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Vol. 77
Thursday,
No. 169
August 30, 2012
Part IV
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3
Federal Reserve System
12 CFR Part 217
Federal Deposit Insurance Corporation
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12 CFR Parts 324, 325
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule;
Market Risk Capital Rule; Proposed Rule
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 3
[Docket No. ID OCC–2012–0010]
RIN 1557–AD46
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulation Q; Docket No. R–1442]
RIN 7100 AD–87
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 324 and 325
RIN 3064–AD97
Regulatory Capital Rules: Advanced
Approaches Risk-Based Capital Rule;
Market Risk Capital Rule
Office of the Comptroller of the
Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Joint notice of proposed
rulemaking.
AGENCY:
The Office of the Comptroller
of the Currency (OCC), the Board of
Governors of the Federal Reserve
System (Board), and the Federal Deposit
Insurance Corporation (FDIC)
(collectively, the agencies) are seeking
comment on three notices of proposed
rulemaking (NPRs) that would revise
and replace the agencies’ current capital
rules.
In this NPR (Advanced Approaches
and Market Risk NPR) the agencies are
proposing to revise the advanced
approaches risk-based capital rule to
incorporate certain aspects of ‘‘Basel III:
A Global Regulatory Framework for
More Resilient Banks and Banking
Systems’’ (Basel III) that the agencies
would apply only to advanced approach
banking organizations. This NPR also
proposes other changes to the advanced
approaches rule that the agencies
believe are consistent with changes by
the Basel Committee on Banking
Supervision (BCBS) to its ‘‘International
Convergence of Capital Measurement
and Capital Standards: A Revised
Framework’’ (Basel II), as revised by the
BCBS between 2006 and 2009, and
recent consultative papers published by
the BCBS. The agencies also propose to
revise the advanced approaches riskbased capital rule to be consistent with
Dodd-Frank Wall Street Reform and
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SUMMARY:
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Consumer Protection Act of 2010 (DoddFrank Act). These revisions include
replacing references to credit ratings
with alternative standards of
creditworthiness consistent with section
939A of the Dodd-Frank Act.
Additionally, the OCC and FDIC are
proposing that the market risk capital
rule be applicable to federal and state
savings associations, and the Board is
proposing that the advanced approaches
and market risk capital rules apply to
top-tier savings and loan holding
companies domiciled in the United
States that meet the applicable
thresholds. In addition, this NPR would
codify the market risk rule consistent
with the proposed codification of the
other regulatory capital rules across the
three proposals.
DATES: Comments must be submitted on
or before October 22, 2012.
ADDRESSES: Comments should be
directed to:
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Regulatory
Capital Rules: Advanced Approaches
Risk-based Capital Rule; Market Risk
Capital Rule’’ to facilitate the
organization and distribution of the
comments. You may submit comments
by any of the following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to http://
www.regulations.gov, under the ‘‘More
Search Options’’ tab click next to the
‘‘Advanced Docket Search’’ option
where indicated, select ‘‘Comptroller of
the Currency’’ from the agency dropdown menu, and then click ‘‘Submit.’’
In the ‘‘Docket ID’’ column, select
‘‘OCC–2012–0010’’ to submit or view
public comments and to view
supporting and related materials for this
proposed rule. The ‘‘How to Use This
Site’’ link on the Regulations.gov home
page provides information on using
Regulations.gov, including instructions
for submitting or viewing public
comments, viewing other supporting
and related materials, and viewing the
docket after the close of the comment
period.
• Email:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E Street
SW., Mail Stop 2–3, Washington, DC
20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
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Number OCC–2012–0010’’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure. You
may review comments and other related
materials that pertain to this notice by
any of the following methods:
• Viewing Comments Electronically:
Go to http://www.regulations.gov. Select
‘‘Document Type’’ of ‘‘Public
Submissions,’’ in ‘‘Enter Keyword or ID
Box,’’ enter Docket ID ‘‘OCC–2012–
0010,’’ and click ‘‘Search.’’ Comments
will be listed under ‘‘View By
Relevance’’ tab at bottom of screen. If
comments from more than one agency
are listed, the ‘‘Agency’’ column will
indicate which comments were received
by the OCC.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street SW.,
Washington, DC. For security reasons,
the OCC requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 874–4700.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and to submit to security
screening in order to inspect and
photocopy comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board: When submitting comments,
please consider submitting your
comments by email or fax because paper
mail in the Washington, DC area and at
the Board may be subject to delay. You
may submit comments, identified by
Docket No. [XX][XX], by any of the
following methods:
• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Street NW., Washington, DC 20551)
between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Agency Web site: http://
www.FDIC.gov/regulations/laws/
federal/propose.html.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
• Hand Delivered/Courier: The guard
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7 a.m. and 5 p.m.
• E-mail: comments@FDIC.gov.
Instructions: Comments submitted
must include ‘‘FDIC’’ and ‘‘RIN 3064–
D97.’’ Comments received will be
posted without change to http://
www.FDIC.gov/regulations/laws/
federal/propose.html, including any
personal information provided.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk
Expert, (202) 874–6022, David Elkes,
Risk Expert, (202) 874–3846, or Mark
Ginsberg, Risk Expert, (202) 927–4580,
or Ron Shimabukuro, Senior Counsel,
Patrick Tierney, Counsel, Carl
Kaminski, Senior Attorney, or Kevin
Korzeniewski, Attorney, Legislative and
Regulatory Activities Division, (202)
874–5090, Office of the Comptroller of
the Currency, 250 E Street SW.,
Washington, DC 20219.
Board: Anna Lee Hewko, Assistant
Director, Capital and Regulatory Policy,
(202) 530–6260, Thomas Boemio,
Manager, Capital and Regulatory Policy,
(202) 452–2982, or Constance M.
Horsley, Manager, Capital and
Regulatory Policy, (202) 452–5239,
Division of Banking Supervision and
Regulation; or Benjamin W.
McDonough, Senior Counsel, (202) 452–
2036, or April C. Snyder, Senior
Counsel, (202) 452–3099, Legal
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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: Bobby R. Bean, Associate
Director, bbean@fdic.gov; Ryan
Billingsley, Senior Policy Analyst,
rbillingsley@fdic.gov; or Karl Reitz,
Senior Policy Analyst, kreitz@fdic.gov,
Capital Markets Branch, Division of Risk
Management Supervision, (202) 898–
6888; or Mark Handzlik, Counsel,
mhandzlik@fdic.gov, Michael Phillips,
Counsel, mphillips@fdic.gov; or Greg
Feder, Counsel, gfeder@fdic.gov, Ryan
Clougherty, Senior Attorney,
rclougherty@fdic.gov; Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
In
connection with the proposed changes
to the agencies’ capital rules in this
NPR, the agencies are also seeking
comment on the two related NPRs
published elsewhere in today’s Federal
Register. In the notice titled ‘‘Regulatory
Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and
Prompt Corrective Action’’ (Basel III
NPR) the agencies are proposing to
revise their minimum risk-based capital
requirements and criteria for regulatory
capital, as well as establish a capital
conservation buffer framework,
consistent with Basel III. The Basel III
NPR also includes transition provisions
for banking organizations to come into
compliance with its requirements.
In the notice titled ‘‘Regulatory
Capital Rules: Standardized Approach
for Risk-weighted Assets; Market
Discipline and Disclosure
Requirements’’ (Standardized Approach
NPR), the agencies are proposing to
revise and harmonize their rules for
calculating risk-weighted assets to
enhance risk sensitivity and address
weaknesses identified over recent years,
including by incorporating aspects of
the standardized framework in Basel II,
and providing alternatives to credit
ratings, consistent with section 939A of
the Dodd-Frank Act. The revisions
include methodologies for determining
risk-weighted assets for residential
mortgages, securitization exposures, and
counterparty credit risk. The
Standardized Approach NPR also would
introduce disclosure requirements that
would apply to top-tier banking
organizations domiciled in the United
States with $50 billion or more in total
SUPPLEMENTARY INFORMATION:
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assets, including disclosures related to
regulatory capital instruments.
The proposed requirements in the
Basel III NPR and Standardized
Approach NPR would apply to all
banking organizations that are currently
subject to minimum capital
requirements (including national banks,
state member banks, state nonmember
banks, state and federal savings
associations, and top-tier bank holding
companies domiciled in the United
States not subject to the Board’s Small
Bank Holding Company Policy
Statement (12 CFR part 225, appendix
C)), as well as top-tier savings and loan
holding companies domiciled in the
United States (collectively, banking
organizations).
The proposals are being published in
three separate NPRs to reflect the
distinct objectives of each proposal, to
allow interested parties to better
understand the various aspects of the
overall capital framework, including
which aspects of the rules would apply
to which banking organizations, and to
help interested parties better focus their
comments on areas of particular
interest.
Table of Contents
I. Introduction
II. Risk-Weighted Assets—Proposed
Modifications to the Advanced
Approaches Rules
A. Counterparty Credit Risk
1. Revisions to the Recognition of Financial
Collateral
2. Changes to Holding Periods and the
Margin Period of Risk
3. Changes to the Internal Models
Methodology (IMM)
4. Credit Valuation Adjustments
5. Cleared Transactions (Central
Counterparties)
6. Stress period for Own Internal Estimates
B. Removal of Credit Ratings
C. Proposed Revisions to the Treatment of
Securitization Exposures
1. Definitions
2. Operational Criteria for Recognizing Risk
Transference in Traditional Securitizations
3. Proposed Revisions to the Hierarchy of
Approaches
4. Guarantees and Credit Derivatives
Referencing a Securitization Exposure
5. Due Diligence Requirements for
Securitization Exposures
6. Nth-to-Default Credit Derivatives
D. Treatment of Exposures Subject to
Deduction
E. Technical Amendments to the Advanced
Approaches Rule
1. Eligible Guarantees and Contingent U.S.
Government Guarantees
2. Calculation of Foreign Exposures for
Applicability of the Advanced
Approaches—Insurance Underwriting
Subsidiaries
3. Calculation of Foreign Exposures for
Applicability of the Advanced
Approaches—Changes to FFIEC 009
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4. Applicability of the Rule
5. Change to the Definition of Probability of
Default Related to Seasoning
6. Cash Items in Process of Collection
7. Change to the Definition of Qualified
Revolving Exposure
8. Trade-Related Letters of Credit
F. Pillar 3 Disclosures
1. Frequency and Timeliness of Disclosures
2. Enhanced Securitization Disclosure
Requirements
3. Equity Holding That Are Not Covered
Positions
III. Market Risk Capital Rule
IV. List of Acronyms
V. Regulatory Flexibility Act Analysis
VI. Paperwork Reduction Act
VII. Plain Language
VIII. OCC Unfunded Mandates Reform Act of
1995 Determination
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I. Introduction
The Office of the Comptroller of the
Currency (OCC), Board of Governors of
the Federal Reserve System (Board), and
the Federal Deposit Insurance
Corporation (FDIC) (collectively, the
agencies) are issuing this notice of
proposed rulemaking (NPR, proposal, or
proposed rule) to revise the advanced
approaches risk-based capital rule
(advanced approaches rule) to
incorporate certain aspects of ‘‘Basel III:
A global regulatory framework for more
resilient banks and banking systems’’
(Basel III). This NPR also proposes to
revise the advanced approaches rule to
incorporate other revisions to the Basel
capital framework published by the
Basel Committee on Banking
Supervision (BCBS) in a series of
documents between 2009 and 2011 1
and subsequent consultative papers.
The proposal would also address
relevant provisions of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),
and incorporate certain technical
amendments to the existing
requirements.2
In this NPR, the Board also proposes
applying the advanced approaches rule
and the market risk rule to savings and
loan holding companies, and the Board,
FDIC, and OCC propose applying the
1 The BCBS is a committee of banking supervisory
authorities, which was established by the central
bank governors of the G–10 countries in 1975. It
consists of senior representatives of bank
supervisory authorities and central banks from
Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India,
Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Sweden, Switzerland, Turkey, the
United Kingdom, and the United States. Documents
issued by the BCBS are available through the Bank
for International Settlements Web site at http://
www.bis.org. Basel III was published in December
2010 and revised in June 2011. The text is available
at http://www.bis.org/publ/bcbs189.htm.
2 Public Law 111–203, 124 Stat. 1376 (July 21,
2010) (Dodd-Frank Act).
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market risk capital rule to savings and
loan holding companies and to state and
federal savings associations,
respectively. In addition, this NPR
would codify the market risk rule in a
manner similar to the other regulatory
capital rules in the three proposals. In
a separate Federal Register notice, also
published today, the agencies are
finalizing changes to the market risk
rule. As described in more detail below,
the agencies are proposing changes to
the advanced approaches rule in a
manner consistent with the BCBS
requirements, including the
requirements introduced by the BCBS in
‘‘Enhancements to the Basel II
framework’’ (2009 Enhancements) in
July 2009 and in Basel III.3 The main
proposed revisions to the advanced
approaches rule are related to treatment
of counterparty credit risk, the
securitization framework, and
disclosure requirements.
Consistent with Basel III, the proposal
seeks to ensure that counterparty credit
risk, credit valuation adjustments
(CVA), and wrong-way risk are
incorporated adequately into the
agencies’ regulatory capital
requirements. More specifically, the
NPR would establish a capital
requirement for the market value of
counterparty credit risk; propose a more
risk-sensitive approach for certain
transactions with central counterparties,
including the treatment of default fund
contributions to central counterparties;
and make certain adjustments to the
methodologies used to calculate
counterparty credit risk requirements. In
addition, consistent with the ‘‘2009
Enhancements,’’ the agencies propose
strengthening the risk-based capital
requirements for certain securitization
exposures by requiring banking
organizations that are subject to the
advanced approaches rule to conduct
more rigorous credit analysis of
securitization exposures and enhancing
the disclosure requirements related to
these exposures.
In addition to the incorporation of the
BCBS standards, the agencies are
proposing changes to the advanced
approaches rule in a manner consistent
with the Dodd-Frank Act, by removing
references to, or requirements of
reliance on, credit ratings from their
regulations.4 Accordingly, the agencies
are proposing to remove the ratingsbased approach and the internal
assessment approach for securitization
3 See ‘‘Enhancements to the Basel II framework’’
(July 2009), available at http://www.bis.org/publ/
bcbs157.htm.
4 See section 939A of Dodd-Frank Act (15 U.S.C.
78o–7 note).
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exposures from the advanced
approaches rule and require advanced
approaches banking organizations to use
either the supervisory formula approach
(SFA) or a simplified version of the SFA
when calculating capital requirements
for securitization exposures. The
agencies also are proposing to remove
references to ratings from certain
defined terms under the advanced
approaches rule and replace them with
alternative standards of
creditworthiness. Finally, the proposed
rule contains a number of proposed
technical amendments that would
clarify or adjust existing requirements
under the advanced approaches rule.
In addition, in today’s Federal
Register, the agencies are publishing
two separate notices of proposed
rulemaking that are both relevant to the
calculation of capital requirements for
institutions using the advanced
approaches rule. The notice titled
‘‘Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III,
Minimum Regulatory Capital Ratios,
Capital Adequacy, Transition
Provisions, and Prompt Corrective
Action’’ (Basel III NPR), which is
applicable to all banking organizations,
would revise the definition of capital
(the numerator of the risk-based capital
ratios), establish the new minimum ratio
requirements, and make other changes
to the agencies’ general risk-based
capital rules related to regulatory
capital. In addition, the Basel III NPR
proposes that certain elements of Basel
III apply only to institutions using the
advanced approaches rule, including a
supplementary Basel III leverage ratio
and a countercyclical capital buffer. The
Basel III NPR also includes transition
provisions for banking organizations to
come into compliance with the
requirements of that proposed rule.
The notice titled ‘‘Regulatory Capital
Rules: Standardized Approach for RiskWeighted Assets; Market Discipline and
Disclosure Requirements’’
(Standardized Approach NPR) would
also apply to all banking organizations.
In the Standardized Approach NPR, the
agencies are proposing to revise and
harmonize their rules for calculating
risk-weighted assets to enhance risk
sensitivity and address weaknesses
identified over recent years, including
by incorporating aspects of the BCBS’
Basel II standardized framework,
changes proposed in recent consultative
papers published by the BCBS and
alternatives to credit ratings, consistent
with section 939A of the Dodd-Frank
Act. The revisions include
methodologies for determining riskweighted assets for residential
mortgages, securitization exposures, and
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counterparty credit risk. The
Standardized Approach NPR also would
introduce disclosure requirements that
would apply to top-tier banking
organizations domiciled in the United
States with $50 billion or more in total
assets, including disclosures related to
regulatory capital instruments.
The requirements proposed in the
Basel III NPR and Standardized
Approach NPR, as well as the market
risk capital rule in this proposal, are
proposed to become the ‘‘generally
applicable’’ capital requirements for
purposes of section 171 of the DoddFrank Act because they would be the
capital requirements applied to insured
depository institutions under section 38
of the Federal Deposit Insurance Act,
without regard to asset size or foreign
financial exposure. Banking
organizations that are or would be
subject to the advanced approaches rule
(advanced approaches banking
organizations) or the market risk rule
should also review the Basel III NPR
and Standardized Approach NPR.
II. Risk-Weighted Assets—Proposed
Modifications to the Advanced
Approaches
A. Counterparty Credit Risk
The recent financial crisis highlighted
certain aspects of the treatment of
counterparty credit risk under the Basel
II framework that were inadequate and
of banking organizations’ risk
management of counterparty credit risk
that were insufficient. The Basel III
revisions would address both areas of
weakness by ensuring that all material
on- and off-balance sheet counterparty
risks, including those associated with
derivative-related exposures, are
appropriately incorporated into banking
organizations’ risk-based capital ratios.
In addition, new risk management
requirements in Basel III strengthen the
oversight of counterparty credit risk
exposures. The agencies are proposing
the counterparty credit risk revisions in
a manner generally consistent with
Basel III, modified to incorporate
advanced approaches rule. As a result,
under this proposal, a banking
organization would no longer be able to
recognize the credit risk mitigation
benefit of such instruments through an
adjustment to EAD. In addition, also
consistent with the Basel framework,
the agencies propose to exclude all debt
securities that are not investment grade
from the definition of financial
collateral. As discussed in section II (B)
of this preamble, the agencies are
proposing to revise the definition of
‘‘investment grade’’ for both the
advanced approaches rule and market
risk capital rule.
alternative standards to the use of credit
ratings. The discussion below highlights
these revisions.
1. Revisions to the Recognition of
Financial Collateral
Eligible Financial Collateral
The exposure-at-default (EAD)
adjustment approach under section 132
of the proposed rules permits a banking
organization to recognize the credit risk
mitigation benefits of eligible financial
collateral by adjusting the EAD to the
counterparty. Such approaches include
the collateral haircut approach, simple
Value-at-Risk (VaR) approach and the
internal models methodology (IMM).
Consistent with Basel III, the agencies
are proposing to modify the definition
of financial collateral so that
resecuritizations would no longer
qualify as eligible financial collateral
under the advanced approaches rule.
Thus, resecuritization collateral could
not be used to adjust the EAD of an
exposure. The agencies believe that this
treatment is appropriate because
resecuritizations have been shown to
have more market value volatility than
other collateral types. During the recent
financial crisis, the market volatility of
resecuritization exposures made it
difficult for resecuritizations to serve as
a source of liquidity because banking
organizations were unable to sell those
positions without incurring substantial
loss or to use them as collateral for
secured lending transactions.
Under the proposal, a securitization
in which one or more of the underlying
exposures is a securitization position
would be considered a resecuritization.
A resecuritization position under the
proposal means an on- or off-balance
sheet exposure to a resecuritization, or
an exposure that directly or indirectly
references a resecuritization exposure.
Consistent with these changes
excluding less liquid collateral from the
definition of financial collateral, the
agencies also propose that conforming
residential mortgages no longer qualify
as financial collateral under the
Revised Supervisory Haircuts
As reflected in Basel III, securitization
exposures have increased levels of
volatility relative to other collateral
types. To address this issue, Basel III
incorporates new standardized
supervisory haircuts for securitization
exposures in the EAD adjustment
approach based on the credit rating of
the exposure. Consistent with section
939A of the Dodd Frank Act, the
agencies are proposing an alternative
approach to assigning standard
supervisory haircuts for securitization
exposures, and are also proposing to
amend the standard supervisory
haircuts for other types of financial
collateral to remove the references to
credit ratings.
Under the proposal, as outlined in
table 1 below, the standard supervisory
market price volatility haircuts would
be revised based on the applicable risk
weight of the exposure calculated under
the standardized approach. Supervisory
haircuts for exposures to sovereigns,
government-sponsored entities, public
sector entities, depository institutions,
foreign banks, credit unions, and
corporate issuers would be calculated
based upon the risk weights for such
exposures described under section 32 of
the Standardized Approach NPR. The
proposed table for the standard
supervisory market price volatility
haircuts would be revised as follows:
TABLE 1—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
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Haircut (in percents) assigned based on:
Sovereign issuers risk weight
under § ___.32 2
Residual maturity
Zero%
Less than or equal to 1 year .................................
Greater than 1 year and less than or equal to 5
years ...................................................................
Greater than 5 years ..............................................
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20% or
50%
100%
Non-sovereign issuers risk weight
under § ___.32
20%
50%
Investment grade
securitization exposures
(in percent)
100%
0.5
1.0
15.0
1.0
2.0
25.0
4.0
2.0
4.0
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6.0
15.0
15.0
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TABLE 1—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1—Continued
Haircut (in percents) assigned based on:
Sovereign issuers risk weight
under § ___.32 2
Residual maturity
Zero%
20% or
50%
100%
Non-sovereign issuers risk weight
under § ___.32
20%
50%
Investment grade
securitization exposures
(in percent)
100%
Main index equities (including convertible bonds) and gold .............................................
15.0
Other publicly-traded equities (including convertible bonds) ............................................
25.0
Mutual funds ......................................................................................................................
Highest haircut applicable to any security in which the
fund can invest.
Cash collateral held ...........................................................................................................
Zero
1 The
market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
2 Includes a foreign PSE that receives a zero percent risk weight.
The agencies are also proposing to
clarify that if a banking organization
lends instruments that do not meet the
definition of financial collateral used in
the Standardized Approach NPR and
the advanced approaches rule (as
modified by the proposal), such as noninvestment grade corporate debt
securities or resecuritization exposures,
the haircut applied to the exposure
would be the same as the haircut for
equity that is publicly traded but which
is not part of a main index.
Question 1: The agencies solicit
comments on the proposed changes to
the recognition of financial collateral
under the advanced approaches rule.
