt instrument, in
accordance with paragraph (c)(5)(iv)(A) of this section, and has been
held for more than thirty business days.
(D) A global systemically important BHC or a Board-regulated
institution that is a subsidiary of a global systemically important BHC
must deduct according to the corresponding deduction approach in
paragraph (c)(2) of this section its gross long position, calculated in
accordance with paragraph (h)(2) of this section, of its aggregate
[[Page 737]]
position in excluded covered debt instruments that exceeds 5 percent of
the sum of the Board-regulated institution's common equity tier 1
capital elements minus all deductions from and adjustments to common
equity tier 1 capital elements required under paragraphs (a) through
(c)(3) of this section, net of associated DTLs in accordance with
paragraph (e) of this section.
(6) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. If an
advanced approaches Board-regulated institution has a significant
investment in the capital of an unconsolidated financial institution,
the advanced approaches Board-regulated institution must deduct from
capital any such investment issued by the unconsolidated financial
institution that is held by the Board-regulated institution other than
an investment in the form of common stock, as well as any investment in
a covered debt instrument issued by the unconsolidated financial
institution, by applying the corresponding deduction approach in
paragraph (c)(2) of this section.\28\ The deductions described in this
section are net of associated DTLs in accordance with paragraph (e) of
this section. In addition, with the prior written approval of the
Board, for the period of time stipulated by the Board, an advanced
approaches Board-regulated institution that underwrites a failed
underwriting is not required to deduct the significant investment in
the capital of an unconsolidated financial institution or an investment
in a covered debt instrument pursuant to this paragraph (c)(6) if such
investment is related to such failed underwriting.
\28\ With prior written approval of the Board, for the period of
time stipulated by the Board, an advanced approaches Board-regulated
institution is not required to deduct a significant investment in
the capital of an unconsolidated financial institution, including an
investment in a covered debt instrument, under this paragraph (c)(6)
or otherwise under this section if such investment is made for the
purpose of providing financial support to the financial institution
as determined by the Board.
* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if a
Board-regulated institution does not have a sufficient amount of a
specific component of capital to effect the full amount of any
deduction from capital required under paragraph (d) of this section,
the Board-regulated institution must deduct the shortfall amount from
the next higher (that is, more subordinated) component of regulatory
capital. Any investment by an advanced approaches Board-regulated
institution in a covered debt instrument must be treated as an
investment in the tier 2 capital for purposes of this paragraph (f).
Notwithstanding any other provision of this section, a qualifying
community banking organization (as defined in Sec. 217.12) that has
elected to use the community bank leverage ratio framework pursuant to
Sec. 217.12 is not required to deduct any shortfall of tier 2 capital
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *
(h) Net long position--(1) In general. For purposes of calculating
the amount of a Board-regulated institution's investment in the Board
regulated institution's own capital instrument, investment in the
capital of an unconsolidated financial institution, and investment in a
covered debt instrument under this section, the institution's net long
position is the gross long position in the underlying instrument
determined in accordance with paragraph (h)(2) of this section, as
adjusted to recognize any short position by the Board-regulated
institution in the same instrument subject to paragraph (h)(3) of this
section.
(2) Gross long position. A gross long position is determined as
follows:
(i) For an equity exposure that is held directly by the Board-
regulated institution, the adjusted carrying value of the exposure as
that term is defined in Sec. 217.51(b);
(ii) For an exposure that is held directly and that is not an
equity exposure or a securitization exposure, the exposure amount as
that term is defined in Sec. 217.2;
(iii) For each indirect exposure, the Board-regulated institution's
carrying value of its investment in an investment fund or,
alternatively:
(A) A Board-regulated institution may, with the prior approval of
the Board, use a conservative estimate of the amount of its indirect
investment in the Board-regulated institution's own capital
instruments, its indirect investment in the capital of an
unconsolidated financial institution, or its indirect investment in a
covered debt instrument held through a position in an index, as
applicable; or
(B) A Board-regulated institution may calculate the gross long
position for an indirect exposure to the Board-regulated institution's
own capital instruments, the capital of an unconsolidated financial
institution, or a covered debt instrument by multiplying the Board-
regulated institution's carrying value of its investment in the
investment fund by either:
(1) The highest stated investment limit (in percent) for an
investment in the Board-regulated institution's own capital
instruments, an investment in the capital of an unconsolidated
financial institution, or an investment in a covered debt instrument,
as applicable, as stated in the prospectus, partnership agreement, or
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings (in percent) of the
investment in the Board-regulated institution's own capital
instruments, investment in the capital of an unconsolidated financial
institution, or investment in a covered debt instrument, as applicable;
and
(iv) For a synthetic exposure, the amount of the Board-regulated
institution's loss on the exposure if the reference capital or covered
debt instrument were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument under paragraph (h)(1) of this section, the following
criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position must have a residual maturity
of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the Board-regulated
institution's Call Report, for a state member bank, or FR Y-9C, for a
bank holding company, savings and loan holding company, or intermediate
holding company, as applicable, if the Board-regulated institution has
a contractual right or obligation to sell the long position at a
specific point in time and the counterparty to the contract has an
obligation to purchase the long position if the Board-regulated
institution exercises its right to sell, this point in time may be
treated as the maturity of the long position such that the maturity of
the long position and short position are deemed to match for purposes
of the maturity requirement, even if the maturity of the short position
is less than one year; and
(iii) For an investment in a Board-regulated institution's own
capital instrument under paragraph (c)(1) of this section, an
investment in the capital of an unconsolidated financial institution
under paragraphs (c)(4) through (6) and (d) of this section (as
applicable), and an investment in a covered debt instrument under
[[Page 738]]
paragraphs (c)(1), (5), and (6) of this section:
(A) The Board-regulated institution may only net a short position
against a long position in an investment in the Board-regulated
institution's own capital instrument or own covered debt instrument
under paragraph (c)(1) of this section if the short position involves
no counterparty credit risk;
(B) A gross long position in an investment in the Board-regulated
institution's own capital instrument, an investment in the capital of
an unconsolidated financial institution, or an investment in a covered
debt instrument due to a position in an index may be netted against a
short position in the same index;
(C) Long and short positions in the same index without maturity
dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or
synthetic position in an investment in the Board-regulated
institution's own capital instrument, an investment in the capital
instrument of an unconsolidated financial institution, or an investment
in a covered debt instrument can be decomposed to provide recognition
of the hedge. More specifically, the portion of the index that is
composed of the same underlying instrument that is being hedged may be
used to offset the long position if both the long position being hedged
and the short position in the index are reported as a trading asset or
trading liability (whether on- or off-balance sheet) on the Board-
regulated institution's Call Report, for a state member bank, or FR Y-
9C, for a bank holding company, savings and loan holding company, or
intermediate holding company, as applicable, and the hedge is deemed
effective by the Board-regulated institution's internal control
processes, which have not been found to be inadequate by the Board.