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2. Changes to Holding Periods and the
Margin Period of Risk
During the financial crisis, many
financial institutions experienced
significant delays in settling or closingout collateralized transactions, such as
repo-style transactions and
collateralized over-the-counter (OTC)
derivatives. The assumed holding
period for collateral in the collateral
haircut and simple VaR approaches and
the margin period of risk in the IMM
under Basel II proved to be inadequate
for certain transactions and netting
sets.5 It also did not reflect the
difficulties and delays experienced by
institutions when settling or liquidating
5 Under the advanced approaches rule, the margin
period of risk means, with respect to a netting set
subject to a collateral agreement, the time period
from the most recent exchange of collateral with a
counterparty until the next required exchange of
collateral plus the period of time required to sell
and realize the proceeds of the least liquid
collateral that can be delivered under the terms of
the collateral agreement and, where applicable, the
period of time required to re-hedge the resulting
market risk, upon the default of the counterparty.
See 12 CFR part 3, appendix C, and part 167,
appendix C (OCC); 12 CFR part 208, appendix F,
and 12 CFR part 225, appendix G (Board); 12 CFR
part 325, appendix D, and 12 CFR part 390, subpart
Z, appendix A (FDIC).
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collateral during a period of financial
stress.
Under Basel II, the minimum assumed
holding period for collateral and margin
period of risk are five days for repo-style
transactions, and ten days for other
collateralized transactions where liquid
financial collateral is posted under a
daily margin maintenance requirement.
Under Basel III, a banking organization
must assume a holding period of 20
business days under the collateral
haircut or simple VaR approaches, or
must assume a margin period of risk
under the IMM of 20 business days for
netting sets where: (1) The number of
trades exceeds 5,000 at any time during
the quarter (except if the counterparty is
a central counterparty (CCP) or the
netting set consists of cleared
transactions with a clearing member);
(2) one or more trades involves illiquid
collateral posted by the counterparty; or
(3) the netting set includes any OTC
derivatives that cannot be easily
replaced.
For purposes of determining whether
collateral is illiquid or an OTC
derivative cannot be easily replaced for
these purposes, a banking organization
could, for example, assess whether,
during a period of stressed market
conditions, it could obtain multiple
price quotes within two days or less for
the collateral or OTC derivative that
would not move the market or represent
a market discount (in the case of
collateral) or a premium (in the case of
an OTC derivative).
If, over the two previous quarters,
more than two margin disputes on a
netting set have occurred that lasted
longer than the holding period or
margin period of risk used in the EAD
calculation, then a banking organization
would use a holding period or a margin
period of risk for that netting set that is
at least two times the minimum holding
period that would otherwise be used for
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that netting set. Margin disputes occur
when the banking organization and its
counterparty do not agree on the value
of collateral or on the eligibility of the
collateral provided. In addition, such
disputes also can occur when a banking
organization and its counterparty
disagree on the amount of margin that
is required, which could result from
differences in the valuation of a
transaction, or from errors in the
calculation of the net exposure of a
portfolio (for instance, if a transaction is
incorrectly included or excluded from
the portfolio).
Consistent with Basel III, the agencies
propose to amend the advanced
approaches rule to incorporate these
adjustments to the holding period in the
collateral haircut and simple VaR
approaches, and to the margin period of
risk in the IMM that a banking
organization may use to determine its
capital requirement for repo-style
transactions, OTC derivative
transactions, or eligible margin loans.
For cleared transactions, which are
discussed below, the agencies propose
that a banking organization not be
required to adjust the holding period or
margin period of risk upward when
determining the capital requirement for
its counterparty credit risk exposures to
the central counterparty, which is also
consistent with Basel III.
Question 2: The agencies solicit
comments on the proposed changes to
holding periods and margin periods of
risk.
3. Changes to the Internal Models
Methodology
During the recent financial crisis,
increased volatility in the value of
derivative positions and collateral led to
higher counterparty exposures than
amounts estimated by banking
organizations’ internal models. To
address this issue, under Basel III, when
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
using the IMM, banking organizations
are required to determine their capital
requirements for counterparty credit
risk using stressed inputs. Consistent
with Basel III, the agencies propose to
amend the advanced approaches rule so
that the capital requirement for IMM
exposures would be equal to the larger
of the capital requirement for those
exposures calculated using data from
the most recent three-year period and
data from a three-year period that
contains a period of stress reflected in
the credit default spreads of the banking
organization’s counterparties.
Under the proposal, an IMM exposure
would be defined as a repo-style
transaction, eligible margin loan, or
OTC derivative for which a banking
organization calculates its EAD using
the IMM. A banking organization would
be required to demonstrate to the
satisfaction of the banking
organization’s primary federal
supervisor at least quarterly that the
stress period coincides with increased
credit default swap (CDS) spreads, or
other credit spreads of its counterparties
and have procedures to evaluate the
effectiveness of its stress calibration.
These procedures would be required to
include a process for using benchmark
portfolios that are vulnerable to the
same risk factors as the banking
organization’s portfolio. In addition, the
primary federal supervisor could require
a banking organization to modify its
stress calibration if the primary federal
supervisor believes that another
calibration would better reflect the
actual historic losses of the portfolio.
Consistent with Basel III, the agencies
are proposing to require a banking
organization to subject its internal
models to an initial validation and
annual model review process. As part of
the model review process, the agencies
propose that a banking organization
would need to have a backtesting
program for its model that includes a
process by which unacceptable model
performance would be identified and
remedied. In addition, the agencies
propose that when a banking
organization multiplies expected
positive exposure (EPE) by the default
scaling factor alpha of 1.4 when
calculating EAD, the primary federal
supervisor may require the banking
organization to set that alpha higher
based on the performance of the banking
organization’s internal model.
The agencies also are proposing to
require a banking organization to have
policies for the measurement,
management, and control of collateral,
including the reuse of collateral and
margin amounts, as a condition of using
the IMM. Under the proposal, a banking
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organization would be required to have
a comprehensive stress testing program
that captures all credit exposures to
counterparties and incorporates stress
testing of principal market risk factors
and the creditworthiness of its
counterparties.
Under Basel II, a banking organization
was permitted to capture within its
internal model the effect on EAD of a
collateral agreement that requires
receipt of collateral when the exposure
to the counterparty increases. Basel II
also contained a ‘‘shortcut’’ method to
provide a banking organization whose
internal model did not capture the
effects of collateral agreements with a
method to recognize some benefit from
the collateral agreement. Basel III
modifies that ‘‘shortcut’’ method by
setting effective EPE to a counterparty as
the lesser of the following two exposure
calculations: (1) The exposure without
any held or posted margining collateral,
plus any collateral posted to the
counterparty independent of the daily
valuation and margining process or
current exposure, or (2) an add-on that
reflects the potential increase of
exposure over the margin period of risk
plus the larger of (i) the current
exposure of the netting set reflecting all
collateral received or posted by the
banking organization excluding any
collateral called or in dispute; or (ii) the
largest net exposure (including all
collateral held or posted under the
margin agreement) that would not
trigger a collateral call. The add-on
would be computed as the largest
expected increase in the netting set’s
exposure over any margin period of risk
in the next year. The agencies propose
to include the Basel III modification of
the ‘‘shortcut’’ method in this NPR.
Recognition of Wrong-way Risk
The financial crisis also highlighted
the interconnectedness of large financial
institutions through an array of complex
transactions. To recognize this
interconnectedness and to mitigate the
risk of contagion from the banking
sector to the broader financial system
and the general economy, Basel III
includes enhanced requirements for the
recognition and treatment of wrong-way
risk in the IMM. The proposed rule
would define wrong-way risk as the risk
that arises when an exposure to a
particular counterparty is positively
correlated with the probability of
default of such counterparty itself.
The agencies are proposing
enhancements to the advanced
approaches rule that would require
banking organizations’ risk management
procedures to identify, monitor, and
control wrong-way risk throughout the
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life of an exposure. These risk
management procedures should include
the use of stress testing and scenario
analysis. In addition, where a banking
organization has identified an IMM
exposure with specific wrong-way risk,
the banking organization would be
required to treat that transaction as its
own netting set. Specific wrong-way
risk is a type of wrong way risk that
arises when either the counterparty and
issuer of the collateral supporting the
transaction, or the counterparty and the
reference asset of the transaction, are
affiliates or are the same entity.
In addition, where a banking
organization has identified an OTC
derivative transaction, repo-style
transaction, or eligible margin loan with
specific wrong-way risk for which the
banking organization would otherwise
apply the IMM, the banking
organization would insert the
probability of default (PD) of the
counterparty and a loss given default
(LGD) equal to 100 percent into the
appropriate risk-based capital formula
specified in table 1 of section 131 of the
proposed rule, then multiply the output
of the formula (K) by an alternative EAD
based on the transaction type, as
follows:
(1) For a purchased credit derivative,
EAD would be the fair value of the
underlying reference asset of the credit
derivative contract;
(2) For an OTC equity derivative,6
EAD would be the maximum amount
that the banking organization could lose
if the fair value of the underlying
reference asset decreased to zero;
(3) For an OTC bond derivative (that
is, a bond option, bond future, or any
other instrument linked to a bond that
gives rise to similar counterparty credit
risks), EAD would be the smaller of the
notional amount of the underlying
reference asset and the maximum
amount that the banking organization
could lose if the fair value of the
underlying reference asset decreased to
zero; and
(4) For repo-style transactions and
eligible margin loans, EAD would be
calculated using the formula in the
collateral haircut approach of section
132 and with the estimated value of the
collateral substituted for the parameter
C in the equation.
Question 3: The agencies solicit
comment on the appropriateness of the
proposed calculation of capital
requirements for OTC equity or bond
derivatives with specific wrong-way
risk. What alternatives should be made
6 Equity derivatives that are call options are not
subject to a counterparty credit risk capital
requirement for specific wrong-way risk.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
available to banking organizations in
order to calculate the EAD in such
cases? What challenges would a banking
organization face in estimating the EAD
for OTC derivative transactions with
specific wrong-way risk if the agencies
were to permit a banking organization to
use its incremental risk model that
meets the requirements of section 8 of
the market risk rule instead of the
proposed alternatives?
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Increased Asset Value Correlation
Factor
To recognize the correlation of
financial institutions’ creditworthiness
attributable to similar sensitivities to
common risk factors, the agencies are
proposing to incorporate the Basel III
increase in the correlation factor used in
the formula provided in table 1 of
section 131 of the proposed rule for
certain wholesale exposures. Under the
proposed rule, banking organizations
would apply a multiplier of 1.25 to the
correlation factor for wholesale
exposures to unregulated financial
institutions that generate a majority of
their revenue from financial activities,
regardless of asset size. This category
would include highly leveraged entities
such as hedge funds and financial
guarantors. In addition, banking
organizations would apply a multiplier
of 1.25 to the correlation factor for
wholesale exposures to regulated
financial institutions with consolidated
assets of greater than or equal to $100
billion.
The proposed definitions of ‘‘financial
institution’’ and ‘‘regulated financial
institution’’ are set forth and discussed
in the Basel III NPR.
4. Credit Valuation Adjustments
CVA is the fair value adjustment to
reflect counterparty credit risk in the
valuation of an OTC derivative contract.
The BCBS reviewed the treatment of
counterparty credit risk and found that
roughly two-thirds of counterparty
credit risk losses during the crisis were
due to marked-to-market losses from
CVA, while one-third of counterparty
credit risk losses resulted from actual
defaults. Basel II addressed counterparty
credit risk as a combination of default
risk and credit migration risk. Credit
migration risk accounts for market value
losses resulting from deterioration of
counterparties’ credit quality short of
default and is addressed in Basel II via
the maturity adjustment multiplier.
However, the maturity adjustment
multiplier in Basel II was calibrated for
loan portfolios and may not be suitable
for addressing CVA risk. Accordingly,
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Basel III requires banking organizations
to directly reflect CVA risk through an
additional capital requirement.
The Basel III CVA capital requirement
would reflect the CVA due to changes
of counterparties’ credit spreads,
assuming fixed expected exposure (EE)
profiles. Basel III provides two
approaches for calculating the CVA
capital requirement: the simple
approach and the advanced CVA
approach. The agencies are proposing
both approaches for calculating the CVA
capital requirement (subject to certain
requirements discussed below), but
without references to credit ratings.
Only a banking organization that is
subject to the market risk capital rule
and has obtained prior approval from its
primary federal supervisor to calculate
both the EAD for OTC derivative
contracts using the IMM described in
section 132 of the proposed rule, and
the specific risk add-on for debt
positions using a specific risk model
described in section 207(b) of subpart F
would be eligible to use the advanced
CVA approach. A banking organization
that receives such approval would
continue to use the advanced CVA
approach until it notifies its primary
federal supervisor in writing that it
expects to begin calculating its CVA
capital requirement using the simple
CVA approach. The notice would
include an explanation from the
banking organization as to why it is
choosing to use the simple CVA
approach and the date when the
banking organization would begin to
calculate its CVA capital requirement
using the simple CVA approach.
Under the proposal, when calculating
a CVA capital requirement, a banking
organization would be permitted to
recognize the hedging benefits of single
name CDS, single name contingent CDS,
index CDS (CDSind), and any other
equivalent hedging instrument that
references the counterparty directly,
provided that the equivalent hedging
instrument is managed as a CVA hedge
in accordance with the banking
organization’s hedging policies.
Consistent with Basel III, under this
NPR, a tranched or nth-to-default CDS
would not qualify as a CVA hedge. In
addition, the agencies propose that any
position that is recognized as a CVA
hedge would not be a covered position
under the market risk capital rule,
except in the case where the banking
organization is using the advanced CVA
approach, the hedge is a CDSind, and the
VaR model does not capture the basis
between the spreads of the index that is
used as the hedging instrument and the
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hedged counterparty exposure over
various time periods, as discussed in
further detail below.
To convert the CVA capital
requirement to a risk-weighted asset
amount, a banking organization would
multiply its CVA capital requirement by
12.5. Under the proposal, because the
CVA capital requirement reflects market
risk, the CVA risk-weighted asset
amount would not be a component of
credit risk-weighted assets and therefore
would not be subject to the 1.06
multiplier for credit risk-weighted
assets.
Simple CVA Approach
The agencies are proposing the Basel
III formula for the simple CVA approach
to calculate the CVA capital
requirement (KCVA), with a modification
in a manner consistent with section
939A of the Dodd-Frank Act. A banking
organization would use the formula
below to calculate its CVA capital
requirement for OTC derivative
transactions. The banking organization
would calculate KCVA as the square root
of the sum of the capital requirement for
each of its OTC derivative
counterparties multiplied by 2.33. The
simple CVA approach is based on an
analytical approximation derived from a
general CVA VaR formulation under a
set of simplifying assumptions:
• All credit spreads have a flat term
structure;
• All credit spreads at the time
horizon have a lognormal distribution;
• Each single name credit spread is
driven by the combination of a single
systematic factor and an idiosyncratic
factor;
• The correlation between any single
name credit spread and the systematic
factor is equal to 0.5;
• All credit indices are driven by the
single systematic factor; and
• The time horizon is short (the
square root of time scaling to 1 year is
applied in the end).
The approximation is based on the
linearization of the dependence of both
CVA and CDS hedges on credit spreads.
Given the assumptions listed above
(most notably, the single-factor
assumption), CVA VaR can be expressed
using an analytical formula. The
formula of the simple CVA approach is
obtained by applying certain
standardizations, conservative
adjustments, and scaling to the
analytical CVA VaR result.
A banking organization would
calculate KCVA, where:
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7 These weights represent the assumed values of
the product of a counterparties’ current credit
spread and the volatility of that credit spread.
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Internal PD
(in percent)
described in section 132(c) of the
proposed rule as adjusted by Formula 2
or the IMM described in section 132(d)
of the proposed rule. When the banking
0.70
0.80 organization calculates EAD using the
1.00 IMM, EADi total equals EADunstressed.
Weight Wind
(in percent)
0.00–0.07 ..............................
>0.07–0.15 ............................
>0.15–0.40 ............................
>0.4–2.00 ..............................
>2.0—6.00 ............................
>6.0 .......................................
2.00
3.00
10.00
EADi total in Formula 1 refers to the
sum of the EAD for all netting sets of
attributable to that counterparty as a
single name hedge of counterparty i (Bi,)
when calculating KCVA and subtract the
notional amount of Bi from the notional
amount of the CDSind. The banking
organization would be required to then
calculate its capital requirement for the
remaining notional amount of the
CDSind as a stand-alone position.
Advanced CVA Approach
Under the advanced CVA approach, a
banking organization would use the VaR
model it uses to calculate specific risk
under section 205(b) of subpart F or
another model that meets the
quantitative requirements of sections
205(b) and 207(b) of subpart F to
calculate its CVA capital requirement
for a counterparty by modeling the
impact of changes in the counterparty’s
credit spreads, together with any
recognized CVA hedges on the CVA for
the counterparty. A banking
organization’s total capital requirement
8 The
PO 00000
for CVA equals the sum of the CVA
capital requirements for each
counterparty.
The agencies are proposing that the
VaR model incorporate only changes in
the counterparty’s credit spreads, not
changes in other risk factors. The
banking organization would not be
required to capture jump-to-default risk
in its VaR model. A banking
organization would be required to
include any immaterial OTC derivative
portfolios for which it uses the current
exposure methodology by using the
EAD calculated under the current
exposure methodology as a constant EE
in the formula for the calculation of
CVA and setting the maturity equal to
the greater of half of the longest
maturity occurring in the netting set and
the notional weighted average maturity
of all transactions in the netting set.
In order for a banking organization to
receive approval to use the advanced
CVA approach, under the NPR, the
term ‘‘exp’’ is the exponential function.
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Mi in Formulas 1 and 2 refers to the
EAD-weighted average of the effective
maturity of each netting set with
counterparty i (where each netting set’s
M cannot be smaller than one). Mihedge
in Formula 1 refers to the notional
weighted average maturity of the hedge
instrument. Mind in Formula 1 equals
the maturity of the CDSind or the
notional weighted average maturity of
any CDSind purchased to hedge CVA risk
of counterparty i.
Bi in Formula 1 refers to the sum of
the notional amounts of any purchased
single name CDS referencing
counterparty i that is used to hedge CVA
risk to counterparty i multiplied by (1exp(¥0.05 × Mi hedge))/(0.05 × Mi hedge).
B ind in Formula 1 refers to the notional
amount of one or more CDSind
purchased as protection to hedge CVA
risk for counterparty i multiplied by (1exp(¥0.05 × Mind))/(0.05 × Mind). A
banking organization would be allowed
to treat the notional amount in the index
OTC derivative contracts with
TABLE 2—ASSIGNMENT OF
COUNTERPARTY WEIGHT UNDER THE counterparty i calculated using the
current exposure methodology
SIMPLE CVA
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In Formula 1, wi refers to the weight
applicable to counterparty i assigned
according to Table 2 below.7 In Basel III,
the BCBS assigned wi based on the
external rating of the counterparty.
However, to comply with the DoddFrank requirement to remove references
to ratings, the agencies propose to assign
wi based on the relevant PD of the
counterparty, as assigned by the banking
organization. Wind in Formula 1 refers to
the weight applicable to the CDSind
based on the average weight under
Table 2 of the underlying reference
names that comprise the index.
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banking organization would need to
have the systems capability to calculate
the CVA capital requirement on a daily
basis, but would not be expected or
required to calculate the CVA capital
requirement on a daily basis.
The CVA capital requirement under
the advanced CVA approach would be
equal to the general market risk capital
requirement of the CVA exposure using
the ten-business-day time horizon of the
revised market risk framework. The
capital requirement would not include
the incremental risk requirement of
subpart F. The agencies propose to
require a banking organization to use
the Basel III formula for the advanced
CVA approach to calculate KCVA as
follows:
In Formula 3:
(A) ti = the time of the i-th revaluation time
bucket starting from t0 = 0.
(B) tT = the longest contractual maturity
across the OTC derivative contracts with
the counterparty.
(C) si = the CDS spread for the counterparty
at tenor ti used to calculate the CVA for
the counterparty. If a CDS spread is not
available, the banking organization
would use a proxy spread based on the
credit quality, industry and region of the
counterparty.
(D) LGDMKT = the loss given default of the
counterparty based on the spread of a
publicly traded debt instrument of the
counterparty, or, where a publicly traded
debt instrument spread is not available,
a proxy spread based on the credit
quality, industry and region of the
counterparty.
(E) EEi = the sum of the expected exposures
for all netting sets with the counterparty
at revaluation time ti calculated using the
IMM.
(F) Di = the risk-free discount factor at time
ti, where D0 = 1.
(G) Exp is the exponential function.
If the VaR model uses credit spread
sensitivities to parallel shifts in credit
spreads, the banking organization would
calculate each credit spread sensitivity
according to Formula 5:
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Under the proposal, if a banking
organization’s VaR model is not based
on full repricing, the banking
organization would use either Formula
4 or Formula 5 to calculate credit spread
sensitivities. If the VaR model is based
on credit spread sensitivities for specific
tenors, the banking organization would
calculate each credit spread sensitivity
according to Formula 4:
9 For
the final time bucket, i = T.
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To calculate the CVAUnstressedVAR
measure in Formula 3, a banking
organization would use the EE for a
counterparty calculated using current
market data to compute current
exposures and would estimate model
parameters using the historical
observation period required under
section 205(b)(2) of subpart F. However,
if a banking organization uses the
shortcut method described in section
132(d)(5) of the proposed rule to capture
the effect of a collateral agreement when
estimating EAD using the IMM, the
banking organization would calculate
the EE for the counterparty using that
method and keep that EE constant with
the maturity equal to the maximum of
half of the longest maturity occurring in
the netting set, and the notional
weighted average maturity of all
transactions in the netting set.
To calculate the CVAStressedVAR
measure in Formula 3, the banking
organization would use the EEi for a
counterparty calculated using the stress
calibration of the IMM. However, if a
banking organization uses the shortcut
method described in section 132(d)(5) of
the proposed rule to capture the effect
of a collateral agreement when
estimating EAD using the IMM, the
banking organization would calculate
the EEi for the counterparty using that
method and keep that EEi constant with
the maturity equal to the greater of half
of the longest maturity occurring in the
netting set with the notional amount
equal to the weighted average maturity
of all transactions in the netting set.
Consistent with Basel III, the agencies
propose to require a banking
organization to calibrate the VaR model
inputs to historical data from the most
severe twelve-month stress period
contained within the three-year stress
period used to calculate EEi. However,
the agencies propose to retain the
flexibility to require a banking
organization to use a different period of
significant financial stress in the
calculation of the CVAStressedVAR
measure that would better reflect actual
historic losses of the portfolio.
Under the NPR, a banking
organization’s VaR model would be
required to capture the basis between
the spreads of the index that is used as
the hedging instrument and the hedged
counterparty exposure over various time
periods, including benign and stressed
environments. If the VaR model does
not capture that basis, the banking
organization would be permitted to
reflect only 50 percent of the notional
amount of the CDSind hedge in the VaR
model. The remaining 50 percent of the
notional amount of the CDSind hedge
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would be a covered position under the
market risk capital rule.
Question 4: The agencies solicit
comments on the proposed CVA capital
requirements, including the simple CVA
approach and the advanced CVA
approach.
5. Cleared Transactions (Central
Counterparties)
CCPs help improve the safety and
soundness of the derivatives and repostyle transaction markets through the
multilateral netting of exposures,
establishment and enforcement of
collateral requirements, and market
transparency. Under the current
advanced approaches rule, exposures to
qualifying central counterparties
(QCCPs) received a zero percent risk
weight. However, when developing
Basel III, the BCBS recognized that as
more derivatives and repo-style
transactions move to CCPs, the potential
for systemic risk increases. To address
these concerns, the BCBS has sought
comment on a specific capital
requirement for such transactions with
CCPs and a more risk-sensitive
approach for determining a capital
requirement for a banking organization’s
contributions to the default funds of
these CCPs. The BCBS also has sought
comment on a preferential capital
treatment for exposures arising from
derivative and repo-style transactions
with, and related default fund
contributions to, CCPs that meet the
standards established by the Committee
on Payment and Settlement Systems
(CPSS) and International Organization
of Securities Commissions (IOSCO).10
The treatment for exposures that arise
from the settlement of cash transactions
(such as equities, fixed income, spot
(FX), and spot commodities) with a
QCCP where there is no assumption of
ongoing counterparty credit risk by the
QCCP after settlement of the trade and
associated default fund contributions
remains unchanged.
A banking organization that is a
clearing member, a term that is defined
in the Basel III NPR as a member of, or
direct participant in, a CCP that is
entitled to enter into transactions with
the CCP, or a clearing member client,
proposed to be defined as a party to a
cleared transaction associated with a
CCP in which a clearing member acts
either as a financial intermediary with
respect to the party or guarantees the
performance of the party to the CCP,
would first calculate its trade exposure
for a cleared transaction. The trade
10 See CPSS, ‘‘Recommendations for Central
Counterparties,’’ (November 2004), available at
http://www.bis.org/publ/cpss64.pdf?
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exposure amount for a cleared
transaction would be determined as
follows:
(1) For a cleared transaction that is a
derivative contract or netting set of
derivative contracts, the trade exposure
amount equals:
(i) The exposure amount for the
derivative contract or netting set of
derivative contracts, calculated using
the methodology used to calculate
exposure amount for OTC derivative
contracts under section 132(c) or 132(d)
of this NPR, plus
(ii) The fair value of the collateral
posted by the banking organization and
held by the CCP or a clearing member
in a manner that is not bankruptcy
remote.
(2) For a cleared transaction that is a
repo-style transaction, the trade
exposure amount equals:
(i) The exposure amount for the repostyle transaction calculated using the
methodologies under sections 132(b)(2),
132(b)(3) or 132(d) of this NPR, plus
(ii) The fair value of the collateral
posted by the banking organization and
held by the CCP or a clearing member
in a manner that is not bankruptcy
remote.
When the banking organization
calculates EAD under the IMM, EAD
would be calculated using the most
recent three years of historical data, that
is, EADunstressed. Trade exposure would
not include any collateral held by a
custodian in a manner that is
bankruptcy remote from the CCP.
Under the proposal, a clearing
member banking organization would
apply a risk weight of 2 percent to its
trade exposure amount with a QCCP.
The proposed definition of QCCP is
discussed in the Standardized Approach
NPR preamble. A banking organization
that is a clearing member client would
apply a 2 percent risk weight to the
trade exposure amount if:
(1) The collateral posted by the
banking organization to the QCCP or
clearing member is subject to an
arrangement that prevents any losses to
the clearing member due to the joint
default or a concurrent insolvency,
liquidation, or receivership proceeding
of the clearing member and any other
clearing member clients of the clearing
member; and
(2) The clearing member client has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from default or
a receivership, insolvency, or
liquidation proceeding) the relevant
court and administrative authorities
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would find the arrangements to be legal,
valid, binding, and enforceable under
the law of the relevant jurisdiction,
provided certain additional criteria are
met.
The agencies believe that omnibus
accounts (that is, accounts that are
generally established by clearing entities
for non-clearing members) in the United
States would satisfy these requirements
because of the protections afforded
client accounts under certain
regulations of the Securities and
Exchange Commission (SEC) and
Commodities Futures Trading
Commission (CFTC).11 If the criteria
above are not met, a banking
organization that is a clearing member
client would apply a risk weight of 4
percent to the trade exposure amount.
For a cleared transaction with a CCP
that is not a QCCP, a clearing member
and a banking organization that is a
clearing member client would risk
weight the trade exposure according to
the risk weight applicable to the CCP
under the Standardized Approach NPR.
Collateral posted by a clearing
member or clearing member client
banking organization that is held in a
manner that is bankruptcy remote from
the CCP would not be subject to a
capital requirement for counterparty
credit risk. As with all posted collateral,
the banking organization would
continue to have a capital requirement
for any collateral provided to a CCP or
a custodian in connection with a cleared
transaction.
Under the proposal, a cleared
transaction would not include an
exposure of a banking organization that
is a clearing member to its clearing
member client where the banking
organization is either acting as a
financial intermediary and enters into
an offsetting transaction with a CCP or
where the banking organization
provides a guarantee to the CCP on the
performance of the client. Such a
transaction would be treated as an OTC
derivative transaction. However, the
agencies recognize that this treatment
may create a disincentive for banking
organizations to act as intermediaries
and provide access to CCPs for clients.
As a result, the agencies are considering
approaches that could address this
disincentive while at the same time
appropriately reflect the risks of these
transactions. For example, one approach
would allow banking organizations that
are clearing members to adjust the EAD
calculated under section 132 downward
by a certain percentage or, for banking
11 See Securities Investor Protection Act of 1970,
15 U.S.C Section 78aaa—78lll; 17 CFR part 300; 17
CFR part 190.
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organizations using the IMM, to adjust
the margin period of risk. International
discussions are ongoing on this issue,
and the agencies would expect to revisit
the treatment of these transactions in
the event that the BCBS revises its
treatment of these transactions.
Default Fund Contribution
The agencies are proposing that,
under the advanced approaches rule, a
banking organization that is a clearing
member of a CCP calculate its capital
requirement for its default fund
contributions at least quarterly or more
frequently upon material changes to the
CCP. Banking organizations seeking
more information on the proposed riskbased capital treatment of default fund
contributions should refer to the
preamble of the Standardized Approach
NPR.
Question 5: The agencies request
comment on the proposed treatment of
cleared transactions. The agencies
solicit comment on whether the
proposal provides an appropriately risksensitive treatment of a transaction
between a banking organization that is
a clearing member and its client and a
clearing member’s guarantee of its
client’s transaction with a CCP by
treating these exposures as OTC
derivative contracts. The agencies also
request comment on whether the
adjustment of the exposure amount
would address possible disincentives
for banking organizations that are
clearing members to facilitate the
clearing of their clients’ transactions.
What other approaches should the
agencies consider and why?
Question 6: The agencies are seeking
comment on the proposed calculation of
the risk-based capital for cleared
transactions, including the proposed
risk-based capital requirements for
exposures to a QCCP. Are there specific
types of exposures to certain QCCPs that
would warrant an alternative risk-based
capital approach? Please provide a
detailed description of such transactions
or exposures, the mechanics of the
alternative risk-based approach, and the
supporting rationale.
6. Stress Period for Own Internal
Estimates
Under the collateral haircut approach
in the advanced approaches rule,
banking organizations that receive prior
approval from their primary federal
supervisory may calculate market price
and foreign exchange volatility using
own internal estimates. To receive
approval to use such an approach,
banking organizations are required to
base own internal estimates on a
historical observation period of at least
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one year, among other criteria. During
the financial crisis, increased volatility
in the value of collateral led to higher
counterparty exposures than estimated
by banking organizations. In response,
the agencies are proposing in this NPR
to modify the quantitative standards for
approval by requiring banking
organizations to base own internal
estimates of haircuts on a historical
observation period that reflects a
continuous 12-month period of
significant financial stress appropriate
to the security or category of securities.
As described in the Standardized
Approach NPR preamble, a banking
organization would also be required to
have policies and procedures that
describe how it determines the period of
significant financial stress used to
calculate the banking organization’s
own internal estimates, and to be able
to provide empirical support for the
period used. To ensure an appropriate
level of conservativeness, in certain
circumstances a primary federal
supervisor may require a banking
organization to use a different period of
significant financial stress in the
calculation of own internal estimates for
haircuts.
B. Removal of Credit Ratings
Consistent with section 939A of the
Dodd-Frank Act, the agencies are
proposing a number of changes to the
definitions in the advanced approaches
rule that currently reference credit
ratings.12 These changes are similar to
alternative standards proposed in the
Standardized Approach NPR and
alternative standards that already have
been implemented in the agencies’
market risk capital rule. In addition, the
agencies are proposing necessary
changes to the hierarchy for risk
weighting securitization exposures
necessitated by the removal of the
ratings-based approach, as described
further below.
The agencies propose to use an
‘‘investment grade’’ standard that does
not rely on credit ratings as an
alternative standard in a number of
requirements under the advanced
approaches rule, as explained below.
Under this NPR and the Standardized
Approach NPR, investment grade would
mean that the entity to which the
banking organization is exposed through
a loan or security, or the reference entity
with respect to a credit derivative, has
adequate capacity to meet financial
commitments for the projected life of
the asset or exposure. Such an entity or
reference entity has adequate capacity to
meet financial commitments if the risk
12 See
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proposed definition of ‘‘investment
grade.’’
of its default is low and the full and
timely repayment of principal and
interest is expected.
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Eligible Guarantor
Under the current advanced
approaches rule, guarantors are required
to meet a number of criteria in order to
be considered as eligible guarantors
under the securitization framework. For
example, the entity must have issued
and outstanding an unsecured long-term
debt security without credit
enhancement that has a long-term
applicable external rating in one of the
three highest investment-grade rating
categories. The agencies are proposing
to replace the term ‘‘eligible
securitization guarantor’’ with the term
‘‘eligible guarantor,’’ which includes
certain entities that have issued and
outstanding an unsecured debt security
without credit enhancement that is
investment grade. Other modifications
to the definition of eligible guarantor are
discussed in subpart C of this preamble.
Eligible Double Default Guarantor
Under this proposal, the term
‘‘eligible double default guarantor,’’
with respect to a guarantee or credit
derivative obtained by a banking
organization, means:
(1) U.S.-based-entities. A depository
institution, bank holding company,
savings and loan holding company, or
securities broker or dealer registered
with the SEC under the Securities
Exchange Act of 1934 (15 U.S.C. 78o et
seq.), if at the time the guarantee is
issued or any time thereafter, has issued
and outstanding an unsecured debt
security without credit enhancement
that is investment grade.
(2) Non-U.S.-based entities. A foreign
bank, or a non-U.S.-based securities firm
if the banking organization
demonstrates that the guarantor is
subject to consolidated supervision and
regulation comparable to that imposed
on U.S. depository institutions, or
securities broker-dealers) if at the time
the guarantee is issued or anytime
thereafter, has issued and outstanding
an unsecured debt security without
credit enhancement that is investment
grade. Under the proposal, insurance
companies in the business of providing
credit protection would no longer be
eligible double default guarantors.
Conversion Factor Matrix for OTC
Derivative Contracts
Under this proposal and Standardized
Approach NPR, the agencies propose to
retain the metrics used to calculate the
potential future exposure (PFE) for
derivative contracts (as set forth in table
3 of the proposed rule), and apply the
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Money Market Fund Approach
Previously, under the advanced
approaches money market fund
approach, banking organizations were
permitted to assign a 7 percent risk
weight to exposures to money market
funds that were subject to SEC rule 2a7 and that had an applicable external
rating in the highest investment grade
rating category. In this NPR, the
agencies propose to eliminate the
money market fund approach. The
agencies believe it is appropriate to
eliminate the preferential risk weight for
money market fund investments due to
the agencies’ and banking organizations’
experience with them during the recent
financial crisis, in which they
demonstrated, at times, elevated credit
risk. As a result of the proposed
changes, a banking organization would
use one of the three alternative
approaches under section 154 of this
proposal to determine the risk weight
for its exposures to a money market
fund, subject to a 20 percent floor.
Modified Look-Through Approaches for
Equity Exposures to Investment Funds
Under the proposal, risk weights for
equity exposures under the simple
modified look-through approach would
be based on the highest risk weight
assigned according to subpart D of the
Standardized Approach NPR based on
the investment limits in the fund’s
prospectus, partnership agreement, or
similar contract that defines the fund’s
permissible investments.
Qualifying Operational Risk Mitigants
Under section 161 of the proposal, a
banking organization may adjust its
estimate of operational risk exposure to
reflect qualifying operational risk
mitigants. Previously, for insurance to
be considered as a qualifying
operational risk mitigant, it was
required to be provided by an
unaffiliated company rated in the three
highest rating categories by a nationally
recognized statistical ratings
organization (NRSRO). Under the
proposal, qualifying operational risk
mitigants, among other criteria, would
be required to be provided by an
unaffiliated company that the banking
organization deems to have strong
capacity to meet its claims payment
obligations and the obligor rating
category to which the banking
organization assigns the company is
assigned a PD equal to or less than 10
basis points.
Question 7: The agencies request
comment on the proposed use of
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alternative standards as they would
relate to the definitions of investment
grade, eligible guarantor, eligible double
default guarantor under the advanced
approaches rule, as well as the
treatment of certain OTC derivative
contracts, operational risk mitigants,
money market mutual funds, and
investment funds under the advanced
approaches rule.
C. Proposed Revisions to the Treatment
of Securitization Exposures
1. Definitions
Consistent with the 2009
Enhancements and as proposed in the
Standardized Approach NPR, the
agencies are proposing to introduce a
new definition for resecuritization
exposures and broaden the definition of
securitization. In addition, the agencies
are proposing to amend the existing
definition of traditional securitization in
order to exclude certain types of
investment firms from treatment under
the securitization framework.
The definition of a securitization
exposure would be broadened to
include an exposure that directly or
indirectly references a securitization
exposure. Specifically, a securitization
exposure would be defined as an onbalance sheet or off-balance sheet credit
exposure (including credit-enhancing
representations and warranties) that
arises from a traditional securitization
or synthetic securitization exposure
(including a resecuritization), or an
exposure that directly or indirectly
references a securitization exposure.
The agencies are proposing to define a
resecuritization exposure as (1) an onor off-balance sheet exposure to a
resecuritization; or (2) an exposure that
directly or indirectly references a
resecuritization exposure. An exposure
to an asset-backed commercial paper
(ABCP) program would not be a
resecuritization exposure if either: the
program-wide credit enhancement does
not meet the definition of a
resecuritization exposure; or the entity
sponsoring the program fully supports
the commercial paper through the
provision of liquidity so that the
commercial paper holders effectively
are exposed to the default risk of the
sponsor instead of the underlying
exposures. Resecuritization would mean
a securitization in which one or more of
the underlying exposures is a
securitization exposure.
The recent financial crisis
demonstrated that resecuritization
exposures, such as collateralized debt
obligations (CDOs) comprised of assetbacked securities (ABS), generally
present greater levels of risk relative to
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other securitization exposures due to
their increased complexity and lack of
transparency and potential to
concentrate systematic risk.
Accordingly, the 2009 Enhancements
amended the Basel II internal ratingsbased approach in the securitization
framework to require a banking
organization to assign higher risk
weights to resecuritization exposures
than other, similarly-rated securitization
exposures. In this proposal, the agencies
are proposing to assign risk weights
under the simplified supervisory
formula approach (SSFA) in a manner
that would result in higher risk weights
for resecuritization exposures. In
addition, the agencies are proposing to
modify the definition of financial
collateral such that resecuritizations
would no longer qualify as eligible
financial collateral under the advanced
approaches rule.
Asset-Backed Commercial Paper
The following is an example of how
to evaluate whether a transaction
involving a traditional multi-seller
ABCP conduit would be considered a
resecuritization exposure under the
proposed rule. In this example, an
ABCP conduit acquires securitization
exposures where the underlying assets
consist of wholesale loans and no
securitization exposures. As is typically
the case in multi-seller ABCP conduits,
each seller provides first-loss protection
by over-collateralizing the conduit to
which it sells its loans. To ensure that
the commercial paper issued by each
conduit is highly-rated, a banking
organization sponsor provides either a
pool-specific liquidity facility or a
program-wide credit enhancement such
as a guarantee to cover a portion of the
losses above the seller-provided
protection.
The pool-specific liquidity facility
generally would not be treated as a
resecuritization exposure under this
proposal because the pool-specific
liquidity facility represents a tranche of
a single asset pool (that is, the
applicable pool of wholesale exposures),
which contains no securitization
exposures. However, a sponsor’s
program-wide credit enhancement that
does not cover all losses above the
seller-provided credit enhancement
across the various pools generally
would constitute tranching of risk of a
pool of multiple assets containing at
least one securitization exposure, and
therefore would be treated as a
resecuritization exposure.
In addition, if the conduit from the
example funds itself entirely with a
single class of commercial paper, then
the commercial paper generally would
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not be considered a resecuritization
exposure if either the program-wide
credit enhancement did not meet the
proposed definition of a resecuritization
exposure, or the commercial paper was
fully guaranteed by the sponsoring
banking organization. When the
sponsoring banking organization fully
guarantees the commercial paper, the
commercial paper holders effectively
would be exposed to the default risk of
the sponsor instead of the underlying
exposures, thus ensuring that the
commercial paper does not represent a
tranched risk position.
Definition of Traditional Securitization
Since issuing the advanced
approaches rules in 2007, the agencies
have received feedback from banking
organizations that the existing definition
of traditional securitization is
inconsistent with their risk experience
and market practice. The agencies have
reviewed this definition in light of this
feedback and agree with commenters
that changes to it may be appropriate.
The agencies are proposing to exclude
from the definition of traditional
securitization exposures to investment
funds, collective investment funds,
pension funds regulated under the
Employee Retirement Income Security
Act (ERISA) and their foreign
equivalents, and transactions regulated
under the Investment Company Act of
1940 and their foreign equivalents,
because these entities are generally
prudentially regulated and subject to
strict leverage requirements. Moreover,
the agencies believe that the capital
requirements for an extension of credit
to, or an equity holding in these
transactions would be more
appropriately calculated under the rules
for corporate and equity exposures, and
that the securitization framework was
not designed to apply to such
transactions.
Accordingly, the agencies propose to
amend the definition of a traditional
securitization by excluding any fund
that is (1) An investment fund, as
defined under the rule, (2) a pension
fund regulated under ERISA or a foreign
equivalent, or (3) a company regulated
under the Investment Company Act of
1940 or a foreign equivalent. Under the
current rule, the definition of
investment fund, which the agencies are
not proposing to amend, means a
company all or substantially all of the
assets of which are financial assets; and
that has no material liabilities.
Question 8: The agencies request
comment on the proposed revisions to
the definition of traditional
securitization.
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Under the current advanced
approaches rule, the definition of
eligible securitization guarantor
includes, among other entities, any
entity (other than a securitization
special purpose entity (SPE)) that has
issued and has outstanding an
unsecured long-term debt security
without credit enhancement that has a
long-term applicable external rating in
one of the three highest investmentgrade rating categories, or has a PD
assigned by the banking organization
that is lower than or equal to the PD
associated with a long-term external
rating in the third highest investment
grade category. The agencies are
proposing to remove the existing
references to ratings from the definition
of an eligible guarantor (the proposed
new term for an eligible securitization
guarantor). As revised, the definition for
an eligible guarantor would include:
(1) A sovereign, the Bank for
International Settlements, the
International Monetary Fund, the
European Central Bank, the European
Commission, a Federal Home Loan
Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), a multilateral
development bank, a depository
institution, a bank holding company, a
savings and loan holding company (as
defined in 12 U.S.C. 1467a), a credit
union, or a foreign bank; or
(2) An entity (other than an SPE):
(i) That at the time the guarantee is
issued or anytime thereafter, has issued
and outstanding an unsecured debt
security without credit enhancement
that is investment grade;
(ii) Whose creditworthiness is not
positively correlated with the credit risk
of the exposures for which it has
provided guarantees; and
(iii) That is not an insurance company
engaged predominately in the business
of providing credit protection (such as
a monoline bond insurer or re-insurer).
During the financial crisis, certain
guarantors of securitization exposures
had difficulty honoring those guarantees
as the financial condition of the
guarantors deteriorated at the same time
as the guaranteed exposures
experienced losses. Therefore, the
agencies are proposing to add the
requirement related to the correlation
between the guarantor’s
creditworthiness and the credit risk of
the exposures it has guaranteed to
address this concern.
Question 9: The agencies request
comment on the proposed revisions to
the definition of eligible securitization
guarantor.
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2. Operational Criteria for Recognizing
Risk Transference in Traditional
Securitizations
Section 41 of the current advanced
approaches rule includes operational
criteria for recognizing the transfer of
risk. Under the criteria, a banking
organization that transfers exposures
that it has originated or purchased to a
securitization SPE or other third party
in connection with a traditional
securitization may exclude the
exposures from the calculation of riskweighted assets only if certain
conditions are met. Among the criteria
listed is that the transfer is considered
a sale under the Generally Accepted
Accounting Principles (GAAP).
The purpose of the criterion that the
transfer be considered a sale under
GAAP was to ensure that the banking
organization that transferred the
exposures was not required under
GAAP to consolidate the exposures on
its balance sheet. Given changes in
GAAP since the rule was published in
2007, the agencies propose to amend
paragraph (a)(1) of section 41 of the
advanced approaches rule to require
that the transferred exposures are not
reported on the banking organization’s
balance sheet under GAAP.13
Question 10: The agencies request
comment on the proposed revisions to
operational criteria under section 41 of
the advanced approaches rule.
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3. Proposed Revisions to the Hierarchy
of Approaches
Consistent with section 939A of the
Dodd-Frank Act, the agencies are
proposing to remove the advanced
approaches rule’s ratings-based
approach (RBA) and internal assessment
approach (IAA) for securitization
exposures. Under the proposal, the
hierarchy for securitization exposures
would be modified as follows:
(1) A banking organization would be
required to deduct from common equity
tier 1 capital any after-tax gain-on-sale
resulting from a securitization and
apply a 1,250 percent risk weight to the
portion of a credit-enhancing interestonly strip (CEIO) that does not
constitute after-tax gain-on-sale.
(2) If a securitization exposure does
not require deduction, a banking
organization would be required to
assign a risk weight to the securitization
exposure using the supervisory formula
approach (SFA). The agencies expect
banking organizations to use the SFA
rather than the SSFA in all instances
13 For
more information on the changes in GAAP
related to the transfer of exposures, see Financial
Accounting Standards Board, Topics 810 and 860.
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where data to calculate the SFA is
available.