Sec. 217.121 [Amended]
0
12. Section 217.121 is amended by removing ``Sec. 217.10(c)(1) through
(3)'' and adding ``Sec. 217.10(d)(1) through (3)'' in paragraph (c).
Sec. 217.132 [Amended]
0
13. Section 217.132 is amended by removing ``Sec.
217.10(c)(4)(ii)(B)(2)'' and adding ``Sec. 217.10(c)(2)(ii)(B)'' in
paragraphs (c)(7)(iii) and (iv).
Sec. 217.303 [Amended]
0
14. Section 217.303 is amended by:
0
a. Removing ``Sec. 217.10(c)(4)'' and adding in its place ``Sec.
217.10(c)'' in paragraph (a); and
0
b. Removing ``Sec. 217.10(c)(4)(ii)(J)(1)'' and adding in its place
``Sec. 217.10(c)(2)(x)(A)'' in paragraph (e).
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
15. The authority citation for part 252 continues to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828,
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367,
5368, 5371.
Subpart G--External Long-Term Debt Requirement, External Total
Loss-Absorbing Capacity Requirement and Buffer, and Restrictions on
Corporate Practices for U.S. Global Systemically Important Banking
Organizations
0
16. In Sec. 252.61, remove the definition of ``External TLAC buffer''
and add a definition for ``External TLAC risk-weighted buffer'' in
alphabetical order.
The addition reads as follows:
Sec. 252.61 Definitions.
* * * * *
External TLAC risk-weighted buffer means, with respect to a global
systemically important BHC, the sum of 2.5 percent, any applicable
countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a
percentage), and the global systemically important BHC's method 1
capital surcharge.
* * * * *
0
17. In Sec. 252.63, revise paragraphs (c)(3)(i)(C) and
(c)(5)(iii)(A)(2) to read as follows:
Sec. 252.63 External total loss-absorbing capacity requirement and
buffer.
* * * * *
(c) * * *
(3) * * *
(i) * * *
(C) The ratio (expressed as a percentage) of the global
systemically important BHC's outstanding eligible external long-term
debt amount plus 50 percent of the amount of unpaid principal of
outstanding eligible debt securities issued by the global systemically
important BHC due to be paid in, as calculated in Sec. 252.62(b)(2),
greater than or equal to 365 days (one year) but less than 730 days
(two years) to total risk-weighted assets.
* * * * *
(5) * * *
(iii) * * *
(A) * * *
(2) The ratio (expressed as a percentage) of the global
systemically important BHC's outstanding eligible external long-term
debt amount plus 50 percent of the amount of unpaid principal of
outstanding eligible debt securities issued by the global systemically
important BHC due to be paid in in, as calculated in Sec.
252.62(b)(2), greater than or equal to 365 days (one year) but less
than 730 days (two years) to total leverage exposure.
* * * * *
Subpart P--Covered IHC Long-Term Debt Requirement, Covered IHC
Total Loss-Absorbing Capacity Requirement and Buffer, and
Restrictions on Corporate Practices for Intermediate Holding
Companies of Global Systemically Important Foreign Banking
Organizations
0
18. In Sec. 252.160, revise paragraph (b)(2) to read as follows:
Sec. 252.160 Applicability.
* * * * *
(b) * * *
(2) 1095 days (three years) after the later of the date on which:
(i) The U.S. non-branch assets of the global systemically important
foreign banking organization that controls the Covered IHC equaled or
exceeded $50 billion; and
(ii) The foreign banking organization that controls the Covered IHC
became a global systemically important foreign banking organization.
* * * * *
0
19. In Sec. 252.162, revise paragraph (b)(1) to read as follows:
Sec. 252.162 Covered IHC long-term debt requirement.
* * * * *
(b) * * *
(1) A Covered IHC's outstanding eligible Covered IHC long-term debt
amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of
unpaid principal of the outstanding eligible Covered IHC debt
securities issued by the Covered IHC in greater than or equal to 730
days (two years); and
(ii) Fifty (50) percent of the amount due to be paid of unpaid
principal of the outstanding eligible Covered IHC debt securities
issued by the Covered IHC in greater than or equal to 365 days (one
year) and less than 730 days (two years); and
(iii) Zero (0) percent of the amount due to be paid of unpaid
principal of the outstanding eligible Covered IHC debt securities
issued by the Covered IHC in less than 365 days (one year).
* * * * *
[[Page 739]]
0
20. In Sec. 252.165, revise paragraph (d)(3)(i)(C) to read as follows:
Sec. 252.165 Covered IHC total loss-absorbing capacity requirement
and buffer.
* * * * *
(d) * * *
(3) * * *
(i) * * *
(C) The ratio (expressed as a percentage) of the Covered IHC's
outstanding eligible Covered IHC long-term debt amount plus 50 percent
of the amount of unpaid principal of outstanding eligible Covered IHC
debt securities issued by the Covered IHC due to be paid in, as
calculated in Sec. 252.162(b)(2), greater than or equal to 365 days
(one year) but less than 730 days (two years) to total risk-weighted
assets.
* * * * *
12 CFR Part 324
FEDERAL DEPOSIT INSURANCE CORPORATION
For the reasons set out in the joint preamble, the FDIC amends 12
CFR part 324 as follows.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
21. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note),
Pub. L. 115-174; section 4014, Pub. L. 116-136, 134 Stat. 281 (15
U.S.C. 9052).
0
22. In Sec. 324.2:
0
a. Add in alphabetical order definitions for ``Covered debt
instrument'' and ``Excluded covered debt instrument'';
0
b. Revise the definitions of ``Fiduciary or custodial and safekeeping
account'' and ``Indirect exposure'';
0
c. Add in alphabetical order and definition for ``Investment in a
covered debt instrument''; and
0
d. Revise the definitions of ``Synthetic exposure'' and ``Total
leverage exposure''.
The additions and revisions read as follows:
Sec. 324.2 Definitions.