(3) If the banking organization cannot
apply the SFA because not all the
relevant qualification criteria are met, it
would be allowed to apply the SSFA. A
banking organization should be able to
explain and justify (e.g., based on data
availability) to its primary federal
regulator any instances in which the
banking organization uses the SSFA
rather than the SFA for its securitization
exposures.
If the banking organization does not
apply the SSFA to the exposure, the
banking organization would be required
to assign a 1,250 percent risk weight,
unless the exposure qualifies for a
treatment available to certain ABCP
exposures under section 44 of
Standardized Approach NPR.
The SSFA, described in detail in the
Standardized Approach NPR, is similar
in construct and function to the SFA. A
banking organization would need
several inputs to calculate the SSFA.
The first input is the weighted-average
capital requirement under the
requirements described in Standardized
Approach NPR that would be applied to
the underlying exposures if they were
held directly by the banking
organization. The second and third
inputs indicate the position’s level of
subordination and relative size within
the securitization. The fourth input is
the level of delinquencies experienced
on the underlying exposures. A bank
would apply the hierarchy of
approaches in section 142 of this
proposed rule to determine which
approach it would apply to a
securitization exposure.
Banking organizations using the
advanced approaches rule should note
that the Standardized Approach NPR
would require the use of the SSFA for
certain securitizations subject to the
advanced approaches rule.
Question 11: The agencies request
comment on the proposed revisions to
the hierarchy for securitization
exposures under the advanced
approaches rule.
52991
The advanced approaches rule
includes methods for calculating riskweighted assets for nth-to-default credit
derivatives, including first-to-default
credit derivatives and second-orsubsequent-to-default credit
derivatives.14 The advanced approaches
rule, however, does not specify how to
treat guarantees or non-nth-to-default
credit derivatives purchased or sold that
reference a securitization exposure.
Accordingly, the agencies are proposing
clarifying revisions to the risk-based
capital requirements for credit
protection purchased or provided in the
form of a guarantee or derivative other
than nth-to-default credit derivatives
that reference a securitization exposure.
For a guarantee or credit derivative
(other than an nth-to-default credit
derivative), the proposal would require
a banking organization to determine the
risk-based capital requirement for the
guarantee or credit derivative as if it
directly holds the portion of the
reference exposure covered by the
guarantee or credit derivative. The
banking organization would calculate its
risk-based capital requirement for the
guarantee or credit derivative by
applying either (1) the SFA as provided
in section 143 of the proposal to the
reference exposure if the bank and the
reference exposure qualify for the SFA;
or (2) the SSFA as provided in section
144 of the proposal. If the guarantee or
credit derivative and the reference
securitization exposure would not
qualify for the SFA, or the SSFA, the
bank would be required to assign a
1,250 percent risk weight to the notional
amount of protection provided under
the guarantee or credit derivative.
The proposal also would modify the
advanced approaches rule to clarify how
a banking organization may recognize a
guarantee or credit derivative (other
than an nth-to-default credit derivative)
purchased as a credit risk mitigant for
a securitization exposure held by the
banking organization. In addition, the
proposal adds a provision that would
require a banking organization to use
section 131 of the proposal instead of
the approach required under the
hierarchy of approaches in section 142
to calculate the risk-based capital
requirements for a credit protection
purchased by a banking organization in
the form of a guarantee or credit
derivative (other than an nth-to-default
credit derivative) that references a
securitization exposure that a banking
organization does not hold. Credit
protection purchased that references a
securitization exposure not held by a
banking organization subjects the
banking organization to counterparty
credit risk with respect to the credit
protection but not credit risk to the
securitization exposure.
14 Nth-to-default credit derivative means a credit
derivative that provides credit protection only for
the nth-defaulting reference exposure in a group of
reference exposures. See 12 CFR part 3, appendix
C, section 42(l) (OCC); 12 CFR part 208, appendix
F, and 12 CFR part 225, appendix G (Board); 12 CFR
part 325, appendix D, section 4(l), and 12 CFR part
390, subpart Z, appendix A, section 4(l) (FDIC).
4. Guarantees and Credit Derivatives
Referencing a Securitization Exposure
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Question 12: The agencies request
comment on the proposed revisions to
the treatment of guarantees and credit
derivatives that reference a
securitization exposure.
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5. Due Diligence Requirements for
Securitization Exposures
As the recent financial crisis
unfolded, weaknesses in exposures
underlying securitizations became
apparent and resulted in NRSROs
downgrading many securitization
exposures held by banks. The agencies
found that many banking organizations
relied on NRSRO ratings as a proxy for
the credit quality of securitization
exposures they purchased and held
without conducting their own sufficient
independent credit analysis. As a result,
some banking organizations did not
have sufficient capital to absorb the
losses attributable to these exposures.
Accordingly, consistent with the 2009
Enhancements, the agencies are
proposing to implement due diligence
requirements that banking organizations
would be required to use the SFA or
SSFA to determine the risk-weighted
asset amount for securitization
exposures under the advanced
approaches proposal. These disclosure
requirements are consistent with those
required in the standardized approach,
as discussed in the Standardized
Approach NPR.
Question 13: The agencies solicit
comments on what, if any, are specific
challenges that are involved with
meeting the proposed due diligence
requirements and for what types of
securitization exposures? How might
the agencies address these challenges
while ensuring that a banking
organization conducts an appropriate
level of due diligence commensurate
with the risks of its exposures?
6. Nth-to-Default Credit Derivatives
The agencies propose that a banking
organization that provides credit
protection through an nth-to-default
derivative assign a risk weight to the
derivative using the SFA or the SSFA.
In the case of credit protection sold, a
banking organization would determine
its exposure in the nth-to-default credit
derivative as the largest notional dollar
amount of all the underlying exposures.
When applying the SSFA to
protection provided in the form of an
nth-to-default credit derivative, the
attachment point (parameter A) is the
ratio of the sum of the notional amounts
of all underlying exposures that are
subordinated to the banking
organization’s exposure to the total
notional amount of all underlying
exposures. For purposes of applying the
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SFA, parameter A would be set equal to
the credit enhancement level (L) used in
the SFA formula. In the case of a firstto-default credit derivative, there are no
underlying exposures that are
subordinated to the banking
organization’s exposure. In the case of a
second-or-subsequent-to default credit
derivative, the smallest (n-1) underlying
exposure(s) are subordinated to the
banking organization’s exposure.
Under the SSFA, the detachment
point (parameter D) would be the sum
of the attachment point and the ratio of
the notional amount of the banking
organization’s exposure to the total
notional amount of the underlying
exposures. Under the SFA, Parameter D
would be set to equal L plus the
thickness of the tranche (T) under the
SFA formula. A banking organization
that does not use the SFA or SSFA to
calculate a risk weight for an nth-todefault credit derivative would assign a
risk weight of 1,250 percent to the
exposure.
For the treatment of protection
purchased through an nth-to-default, a
banking organization would determine
its risk-based capital requirement for the
underlying exposures as if the banking
organization had synthetically
securitized the underlying exposure
with the lowest risk-based capital
requirement and had obtained no credit
risk mitigant on the underlying
exposures. A banking organization
would calculate a risk-based capital
requirement for counterparty credit risk
according to section 132 of the proposal
for a first-to-default credit derivative
that does not meet the rules of
recognition for guarantees and credit
derivatives under section 134(b).
A banking organization that obtains
credit protection on a group of
underlying exposures through a nth-todefault credit derivative that meets the
rules of recognition of section 134(b) of
the proposal (other than a first-todefault credit derivative) would be
permitted to recognize the credit risk
mitigation benefits of the derivative
only if the banking organization also has
obtained credit protection on the same
underlying exposures in the form of
first-through-(n-1)-to-default credit
derivatives; or if n-1 of the underlying
exposures have already defaulted. If a
banking organization satisfies these
requirements, the banking organization
would determine its risk-based capital
requirement for the underlying
exposures as if the banking organization
had only synthetically securitized the
underlying exposure with the nth
lowest risk-based capital requirement
and had obtained no credit risk mitigant
on the other underlying exposures. A
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banking organization that does not
fulfill these requirements would
calculate a risk-based capital
requirement for counterparty credit risk
according to section 132 of the proposal
for a nth-to-default credit derivative that
does not meet the rules of recognition of
section 134(b) of the proposal.
For a guarantee or credit derivative
(other than an nth-to-default credit
derivative) provided by a banking
organization that covers the full amount
or a pro rata share of a securitization
exposure’s principal and interest, the
banking organization would risk weight
the guarantee or credit derivative as if
it holds the portion of the reference
exposure covered by the guarantee or
credit derivative.
As a protection purchaser, if a
banking organization chooses (and is
able) to recognize a guarantee or credit
derivative (other than an nth-to-default
credit derivative) that references a
securitization exposure as a credit risk
mitigant, where applicable, the banking
organization must apply section 145 of
the proposal for the recognition of credit
risk mitigants. If a banking organization
cannot, or chooses not to, recognize a
credit derivative that references a
securitization exposure as a credit risk
mitigant under section 145, the banking
organization would determine its capital
requirement only for counterparty credit
risk in accordance with section 131 of
the proposal.
Question 14: The agencies request
comment on the proposed treatment for
nth-to-default credit derivatives.
D. Treatment of Exposures Subject to
Deduction
Under the current advanced
approaches rule, a banking organization
must deduct certain exposures from
total capital, including securitization
exposures such as CEIOs, low-rated
securitization exposures, and high-risk
securitization exposures subject to the
SFA; eligible credit reserves shortfall;
and certain failed capital markets
transactions.15 Consistent with Basel III,
the agencies are proposing that the
exposures noted above that are currently
deducted from total capital would
instead be assigned a 1,250 percent risk
weight, except as required under
15 Section 42(a)(1) of the advanced approaches
rule states, in part, that a banking organization must
deduct from total capital the portion of any CEIO
that does not constitute gain-on-sale. The proposal
would clarify that this provision relates to any CEIO
that does not constitute after-tax gain-on-sale; see
12 CFR part 3, appendix C, section 11, and 12 CFR
part 167, section 11 (OCC); 12 CFR part 208,
appendix F, section 11, and 12 CFR part 225,
appendix G, section 11 (Board); 12 CFR part 325,
appendix D, section 11, and 12 CFR part 390,
subpart Z, appendix A, section 11 (FDIC).
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subpart B of the Standardized Approach
NPR, and except for deductions from
total capital of insurance underwriting
subsidiaries of bank holding companies.
The proposed change would reduce the
differences in the measure of tier 1
capital for risk-based capital purposes
under the advanced approaches rule as
compared to the leverage capital
requirements.
The agencies note that such treatment
is not equivalent to a deduction from
tier 1 capital, as the effect of a 1,250
percent risk weight would depend on an
individual banking organization’s
current risk-based capital ratios.
Specifically, when a risk-based capital
ratio (either tier 1 or total risk-based
capital) exceeds 8.0 percent, the effect
on that risk-based capital ratio of
assigning an exposure a 1,250 percent
risk weight would be more conservative
than a deduction from total capital. The
more a risk-based capital ratio exceeds
8.0 percent, the harsher is the effect of
a 1,250 percent risk weight on riskbased capital ratios. Conversely, the
effect of a 1,250 percent risk weight
would be less harsh than a deduction
from total capital for any risk-based
capital ratio that is below 8.0 percent.
Unlike a deduction from total capital,
however, a bank’s leverage ratio would
not be affected by assigning an exposure
a 1,250 percent risk weight.
The agencies are not proposing to
apply a 1,250 percent risk weight to
those exposures currently deducted
from tier 1 capital under the advanced
approaches rule. For example, the
agencies are proposing that gain-on-sale
that is deducted from tier 1 under the
advanced approaches rule be deducted
from common equity tier 1 under the
proposed rule. In this regard, the
agencies also clarify that any asset
deducted from common equity tier 1,
tier 1, or tier 2 capital under the
advanced approaches rule would not be
included in the measure of riskweighted assets under the advanced
approaches rule.
Question 15: The agencies request
comment on the proposed 1,250 percent
risk weighting approach to CEIOs, lowrated securitization exposures, and
high-risk securitization exposures
subject to the SFA, any eligible credit
reserves shortfall, and certain failed
capital markets transactions.
E. Technical Amendments to the
Advanced Approaches Rule
The agencies are proposing other
amendments to the advanced
approaches rule that are designed to
refine and clarify certain aspects of the
rule’s implementation. Each of these
revisions is described below.
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1. Eligible Guarantees and Contingent
U.S. Government Guarantees
In order to be recognized as an
eligible guarantee under the advanced
approaches rule, the guarantee, among
other criteria, must be unconditional.
The agencies note that this definition
would exclude certain guarantees
provided by the U.S. Government or its
agencies that would require some action
on the part of the bank or some other
third party. However, based on their risk
perspective, the agencies believe that
these guarantees should be recognized
as eligible guarantees. Therefore, the
agencies are proposing to amend the
definition of eligible guarantee so that it
explicitly includes a contingent
obligation of the U.S. Government or an
agency of the U.S. Government, the
validity of which is dependent on some
affirmative action on the part of the
beneficiary or a third party (for example,
servicing requirements) irrespective of
whether such contingent obligation
would otherwise be considered a
conditional guarantee. A corresponding
provision is included in section 36 of
the Standardized Approach NPR.
2. Calculation of Foreign Exposures for
Applicability of the Advanced
Approaches—Insurance Underwriting
Subsidiaries
A banking organization is subject to
the advanced approaches rule if it has
consolidated assets greater than or equal
to $250 billion, or if it has total
consolidated on-balance sheet foreign
exposures of at least $10 billion.16 For
bank holding companies, in particular,
the advanced approaches rule provides
that the $250 billion threshold criterion
excludes assets held by an insurance
underwriting subsidiary. However, a
similar provision does not exist for the
$10 billion foreign-exposure threshold
criteria. Therefore, for bank holding
companies and savings and loan
holding companies, the Board is
proposing to exclude assets held by
insurance underwriting subsidiaries
from the $10 billion in total foreign
exposures threshold. The Board believes
such a parallel provision would result
in a more appropriate scope of
application for the advanced approaches
rule.
16 See 12 CFR part 3, appendix C, and 12 CFR part
167, appendix C (OCC); 12 CFR part 208, appendix
F, and 12 CFR part 225, appendix G (Board); 12 CFR
part 325, appendix D, and 12 CFR part 390, subpart
Z (FDIC).
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3. Calculation of Foreign Exposures for
Applicability of the Advanced
Approaches—Changes to FFIEC 009
The agencies are proposing to revise
the advanced approaches rule to
comport with changes to the Federal
Financial Institutions Examination
Council (FFIEC) Country Exposure
Report (FFIEC 009) that occurred after
the issuance of the advanced
approaches rule in 2007. Specifically,
the FFIEC 009 replaced the term ‘‘local
country claims’’ with the term ‘‘foreignoffice claims.’’ Accordingly, the
agencies have made a similar change
under section 100, the section of the
advanced approaches rule that makes
the rules applicable to a banking
organization that has consolidated total
on-balance sheet foreign exposures
equal to $10 billion or more. As a result,
to determine total on-balance sheet
foreign exposure, a bank would sum its
adjusted cross-border claims, local
country claims, and cross-border
revaluation gains calculated in
accordance with FFIEC 009. Adjusted
cross-border claims would equal total
cross-border claims less claims with the
head office or guarantor located in
another country, plus redistributed
guaranteed amounts to the country of
the head office or guarantor.
4. Applicability of the Rule
The agencies believe it would not be
appropriate for banking organizations to
move in and out of the scope of the
advanced approaches rule based on
fluctuating asset sizes. As a result, the
agencies are proposing to amend the
advanced approaches rule to clarify that
once a banking organization is subject to
the advanced approaches rule, it would
remain subject to the rule until its
primary federal supervisor determines
that application of the rule would not be
appropriate in light of the banking
organization’s asset size, level of
complexity, risk profile, or scope of
operations. In connection with the
consideration of a banking
organization’s level of complexity, risk
profile, and scope of operations, the
agencies also may consider a banking
organization’s interconnectedness and
other relevant risk-related factors.
5. Change to the Definition of
Probability of Default Related to
Seasoning
The advanced approaches rule
requires an upward adjustment to
estimated PD for segments of retail
exposures for which seasoning effects
are material. The rationale underlying
this requirement was the seasoning
pattern displayed by some types of retail
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exposures—that is, the exposures have
very low default rates in their first year,
rising default rates in the next few years,
and declining default rates for the
remainder of their terms. Because of the
one-year internal ratings-based (IRB)
default horizon, capital based on the
very low PDs for newly originated, or
‘‘unseasoned,’’ loans would be
insufficient to cover the elevated risk in
subsequent years. The upward
seasoning adjustment to PD was
designed to ensure that banking
organizations would have sufficient
capital when default rates for such
segments rose predictably beginning in
year two.
Since the issuance of the advanced
approaches rule, the agencies have
found the seasoning provision to be
problematic. First, it is difficult to
ensure consistency across institutions,
given that there is no guidance or
criteria for determining when seasoning
is ‘‘material’’ or what magnitude of
upward adjustment to PD is
‘‘appropriate.’’ Second, the advanced
approaches rule lacks flexibility by
requiring an upward PD adjustment
whenever there is a significant
relationship between a segment’s
default rate and its age (since
origination). For example, the upward
PD adjustment may be inappropriate in
cases where (1) The outstanding balance
of a segment is falling faster over time
(due to defaults and prepayments) than
the default rate is rising; (2) the age
(since origination) distribution of a
portfolio is stable over time; or (3)
where the loans in a segment are
intended, with a high degree of
certainty, to be sold or securitized
within a short time period.
Therefore, the agencies are proposing
to delete the regulatory (Pillar 1)
seasoning provision and instead to treat
seasoning under Pillar 2. In addition to
the difficulties in applying the advanced
approaches rule’s seasoning
requirements discussed above, the
agencies believe that the consideration
of seasoning belongs more appropriately
in Pillar 2 First, seasoning involves the
determination of minimum required
capital for a period in excess of the 12month time horizon of Pillar 1. It thus
falls more appropriately under longerterm capital planning and capital
adequacy, which are major focal points
of the internal capital adequacy
assessment process component of Pillar
2. Second, seasoning is a major issue
only where a banking organization has
a concentration of unseasoned loans.
The capital treatment of loan
concentrations of all kinds is omitted
from Pillar 1; however, it is dealt with
explicitly in Pillar 2.
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6. Cash Items in Process of Collection
Previously under the advanced
approaches rule issued in 2007, cash
items in the process of collection were
not assigned a risk-based capital
treatment and, as a result, would have
been subject to a 100 percent risk
weight. Under the proposed rule, the
agencies are revising the advanced
approaches rule to risk weight cash
items in the process of collection at 20
percent of the carrying value, as the
agencies have concluded that this
treatment would be more commensurate
with the risk of these exposures. A
corresponding provision is included in
section 32 of the Standardized
Approach NPR.
7. Change to the Definition of Qualified
Revolving Exposure
The agencies are proposing to modify
the definition of Qualified Revolving
Exposure (QRE) such that certain
unsecured and unconditionally
cancellable exposures where a banking
organization consistently imposes in
practice an upper exposure limit of
$100,000 and requires payment in full
every cycle will now qualify as QRE.
Under the current definition, only
unsecured and unconditionally
cancellable revolving exposures with a
pre-established maximum exposure
amount of $100,000 (such as credit
cards) are classified as QRE. Unsecured,
unconditionally cancellable exposures
that require payment in full and have no
communicated maximum exposure
amount (often referred to as ‘‘charge
cards’’) are instead classified as ‘‘other
retail.’’ For regulatory capital purposes,
this classification is material and would
generally result in substantially higher
minimum required capital to the extent
that the exposure’s asset value
correlation (AVC) will differ if classified
as QRE (where it is assigned an AVC of
4 percent) or other retail (where AVC
varies inversely with through-the-cycle
PD estimated at the segment level and
can go as high as almost 16 percent for
very low PD segments).
The proposed definition would allow
certain charge card products to qualify
as QRE. Charge card exposures may be
viewed as revolving in that there is an
ability to borrow despite a requirement
to pay in full. Where a banking
organization consistently imposes in
practice an upper exposure limit of
$100,000 the agencies believe that
charge cards are more closely aligned
from a risk perspective with credit cards
than with any type of ‘‘other retail’’
exposure and are therefore proposing to
amend the definition of QRE in order to
allow such products to qualify as QRE.
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The agencies also have considered the
appropriate treatment of hybrid cards.
Hybrid cards have characteristics of
both charge and credit cards. The
agencies are uncertain whether it would
be prudent to allow hybrid cards to
qualify as QREs at this time. Hybrid
cards are a relatively new product, and
there is limited information available
about them including data on their
market and risk characteristics.
Question 16: Do hybrid cards exhibit
similar risk characteristics to credit and
charge cards and should the agencies
allow them to qualify as QREs?
Commenters are requested to provide a
detailed explanation, as appropriate, as
well as the relevant data and impact
analysis to support their positions. Such
information should include data on the
number or dollar-amounts of cards
issued to date, anticipated growth rate,
and performance data including default
and delinquency rates, credit score
distribution of cardholders, volatilities,
or asset-value correlations.
8. Trade-Related Letters of Credit
In 2011, the BCBS revised the Basel
II advanced internal ratings-based
approach to remove the one-year
maturity floor for trade finance
instruments. Consistent with this
revision, this proposed rule would
specify that an exposure’s effective
maturity must be no greater than five
years and no less than one year, except
that an exposure’s effective maturity
must be no less than one day if the
exposure is a trade-related letter of
credit, or if the exposure has an original
maturity of less than one year and is not
part of a banking organization’s ongoing
financing of the obligor.
A corresponding provision is
included in section 33 of the
Standardized Approach NPR.
Question 17: The agencies request
comment on all the other proposed
amendments to the advanced
approaches rule described in section E
(items 1 through 8), of this preamble.
F. Pillar 3 Disclosures
1. Frequency and Timeliness of
Disclosures
Under the proposed rule, a banking
organization is required to provide
certain qualitative and quantitative
disclosures on a quarterly, or in some
cases, annual basis, and these
disclosures must be ‘‘timely.’’ In the
preamble to the advanced approaches
rule issued in 2007, the agencies
indicated that quarterly disclosures
would be timely if they were provided
within 45 days after calendar quarterend. The preamble did not specify
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expectations regarding annual
disclosures. The agencies acknowledged
that timing of disclosures required
under the federal banking laws may not
always coincide with the timing of
disclosures under other federal laws,
including federal securities laws and
their implementing regulations by the
SEC. The agencies also indicated that a
banking organization may use
disclosures made pursuant to SEC,
regulatory reporting, and other
disclosure requirements to help meet its
public disclosure requirements under
the advanced approaches rule.
The agencies understand that the
deadline for certain SEC financial
reports is more than 45 calendar days
after calendar quarter-end. Therefore,
the agencies are proposing to clarify in
this NPR that, where a banking
organization’s fiscal year-end coincides
with the end of a calendar quarter, the
requirement for timely disclosure would
be no later than the applicable reporting
deadlines for regulatory reports (for
example, FR Y–9C) and financial reports
(for example, SEC Forms 10–Q and 10–
K). When these deadlines differ,
banking organizations would adhere to
the later deadline. In cases where a
banking organization’s fiscal year-end
does not coincide with the end of a
calendar quarter, the agencies would
consider those disclosures that are made
within 45 days as timely.
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2. Enhanced Securitization Disclosure
Requirements
In view of the significant contribution
of securitization exposures to the
financial crisis, the agencies believe that
enhanced disclosure requirements are
appropriate. Consistent with the
disclosures introduced by the 2009
Enhancements, the agencies are
proposing to amend the qualitative
section for Table 11.8 disclosures
(Securitization) to include the
following:
D The nature of the risks inherent in
a banking organization’s securitized
assets,
D A description of the policies that
monitor changes in the credit and
market risk of a banking organization’s
securitization exposures,
D A description of a banking
organization’s policy regarding the use
of credit risk mitigation for
securitization exposures,
D A list of the special purpose entities
a banking organization uses to securitize
exposures and the affiliated entities that
a bank manages or advises and that
invest in securitization exposures or the
referenced SPEs, and
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D A summary of the banking
organization’s accounting policies for
securitization activities.
To the extent possible, the agencies
are proposing the disclosure
requirements included in the 2009
Enhancements. However, due to the
prohibition on the use of credit ratings
in the risk-based capital rules required
by the Dodd-Frank Act, the proposed
tables do not include those disclosure
requirements related to the use of
ratings.
3. Equity Holding That Are Not Covered
Positions
Section 71 of the current advanced
approaches rule requires banking
organizations to include in their public
disclosures a discussion of ‘‘important
policies covering the valuation of and
accounting for equity holdings in the
banking book.’’ Since ‘‘banking book’’ is
not a defined term under the advanced
approaches rule, the agencies propose to
refer to such exposures as equity
holdings that are not covered positions.
III. Market Risk Capital Rule
In today’s Federal Register, the
federal banking agencies are finalizing
revisions to the agencies’ market risk
capital rule (the market risk capital
rule), which generally requires national
banks, state banks, and bank holding
companies with significant exposure to
market risk to implement systems and
procedures necessary to manage and
measure that risk and to hold a
commensurate amount of capital. As
noted in the introduction of this
preamble, in this NPR, the agencies are
proposing to expand the scope of the
market risk capital rule to include
savings associations and savings and
loan holding companies and codify the
market risk rule in a manner similar to
the other regulatory capital rules in the
three proposals. In the process of
incorporating the market risk rule into
the regulatory capital framework, the
agencies note that there will be some
overlap among certain defined terms. In
any final rule, the agencies intend to
merge definitions and make any
appropriate technical changes.
As a general matter, a banking
organization subject to the market risk
capital rule will not include assets held
for trading purposes when calculating
its risk-weighted assets for the purpose
of the other risk-based capital rules.
Instead, the banking organization must
determine an appropriate capital
requirement for such assets using the
methodologies set forth in the final
market risk capital rule. The banking
organization then must multiply its
market risk capital requirement by 12.5
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to determine a risk-weighted asset
amount for its market risk exposures
and then add that amount to its credit
risk-weighted assets to arrive at its total
risk-weighted asset amount.
As described in the preamble to the
market risk capital rule, the agencies
revised their respective market risk
rules to better capture positions subject
to market risk, reduce pro-cyclicality in
market risk capital requirements,
enhance the rule’s sensitivity to risks
that were not adequately captured under
the prior regulatory measurement
methodologies, and increase
transparency through enhanced
disclosures.
The market risk capital rules is
designed to determine capital
requirements for trading assets based on
general and specific market risk
associated with these assets. General
market risk is the risk of loss in the
market value of positions resulting from
broad market movements, such as
changes in the general level of interest
rates, equity prices, foreign exchange
rates, or commodity prices. Specific
market risk is the risk of loss from
changes in the market value of a
position due to factors other than broad
market movements, including event risk
(changes in market price due to
unexpected events specific to a
particular obligor or position) and
default risk.
The agencies’ current market risk
capital rules do not apply to savings
associations or savings and loan holding
companies. The Board has previously
expressed its intention to assess the
condition, performance, and activities of
savings and loan holding companies
(SLHCs) on a consolidated risk-based
basis in a manner that is consistent with
the Board’s established approach
regarding bank holding company
supervision while considering any
unique characteristics of SLHCs and the
requirements of the Home Owners’ Loan
Act.17 Therefore, as noted above, the
agencies are proposing in this NPR to
expand the scope of the market risk rule
to savings associations and savings and
loan holding companies that meet the
stated thresholds. As proposed, the
market risk capital rule would apply to
any savings association or savings and
loan holding company whose trading
activity (the gross sum of its trading
assets and trading liabilities) is equal to
10 percent or more of its total assets or
$1 billion or more. Under the proposed
rule, each agency would retain the
authority to apply its respective market
risk rule to any entity under its
jurisdiction, regardless of whether it
17 See
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meets the aforementioned thresholds, if
the agency deems it necessary or
appropriate for safe and sound banking
practices.
As a general matter, savings
associations and savings and loan
holding companies do not engage in
trading activity to a substantial degree.
However, the agencies believe that any
savings association or savings and loan
holding company whose trading activity
grows to the extent that it meets the
thresholds should hold capital
commensurate with the risk of the
trading activity and should have in
place the prudential risk management
systems and processes required under
the market risk capital rule. Therefore,
the agencies believe it would be
necessary and appropriate to expand the
scope of the market risk rule to apply to
savings associations and savings and
loan holding companies.
Application of the market risk capital
rule to all banking organizations with
material exposure to market risk would
be particularly important because of
banking organizations’ increased
exposure to traded credit products, such
as credit default swaps, asset-backed
securities and other structured products,
as well as other less liquid products. In
fact, many of the revisions to the final
market risk capital rule were made in
response to concerns that arose during
the financial crisis when certain trading
assets suffered substantial losses,
causing banking organizations holding
those assets to suffer substantial losses.
For example, in addition to a market
risk capital requirement to account for
general market risk, the revised rules
apply more conservative standardized
specific risk capital requirements to
most securitization positions,
implement an additional incremental
risk capital requirement for a banking
organization that models specific risk
for one or more portfolios of debt or, if
applicable, equity positions.
Additionally, to address concerns about
the appropriate treatment of traded
positions that have limited price
transparency, a banking organization
subject to the market risk capital rule
must have a well-defined valuation
process for all covered positions.
Question 18: The agencies request
comment on the application of the
market risk rule to savings associations
and savings and loan holding
companies.
IV. List of Acronyms
ABCP Asset-Backed Commercial Paper
ABS Asset-Backed Security
AVC Asset Value Correlation
BCBS Basel Committee on Banking
Supervision
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CCP Central Counterparty
CDO Collateralized Debt Obligation
CDS Credit Default Swap
CDSind Index Credit Default Swap
CEIO Credit-Enhancing Interest-Only Strip
CPSS Committee on Payment and
Settlement Systems
CVA Credit Valuation Adjustment
DFA Dodd-Frank Act
DvP Delivery-versus-Payment
E Measure of Effectiveness
EAD Exposure-at-Default
EE Expected Exposure
Expected Operational Loss (EOL)
EPE Expected Positive Exposure
FDIC Federal Deposit Insurance
Corporation
FFIEC Federal Financial Institutions
Examination Council
FR Federal Register
GAAP Generally Accepted Accounting
Principles
HVCRE High-Volatility Commercial Real
Estate
IAA Internal Assessment Approach
IMA Internal Models Approach
IMM Internal Models Methodology
I/O Interest-Only
IOSCO International Organization of
Securities Commissions
IRB Internal Ratings-Based
Loss Given Default (LGD)
M Effective Maturity
NGR Net-to-Gross Ratio
NPR Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical
Rating Organization
OCC Office of the Comptroller of the
Currency
OTC Over-the-Counter
PD Probability of Default
PFE Potential Future Exposure
PvP Payment-versus-Payment
QCCP Qualifying Central Counterparty
QRE Qualified Retail Exposure
RBA Ratings-Based Approach
RVC Ratio of Value Change
SFA Supervisory Formula Approach
SSFA Simplified Supervisory Formula
Approach
U.S.C. United States Code
VaR Value-at-Risk
V. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA) requires an
agency to provide an initial regulatory
flexibility analysis with a proposed rule
or to certify that the rule will not have
a significant economic impact on a
substantial number of small entities
(defined for purposes of the RFA to
include banks with assets less than or
equal to $175 million) and publish its
certification and a short, explanatory
statement in the Federal Register along
with the proposed rule.
The Board is providing an initial
regulatory flexibility analysis with
respect to this NPR. The OCC and FDIC
are certifying that the proposals in this
NPR will not have a significant
economic impact on a substantial
number of small entities.
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Board
Under regulations issued by the Small
Business Administration,18 a small
entity includes a depository institution
or bank holding company with total
assets of $175 million or less (a small
banking organization). As of March 31,
2012 there were 373 small state member
banks. As of December 31, 2011, there
were approximately 128 small savings
and loan holding companies and 2,385
small bank holding companies.19
As discussed previously in the
Supplementary Information, the Board
is proposing to revise its capital
requirements to promote safe and sound
banking practices, implement Basel III,
and other aspects of the Basel capital
framework, and codify its capital
requirements.
The proposals also satisfy certain
requirements under the Dodd-Frank Act
by imposing new or revised minimum
capital requirements on certain
depository institution holding
companies.20 Additionally, under
section 38(c)(1) of the Federal Deposit
Insurance Act, the agencies may
prescribe capital standards for
depository institutions that they
regulate.21 In addition, among other
authorities, the Board may establish
capital requirements for state member
banks under the Federal Reserve Act,22
for state member banks and bank
holding companies under the
International Lending Supervision Act
and Bank Holding Company Act,23 and
for savings and loan holding companies
under the Home Owners’ Loan Act.24
The proposed requirements in this
NPR generally would not apply to small
bank holding companies that are not
engaged in significant nonbanking
activities, do not conduct significant offbalance sheet activities, and do not have
a material amount of debt or equity
securities outstanding that are registered
with the SEC. These small bank holding
companies remain subject to the Board’s
Small Bank Holding Company Policy
Statement (Policy Statement).25
18 See
13 CFR 121.201.
December 31, 2011, data are the most
recent available data on small savings and loan
holding companies and small bank holding
companies.
20 See 12 U.S.C. 5371.
21 See 12 U.S.C. 1831o(c)(1).
22 See 12 CFR 208.43.
23 See 12 U.S.C. 3907; 12 U.S.C. 1844.
24 See 12 U.S.C. 1467a(g)(1).
25 See 12 CFR part 225, appendix C; see also 12
U.S.C. 5371(b)(5)(C). Section 171 of the Dodd-Frank
provides an exemption from its requirements for
bank holding companies subject to the Policy
Statement (as in effect on May 19, 2010). Section
171 does not provide a similar exemption for small
savings and loan holding companies and they are
therefore subject to the proposed rules.
19 The
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The proposals in this NPR would
generally not apply to other small
banking organizations. Those small
banking organizations that would be
subject to the proposed modifications to
the advanced approaches rules would
only be subject to those requirements
because they are a subsidiary of a large
banking organization that meets the
criteria for advanced approaches. The
Board expects that all such entities
would rely on the systems developed by
their parent banking organizations and
would have no additional compliance
costs. The Board also expects that the
parent banking organization would
remedy any capital shortfalls at such a
subsidiary that would occur due to the
proposals in this NPR.
The Board welcomes comment on all
aspects of its analysis. A final regulatory
flexibility analysis will be conducted
after consideration of comments
received during the public comment
period.
OCC
Pursuant to section 605(b) of the
Regulatory Flexibility Act, (RFA), the
regulatory flexibility analysis otherwise
required under section 604 of the RFA
is not required if an agency certifies that
the rule will not have a significant
economic impact on a substantial
number of small entities (defined for
purposes of the RFA to include banks
with assets less than or equal to $175
million) and publishes its certification
and a short, explanatory statement in
the Federal Register along with its rule.
As of March 31, 2012, there were
approximately 599 small national banks
and 284 small federally chartered
savings associations. The proposed
changes to OCC’s minimum risk-based
capital requirements included in this
NPR would impact only those small
national banks and federal savings
associations that are subsidiaries of
large internationally active banking
organizations that use the advanced
approaches risk-based capital rules, and
those small federal savings associations
that meet the threshold criteria for
application of the market risk rule. Only
six small institutions would be subject
to the advanced approaches risk-based
capital rules, and no small federal
savings associations satisfy the
threshold criteria for application of the
market risk rule. Therefore, the OCC
does not believe that the proposed rule
will result in a significant economic
impact on a substantial number of small
entities.
FDIC Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the
Regulatory Flexibility Act, (RFA), the
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regulatory flexibility analysis otherwise
required under section 604 of the RFA
is not required if an agency certifies that
the rule will not have a significant
economic impact on a substantial
number of small entities (defined for
purposes of the RFA to include banks
with assets less than or equal to $175
million) and publishes its certification
and a short, explanatory statement in
the Federal Register along with its rule.
As of March 31, 2012, there were
approximately 2,433 small state
nonmember banks, 115 small state
savings banks, and 45 small state
savings associations (collectively, small
banks and savings associations). The
proposed changes to FDIC’s minimum
risk-based capital requirements
included in this NPR would impact only
those small banks and savings
associations that are subsidiaries of
large, internationally-active banking
organizations that use the advanced
approaches risk-based capital rules, and
those small state savings associations
that meet the threshold criteria for
application of the market risk rule.
There are no small banks and savings
associations subject to the advanced
approaches risk-based capital rules, and
no small state savings associations
satisfy the threshold criteria for
application of the market risk rule.
Therefore, the FDIC does not believe
that the proposed rule will result in a
significant economic impact on a
substantial number of small entities.
VI. Paperwork Reduction Act
Request for Comment on Proposed
Information Collection
In accordance with the requirements
of the Paperwork Reduction Act (PRA)
of 1995, 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. The Agencies
are requesting comment on a proposed
information collection.
The information collection
requirements contained Subpart E of
this joint notice of proposed rulemaking
(NPR) have been submitted by the OCC
and FDIC to OMB for review under the
PRA, under OMB Control Nos. 1557–
0234 and 3064–0153. The information
collection requirements contained in
Subpart F of this NPR have been
submitted by the OCC and FDIC to OMB
for review under the PRA. In accordance
with the PRA (44 U.S.C. 3506; 5 CFR
part 1320, Appendix A.1), the Board has
reviewed the NPR under the authority
delegated by OMB. The Board’s OMB
Control Number for the information
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collection requirements contained
Subpart E of this NPR is 7100–0313 and
for the information collection
requirements contained Subpart F of
this NPR is 7100–0314. The
requirements in Subpart E are found in
proposed sections __.121, __.122,
__.123, __.124, __.132, __.141, __.142,
__.152, __.173. The requirements in
Subpart F are found in proposed
sections __.203, __.204, __.205, __.206,
__.207, __.208, __.209, __.210, and
__.212.
The Agencies have published two
other NPRs in this issue of the Federal
Register. Please see the NPRs entitled
‘‘Regulatory Capital Rules: Regulatory
Capital, Minimum Regulatory Capital
Ratios, Capital Adequacy, Transition
Provisions’’ and ‘‘Regulatory Capital
Rules: Standardized Approach for RiskWeighted Assets; Market Discipline and
Disclosure Requirements.’’ While the
three NPRs together comprise an
integrated capital framework, the PRA
burden has been divided among the
three NPRs and a PRA statement has
been provided in each.
Comments are invited on:
(a) Whether the collection of
information is necessary for the proper
performance of the Agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collection, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record.
Comments should be addressed to:
OCC: Communications Division,
Office of the Comptroller of the
Currency, Public Information Room,
Mail stop 1–5, Attention: 1557–0234,
250 E Street SW., Washington, DC
20219. In addition, comments may be
sent by fax to 202–874–4448, or by
electronic mail to
regs.comments@occ.treas.gov. You can
inspect and photocopy the comments at
the OCC’s Public Information Room, 250
E Street SW., Washington, DC 20219.
You can make an appointment to
inspect the comments by calling 202–
874–5043.
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Board: You may submit comments,
identified by R–1443, by any of the
following methods:
• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments
on the http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• Fax: 202–452–3819 or 202–452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551.
All public comments are available
from the Board’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper in Room MP–500 of the Board’s
Martin Building (20th and C Streets
NW.) between 9 a.m. and 5 p.m. on
weekdays.
FDIC: You may submit written
comments, which should refer to RIN
3064–AD97 Advanced Approaches
Risk-based Capital Rule (3064–0153);
Market Risk Capital Rule (NEW), by any
of the following methods:
• Agency Web Site: http://
www.fdic.gov/regulations/laws/federal/
propose.html. Follow the instructions
for submitting comments on the FDIC
Web site.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: Comments@FDIC.gov.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, FDIC,
550 17th Street NW., Washington, DC
20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
Public Inspection: All comments
received will be posted without change
to http://www.fdic.gov/regulations/laws/
federal/propose/html including any
personal information provided.
Comments may be inspected at the FDIC
Public Information Center, Room 100,
801 17th Street NW., Washington, DC,
between 9 a.m. and 4:30 p.m. on
business days.
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Proposed Information Collection
Title of Information Collection:
Regulatory Capital Rules (Part 3):
Advanced Approaches Risk-based
Capital Rules (Basel III, Part 3).
Frequency of Response: Quarterly and
annually.
Affected Public:
OCC: National banks and federally
chartered savings associations.
Board: State member banks (SMBs),
bank holding companies (BHCs), and
savings and loan holding companies
(SLHCs).
FDIC: Insured state nonmember
banks, certain subsidiaries of these
entities, and state chartered savings
associations.
Estimated Burden: The burden
estimates below exclude any regulatory
reporting burden associated with
changes to the Consolidated Reports of
Income and Condition for banks (FFIEC
031 and FFIEC 041; OMB Nos. 7100–
0036, 3064–0052, 1557–0081),
Advanced Capital Adequacy Framework
Regulatory Reporting Requirements
(FFIEC 101; OMB Nos. 7100–0319,
3064–0159, 1557–0239), the Financial
Statements for Bank Holding Companies
(FR Y–9; OMB No. 7100–0128), and the
Capital Assessments and Stress Testing
information collection (FR Y–14A/Q/M;
OMB No. 7100–0341). The agencies are
still considering whether to revise these
information collections or to implement
a new information collection for the
regulatory reporting requirements. In
either case, a separate notice would be
published for comment on the
regulatory reporting requirements.
OCC
Estimated Number of Respondents:
45.
Estimated Burden per Respondent:
One-time recordkeeping, 460 hours;
ongoing recordkeeping, 176 hours; onetime disclosures, 280 hours; ongoing
disclosures, 140 hours.
Total Estimated Annual Burden:
47,520 hours.
Board
Estimated Number of Respondents:
SMBs, 4; BHCs, 20; SLHCs, 13.
Estimated Burden per Respondent:
One-time recordkeeping, 460 hours;
ongoing recordkeeping, 176 hours; onetime disclosures, 280 hours; ongoing
disclosures, 140 hours.
Total Estimated Annual Burden:
39,072 hours.
FDIC
Estimated Number of Respondents: 8.
Estimated Burden per Respondent:
One-time recordkeeping, 460 hours;
ongoing recordkeeping, 176 hours; one-
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time disclosures, 280 hours; ongoing
disclosures, 140 hours.
Total Estimated Annual Burden:
8,448 hours.
Abstract
The PRA burden associated with
reporting, recordkeeping, and disclosure
requirements of Subpart E that are
found in proposed sections ll.121,
ll.122, ll.123, ll.124,
ll.132(b)(2)(iii), ll.132(b)(3),
ll.132 (d)(1), ll.132(d)(1)(iii),
ll.141(b)(3), ll.142(h)(2),
ll.152(c)(2), ll.173 (tables: 11.1,
11.2, 11.3, 11.6, 11.7, 11.8, 11.10, and
11.11) are currently accounted for under
the Agencies’ existing information
collections (ICs).
The PRA burden associated with
recordkeeping and disclosure
requirements found in proposed
sections ll.132(b)(2)(iii)(A),
ll.132(d)(2)(iv), ll.132(d)(3)(vi),
ll.132(d)(3)(viii), ll.132(d)(3)(ix),
ll.132(d)(3)(x), ll.132(d)(3)(xi),
ll.141(c)(2)(i), ll.141(c)(2)(ii),
ll.173 (tables: 11.4, 11.5, 11.9, and
11.12) would revise the Agencies’
existing ICs and are described below.
Section-by-Section Analysis
Recordkeeping Requirements
Under proposed section
ll.132(b)(2)(iii)(A), counterparty
credit risk of repo-style transactions,
eligible margin loans, and OTC
derivative contracts, Own internal
estimates for haircuts. With the prior
written approval of the [AGENCY], a
[BANK] may calculate haircuts (Hs and
Hfx) using its own internal estimates of
the volatilities of market prices and
foreign exchange rates. To receive
[AGENCY] approval to use its own
internal estimates, a [BANK] must
satisfy the minimum quantitative
standards outlined in this section. The
agencies estimate that respondents
would take on average 80 hours (two
business weeks) to reprogram and
update systems with the requirements
outlined in this section. In addition, the
agencies estimate that, on a continuing
basis, respondents would take on
average 16 hours annually to maintain
their internal systems.
Under proposed section
ll.132(d)(2)(iv), counterparty credit
risk of repo-style transactions, eligible
margin loans, and OTC derivative
contracts, Risk-weighted assets using
IMM—Under the IMM, a [BANK] uses
an internal model to estimate the
expected exposure (EE) for a netting set
and then calculates EAD based on that
EE. A [BANK] must calculate two EEs
and two EADs (one stressed and one
unstressed) for each netting as outlined
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in this section. The agencies estimate
that respondents would take on average
80 hours (two business weeks) to update
their current model with the
requirements outlined in this section. In
addition, the agencies estimate that, on
a continuing basis, respondents would
take on average 40 hours annually to
maintain their internal model.
Under proposed section
ll.132(d)(3)(vi), counterparty credit
risk of repo-style transactions, eligible
margin loans, and OTC derivative
contracts. To obtain [AGENCY] approval
to calculate the distributions of
exposures upon which the EAD
calculation is based, the [BANK] must
demonstrate to the satisfaction of the
[AGENCY] that it has been using for at
least one year an internal model that
broadly meets the minimum standards,
with which the [BANK] must maintain
compliance. The [BANK] must have
procedures to identify, monitor, and
control wrong-way risk throughout the
life of an exposure. The procedures
must include stress testing and scenario
analysis. The agencies estimate that
respondents would take on average 80
hours (two business weeks) to
implement a model with the
requirements outlined in this section.