* * * * *
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC, as defined in 12
CFR 217.2, and that is an eligible debt security, as defined in 12 CFR
252.61, or that is pari passu or subordinated to any eligible debt
security issued by the global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161,
or that is pari passu or subordinated to any eligible Covered IHC debt
security issued by the Covered IHC; or
(3) Issued by a global systemically important banking organization,
as defined in 12 CFR 252.2 other than a global systemically important
BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global
systemically important banking organization that is not a global
systemically important BHC, other than a Covered IHC, as defined in 12
CFR 252.161; and where,
(i) The instrument is eligible for use to comply with an applicable
law or regulation requiring the issuance of a minimum amount of
instruments to absorb losses or recapitalize the issuer or any of its
subsidiaries in connection with a resolution, receivership, insolvency,
or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument
described in paragraph (3)(i) of this definition; for purposes of this
paragraph (3)(ii) of this definition, if the issuer may be subject to a
special resolution regime, in its jurisdiction of incorporation or
organization, that addresses the failure or potential failure of a
financial company and any instrument described in paragraph (3)(i) of
this definition is eligible under that special resolution regime to be
written down or converted into equity or any other capital instrument,
then an instrument is pari passu or subordinated to any instrument
described in paragraph (3)(i) of this definition if that instrument is
eligible under that special resolution regime to be written down or
converted into equity or any other capital instrument ahead of or
proportionally with any instrument described in paragraph (3)(i) of
this definition; and
(4) Provided that, for purposes of this definition, covered debt
instrument does not include a debt instrument that qualifies as tier 2
capital pursuant to 12 CFR 324.20(d) or that is otherwise treated as
regulatory capital by the primary supervisor of the issuer.
* * * * *
Excluded covered debt instrument means an investment in a covered
debt instrument held by an FDIC-supervised institution that is a
subsidiary of a global systemically important BHC, as defined in 12 CFR
252.2, that:
(1) Is held in connection with market making-related activities
permitted under 12 CFR 351.4, provided that a direct exposure or an
indirect exposure to a covered debt instrument is held for 30 business
days or less; and
(2) Has been designated as an excluded covered debt instrument by
the FDIC-supervised institution that is a subsidiary of a global
systemically important BHC, as defined in 12 CFR 252.2, pursuant to 12
CFR 324.22(c)(5)(iv)(A).
* * * * *
Fiduciary or custodial and safekeeping account means, for purposes
of Sec. 324.10(c)(2)(x), an account administered by a custody bank for
which the custody bank provides fiduciary or custodial and safekeeping
services, as authorized by applicable Federal or state law.
* * * * *
Indirect exposure means an exposure that arises from the FDIC-
supervised institution's investment in an investment fund which holds
an investment in the FDIC-supervised institution's own capital
instrument or an investment in the capital of an unconsolidated
financial institution. For an advanced approaches FDIC-supervised
institution, indirect exposure also includes an investment in an
investment fund that holds a covered debt instrument.
* * * * *
Investment in a covered debt instrument means an FDIC-supervised
institution's net long position calculated in accordance with Sec.
324.22(h) in a covered debt instrument, including direct, indirect, and
synthetic exposures to the debt instrument, excluding any underwriting
positions held by the FDIC-supervised institution for five or fewer
business days.
* * * * *
Synthetic exposure means an exposure whose value is linked to the
value of an investment in the FDIC-supervised institution's own capital
instrument or to the value of an investment in the capital of an
unconsolidated financial institution. For an advanced approaches FDIC-
supervised institution, synthetic exposure includes an exposure whose
value is linked to the value of an investment in a covered debt
instrument.
* * * * *
[[Page 740]]
Total leverage exposure is defined in Sec. 324.10(c)(2).
* * * * *
0
23. Section 324.10 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as (e); and
0
c. Adding new paragraph (d).
The revision and addition read as follows:
Sec. 324.10 Minimum capital requirements.
* * * * *
(c) Supplementary leverage ratio. (1) A Category III FDIC-
supervised institution or advanced approaches FDIC-supervised
institution must determine its supplementary leverage ratio in
accordance with this paragraph, beginning with the calendar quarter
immediately following the quarter in which the FDIC-supervised
institution is identified as a Category III FDIC-supervised
institution. An advanced approaches FDIC-supervised institution's or a
Category III FDIC-supervised institution's supplementary leverage ratio
is the ratio of its tier 1 capital to total leverage exposure, the
latter of which is calculated as the sum of:
(i) The mean of the on-balance sheet assets calculated as of each
day of the reporting quarter; and
(ii) The mean of the off-balance sheet exposures calculated as of
the last day of each of the most recent three months, minus the
applicable deductions under Sec. 324.22(a), (c), and (d).
(2) For purposes of this part, total leverage exposure means the
sum of the items described in paragraphs (c)(2)(i) through (viii) of
this section, as adjusted pursuant to paragraph (c)(2)(ix) of this
section for a clearing member FDIC-supervised institution and paragraph
(c)(2)(x) of this section for a custody bank:
(i) The balance sheet carrying value of all of the FDIC-supervised
institution's on-balance sheet assets, plus the value of securities
sold under a repurchase transaction or a securities lending transaction
that qualifies for sales treatment under GAAP, less amounts deducted
from tier 1 capital under Sec. 324.22(a), (c), and (d), and less the
value of securities received in security-for-security repo-style
transactions, where the FDIC-supervised institution acts as a
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities
received, and, for an FDIC-supervised institution that uses the
standardized approach for counterparty credit risk under Sec.
324.132(c) for its standardized risk-weighted assets, less the fair
value of any derivative contracts;
(ii)(A) For an FDIC-supervised institution that uses the current
exposure methodology under Sec. 324.34(b) for its standardized risk-
weighted assets, the potential future credit exposure (PFE) for each
derivative contract or each single-product netting set of derivative
contracts (including a cleared transaction except as provided in
paragraph (c)(2)(ix) of this section and, at the discretion of the
FDIC-supervised institution, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse repurchase
or a securities borrowing or lending transaction that qualifies for
sales treatment under GAAP), to which the FDIC-supervised institution
is a counterparty as determined under Sec. 324.34, but without regard
to Sec. 324.34(c), provided that:
(1) An FDIC-supervised institution may choose to exclude the PFE of
all credit derivatives or other similar instruments through which it
provides credit protection when calculating the PFE under Sec. 324.34,
but without regard to Sec. 324.34(c), provided that it does not adjust
the net-to-gross ratio (NGR); and
(2) An FDIC-supervised institution that chooses to exclude the PFE
of credit derivatives or other similar instruments through which it
provides credit protection pursuant to this paragraph (c)(2)(ii)(A)
must do so consistently over time for the calculation of the PFE for
all such instruments; or
(B)(1) For an FDIC-supervised institution that uses the
standardized approach for counterparty credit risk under section Sec.