Under proposed section
ll.132(d)(3)(viii), counterparty credit
risk of repo-style transactions, eligible
margin loans, and OTC derivative
contracts. When estimating model
parameters based on a stress period, the
[BANK] must use at least three years of
historical data that include a period of
stress to the credit default spreads of the
[BANK]’s counterparties. The [BANK]
must review the data set and update the
data as necessary, particularly for any
material changes in its counterparties.
The [BANK] must demonstrate at least
quarterly that the stress period
coincides with increased CDS or other
credit spreads of the [BANK]’s
counterparties. The [BANK] must have
procedures to evaluate the effectiveness
of its stress calibration that include a
process for using benchmark portfolios
that are vulnerable to the same risk
factors as the [BANK]’s portfolio. The
[AGENCY] may require the [BANK] to
modify its stress calibration to better
reflect actual historic losses of the
portfolio. The agencies estimate that
respondents would take on average 80
hours (two business weeks) to
implement procedures with the
requirements outlined in this section.
Under proposed section
ll.132(d)(3)(ix), counterparty credit
risk of repo-style transactions, eligible
margin loans, and OTC derivative
contracts. A [BANK] must subject its
internal model to an initial validation
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and annual model review process. The
model review should consider whether
the inputs and risk factors, as well as the
model outputs, are appropriate. As part
of the model review process, the
[BANK] must have a backtesting
program for its model that includes a
process by which unacceptable model
performance will be determined and
remedied. The agencies estimate that
respondents would take on average 40
hours (one business week) to implement
a model with the requirements outlined
in this section. In addition, the agencies
estimate that, on a continuing basis,
respondents would take on average 40
hours annually to maintain their
internal model.
Under proposed section
ll.132(d)(3)(x), counterparty credit
risk of repo-style transactions, eligible
margin loans, and OTC derivative
contracts. A [BANK] must have policies
for the measurement, management and
control of collateral and margin
amounts. The agencies estimate that
respondents would take on average 20
hours to implement policies with the
requirements outlined in this section.
Under proposed section
ll.132(d)(3)(xi), counterparty credit
risk of repo-style transactions, eligible
margin loans, and OTC derivative
contracts. A [BANK] must have a
comprehensive stress testing program
that captures all credit exposures to
counterparties, and incorporates stress
testing of principal market risk factors
and creditworthiness of counterparties.
The agencies estimate that respondents
would take on average 40 hours (one
business week) to implement a program
with the requirements outlined in this
section. In addition, the agencies
estimate that, on a continuing basis,
respondents would take on average 40
hours annually to maintain their
program.
Under proposed sections
ll.141(c)(2)(i) and (ii), operational
criteria for recognizing the transfer of
risk. A [BANK] must demonstrate its
comprehensive understanding of a
securitization exposure under section
141(c)(1), for each securitization
exposure by conducting an analysis of
the risk characteristics of a
securitization exposure prior to
acquiring the exposure and document
such analysis within three business
days after acquiring the exposure. On an
on-going basis (no less frequently than
quarterly), evaluate, review, and update
as appropriate the analysis required
under this section for each
securitization exposure. The agencies
estimate that respondents would take on
average 40 hours (one business week) to
implement a program with the
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requirements outlined in this section.
The agencies estimate that, on a
continuing basis, respondents would
take on average 10 hours quarterly to
evaluate, review, and update the
program requirements.
Disclosure Requirements
Under proposed section ll.173,
disclosures by banks that are advanced
approaches banks that have successfully
completed parallel run. A [BANK] that
is an advanced approaches bank must
make the disclosures described in
Tables 11.1 through 11.12. The [BANK]
must make these disclosures publicly
available for each of the last three years
(that is, twelve quarters) or such shorter
period beginning on the effective date of
this subpart E.
Under proposed table 11.4—Capital
Conservation and Countercyclical
Buffers. The [BANK] must comply with
the qualitative and quantitative public
disclosures outlined in this table. The
agencies estimate that respondents
would take on average 80 hours (two
business weeks) to comply with the
disclosure requirements outlined in this
table. The agencies estimate that, on a
continuing basis, respondents would
take on average 40 hours annually
comply with the disclosure
requirements outlined in this table.
Under proposed table 11.5—Credit
Risk: General Disclosures. The [BANK]
must comply with the qualitative and
quantitative public disclosures outlined
in this table. The agencies estimate that
respondents would take on average 80
hours (two business weeks) to comply
with the disclosure requirements
outlined in this table. The agencies
estimate that, on a continuing basis,
respondents would take on average 40
hours annually to comply with the
disclosure requirements outlined in this
table.
Under proposed table 11.9—
Securitization. The [BANK] must
comply with the qualitative and
quantitative public disclosures outlined
in this table. The agencies estimate that
respondents would take on average 60
hours to comply with the disclosure
requirements outlined in this table. The
agencies estimate that, on a continuing
basis, respondents would take on
average 30 hours annually comply with
the disclosure requirements outlined in
this table.
Under proposed Table 11.12—Interest
Rate Risk for Non-trading Activities.
The [BANK] must comply with the
qualitative and quantitative public
disclosures outlined in this table. The
agencies estimate that respondents
would take on average 60 hours to
comply with the disclosure
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requirements outlined in this table. The
agencies estimate that, on a continuing
basis, respondents would take on
average 30 hours annually comply with
the disclosure requirements outlined in
this table.
Proposed Information Collection
Title of Information Collection:
Regulatory Capital Rules (Part 3):
Market Risk Capital Rule (Basel III, Part
3).
Frequency of Response: Quarterly and
annually.
Affected Public:
OCC: National banks and federally
chartered savings associations.
Board: Savings associations and
saving and loan holding companies.
FDIC: Insured state nonmember
banks, state savings associations, and
certain subsidiaries of these entities.
Estimated Burden:
OCC
Estimated Number of Respondents:
45.
Estimated Burden per Respondent:
1,964 hours.
Total Estimated Annual Burden:
99,180 hours.
Board
Estimated Number of Respondents:
30.
Estimated Burden per Respondent:
2,204 hours.
Total Estimated Annual Burden:
66,120 hours.
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FDIC
Estimated Number of Respondents: 2.
Estimated Burden per Respondent:
1,964 hours.
Total Estimated Annual Burden:
3,928 hours.
Abstract:
The PRA burden associated with
reporting, recordkeeping, and disclosure
requirements of Subpart F that are
found in proposed sections ll.203,
ll.204, ll.205, ll.206, ll.207,
ll.208, ll.209, ll.210, and
ll.212. They would enhance risk
sensitivity and introduce requirements
for public disclosure of certain
qualitative and quantitative information
about a savings association’s or a
savings and loan holding company’s
market risk. The collection of
information is necessary to ensure
capital adequacy according to the level
of market risk.
Section-by-Section Analysis
Section
lllowbarm;lllowbarm;.203 sets
forth the requirements for applying the
market risk framework. Section
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ll.203(a)(1) requires clearly defined
policies and procedures for determining
which trading assets and trading
liabilities are trading positions, which of
its trading positions are correlation
trading positions, and specifies what
must be taken into account. Section
ll.203(a)(2) requires a clearly defined
trading and hedging strategy for trading
positions approved by senior
management and specifies what each
strategy must articulate. Section
ll.203(b)(1) requires clearly defined
policies and procedures for actively
managing all covered positions and
specifies the minimum that they must
require. Sections ll.203(c)(4) through
ll.203(c)(10) require the annual
review of internal models and include
certain requirements that the models
must meet. Section ll.203(d)(4)
requires an annual report to the board
of directors on the effectiveness of
controls supporting market risk
measurement systems.
Section ll.204(b) requires quarterly
backtesting. Section ll.205(a)(5)
requires institutions to demonstrate to
the agencies the appropriateness of
proxies used to capture risks within
value-at- risk models. Section
ll.205(c) requires institutions to
retain value-at-risk and profit and loss
information on sub-portfolios for two
years. Section ll.206(b)(3) requires
policies and procedures for stressed
value-at-risk models and prior approvals
on determining periods of significant
financial stress.
Section ll.207(b)(1) specifies what
internal models for specific risk must
include and address. Section 208(a)
requires prior written approval for
incremental risk. Section ll.209(a)
requires prior approval for
comprehensive risk models. Section
ll.209(c)(2) requires retaining and
making available the results of
supervisory stress testing on a quarterly
basis. Section ll.210(f) requires
documentation quarterly for analysis of
risk characteristics of each
securitization position it holds. Section
ll.212 requires quarterly quantitative
disclosures, annual qualitative
disclosures, and a formal disclosure
policy approved by the board of
directors that addresses the bank’s
approach for determining the market
risk disclosures it makes.
VII. Plain Language
Section 722 of the Gramm-LeachBliley Act 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 proposed rule in
a simple and straightforward manner,
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and invite comment on the use of plain
language.
VIII. OCC Unfunded Mandates Reform
Act of 1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
(2 U.S.C. 1532 et seq.) requires that an
agency prepare a written statement
before promulgating a rule that 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
(adjusted annually for inflation) in any
one year. If a written statement is
required, the UMRA (2 U.S.C. 1535) also
requires an agency to identify and
consider a reasonable number of
regulatory alternatives before
promulgating a rule and from those
alternatives, either select the least
costly, most cost-effective or least
burdensome alternative that achieves
the objectives of the rule, or provide a
statement with the rule explaining why
such an option was not chosen.
This NPR would incorporate revisions
to the Basel Committee’s capital
framework into the banking agencies’
advanced approaches risk-based capital
rules and remove references to credit
ratings consistent with section 939A of
the Dodd-Frank Act. This NPR would
modify various elements of the
advanced approached risk-based capital
rules regarding the determination of
risk-weighted assets. These changes
would (1) Modify treatment of
counterparty credit risk, (2) remove
references to credit ratings, (3) modify
the treatment of securitization
exposures, and (4) modify the treatment
of exposures subject to deduction from
capital. The NPR also would enhance
disclosure requirements, especially with
regard to securitizations, and would
amend the advanced approaches so that
capital requirements using the internal
models methodology take into
consideration stress in calibration data,
stress testing, initial validation,
collateral management, and annual
model review. The NPR rule also would
require national banks and federal
savings associations subject to the
advanced approaches risk-based capital
rules to identify, monitor, and control
wrong-way risk.
Finally, the NPR would expand the
scope of the agencies’ market risk
capital rule to savings associations that
meet certain thresholds.
To estimate the impact of this NPR on
national banks and federal savings
associations, the OCC estimated the
amount of capital banks will need to
raise to meet the new requirements
relative to the amount of capital they
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currently hold, as well as the
compliance costs associated with
establishing the infrastructure to
determine correct risk weights using the
revised methods for calculating riskweighted assets and the compliance
costs associated with new disclosure
requirements. The OCC has determined
that its proposed rule will not result in
expenditures by State, local, and Tribal
governments, or by the private sector, of
$100 million or more. Accordingly, the
UMRA does not require that a written
statement accompany this NPR.
Text of the Proposed Common Rule [All
Agencies]
The text of the proposed common rule
appears below:
PART ll CAPITAL ADEQUACY OF
[BANK]S
Subpart E—Risk-Weighted Assets—Internal
Ratings-Based and Advanced Measurement
Approaches
Sec.
ll.100 Purpose, applicability, and
principle of conservatism.
ll.101 Definitions.
QUALIFICATION
ll.121 Qualification process.
ll.122 Qualification requirements.
ll.123 Ongoing qualification.
ll.124 Merger and acquisition
transitional arrangements.
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RISK-WEIGHTED ASSETS FOR GENERAL
CREDIT RISK
ll.131 Mechanics for calculating total
wholesale and retail risk-weighted
assets.
ll.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
ll.133 Cleared transactions.
ll.134 Guarantees and credit derivatives:
PD substitution and LGD adjustment
approaches.
ll.135 Guarantees and credit derivatives:
Double default treatment.
ll.136 Unsettled transactions.
RISK-WEIGHTED ASSETS FOR
SECURITIZATION EXPOSURES
ll.141 Operational criteria for
recognizing the transfer of risk.
ll.142 Risk-based capital requirement for
securitization exposures.
ll.143 Supervisory formula approach
(SFA).
ll.144 Simplified supervisory formula
approach (SSFA).
ll.145 Recognition of credit risk
mitigants for securitization exposures.
RISK-WEIGHTED ASSETS FOR EQUITY
EXPOSURES
ll.151 Introduction and exposure
measurement.
ll.152 Simple risk weight approach
(SRWA).
ll.153 Internal models approach (IMA).
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ll.154 Equity exposures to investment
funds.
ll.155 Equity derivative contracts.
RISK-WEIGHTED ASSETS FOR
OPERATIONAL RISK
ll.161 Qualification requirements for
incorporation of operational risk
mitigants.
ll.162 Mechanics of risk-weighted asset
calculation.
DISCLOSURES
ll.171 Purpose and scope.
ll.172 Disclosure requirements.
ll.173 Disclosures by certain advanced
approaches [BANKS].
Subpart F—Risk-weighted Assets—Market
Risk
ll.201 Purpose, applicability, and
reservation of authority.
ll.202 Definitions.
ll.203 Requirements for application of
this subpart F.
ll.204 Measure for market risk.
ll.205 VaR-based measure.
ll.206 Stressed VaR-based measure.
ll.207 Specific risk.
ll.208 Incremental risk.
ll.209 Comprehensive risk.
ll.210 Standardized measurement
method for specific risk.
ll.211 Simplified supervisory formula
approach (SSFA).
ll.212 Market risk disclosures.
Subpart E—Risk Weighted Assets—
Internal Ratings-Based and Advanced
Measurement Approaches
§ ll.100 Purpose, applicability, and
principle of conservatism.
(a) Purpose. This subpart E
establishes:
(1) Minimum qualifying criteria for
[BANK]s using [BANK]-specific internal
risk measurement and management
processes for calculating risk-based
capital requirements; and
(2) Methodologies for such [BANK]s
to calculate their total risk-weighted
assets.
(b) Applicability. (1) This subpart
applies to a [BANK] that:
(i) Has consolidated total assets, as
reported on the most recent year-end
[Regulatory Reports] equal to $250
billion or more;
(ii) Has consolidated total on-balance
sheet foreign exposure at the most
recent year-end equal to $10 billion or
more (where total on-balance sheet
foreign exposure equals total crossborder claims less claims with a head
office or guarantor located in another
country plus redistributed guaranteed
amounts to the country of head office or
guarantor plus local country claims on
local residents plus revaluation gains on
foreign exchange and derivative
products, calculated in accordance with
the Federal Financial Institutions
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53001
Examination Council (FFIEC) 009
Country Exposure Report);
(iii) Is a subsidiary of a depository
institution that uses the advanced
approaches pursuant to subpart E of 12
CFR part 3 (OCC), 12 CFR part 217
(Board), or 12 CFR part 325 (FDIC) to
calculate its total risk-weighted assets;
(iv) Is a subsidiary of a bank holding
company or savings and loan holding
company that uses the advanced
approaches pursuant to 12 CFR part 217
to calculate its total risk-weighted
assets; or
(v) Elects to use this subpart to
calculate its total risk-weighted assets.
(2) A bank that is subject to this
subpart shall remain subject to this
subpart unless the [AGENCY]
determines in writing that application of
this subpart is not appropriate in light
of the [BANK]’s asset size, level of
complexity, risk profile, or scope of
operations. In making a determination
under this paragraph, the [AGENCY]
will apply notice and response
procedures in the same manner and to
the same extent as the notice and
response procedures in 12 CFR 3.12
(OCC), 12 CFR 263.202 (Board), and 12
CFR 325.6(c) (FDIC).
(3) A market risk [BANK] must
exclude from its calculation of riskweighted assets under this subpart the
risk-weighted asset amounts of all
covered positions, as defined in subpart
F of this part (except foreign exchange
positions that are not trading positions,
over-the-counter derivative positions,
cleared transactions, and unsettled
transactions).
(c) Principle of Conservatism.
Notwithstanding the requirements of
this subpart, a [BANK] may choose not
to apply a provision of this subpart to
one or more exposures provided that:
(1) The [BANK] can demonstrate on
an ongoing basis to the satisfaction of
the [AGENCY] that not applying the
provision would, in all circumstances,
unambiguously generate a risk-based
capital requirement for each such
exposure greater than that which would
otherwise be required under this
subpart;
(2) The [BANK] appropriately
manages the risk of each such exposure;
(3) The [BANK] notifies the
[AGENCY] in writing prior to applying
this principle to each such exposure;
and
(4) The exposures to which the
[BANK] applies this principle are not, in
the aggregate, material to the [BANK].
§ ll.
101 Definitions.
(a) Terms set forth in § ll.2 and
used in this subpart have the definitions
assigned thereto in § ll.2.
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(b) For the purposes of this subpart,
the following terms are defined as
follows:
Advanced internal ratings-based (IRB)
systems means an advanced approaches
[BANK]’s internal risk rating and
segmentation system; risk parameter
quantification system; data management
and maintenance system; and control,
oversight, and validation system for
credit risk of wholesale and retail
exposures.
Advanced systems means an
advanced approaches [BANK]’s
advanced IRB systems, operational risk
management processes, operational risk
data and assessment systems,
operational risk quantification systems,
and, to the extent used by the [BANK],
the internal models methodology,
advanced CVA approach, double default
excessive correlation detection process,
and internal models approach (IMA) for
equity exposures.
Backtesting means the comparison of
a [BANK]’s internal estimates with
actual outcomes during a sample period
not used in model development. In this
context, backtesting is one form of outof-sample testing.
Benchmarking means the comparison
of a [BANK]’s internal estimates with
relevant internal and external data or
with estimates based on other
estimation techniques.
Bond option contract means a bond
option, bond future, or any other
instrument linked to a bond that gives
rise to similar counterparty credit risk.
Business environment and internal
control factors means the indicators of
a [BANK]’s operational risk profile that
reflect a current and forward-looking
assessment of the [BANK]’s underlying
business risk factors and internal
control environment.
Credit default swap (CDS) means a
financial contract executed under
standard industry documentation that
allows one party (the protection
purchaser) to transfer the credit risk of
one or more exposures (reference
exposure(s)) to another party (the
protection provider) for a certain period
of time.
Credit valuation adjustment (CVA)
means the fair value adjustment to
reflect counterparty credit risk in
valuation of an OTC derivative contract.
Default—For the purposes of
calculating capital requirements under
this subpart:
(1) Retail. (i) A retail exposure of a
[BANK] is in default if:
(A) The exposure is 180 days past
due, in the case of a residential
mortgage exposure or revolving
exposure;
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(B) The exposure is 120 days past due,
in the case of retail exposures that are
not residential mortgage exposures or
revolving exposures; or
(C) The [BANK] has taken a full or
partial charge-off, write-down of
principal, or material negative fair value
adjustment of principal on the exposure
for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i)
of this definition, for a retail exposure
held by a non-U.S. subsidiary of the
[BANK] that is subject to an internal
ratings-based approach to capital
adequacy consistent with the Basel
Committee on Banking Supervision’s
‘‘International Convergence of Capital
Measurement and Capital Standards: A
Revised Framework’’ in a non-U.S.
jurisdiction, the [BANK] may elect to
use the definition of default that is used
in that jurisdiction, provided that the
[BANK] has obtained prior approval
from the [AGENCY] to use the definition
of default in that jurisdiction.
(iii) A retail exposure in default
remains in default until the [BANK] has
reasonable assurance of repayment and
performance for all contractual
principal and interest payments on the
exposure.
(2) Wholesale. (i) A [BANK]’s
wholesale obligor is in default if:
(A) The [BANK] determines that the
obligor is unlikely to pay its credit
obligations to the [BANK] in full,
without recourse by the [BANK] to
actions such as realizing collateral (if
held); or
(B) The obligor is past due more than
90 days on any material credit
obligation(s) to the [BANK].1
(ii) An obligor in default remains in
default until the [BANK] has reasonable
assurance of repayment and
performance for all contractual
principal and interest payments on all
exposures of the [BANK] to the obligor
(other than exposures that have been
fully written-down or charged-off).
Dependence means a measure of the
association among operational losses
across and within units of measure.
Economic downturn conditions
means, with respect to an exposure held
by the [BANK], those conditions in
which the aggregate default rates for that
exposure’s wholesale or retail exposure
subcategory (or subdivision of such
subcategory selected by the [BANK]) in
the exposure’s national jurisdiction (or
subdivision of such jurisdiction selected
by the [BANK]) are significantly higher
than average.
Effective maturity (M) of a wholesale
exposure means:
1 Overdrafts are past due once the obligor has
breached an advised limit or been advised of a limit
smaller than the current outstanding balance.
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(1) For wholesale exposures other
than repo-style transactions, eligible
margin loans, and OTC derivative
contracts described in paragraph (2) or
(3) of this definition:
(i) The weighted-average remaining
maturity (measured in years, whole or
fractional) of the expected contractual
cash flows from the exposure, using the
undiscounted amounts of the cash flows
as weights; or
(ii) The nominal remaining maturity
(measured in years, whole or fractional)
of the exposure.
(2) For repo-style transactions, eligible
margin loans, and OTC derivative
contracts subject to a qualifying master
netting agreement for which the [BANK]
does not apply the internal models
approach in section 132(d), the
weighted-average remaining maturity
(measured in years, whole or fractional)
of the individual transactions subject to
the qualifying master netting agreement,
with the weight of each individual
transaction set equal to the notional
amount of the transaction.
(3) For repo-style transactions, eligible
margin loans, and OTC derivative
contracts for which the [BANK] applies
the internal models approach in
§ ll.132(d), the value determined in
§ ll.132(d)(4).
Effective notional amount means, for
an eligible guarantee or eligible credit
derivative, the lesser of the contractual
notional amount of the credit risk
mitigant and the EAD of the hedged
exposure, multiplied by the percentage
coverage of the credit risk mitigant.
Eligible double default guarantor,
with respect to a guarantee or credit
derivative obtained by a [BANK],
means:
(1) U.S.-based entities. A depository
institution, a bank holding company, a
savings and loan holding company, or a
securities broker or dealer registered
with the SEC under the Securities
Exchange Act, if at the time the
guarantee is issued or anytime
thereafter, has issued and outstanding
an unsecured debt security without
credit enhancement that is investment
grade.
(2) Non-U.S.-based entities. A foreign
bank, or a non-U.S.-based securities firm
if the [BANK] demonstrates that the
guarantor is subject to consolidated
supervision and regulation comparable
to that imposed on U.S. depository
institutions, or securities broker-dealers)
if at the time the guarantee is issued or
anytime thereafter, has issued and
outstanding an unsecured debt security
without credit enhancement that is
investment grade.