324.132(c) for its standardized risk-weighted assets, the PFE for each
netting set to which the FDIC-supervised institution is a counterparty
(including cleared transactions except as provided in paragraph
(c)(2)(ix) of this section and, at the discretion of the FDIC-
supervised institution, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse repurchase
or a securities borrowing or lending transaction that qualifies for
sales treatment under GAAP), as determined under Sec. 324.132(c)(7),
in which the term C in Sec. 324.132(c)(7)(i) equals zero, and, for any
counterparty that is not a commercial end-user, multiplied by 1.4. For
purposes of this paragraph (c)(2)(ii)(B)(1), an FDIC-supervised
institution may set the value of the term C in Sec. 324.132(c)(7)(i)
equal to the amount of collateral posted by a clearing member client of
the FDIC-supervised institution in connection with the client-facing
derivative transactions within the netting set; and
(2) An FDIC-supervised institution may choose to exclude the PFE of
all credit derivatives or other similar instruments through which it
provides credit protection when calculating the PFE under Sec.
324.132(c), provided that it does so consistently over time for the
calculation of the PFE for all such instruments;
(iii)(A)(1) For an FDIC-supervised institution that uses the
current exposure methodology under Sec. 324.34(b) for its standardized
risk-weighted assets, the amount of cash collateral that is received
from a counterparty to a derivative contract and that has offset the
mark-to-fair value of the derivative asset, or cash collateral that is
posted to a counterparty to a derivative contract and that has reduced
the FDIC-supervised institution's on-balance sheet assets, unless such
cash collateral is all or part of variation margin that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section;
and
(2) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
324.34(b), and not the PFE; and
(3) For the purpose of the calculation of the NGR described in
Sec. 324.34(b)(2)(ii)(B), variation margin described in paragraph
(c)(2)(iii)(A)(2) of this section may not reduce the net current credit
exposure or the gross current credit exposure; or
(B)(1) For an FDIC-supervised institution that uses the
standardized approach for counterparty credit risk under Sec.
324.132(c) for its standardized risk-weighted assets, the replacement
cost of each derivative contract or single product netting set of
derivative contracts to which the FDIC-supervised institution is a
counterparty, calculated according to the following formula, and, for
any counterparty that is not a commercial end-user, multiplied by 1.4:
Replacement Cost = max{V-CVMr + CVMp; 0{time}
Where:
V equals the fair value for each derivative contract or each
single-product netting set of derivative contracts (including a
cleared transaction except as provided in paragraph (c)(2)(ix) of
this section and, at the discretion of the FDIC-supervised
institution, excluding a forward agreement treated as a derivative
contract that is part of a repurchase or reverse repurchase or a
securities borrowing or lending transaction that qualifies for sales
treatment under GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in
[[Page 741]]
paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the
case of a client-facing derivative transaction on behalf of a
clearing member client, the amount of collateral received from the
clearing member client; and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section,
or, in the case of a client-facing derivative transaction on behalf
of a clearing member client, the amount of collateral posted to the
clearing member client;
(2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section,
where multiple netting sets are subject to a single variation margin
agreement, an FDIC-supervised institution must apply the formula for
replacement cost provided in Sec. 324.132(c)(10)(i), in which the
term CMA may only include cash collateral that satisfies
the conditions in paragraphs (c)(2)(iii)(C) through (G) of this
section; and
(3) For purposes of paragraph (c)(2)(iii)(B)(1), an FDIC-
supervised institution must treat a derivative contract that
references an index as if it were multiple derivative contracts each
referencing one component of the index if the FDIC-supervised
institution elected to treat the derivative contract as multiple
derivative contracts under Sec. 324.132(c)(5)(vi);
(C) For derivative contracts that are not cleared through a
QCCP, the cash collateral received by the recipient counterparty is
not segregated (by law, regulation, or an agreement with the
counterparty);
(D) Variation margin is calculated and transferred on a daily
basis based on the mark-to-fair value of the derivative contract;
(E) The variation margin transferred under the derivative
contract or the governing rules of the CCP or QCCP for a cleared
transaction is the full amount that is necessary to fully extinguish
the net current credit exposure to the counterparty of the
derivative contracts, subject to the threshold and minimum transfer
amounts applicable to the counterparty under the terms of the
derivative contract or the governing rules for a cleared
transaction;
(F) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(2)(iii)(F), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master
netting agreement, or in the governing rules for a cleared
transaction; and
(G) The derivative contract and the variation margin are
governed by a qualifying master netting agreement between the legal
entities that are the counterparties to the derivative contract or
by the governing rules for a cleared transaction, and the qualifying
master netting agreement or the governing rules for a cleared
transaction must explicitly stipulate that the counterparties agree
to settle any payment obligations on a net basis, taking into
account any variation margin received or provided under the contract
if a credit event involving either counterparty occurs;
(iv) The effective notional principal amount (that is, the
apparent or stated notional principal amount multiplied by any
multiplier in the derivative contract) of a credit derivative, or
other similar instrument, through which the FDIC-supervised
institution provides credit protection, provided that:
(A) The FDIC-supervised institution may reduce the effective
notional principal amount of the credit derivative by the amount of
any reduction in the mark-to-fair value of the credit derivative if
the reduction is recognized in common equity tier 1 capital;
(B) The FDIC-supervised institution may reduce the effective
notional principal amount of the credit derivative by the effective
notional principal amount of a purchased credit derivative or other
similar instrument, provided that the remaining maturity of the
purchased credit derivative is equal to or greater than the
remaining maturity of the credit derivative through which the FDIC-
supervised institution provides credit protection and that:
(1) With respect to a credit derivative that references a single
exposure, the reference exposure of the purchased credit derivative
is to the same legal entity and ranks pari passu with, or is junior
to, the reference exposure of the credit derivative through which
the FDIC-supervised institution provides credit protection; or
(2) With respect to a credit derivative that references multiple
exposures, the reference exposures of the purchased credit
derivative are to the same legal entities and rank pari passu with
the reference exposures of the credit derivative through which the
FDIC-supervised institution provides credit protection, and the
level of seniority of the purchased credit derivative ranks pari
passu to the level of seniority of the credit derivative through
which the FDIC-supervised institution provides credit protection;
(3) Where an FDIC-supervised institution has reduced the
effective notional amount of a credit derivative through which the