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Eligible operational risk offsets means
amounts, not to exceed expected
operational loss, that:
(1) Are generated by internal business
practices to absorb highly predictable
and reasonably stable operational losses,
including reserves calculated consistent
with GAAP; and
(2) Are available to cover expected
operational losses with a high degree of
certainty over a one-year horizon.
Eligible purchased wholesale
exposure means a purchased wholesale
exposure that:
(1) The [BANK] or securitization SPE
purchased from an unaffiliated seller
and did not directly or indirectly
originate;
(2) Was generated on an arm’s-length
basis between the seller and the obligor
(intercompany accounts receivable and
receivables subject to contra-accounts
between firms that buy and sell to each
other do not satisfy this criterion);
(3) Provides the [BANK] or
securitization SPE with a claim on all
proceeds from the exposure or a pro rata
interest in the proceeds from the
exposure;
(4) Has an M of less than one year;
and
(5) When consolidated by obligor,
does not represent a concentrated
exposure relative to the portfolio of
purchased wholesale exposures.
Expected exposure (EE) means the
expected value of the probability
distribution of non-negative credit risk
exposures to a counterparty at any
specified future date before the maturity
date of the longest term transaction in
the netting set. Any negative market
values in the probability distribution of
market values to a counterparty at a
specified future date are set to zero to
convert the probability distribution of
market values to the probability
distribution of credit risk exposures.
Expected operational loss (EOL)
means the expected value of the
distribution of potential aggregate
operational losses, as generated by the
[BANK]’s operational risk quantification
system using a one-year horizon.
Expected positive exposure (EPE)
means the weighted average over time of
expected (non-negative) exposures to a
counterparty where the weights are the
proportion of the time interval that an
individual expected exposure
represents. When calculating risk-based
capital requirements, the average is
taken over a one-year horizon.
Exposure at default (EAD) means:
(1) For the on-balance sheet
component of a wholesale exposure or
segment of retail exposures (other than
an OTC derivative contract, a repo-style
transaction or eligible margin loan for
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which the [BANK] determines EAD
under § ll.132, a cleared transaction,
or default fund contribution), EAD
means the [BANK]’s carrying value
(including net accrued but unpaid
interest and fees) for the exposure or
segment less any allocated transfer risk
reserve for the exposure or segment.
(2) For the off-balance sheet
component of a wholesale exposure or
segment of retail exposures (other than
an OTC derivative contract, a repo-style
transaction or eligible margin loan for
which the [BANK] determines EAD
under § ll.132, cleared transaction, or
default fund contribution) in the form of
a loan commitment, line of credit, traderelated letter of credit, or transactionrelated contingency, EAD means the
[BANK]’s best estimate of net additions
to the outstanding amount owed the
[BANK], including estimated future
additional draws of principal and
accrued but unpaid interest and fees,
that are likely to occur over a one-year
horizon assuming the wholesale
exposure or the retail exposures in the
segment were to go into default. This
estimate of net additions must reflect
what would be expected during
economic downturn conditions. For the
purposes of this definition:
(i) Trade-related letters of credit are
short-term, self-liquidating instruments
that are used to finance the movement
of goods and are collateralized by the
underlying goods.
(ii) Transaction-related contingencies
relate to a particular transaction and
include, among other things,
performance bonds and performancebased letters of credit.
(3) For the off-balance sheet
component of a wholesale exposure or
segment of retail exposures (other than
an OTC derivative contract, a repo-style
transaction, or eligible margin loan for
which the [BANK] determines EAD
under § ll.132, cleared transaction, or
default fund contribution) in the form of
anything other than a loan commitment,
line of credit, trade-related letter of
credit, or transaction-related
contingency, EAD means the notional
amount of the exposure or segment.
(4) EAD for OTC derivative contracts
is calculated as described in § ll.132.
A [BANK] also may determine EAD for
repo-style transactions and eligible
margin loans as described in § ll.132.
Exposure category means any of the
wholesale, retail, securitization, or
equity exposure categories.
External operational loss event data
means, with respect to a [BANK], gross
operational loss amounts, dates,
recoveries, and relevant causal
information for operational loss events
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occurring at organizations other than the
[BANK].
IMM exposure means a repo-style
transaction, eligible margin loan, or
OTC derivative for which a [BANK]
calculates its EAD using the internal
models methodology of § ll.132(d).
Internal operational loss event data
means, with respect to a [BANK], gross
operational loss amounts, dates,
recoveries, and relevant causal
information for operational loss events
occurring at the [BANK].
Loss given default (LGD) means:
(1) For a wholesale exposure, the
greatest of:
(i) Zero;
(ii) The [BANK]’s empirically based
best estimate of the long-run defaultweighted average economic loss, per
dollar of EAD, the [BANK] would expect
to incur if the obligor (or a typical
obligor in the loss severity grade
assigned by the [BANK] to the exposure)
were to default within a one-year
horizon over a mix of economic
conditions, including economic
downturn conditions; or
(iii) The [BANK]’s empirically based
best estimate of the economic loss, per
dollar of EAD, the [BANK] would expect
to incur if the obligor (or a typical
obligor in the loss severity grade
assigned by the [BANK] to the exposure)
were to default within a one-year
horizon during economic downturn
conditions.
(2) For a segment of retail exposures,
the greatest of:
(i) Zero;
(ii) The [BANK]’s empirically based
best estimate of the long-run defaultweighted average economic loss, per
dollar of EAD, the [BANK] would expect
to incur if the exposures in the segment
were to default within a one-year
horizon over a mix of economic
conditions, including economic
downturn conditions; or
(iii) The [BANK]’s empirically based
best estimate of the economic loss, per
dollar of EAD, the [BANK] would expect
to incur if the exposures in the segment
were to default within a one-year
horizon during economic downturn
conditions.
(3) The economic loss on an exposure
in the event of default is all material
credit-related losses on the exposure
(including accrued but unpaid interest
or fees, losses on the sale of collateral,
direct workout costs, and an appropriate
allocation of indirect workout costs).
Where positive or negative cash flows
on a wholesale exposure to a defaulted
obligor or a defaulted retail exposure
(including proceeds from the sale of
collateral, workout costs, additional
extensions of credit to facilitate
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repayment of the exposure, and drawdowns of unused credit lines) occur
after the date of default, the economic
loss must reflect the net present value
of cash flows as of the default date using
a discount rate appropriate to the risk of
the defaulted exposure.
Obligor means the legal entity or
natural person contractually obligated
on a wholesale exposure, except that a
[BANK] may treat the following
exposures as having separate obligors:
(1) Exposures to the same legal entity
or natural person denominated in
different currencies;
(2)(i) An income-producing real estate
exposure for which all or substantially
all of the repayment of the exposure is
reliant on the cash flows of the real
estate serving as collateral for the
exposure; the [BANK], in economic
substance, does not have recourse to the
borrower beyond the real estate
collateral; and no cross-default or crossacceleration clauses are in place other
than clauses obtained solely out of an
abundance of caution; and
(ii) Other credit exposures to the same
legal entity or natural person; and
(3)(i) A wholesale exposure
authorized under section 364 of the U.S.
Bankruptcy Code (11 U.S.C. 364) to a
legal entity or natural person who is a
debtor-in-possession for purposes of
Chapter 11 of the Bankruptcy Code; and
(ii) Other credit exposures to the same
legal entity or natural person.
Operational loss means a loss
(excluding insurance or tax effects)
resulting from an operational loss event.
Operational loss includes all expenses
associated with an operational loss
event except for opportunity costs,
forgone revenue, and costs related to
risk management and control
enhancements implemented to prevent
future operational losses.
Operational loss event means an event
that results in loss and is associated
with any of the following seven
operational loss event type categories:
(1) Internal fraud, which means the
operational loss event type category that
comprises operational losses resulting
from an act involving at least one
internal party of a type intended to
defraud, misappropriate property, or
circumvent regulations, the law, or
company policy excluding diversityand discrimination-type events.
(2) External fraud, which means the
operational loss event type category that
comprises operational losses resulting
from an act by a third party of a type
intended to defraud, misappropriate
property, or circumvent the law. Retail
credit card losses arising from noncontractual, third-party-initiated fraud
(for example, identity theft) are external
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fraud operational losses. All other thirdparty-initiated credit losses are to be
treated as credit risk losses.
(3) Employment practices and
workplace safety, which means the
operational loss event type category that
comprises operational losses resulting
from an act inconsistent with
employment, health, or safety laws or
agreements, payment of personal injury
claims, or payment arising from
diversity- and discrimination-type
events.
(4) Clients, products, and business
practices, which means the operational
loss event type category that comprises
operational losses resulting from the
nature or design of a product or from an
unintentional or negligent failure to
meet a professional obligation to
specific clients (including fiduciary and
suitability requirements).
(5) Damage to physical assets, which
means the operational loss event type
category that comprises operational
losses resulting from the loss of or
damage to physical assets from natural
disaster or other events.
(6) Business disruption and system
failures, which means the operational
loss event type category that comprises
operational losses resulting from
disruption of business or system
failures.
(7) Execution, delivery, and process
management, which means the
operational loss event type category that
comprises operational losses resulting
from failed transaction processing or
process management or losses arising
from relations with trade counterparties
and vendors.
Operational risk means the risk of loss
resulting from inadequate or failed
internal processes, people, and systems
or from external events (including legal
risk but excluding strategic and
reputational risk).
Operational risk exposure means the
99.9th percentile of the distribution of
potential aggregate operational losses, as
generated by the [BANK]’s operational
risk quantification system over a oneyear horizon (and not incorporating
eligible operational risk offsets or
qualifying operational risk mitigants).
Other retail exposure means an
exposure (other than a securitization
exposure, an equity exposure, a
residential mortgage exposure, a presold construction loan, a qualifying
revolving exposure, or the residual
value portion of a lease exposure) that
is managed as part of a segment of
exposures with homogeneous risk
characteristics, not on an individualexposure basis, and is either:
(1) An exposure to an individual for
non-business purposes; or
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(2) An exposure to an individual or
company for business purposes if the
[BANK]’s consolidated business credit
exposure to the individual or company
is $1 million or less.
Probability of default (PD) means:
(1) For a wholesale exposure to a nondefaulted obligor, the [BANK]’s
empirically based best estimate of the
long-run average one-year default rate
for the rating grade assigned by the
[BANK] to the obligor, capturing the
average default experience for obligors
in the rating grade over a mix of
economic conditions (including
economic downturn conditions)
sufficient to provide a reasonable
estimate of the average one-year default
rate over the economic cycle for the
rating grade.
(2) For a segment of non-defaulted
retail exposures, the [BANK]’s
empirically based best estimate of the
long-run average one-year default rate
for the exposures in the segment,
capturing the average default experience
for exposures in the segment over a mix
of economic conditions (including
economic downturn conditions)
sufficient to provide a reasonable
estimate of the average one-year default
rate over the economic cycle for the
segment.
(3) For a wholesale exposure to a
defaulted obligor or segment of
defaulted retail exposures, 100 percent.
Qualifying cross-product master
netting agreement means a qualifying
master netting agreement that provides
for termination and close-out netting
across multiple types of financial
transactions or qualifying master netting
agreements in the event of a
counterparty’s default, provided that:
(1) The underlying financial
transactions are OTC derivative
contracts, eligible margin loans, or repostyle transactions; and
(2) The [BANK] obtains a written legal
opinion verifying the validity and
enforceability of the agreement under
applicable law of the relevant
jurisdictions if the counterparty fails to
perform upon an event of default,
including upon receivership,
insolvency, liquidation, or similar
proceeding.
Qualifying revolving exposure (QRE)
means an exposure (other than a
securitization exposure or equity
exposure) to an individual that is
managed as part of a segment of
exposures with homogeneous risk
characteristics, not on an individualexposure basis, and:
(1) Is revolving (that is, the amount
outstanding fluctuates, determined
largely by the borrower’s decision to
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borrow and repay, up to a preestablished maximum amount);
(2) Is unsecured and unconditionally
cancelable by the [BANK] to the fullest
extent permitted by Federal law; and
(3) Has a maximum contractual
exposure amount (drawn plus undrawn)
of up to $100,000, or the [BANK]
consistently imposes in practice an
upper limit of $100,000.
Retail exposure means a residential
mortgage exposure, a qualifying
revolving exposure, or an other retail
exposure.
Retail exposure subcategory means
the residential mortgage exposure,
qualifying revolving exposure, or other
retail exposure subcategory.
Risk parameter means a variable used
in determining risk-based capital
requirements for wholesale and retail
exposures, specifically probability of
default (PD), loss given default (LGD),
exposure at default (EAD), or effective
maturity (M).
Scenario analysis means a systematic
process of obtaining expert opinions
from business managers and risk
management experts to derive reasoned
assessments of the likelihood and loss
impact of plausible high-severity
operational losses. Scenario analysis
may include the well-reasoned
evaluation and use of external
operational loss event data, adjusted as
appropriate to ensure relevance to a
[BANK]’s operational risk profile and
control structure.
Total wholesale and retail riskweighted assets means:
(1) The sum of:
(i) Risk-weighted assets for wholesale
exposures that are not IMM exposures,
cleared transactions, or default fund
contributions to non-defaulted obligors
and segments of non-defaulted retail
exposures;
(ii) Risk-weighted assets for wholesale
exposures to defaulted obligors and
segments of defaulted retail exposures;
(iii) Risk-weighted assets for assets
not defined by an exposure category;
(iv) Risk-weighted assets for nonmaterial portfolios of exposures;
(v) Risk-weighted assets for IMM
exposures (as determined in
§ ll.132(d));
(vi) Risk-weighted assets for cleared
transactions and risk-weighted assets for
default fund contributions (as
determined in § ll.133); and
(vii) Risk-weighted assets for
unsettled transactions (as determined in
§ ll.136); minus
(2) Any amounts deducted from
capital pursuant to § ll.22.
Unexpected operational loss (UOL)
means the difference between the
[BANK]’s operational risk exposure and
the [BANK]’s expected operational loss.
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Unit of measure means the level (for
example, organizational unit or
operational loss event type) at which the
[BANK]’s operational risk quantification
system generates a separate distribution
of potential operational losses.
Wholesale exposure means a credit
exposure to a company, natural person,
sovereign, or governmental entity (other
than a securitization exposure, retail
exposure, or equity exposure).
Wholesale exposure subcategory
means the HVCRE or non-HVCRE
wholesale exposure subcategory.
QUALIFICATION
§ll.121
Qualification process.
(a) Timing. (1) A [BANK] that is
described in § ll.100(b)(1)(i) through
(iv) must adopt a written
implementation plan no later than six
months after the date the [BANK] meets
a criterion in that section. The
implementation plan must incorporate
an explicit start date no later than 36
months after the date the [BANK] meets
at least one criterion under
§ ll.100(b)(1)(i) through (iv). The
[AGENCY] may extend the start date.
(2) A [BANK] that elects to be subject
to this appendix under
§ ll.100(b)(1)(v) must adopt a written
implementation plan.
(b) Implementation plan. (1) The
[BANK]’s implementation plan must
address in detail how the [BANK]
complies, or plans to comply, with the
qualification requirements in § ll.122.
The [BANK] also must maintain a
comprehensive and sound planning and
governance process to oversee the
implementation efforts described in the
plan. At a minimum, the plan must:
(i) Comprehensively address the
qualification requirements in § ll.122
for the [BANK] and each consolidated
subsidiary (U.S. and foreign-based) of
the [BANK] with respect to all portfolios
and exposures of the [BANK] and each
of its consolidated subsidiaries;
(ii) Justify and support any proposed
temporary or permanent exclusion of
business lines, portfolios, or exposures
from the application of the advanced
approaches in this subpart (which
business lines, portfolios, and exposures
must be, in the aggregate, immaterial to
the [BANK]);
(iii) Include the [BANK]’s selfassessment of:
(A) The [BANK]’s current status in
meeting the qualification requirements
in § ll.122; and
(B) The consistency of the [BANK]’s
current practices with the [AGENCY]’s
supervisory guidance on the
qualification requirements;
(iv) Based on the [BANK]’s selfassessment, identify and describe the
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areas in which the [BANK] proposes to
undertake additional work to comply
with the qualification requirements in
§ ll.122 or to improve the consistency
of the [BANK]’s current practices with
the [AGENCY]’s supervisory guidance
on the qualification requirements (gap
analysis);
(v) Describe what specific actions the
[BANK] will take to address the areas
identified in the gap analysis required
by paragraph (b)(1)(iv) of this section;
(vi) Identify objective, measurable
milestones, including delivery dates and
a date when the [BANK]’s
implementation of the methodologies
described in this subpart will be fully
operational;
(vii) Describe resources that have been
budgeted and are available to
implement the plan; and
(viii) Receive approval of the
[BANK]’s board of directors.
(2) The [BANK] must submit the
implementation plan, together with a
copy of the minutes of the board of
directors’ approval, to the [AGENCY] at
least 60 days before the [BANK]
proposes to begin its parallel run, unless
the [AGENCY] waives prior notice.
(c) Parallel run. Before determining its
risk-weighted assets under this subpart
and following adoption of the
implementation plan, the [BANK] must
conduct a satisfactory parallel run. A
satisfactory parallel run is a period of no
less than four consecutive calendar
quarters during which the [BANK]
complies with the qualification
requirements in § ll.122 to the
satisfaction of the [AGENCY]. During
the parallel run, the [BANK] must report
to the [AGENCY] on a calendar
quarterly basis its risk-based capital
ratios determined in accordance with
§ ll.10(b)(1) through (3) and
§ ll.(c)(1) through (3). During this
period, the [BANK]’s minimum riskbased capital ratios are determined as
set forth in subpart D of this part.
(d) Approval to calculate risk-based
capital requirements under this subpart.
The [AGENCY] will notify the [BANK]
of the date that the [BANK] must begin
to use this subpart for purposes of
§ ll.10 if the [AGENCY] determines
that:
(1) The [BANK] fully complies with
all the qualification requirements in
§ ll.122;
(2) The [BANK] has conducted a
satisfactory parallel run under
paragraph (c) of this section; and
(3) The [BANK] has an adequate
process to ensure ongoing compliance
with the qualification requirements in
§ ll.122.
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Qualification requirements.
(a) Process and systems requirements.
(1) A [BANK] must have a rigorous
process for assessing its overall capital
adequacy in relation to its risk profile
and a comprehensive strategy for
maintaining an appropriate level of
capital.
(2) The systems and processes used by
a [BANK] for risk-based capital
purposes under this subpart must be
consistent with the [BANK]’s internal
risk management processes and
management information reporting
systems.
(3) Each [BANK] must have an
appropriate infrastructure with risk
measurement and management
processes that meet the qualification
requirements of this section and are
appropriate given the [BANK]’s size and
level of complexity. Regardless of
whether the systems and models that
generate the risk parameters necessary
for calculating a [BANK]’s risk-based
capital requirements are located at any
affiliate of the [BANK], the [BANK]
itself must ensure that the risk
parameters and reference data used to
determine its risk-based capital
requirements are representative of its
own credit risk and operational risk
exposures.
(b) Risk rating and segmentation
systems for wholesale and retail
exposures. (1) A [BANK] must have an
internal risk rating and segmentation
system that accurately and reliably
differentiates among degrees of credit
risk for the [BANK]’s wholesale and
retail exposures.
(2) For wholesale exposures:
(i) A [BANK] must have an internal
risk rating system that accurately and
reliably assigns each obligor to a single
rating grade (reflecting the obligor’s
likelihood of default). A [BANK] may
elect, however, not to assign to a rating
grade an obligor to whom the [BANK]
extends credit based solely on the
financial strength of a guarantor,
provided that all of the [BANK]’s
exposures to the obligor are fully
covered by eligible guarantees, the
[BANK] applies the PD substitution
approach in § ll.134(c)(1) to all
exposures to that obligor, and the
[BANK] immediately assigns the obligor
to a rating grade if a guarantee can no
longer be recognized under this subpart.
The [BANK]’s wholesale obligor rating
system must have at least seven discrete
rating grades for non-defaulted obligors
and at least one rating grade for
defaulted obligors.
(ii) Unless the [BANK] has chosen to
directly assign LGD estimates to each
wholesale exposure, the [BANK] must
have an internal risk rating system that
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accurately and reliably assigns each
wholesale exposure to a loss severity
rating grade (reflecting the [BANK]’s
estimate of the LGD of the exposure). A
[BANK] employing loss severity rating
grades must have a sufficiently granular
loss severity grading system to avoid
grouping together exposures with
widely ranging LGDs.
(3) For retail exposures, a [BANK]
must have an internal system that
groups retail exposures into the
appropriate retail exposure subcategory,
groups the retail exposures in each retail
exposure subcategory into separate
segments with homogeneous risk
characteristics, and assigns accurate and
reliable PD and LGD estimates for each
segment on a consistent basis. The
[BANK]’s system must identify and
group in separate segments by
subcategories exposures identified in
§ ll.131(c)(2)(ii) and (iii).
(4) The [BANK]’s internal risk rating
policy for wholesale exposures must
describe the [BANK]’s rating philosophy
(that is, must describe how wholesale
obligor rating assignments are affected
by the [BANK]’s choice of the range of
economic, business, and industry
conditions that are considered in the
obligor rating process).
(5) The [BANK]’s internal risk rating
system for wholesale exposures must
provide for the review and update (as
appropriate) of each obligor rating and
(if applicable) each loss severity rating
whenever the [BANK] receives new
material information, but no less
frequently than annually. The [BANK]’s
retail exposure segmentation system
must provide for the review and update
(as appropriate) of assignments of retail
exposures to segments whenever the
[BANK] receives new material
information, but generally no less
frequently than quarterly.
(c) Quantification of risk parameters
for wholesale and retail exposures. (1)
The [BANK] must have a
comprehensive risk parameter
quantification process that produces
accurate, timely, and reliable estimates
of the risk parameters for the [BANK]’s
wholesale and retail exposures.
(2) Data used to estimate the risk
parameters must be relevant to the
[BANK]’s actual wholesale and retail
exposures, and of sufficient quality to
support the determination of risk-based
capital requirements for the exposures.
(3) The [BANK]’s risk parameter
quantification process must produce
appropriately conservative risk
parameter estimates where the [BANK]
has limited relevant data, and any
adjustments that are part of the
quantification process must not result in
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a pattern of bias toward lower risk
parameter estimates.
(4) The [BANK]’s risk parameter
estimation process should not rely on
the possibility of U.S. government
financial assistance, except for the
financial assistance that the U.S.
government has a legally binding
commitment to provide.
(5) Where the [BANK]’s
quantifications of LGD directly or
indirectly incorporate estimates of the
effectiveness of its credit risk
management practices in reducing its
exposure to troubled obligors prior to
default, the [BANK] must support such
estimates with empirical analysis
showing that the estimates are
consistent with its historical experience
in dealing with such exposures during
economic downturn conditions.