FDIC-supervised institution provides credit protection in accordance
with paragraph (c)(2)(iv)(A) of this section, the FDIC-supervised
institution must also reduce the effective notional principal amount
of a purchased credit derivative used to offset the credit
derivative through which the FDIC-supervised institution provides
credit protection, by the amount of any increase in the mark-to-fair
value of the purchased credit derivative that is recognized in
common equity tier 1 capital; and
(4) Where the FDIC-supervised institution purchases credit
protection through a total return swap and records the net payments
received on a credit derivative through which the FDIC-supervised
institution provides credit protection in net income, but does not
record offsetting deterioration in the mark-to-fair value of the
credit derivative through which the FDIC-supervised institution
provides credit protection in net income (either through reductions
in fair value or by additions to reserves), the FDIC-supervised
institution may not use the purchased credit protection to offset
the effective notional principal amount of the related credit
derivative through which the FDIC-supervised institution provides
credit protection;
(v) Where an FDIC-supervised institution acting as a principal
has more than one repo-style transaction with the same counterparty
and has offset the gross value of receivables due from a
counterparty under reverse repurchase transactions by the gross
value of payables under repurchase transactions due to the same
counterparty, the gross value of receivables associated with the
repo-style transactions less any on-balance sheet receivables amount
associated with these repo-style transactions included under
paragraph (c)(2)(i) of this section, unless the following criteria
are met:
(A) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(B) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership,
insolvency, liquidation, or similar proceeding; and
(C) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement, (that is, the
cash flows of the transactions are equivalent, in effect, to a
single net amount on the settlement date), where both transactions
are settled through the same settlement system, the settlement
arrangements are supported by cash or intraday credit facilities
intended to ensure that settlement of both transactions will occur
by the end of the business day, and the settlement of the underlying
securities does not interfere with the net cash settlement;
(vi) The counterparty credit risk of a repo-style transaction,
including where the FDIC-supervised institution acts as an agent for
a repo-style transaction and indemnifies the customer with respect
to the performance of the customer's counterparty in an amount
limited to the difference between the fair value of the security or
cash its customer has lent and the fair value of the collateral the
borrower has provided, calculated as follows:
(A) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for
transactions with a counterparty must be calculated on a transaction
by transaction basis, such that each transaction i is treated as its
own netting set, in accordance with the following formula, where
Ei is the fair value of the instruments, gold, or cash
that the FDIC-supervised institution has lent, sold subject to
repurchase, or provided as collateral to the counterparty, and
Ci is the fair value of the instruments, gold, or cash
that the FDIC-supervised institution has borrowed, purchased subject
to resale, or received as collateral from the counterparty:
Ei* = max {0, [Ei - Ci]{time} ; and
(B) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as
the greater of zero and the total
[[Page 742]]
fair value of the instruments, gold, or cash that the FDIC-
supervised institution has lent, sold subject to repurchase or
provided as collateral to a counterparty for all transactions
included in the qualifying master netting agreement
([Sigma]Ei), less the total fair value of the
instruments, gold, or cash that the FDIC-supervised institution
borrowed, purchased subject to resale or received as collateral from
the counterparty for those transactions ([Sigma]Ci), in
accordance with the following formula:
E* = max {0, [[Sigma]Ei - [Sigma]Ci]{time}
(vii) If an FDIC-supervised institution acting as an agent for a
repo-style transaction provides a guarantee to a customer of the
security or cash its customer has lent or borrowed with respect to
the performance of the customer's counterparty and the guarantee is
not limited to the difference between the fair value of the security
or cash its customer has lent and the fair value of the collateral
the borrower has provided, the amount of the guarantee that is
greater than the difference between the fair value of the security
or cash its customer has lent and the value of the collateral the
borrower has provided;
(viii) The credit equivalent amount of all off-balance sheet
exposures of the FDIC-supervised institution, excluding repo-style
transactions, repurchase or reverse repurchase or securities
borrowing or lending transactions that qualify for sales treatment
under GAAP, and derivative transactions, determined using the
applicable credit conversion factor under Sec. 324.33(b), provided,
however, that the minimum credit conversion factor that may be
assigned to an off-balance sheet exposure under this paragraph is 10
percent; and
(ix) For an FDIC-supervised institution that is a clearing
member:
(A) A clearing member FDIC-supervised institution that
guarantees the performance of a clearing member client with respect
to a cleared transaction must treat its exposure to the clearing
member client as a derivative contract for purposes of determining
its total leverage exposure;
(B) A clearing member FDIC-supervised institution that
guarantees the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client must treat its
exposure to the CCP as a derivative contract for purposes of
determining its total leverage exposure;
(C) A clearing member FDIC-supervised institution that does not
guarantee the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client may exclude its
exposure to the CCP for purposes of determining its total leverage
exposure;
(D) An FDIC-supervised institution that is a clearing member may
exclude from its total leverage exposure the effective notional
principal amount of credit protection sold through a credit
derivative contract, or other similar instrument, that it clears on
behalf of a clearing member client through a CCP as calculated in
accordance with paragraph (c)(2)(iv) of this section; and
(E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this
section, an FDIC-supervised institution may exclude from its total
leverage exposure a clearing member's exposure to a clearing member
client for a derivative contract, if the clearing member client and
the clearing member are affiliates and consolidated for financial
reporting purposes on the FDIC-supervised institution's balance
sheet.
(x) A custody bank shall exclude from its total leverage
exposure the lesser of:
(A) The amount of funds that the custody bank has on deposit at
a qualifying central bank; and
(B) The amount of funds in deposit accounts at the custody bank
that are linked to fiduciary or custodial and safekeeping accounts
at the custody bank. For purposes of this paragraph (c)(2)(x), a
deposit account is linked to a fiduciary or custodial and
safekeeping account if the deposit account is provided to a client
that maintains a fiduciary or custodial and safekeeping account with
the custody bank, and the deposit account is used to facilitate the
administration of the fiduciary or custodial and safekeeping
account.
(d) Advanced approaches capital ratio calculations. An advanced
approaches FDIC-supervised institution that has completed the
parallel run process and received notification from the FDIC
pursuant to Sec. 324.121(d) must determine its regulatory capital
ratios as described in paragraphs (d)(1) through (3) of this
section.
(1) Common equity tier 1 capital ratio. The FDIC-supervised
institution's common equity tier 1 capital ratio is the lower of:
(i) The ratio of the FDIC-supervised institution's common equity
tier 1 capital to standardized total risk-weighted assets; and
(ii) The ratio of the FDIC-supervised institution's common
equity tier 1 capital to advanced approaches total risk-weighted
assets.
(2) Tier 1 capital ratio. The FDIC-supervised institution's tier
1 capital ratio is the lower of:
(i) The ratio of the FDIC-supervised institution's tier 1
capital to standardized total risk-weighted assets; and
(ii) The ratio of the FDIC-supervised institution's tier 1
capital to advanced approaches total risk-weighted assets.
(3) Total capital ratio. The FDIC-supervised institution's total
capital ratio is the lower of:
(i) The ratio of the FDIC-supervised institution's total capital
to standardized total risk-weighted assets; and
(ii) The ratio of the FDIC-supervised institution's advanced-
approaches-adjusted total capital to advanced approaches total risk-
weighted assets. An FDIC-supervised institution's advanced-
approaches-adjusted total capital is the FDIC-supervised
institution's total capital after being adjusted as follows:
(A) An advanced approaches FDIC-supervised institution must
deduct from its total capital any allowance for loan and lease
losses or adjusted allowance for credit losses, as applicable,
included in its tier 2 capital in accordance with Sec.
324.20(d)(3); and
(B) An advanced approaches FDIC-supervised institution must add
to its total capital any eligible credit reserves that exceed the
FDIC-supervised institution's total expected credit losses to the
extent that the excess reserve amount does not exceed 0.6 percent of
the FDIC-supervised institution's credit risk-weighted assets.
(4) State savings association tangible capital ratio. (i) Until
January 1, 2014, a state savings association shall determine its
tangible capital ratio in accordance with 12 CFR 390.468.
(ii) As of January 1, 2014, a state savings association's
tangible capital ratio is the ratio of the state savings
association's core capital (tier 1 capital) to total assets. For
purposes of this paragraph, the term total assets shall have the
meaning provided in 12 CFR 324.401(g).
* * * * *
0
24. In Sec. 324.22, revise paragraphs (c), (f), and (h) to read as
follows:
Sec. 324.22 Regulatory capital adjustments and deductions.
* * * * *
(c) Deductions from regulatory capital related to investments in
capital instruments or covered debt instruments \23\--(1) Investment in
the FDIC-supervised institution's own capital instruments. An FDIC-
supervised institution must deduct an investment in its own capital
instruments, as follows:
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\23\ The FDIC-supervised institution must calculate amounts
deducted under paragraphs (c) through (f) of this section after it
calculates the amount of ALLL or AACL, as applicable, includable in
tier 2 capital under Sec. 324.20(d)(3).
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(i) An FDIC-supervised institution must deduct an investment in the
FDIC-supervised institution's own common stock instruments from its
common equity tier 1 capital elements to the extent such instruments
are not excluded from regulatory capital under Sec. 324.20(b)(1);
(ii) An FDIC-supervised institution must deduct an investment in
the FDIC-supervised institution's own additional tier 1 capital
instruments from its additional tier 1 capital elements; and
(iii) An FDIC-supervised institution must deduct an investment in
the FDIC-supervised institution's own tier 2 capital instruments from
its tier 2 capital elements.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section),
investments in the capital of unconsolidated financial institutions for
an FDIC-supervised institution that is not an advanced approaches FDIC-
supervised institution (as described in paragraph (c)(4) of this
section), non-significant investments in the capital of unconsolidated
financial institutions for
[[Page 743]]
an advanced approaches FDIC-supervised institution (as described in
paragraph (c)(5) of this section), and non-common stock significant
investments in the capital of unconsolidated financial institutions for
an advanced approaches FDIC-supervised institution (as described in
paragraph (c)(6) of this section). Under the corresponding deduction
approach, an FDIC-supervised institution must make deductions from the
component of capital for which the underlying instrument would qualify
if it were issued by the FDIC-supervised institution itself, as
described in paragraphs (c)(2)(i) through (iii) of this section. If the
FDIC-supervised institution does not have a sufficient amount of a
specific component of capital to effect the required deduction, the
shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the FDIC-supervised institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in a liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 324.20, the FDIC-supervised institution must
treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP
equity but considered regulatory capital by the primary supervisor of
the financial institution; and
(D) For an advanced approaches FDIC-supervised institution, a tier
2 capital instrument if it is a covered debt instrument.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 324.300(c)), the FDIC-supervised
institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. (i) An FDIC-supervised institution must deduct an
investment in the capital of other financial institutions that it holds
reciprocally, where such reciprocal cross holdings result from a formal
or informal arrangement to swap, exchange, or otherwise intend to hold
each other's capital instruments, by applying the corresponding
deduction approach in paragraph (c)(2) of this section.
(ii) An advanced approaches FDIC-supervised institution must deduct
an investment in any covered debt instrument that the institution holds
reciprocally with another financial institution, where such reciprocal
cross holdings result from a formal or informal arrangement to swap,
exchange, or otherwise intend to hold each other's capital or covered
debt instruments, by applying the corresponding deduction approach in
paragraph (c)(2) of this section.
(4) Investments in the capital of unconsolidated financial
institutions. An FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution must deduct its investments in
the capital of unconsolidated financial institutions (as defined in
Sec. 324.2) that exceed 25 percent of the sum of the FDIC-supervised
institution's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under paragraphs (a) through (c)(3) of this section
by applying the corresponding deduction approach in paragraph (c)(2) of
this section.\24\ The deductions described in this section are net of
associated DTLs in accordance with paragraph (e) of this section. In
addition, with the prior written approval of the FDIC, an FDIC-
supervised institution that underwrites a failed underwriting, for the
period of time stipulated by the FDIC, is not required to deduct an
investment in the capital of an unconsolidated financial institution
pursuant to this paragraph (c) to the extent the investment is related
to the failed underwriting.\25\
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\24\ With the prior written approval of the FDIC, for the period
of time stipulated by the FDIC, an FDIC-supervised institution that
is not an advanced approaches FDIC-supervised institution, is not
required to deduct an investment in the capital of an unconsolidated
financial institution pursuant to this paragraph if the financial
institution is in distress and if such investment is made for the
purpose of providing financial support to the financial institution,
as determined by the FDIC.
\25\ Any investments in the capital of an unconsolidated
financial institution that do not exceed the 25 percent threshold
for investments in the capital of unconsolidated financial
institutions under this section must be assigned the appropriate
risk weight under subparts D or F of this part, as applicable.
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(5) Non-significant investments in the capital of unconsolidated
financial institutions. (i) An advanced approaches FDIC-supervised
institution must deduct its non-significant investments in the capital
of unconsolidated financial institutions (as defined in Sec. 324.2)
that, in the aggregate and together with any investment in a covered
debt instrument (as defined in Sec. 324.2) issued by a financial
institution in which the FDIC-supervised institution does not have a
significant investment in the capital of the unconsolidated financial
institution (as defined in Sec. 324.2), exceeds 10 percent of the sum
of the advanced approaches FDIC-supervised institution's common equity
tier 1 capital elements minus all deductions from and adjustments to
common equity tier 1 capital elements required under paragraphs (a)
through (c)(3) of this section (the 10 percent threshold for non-
significant investments) by applying the corresponding deduction
approach in paragraph (c)(2) of this section.\26\ The deductions
described in this paragraph are net of associated DTLs in accordance
with paragraph (e) of this section. In addition, with the prior written
approval of the FDIC, an advanced approaches FDIC-supervised
institution that underwrites a failed underwriting, for the period of
time stipulated by the FDIC, is not required to deduct from capital a
non-significant investment in the capital of an unconsolidated
financial institution or an investment in a covered debt instrument
pursuant to this paragraph (c)(5) to the extent the investment is
related to the failed
[[Page 744]]
underwriting.\27\ For any calculation under this paragraph (c)(5)(i),
an advanced approaches FDIC-supervised institution may exclude the
amount of an investment in a covered debt instrument under paragraph
(c)(5)(iii) or (iv) of this section, as applicable.
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\26\ With the prior written approval of the FDIC, for the period
of time stipulated by the FDIC, an advanced approaches FDIC-
supervised institution is not required to deduct a non-significant
investment in the capital of an unconsolidated financial institution
or an investment in a covered debt instrument pursuant to this
paragraph if the financial institution is in distress and if such
investment is made for the purpose of providing financial support to
the financial institution, as determined by the FDIC.
\27\ Any non-significant investment in the capital of an
unconsolidated financial institution or any investment in a covered
debt instrument that is not required to be deducted under this
paragraph (c)(5) or otherwise under this section must be assigned
the appropriate risk weight under subparts D, E, or F of this part,
as applicable.
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(ii) For an advanced approaches FDIC-supervised institution, the
amount to be deducted under this paragraph (c)(5) from a specific
capital component is equal to:
(A) The advanced approaches FDIC-supervised institution's aggregate
non-significant investments in the capital of an unconsolidated
financial institution and, if applicable, any investments in a covered
debt instrument subject to deduction under this paragraph (c)(5),
exceeding the 10 percent threshold for non-significant investments,
multiplied by
(B) The ratio of the advanced approaches FDIC-supervised
institution's aggregate non-significant investments in the capital of
an unconsolidated financial institution (in the form of such capital
component) to the advanced approaches FDIC-supervised institution's
total non-significant investments in unconsolidated financial
institutions, with an investment in a covered debt instrument being
treated as tier 2 capital for this purpose.
(iii) For purposes of applying the deduction under paragraph
(c)(5)(i) of this section, an advanced approaches FDIC-supervised
institution that is not a subsidiary of a global systemically important
banking organization, as defined in 12 CFR 252.2, may exclude from the
deduction the amount of the FDIC-supervised institution's gross long
position, in accordance with Sec. 324.22(h)(2), in investments in
covered debt instruments issued by financial institutions in which the
FDIC-supervised institution does not have a significant investment in
the capital of the unconsolidated financial institutions up to an
amount equal to 5 percent of the sum of the FDIC-supervised
institution's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under paragraphs (a) through (c)(3) of this section,
net of associated DTLs in accordance with paragraph (e) of this
section.
(iv) Prior to applying the deduction under paragraph (c)(5)(i) of
this section:
(A) An FDIC-supervised institution that is a subsidiary of a global
systemically important BHC, as defined in 12 CFR 252.2, may designate
any investment in a covered debt instrument as an excluded covered debt
instrument, as defined in Sec. 324.2.
(B) An FDIC-supervised institution that is a subsidiary of a global
systemically important BHC, as defined in 12 CFR 252.2, must deduct,
according to the corresponding deduction approach in paragraph (c)(2)
of this section, its gross long position, calculated in accordance with
paragraph (h)(2) of this section, in a covered debt instrument that was
originally designated as an excluded covered debt instrument, in
accordance with paragraph (c)(5)(iv)(A) of this section, but no longer
qualifies as an excluded covered debt instrument.
(C) An FDIC-supervised institution that is a subsidiary of a global
systemically important BHC, as defined in 12 CFR 252.2, must deduct
according to the corresponding deduction approach in paragraph (c)(2)
of this section the amount of its gross long position, calculated in
accordance with paragraph (h)(2) of this section, in a direct or
indirect investment in a covered debt instrument that was originally
designated as an excluded covered debt instrument, in accordance with
paragraph (c)(5)(iv)(A) of this section, and has been held for more
than thirty business days.
(D) An FDIC-supervised institution that is a subsidiary of a global
systemically important BHC, as defined in 12 CFR 252.2, must deduct
according to the corresponding deduction approach in paragraph (c)(2)
of this section its gross long position, calculated in accordance with
paragraph (h)(2) of this section, of its aggregate position in excluded
covered debt instruments that exceeds 5 percent of the sum of the FDIC-
supervised institution's common equity tier 1 capital elements minus
all deductions from and adjustments to common equity tier 1 capital
elements required under paragraphs (a) through (c)(3) of this section,
net of associated DTLs in accordance with paragraph (e) of this
section.
(6) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. If an
advanced approaches FDIC-supervised institution has a significant
investment in the capital of an unconsolidated financial institution,
the advanced approaches FDIC-supervised institution must deduct from
capital any such investment issued by the unconsolidated financial
institution that is held by the FDIC-supervised institution other than
an investment in the form of common stock, as well as any investment in
a covered debt instrument issued by the unconsolidated financial
institution, by applying the corresponding deduction approach in
paragraph (c)(2) of this section.\28\ The deductions described in this
section are net of associated DTLs in accordance with paragraph (e) of
this section. In addition, with the prior written approval of the FDIC,
for the period of time stipulated by the FDIC, an advanced approaches
FDIC-supervised institution that underwrites a failed underwriting is
not required to deduct the significant investment in the capital of an
unconsolidated financial institution or an investment in a covered debt
instrument pursuant to this paragraph (c)(6) if such investment is
related to such failed underwriting.
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\28\ With prior written approval of the FDIC, for the period of
time stipulated by the FDIC, an advanced approaches FDIC-supervised
institution is not required to deduct a significant investment in
the capital of an unconsolidated financial institution, including an
investment in a covered debt instrument, under this paragraph (c)(6)
or otherwise under this section if such investment is made for the
purpose of providing financial support to the financial institution
as determined by the FDIC.
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* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if an
FDIC-supervised institution does not have a sufficient amount of a
specific component of capital to effect the full amount of any
deduction from capital required under paragraph (d) of this section,
the FDIC-supervised institution must deduct the shortfall amount from
the next higher (that is, more subordinated) component of regulatory
capital. Any investment by an advanced approaches FDIC-supervised
institution in a covered debt instrument must be treated as an
investment in the tier 2 capital for purposes of this paragraph (f).
Notwithstanding any other provision of this section, a qualifying
community banking organization (as defined in Sec. 324.12) that has
elected to use the community bank leverage ratio framework pursuant to
Sec. 324.12 is not required to deduct any shortfall of tier 2 capital
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *
(h) Net long position--(1) In general. For purposes of calculating
the amount of an FDIC-supervised institution's investment in the FDIC-
supervised
[[Page 745]]
institution's own capital instrument, investment in the capital of an
unconsolidated financial institution, and investment in a covered debt
instrument under this section, the institution's net long position is
the gross long position in the underlying instrument determined in
accordance with paragraph (h)(2) of this section, as adjusted to
recognize any short position by the FDIC-supervised institution in the
same instrument subject to paragraph (h)(3) of this section.
(2) Gross long position. A gross long position is determined as
follows:
(i) For an equity exposure that is held directly by the FDIC-
supervised institution, the adjusted carrying value of the exposure as
that term is defined in Sec. 324.51(b);
(ii) For an exposure that is held directly and that is not an
equity exposure or a securitization exposure, the exposure amount as
that term is defined in Sec. 324.2;
(iii) For each indirect exposure, the FDIC-supervised institution's
carrying value of its investment in an investment fund or,
alternatively:
(A) An FDIC-supervised institution may, with the prior approval of
the FDIC, use a conservative estimate of the amount of its indirect
investment in the FDIC-supervised institution's own capital
instruments, its indirect investment in the capital of an
unconsolidated financial institution, or its indirect investment in a
covered debt instrument held through a position in an index, as
applicable; or
(B) An FDIC-supervised institution may calculate the gross long
position for an indirect exposure to the FDIC-supervised institution's
own capital instruments, the capital of an unconsolidated financial
institution, or a covered debt instrument by multiplying the FDIC-
supervised institution's carrying value of its investment in the
investment fund by either:
(1) The highest stated investment limit (in percent) for an
investment in the FDIC-supervised institution's own capital
instruments, an investment in the capital of an unconsolidated
financial institution, or an investment in a covered debt instrument,
as applicable, as stated in the prospectus, partnership agreement, or
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings (in percent) of the
investment in the FDIC-supervised institution's own capital
instruments, investment in the capital of an unconsolidated financial
institution, or investment in a covered debt instrument, as applicable;
and
(iv) For a synthetic exposure, the amount of the FDIC-supervised
institution's loss on the exposure if the reference capital or covered
debt instrument were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument under paragraph (h)(1) of this section, the following
criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position must have a residual maturity
of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the FDIC-supervised
institution's Call Report, if the FDIC-supervised institution has a
contractual right or obligation to sell the long position at a specific
point in time and the counterparty to the contract has an obligation to
purchase the long position if the FDIC-supervised institution exercises
its right to sell, this point in time may be treated as the maturity of
the long position such that the maturity of the long position and short
position are deemed to match for purposes of the maturity requirement,
even if the maturity of the short position is less than one year; and
(iii) For an investment in an FDIC-supervised institution's own
capital instrument under paragraph (c)(1) of this section, an
investment in the capital of an unconsolidated financial institution
under paragraphs (c)(4) through (6) and (d) of this section (as
applicable), and an investment in a covered debt instrument under
paragraphs (c)(1), (5), and (6) of this section:
(A) The FDIC-supervised institution may only net a short position
against a long position in an investment in the FDIC-supervised
institution's own capital instrument under paragraph (c)(1) of this
section if the short position involves no counterparty credit risk;
(B) A gross long position in an investment in the FDIC-supervised
institution's own capital instrument, an investment in the capital of
an unconsolidated financial institution, or an investment in a covered
debt instrument due to a position in an index may be netted against a
short position in the same index;
(C) Long and short positions in the same index without maturity
dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or
synthetic position in an investment in the FDIC-supervised
institution's own capital instrument, an investment in the capital
instrument of an unconsolidated financial institution, or an investment
in a covered debt instrument can be decomposed to provide recognition
of the hedge. More specifically, the portion of the index that is
composed of the same underlying instrument that is being hedged may be
used to offset the long position if both the long position being hedged
and the short position in the index are reported as a trading asset or
trading liability (whether on- or off-balance sheet) on the FDIC-
supervised institution's Call Report, and the hedge is deemed effective
by the FDIC-supervised institution's internal control processes, which
have not been found to be inadequate by the FDIC.
Sec. 324.121 [Amended]
0
25. Section 324.121 is amended by removing ``Sec. 324.10(c)(1) through
(3)'' and adding ``Sec. 324.10(d)(1) through (3)'' in paragraph (c).
Sec. 324.132 [Amended]
0
6. Section 324.132 is amended by removing ``Sec. 324.10(c)(4)(ii)(B)''
and adding ``Sec. 324.10(c)(2)(ii)(B)'' in paragraph (c)(7)(iii) and
(iv).
Sec. 324.304 [Amended]
0
27. Section 324.304 is amended by:
0
a. Removing ``Sec. 324.10(c)(4)'' and adding in its place ``Sec.
324.10(c)'' in paragraph (a) introductory text; and
0
b. Removing ``Sec. 324.10(c)(4)(ii)(J)(1)'' and adding in its place
``Sec. 324.10(c)(2)(x)(A)'' in paragraph (e).
Brian P. Brooks,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on or about October 20, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-27046 Filed 1-5-21; 8:45 am]
BILLING CODE 4810-33-6210-01-6714-01-P