(6) PD estimates for wholesale
obligors and retail segments must be
based on at least five years of default
data. LGD estimates for wholesale
exposures must be based on at least
seven years of loss severity data, and
LGD estimates for retail segments must
be based on at least five years of loss
severity data. EAD estimates for
wholesale exposures must be based on
at least seven years of exposure amount
data, and EAD estimates for retail
segments must be based on at least five
years of exposure amount data.
(7) Default, loss severity, and
exposure amount data must include
periods of economic downturn
conditions, or the [BANK] must adjust
its estimates of risk parameters to
compensate for the lack of data from
periods of economic downturn
conditions.
(8) The [BANK]’s PD, LGD, and EAD
estimates must be based on the
definition of default in § ll.101.
(9) The [BANK] must review and
update (as appropriate) its risk
parameters and its risk parameter
quantification process at least annually.
(10) The [BANK] must, at least
annually, conduct a comprehensive
review and analysis of reference data to
determine relevance of reference data to
the [BANK]’s exposures, quality of
reference data to support PD, LGD, and
EAD estimates, and consistency of
reference data to the definition of
default in § ll.101.
(d) Counterparty credit risk model. A
[BANK] must obtain the prior written
approval of the [AGENCY] under
§ ll.132 to use the internal models
methodology for counterparty credit risk
and the advanced CVA approach for the
CVA capital requirement.
(e) Double default treatment. A
[BANK] must obtain the prior written
approval of the [AGENCY] under
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§ ll.135 to use the double default
treatment.
(f) Equity exposures model. A [BANK]
must obtain the prior written approval
of the [AGENCY] under § ll.153 to
use the internal models approach for
equity exposures.
(g) Operational risk. (1) Operational
risk management processes. A [BANK]
must:
(i) Have an operational risk
management function that:
(A) Is independent of business line
management; and
(B) Is responsible for designing,
implementing, and overseeing the
[BANK]’s operational risk data and
assessment systems, operational risk
quantification systems, and related
processes;
(ii) Have and document a process
(which must capture business
environment and internal control factors
affecting the [BANK]’s operational risk
profile) to identify, measure, monitor,
and control operational risk in [BANK]
products, activities, processes, and
systems; and
(iii) Report operational risk exposures,
operational loss events, and other
relevant operational risk information to
business unit management, senior
management, and the board of directors
(or a designated committee of the
board).
(2) Operational risk data and
assessment systems. A [BANK] must
have operational risk data and
assessment systems that capture
operational risks to which the [BANK]
is exposed. The [BANK]’s operational
risk data and assessment systems must:
(i) Be structured in a manner
consistent with the [BANK]’s current
business activities, risk profile,
technological processes, and risk
management processes; and
(ii) Include credible, transparent,
systematic, and verifiable processes that
incorporate the following elements on
an ongoing basis:
(A) Internal operational loss event
data. The [BANK] must have a
systematic process for capturing and
using internal operational loss event
data in its operational risk data and
assessment systems.
(1) The [BANK]’s operational risk data
and assessment systems must include a
historical observation period of at least
five years for internal operational loss
event data (or such shorter period
approved by the [AGENCY] to address
transitional situations, such as
integrating a new business line).
(2) The [BANK] must be able to map
its internal operational loss event data
into the seven operational loss event
type categories.
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(3) The [BANK] may refrain from
collecting internal operational loss
event data for individual operational
losses below established dollar
threshold amounts if the [BANK] can
demonstrate to the satisfaction of the
[AGENCY] that the thresholds are
reasonable, do not exclude important
internal operational loss event data, and
permit the [BANK] to capture
substantially all the dollar value of the
[BANK]’s operational losses.
(B) External operational loss event
data. The [BANK] must have a
systematic process for determining its
methodologies for incorporating
external operational loss event data into
its operational risk data and assessment
systems.
(C) Scenario analysis. The [BANK]
must have a systematic process for
determining its methodologies for
incorporating scenario analysis into its
operational risk data and assessment
systems.
(D) Business environment and
internal control factors. The [BANK]
must incorporate business environment
and internal control factors into its
operational risk data and assessment
systems. The [BANK] must also
periodically compare the results of its
prior business environment and internal
control factor assessments against its
actual operational losses incurred in the
intervening period.
(3) Operational risk quantification
systems. (i) The [BANK]’s operational
risk quantification systems:
(A) Must generate estimates of the
[BANK]’s operational risk exposure
using its operational risk data and
assessment systems;
(B) Must employ a unit of measure
that is appropriate for the [BANK]’s
range of business activities and the
variety of operational loss events to
which it is exposed, and that does not
combine business activities or
operational loss events with
demonstrably different risk profiles
within the same loss distribution;
(C) Must include a credible,
transparent, systematic, and verifiable
approach for weighting each of the four
elements, described in paragraph
(g)(2)(ii) of this section, that a [BANK]
is required to incorporate into its
operational risk data and assessment
systems;
(D) May use internal estimates of
dependence among operational losses
across and within units of measure if
the [BANK] can demonstrate to the
satisfaction of the [AGENCY] that its
process for estimating dependence is
sound, robust to a variety of scenarios,
and implemented with integrity, and
allows for uncertainty surrounding the
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estimates. If the [BANK] has not made
such a demonstration, it must sum
operational risk exposure estimates
across units of measure to calculate its
total operational risk exposure; and
(E) Must be reviewed and updated (as
appropriate) whenever the [BANK]
becomes aware of information that may
have a material effect on the [BANK]’s
estimate of operational risk exposure,
but the review and update must occur
no less frequently than annually.
(ii) With the prior written approval of
the [AGENCY], a [BANK] may generate
an estimate of its operational risk
exposure using an alternative approach
to that specified in paragraph (g)(3)(i) of
this section. A [BANK] proposing to use
such an alternative operational risk
quantification system must submit a
proposal to the [AGENCY]. In
determining whether to approve a
[BANK]’s proposal to use an alternative
operational risk quantification system,
the [AGENCY] will consider the
following principles:
(A) Use of the alternative operational
risk quantification system will be
allowed only on an exception basis,
considering the size, complexity, and
risk profile of the [BANK];
(B) The [BANK] must demonstrate
that its estimate of its operational risk
exposure generated under the
alternative operational risk
quantification system is appropriate and
can be supported empirically; and
(C) A [BANK] must not use an
allocation of operational risk capital
requirements that includes entities other
than depository institutions or the
benefits of diversification across
entities.
(h) Data management and
maintenance. (1) A [BANK] must have
data management and maintenance
systems that adequately support all
aspects of its advanced systems and the
timely and accurate reporting of riskbased capital requirements.
(2) A [BANK] must retain data using
an electronic format that allows timely
retrieval of data for analysis, validation,
reporting, and disclosure purposes.
(3) A [BANK] must retain sufficient
data elements related to key risk drivers
to permit adequate monitoring,
validation, and refinement of its
advanced systems.
(i) Control, oversight, and validation
mechanisms. (1) The [BANK]’s senior
management must ensure that all
components of the [BANK]’s advanced
systems function effectively and comply
with the qualification requirements in
this section.
(2) The [BANK]’s board of directors
(or a designated committee of the board)
must at least annually review the
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effectiveness of, and approve, the
[BANK]’s advanced systems.
(3) A [BANK] must have an effective
system of controls and oversight that:
(i) Ensures ongoing compliance with
the qualification requirements in this
section;
(ii) Maintains the integrity, reliability,
and accuracy of the [BANK]’s advanced
systems; and
(iii) Includes adequate governance
and project management processes.
(4) The [BANK] must validate, on an
ongoing basis, its advanced systems.
The [BANK]’s validation process must
be independent of the advanced
systems’ development, implementation,
and operation, or the validation process
must be subjected to an independent
review of its adequacy and
effectiveness. Validation must include:
(i) An evaluation of the conceptual
soundness of (including developmental
evidence supporting) the advanced
systems;
(ii) An ongoing monitoring process
that includes verification of processes
and benchmarking; and
(iii) An outcomes analysis process
that includes backtesting.
(5) The [BANK] must have an internal
audit function independent of businessline management that at least annually
assesses the effectiveness of the controls
supporting the [BANK]’s advanced
systems and reports its findings to the
[BANK]’s board of directors (or a
committee thereof).
(6) The [BANK] must periodically
stress test its advanced systems. The
stress testing must include a
consideration of how economic cycles,
especially downturns, affect risk-based
capital requirements (including
migration across rating grades and
segments and the credit risk mitigation
benefits of double default treatment).
(j) Documentation. The [BANK] must
adequately document all material
aspects of its advanced systems.
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§ ll.123
Ongoing qualification.
(a) Changes to advanced systems. A
[BANK] must meet all the qualification
requirements in § ll.122 on an
ongoing basis. A [BANK] must notify
the [AGENCY] when the [BANK] makes
any change to an advanced system that
would result in a material change in the
[BANK]’s advanced approaches total
risk-weighted asset amount for an
exposure type or when the [BANK]
makes any significant change to its
modeling assumptions.
(b) Failure to comply with
qualification requirements. (1) If the
[AGENCY] determines that a [BANK]
that uses this subpart and that has
conducted a satisfactory parallel run
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fails to comply with the qualification
requirements in § ll.122, the
[AGENCY] will notify the [BANK] in
writing of the [BANK]’s failure to
comply.
(2) The [BANK] must establish and
submit a plan satisfactory to the
[AGENCY] to return to compliance with
the qualification requirements.
(3) In addition, if the [AGENCY]
determines that the [BANK]’s advanced
approaches total risk-weighted assets
are not commensurate with the
[BANK]’s credit, market, operational, or
other risks, the [AGENCY] may require
such a [BANK] to calculate its advanced
approaches total risk-weighted assets
with any modifications provided by the
[AGENCY].
§ ll.124 Merger and acquisition
transitional arrangements.
(a) Mergers and acquisitions of
companies without advanced systems. If
a [BANK] merges with or acquires a
company that does not calculate its riskbased capital requirements using
advanced systems, the [BANK] may use
subpart D of this part to determine the
risk-weighted asset amounts for the
merged or acquired company’s
exposures for up to 24 months after the
calendar quarter during which the
merger or acquisition consummates. The
[AGENCY] may extend this transition
period for up to an additional 12
months. Within 90 days of
consummating the merger or
acquisition, the [BANK] must submit to
the [AGENCY] an implementation plan
for using its advanced systems for the
acquired company. During the period
when subpart D applies to the merged
or acquired company, any ALLL, net of
allocated transfer risk reserves
established pursuant to 12 U.S.C. 3904,
associated with the merged or acquired
company’s exposures may be included
in the acquiring [BANK]’s tier 2 capital
up to 1.25 percent of the acquired
company’s risk-weighted assets. All
general allowances of the merged or
acquired company must be excluded
from the [BANK]’s eligible credit
reserves. In addition, the risk-weighted
assets of the merged or acquired
company are not included in the
[BANK]’s credit-risk-weighted assets but
are included in total risk-weighted
assets. If a [BANK] relies on this
paragraph, the [BANK] must disclose
publicly the amounts of risk-weighted
assets and qualifying capital calculated
under this subpart for the acquiring
[BANK] and under subpart D of this part
for the acquired company.
(b) Mergers and acquisitions of
companies with advanced systems. (1) If
a [BANK] merges with or acquires a
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company that calculates its risk-based
capital requirements using advanced
systems, the [BANK] may use the
acquired company’s advanced systems
to determine total risk-weighted assets
for the merged or acquired company’s
exposures for up to 24 months after the
calendar quarter during which the
acquisition or merger consummates. The
[AGENCY] may extend this transition
period for up to an additional 12
months. Within 90 days of
consummating the merger or
acquisition, the [BANK] must submit to
the [AGENCY] an implementation plan
for using its advanced systems for the
merged or acquired company.
(2) If the acquiring [BANK] is not
subject to the advanced approaches in
this subpart at the time of acquisition or
merger, during the period when subpart
D of this part applies to the acquiring
[BANK], the ALLL associated with the
exposures of the merged or acquired
company may not be directly included
in tier 2 capital. Rather, any excess
eligible credit reserves associated with
the merged or acquired company’s
exposures may be included in the
[BANK]’s tier 2 capital up to 0.6 percent
of the credit-risk-weighted assets
associated with those exposures.
RISK-WEIGHTED ASSETS FOR
GENERAL CREDIT RISK
§ ll.131 Mechanics for calculating total
wholesale and retail risk-weighted assets.
(a) Overview. A [BANK] must
calculate its total wholesale and retail
risk-weighted asset amount in four
distinct phases:
(1) Phase 1—categorization of
exposures;
(2) Phase 2—assignment of wholesale
obligors and exposures to rating grades
and segmentation of retail exposures;
(3) Phase 3—assignment of risk
parameters to wholesale exposures and
segments of retail exposures; and
(4) Phase 4—calculation of riskweighted asset amounts.
(b) Phase 1—Categorization. The
[BANK] must determine which of its
exposures are wholesale exposures,
retail exposures, securitization
exposures, or equity exposures. The
[BANK] must categorize each retail
exposure as a residential mortgage
exposure, a QRE, or an other retail
exposure. The [BANK] must identify
which wholesale exposures are HVCRE
exposures, sovereign exposures, OTC
derivative contracts, repo-style
transactions, eligible margin loans,
eligible purchased wholesale exposures,
cleared transactions, default fund
contributions, unsettled transactions to
which § ll.136 applies, and eligible
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guarantees or eligible credit derivatives
that are used as credit risk mitigants.
The [BANK] must identify any onbalance sheet asset that does not meet
the definition of a wholesale, retail,
equity, or securitization exposure, as
well as any non-material portfolio of
exposures described in paragraph (e)(4)
of this section.
(c) Phase 2—Assignment of wholesale
obligors and exposures to rating grades
and retail exposures to segments. (1)
Assignment of wholesale obligors and
exposures to rating grades.
(i) The [BANK] must assign each
obligor of a wholesale exposure to a
single obligor rating grade and must
assign each wholesale exposure to
which it does not directly assign an LGD
estimate to a loss severity rating grade.
(ii) The [BANK] must identify which
of its wholesale obligors are in default.
(2) Segmentation of retail exposures.
(i) The [BANK] must group the retail
exposures in each retail subcategory
into segments that have homogeneous
risk characteristics.
(ii) The [BANK] must identify which
of its retail exposures are in default. The
[BANK] must segment defaulted retail
exposures separately from nondefaulted retail exposures.
(iii) If the [BANK] determines the
EAD for eligible margin loans using the
approach in § ll.132(b), the [BANK]
must identify which of its retail
exposures are eligible margin loans for
which the [BANK] uses this EAD
approach and must segment such
eligible margin loans separately from
other retail exposures.
(3) Eligible purchased wholesale
exposures. A [BANK] may group its
eligible purchased wholesale exposures
into segments that have homogeneous
risk characteristics. A [BANK] must use
the wholesale exposure formula in
Table 1 of this section to determine the
risk-based capital requirement for each
segment of eligible purchased wholesale
exposures.
(d) Phase 3—Assignment of risk
parameters to wholesale exposures and
segments of retail exposures. (1)
Quantification process. Subject to the
limitations in this paragraph (d), the
[BANK] must:
(i) Associate a PD with each
wholesale obligor rating grade;
(ii) Associate an LGD with each
wholesale loss severity rating grade or
assign an LGD to each wholesale
exposure;
(iii) Assign an EAD and M to each
wholesale exposure; and
(iv) Assign a PD, LGD, and EAD to
each segment of retail exposures.
(2) Floor on PD assignment. The PD
for each wholesale obligor or retail
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segment may not be less than 0.03
percent, except for exposures to or
directly and unconditionally guaranteed
by a sovereign entity, the Bank for
International Settlements, the
International Monetary Fund, the
European Commission, the European
Central Bank, or a multilateral
development bank, to which the
[BANK] assigns a rating grade associated
with a PD of less than 0.03 percent.
(3) Floor on LGD estimation. The LGD
for each segment of residential mortgage
exposures (other than segments of
residential mortgage exposures for
which all or substantially all of the
principal of each exposure is directly
and unconditionally guaranteed by the
full faith and credit of a sovereign
entity) may not be less than 10 percent.
(4) Eligible purchased wholesale
exposures. A [BANK] must assign a PD,
LGD, EAD, and M to each segment of
eligible purchased wholesale exposures.
If the [BANK] can estimate ECL (but not
PD or LGD) for a segment of eligible
purchased wholesale exposures, the
[BANK] must assume that the LGD of
the segment equals 100 percent and that
the PD of the segment equals ECL
divided by EAD. The estimated ECL
must be calculated for the exposures
without regard to any assumption of
recourse or guarantees from the seller or
other parties.
(5) Credit risk mitigation: credit
derivatives, guarantees, and collateral.
(i) A [BANK] may take into account the
risk reducing effects of eligible
guarantees and eligible credit
derivatives in support of a wholesale
exposure by applying the PD
substitution or LGD adjustment
treatment to the exposure as provided in
§ ll.134 or, if applicable, applying
double default treatment to the exposure
as provided in § ll.135. A [BANK]
may decide separately for each
wholesale exposure that qualifies for the
double default treatment under
§ ll.135 whether to apply the double
default treatment or to use the PD
substitution or LGD adjustment
treatment without recognizing double
default effects.
(ii) A [BANK] may take into account
the risk reducing effects of guarantees
and credit derivatives in support of
retail exposures in a segment when
quantifying the PD and LGD of the
segment.
(iii) Except as provided in paragraph
(d)(6) of this section, a [BANK] may take
into account the risk reducing effects of
collateral in support of a wholesale
exposure when quantifying the LGD of
the exposure, and may take into account
the risk reducing effects of collateral in
support of retail exposures when
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quantifying the PD and LGD of the
segment.
(6) EAD for OTC derivative contracts,
repo-style transactions, and eligible
margin loans. A [BANK] must calculate
its EAD for an OTC derivative contract
as provided in §§ ll.132 (c) and (d).
A [BANK] may take into account the
risk-reducing effects of financial
collateral in support of a repo-style
transaction or eligible margin loan and
of any collateral in support of a repostyle transaction that is included in the
[BANK]’s VaR-based measure under
subpart F of this [PART] through an
adjustment to EAD as provided in
§§ ll.132(b) and (d). A [BANK] that
takes collateral into account through
such an adjustment to EAD under
§ ll.132 may not reflect such
collateral in LGD.
(7) Effective maturity. An exposure’s
M must be no greater than five years and
no less than one year, except that an
exposure’s M must be no less than one
day if the exposure is a trade related
letter of credit, or if the exposure has an
original maturity of less than one year
and is not part of a [BANK]’s ongoing
financing of the obligor. An exposure is
not part of a [BANK]’s ongoing
financing of the obligor if the [BANK]:
(i) Has a legal and practical ability not
to renew or roll over the exposure in the
event of credit deterioration of the
obligor;
(ii) Makes an independent credit
decision at the inception of the
exposure and at every renewal or roll
over; and
(iii) Has no substantial commercial
incentive to continue its credit
relationship with the obligor in the
event of credit deterioration of the
obligor.
(8) EAD for exposures to certain
central counterparties. A [BANK] may
attribute an EAD of zero to exposures
that arise from the settlement of cash
transactions (such as equities, fixed
income, spot foreign exchange, and spot
commodities) with a central
counterparty where there is no
assumption of ongoing counterparty
credit risk by the central counterparty
after settlement of the trade and
associated default fund contributions.
(e) Phase 4—Calculation of riskweighted assets. (1) Non-defaulted
exposures.
(i) A [BANK] must calculate the dollar
risk-based capital requirement for each
of its wholesale exposures to a nondefaulted obligor (except for eligible
guarantees and eligible credit
derivatives that hedge another
wholesale exposure, IMM exposures,
cleared transactions, default fund
contributions, unsettled transactions,
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and exposures to which the [BANK]
applies the double default treatment in
§ ll.135) and segments of nondefaulted retail exposures by inserting
the assigned risk parameters for the
wholesale obligor and exposure or retail
segment into the appropriate risk-based
capital formula specified in Table 1 and
multiplying the output of the formula
(K) by the EAD of the exposure or
segment. Alternatively, a [BANK] may
apply a 300 percent risk weight to the
EAD of an eligible margin loan if the
[BANK] is not able to meet the agencies’
requirements for estimation of PD and
LGD for the margin loan.
(ii) The sum of all the dollar riskbased capital requirements for each
wholesale exposure to a non-defaulted
obligor and segment of non-defaulted
retail exposures calculated in paragraph
(e)(1)(i) of this section and in
§ ll.135(e) equals the total dollar riskbased capital requirement for those
exposures and segments.
(iii) The aggregate risk-weighted asset
amount for wholesale exposures to nondefaulted obligors and segments of nondefaulted retail exposures equals the
total dollar risk-based capital
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requirement in paragraph (e)(1)(ii) of
this section multiplied by 12.5.
(2) Wholesale exposures to defaulted
obligors and segments of defaulted retail
exposures.
(i) The dollar risk-based capital
requirement for each wholesale
exposure to a defaulted obligor equals
0.08 multiplied by the EAD of the
exposure.
(ii) The dollar risk-based capital
requirement for a segment of defaulted
retail exposures equals 0.08 multiplied
by the EAD of the segment.
(iii) The sum of all the dollar riskbased capital requirements for each
wholesale exposure to a defaulted
obligor calculated in paragraph (e)(2)(i)
of this section plus the dollar risk-based
capital requirements for each segment of
defaulted retail exposures calculated in
paragraph (e)(2)(ii) of this section equals
the total dollar risk-based capital
requirement for those exposures and
segments.
(iv) The aggregate risk-weighted asset
amount for wholesale exposures to
defaulted obligors and segments of
defaulted retail exposures equals the
total dollar risk-based capital
requirement calculated in paragraph
(e)(2)(iii) of this section multiplied by
12.5.
(3) Assets not included in a defined
exposure category. (i) A [BANK] may
assign a risk-weighted asset amount of
zero to cash owned and held in all
offices of the [BANK] or in transit and
for gold bullion held in the [BANK]’s
own vaults, or held in another [BANK]’s
vaults on an allocated basis, to the
extent the gold bullion assets are offset
by gold bullion liabilities.
(ii) A [BANK] must assign a risk
weighted asset amount equal to 20
percent of the carrying value of cash
items in the process of collection.
(iii) The risk-weighted asset amount
for the residual value of a retail lease
exposure equals such residual value.
(iv) The risk-weighted asset amount
for DTAs arising from temporary
differences that the [BANK] could
realize through net operating loss
carrybacks equals the carrying value,
netted in accordance with § ll.22.
(v) The risk-weighted asset amount for
MSAs, DTAs arising from temporary
timing differences that the [BANK]
could not realize through net operating
loss carrybacks, and significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock that are not
deducted pursuant to § ll.22(a)(7)
equals the amount not subject to
deduction multiplied by 250 percent.
(vi) The risk-weighted asset amount
for any other on-balance-sheet asset that
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does not meet the definition of a
wholesale, retail, securitization, IMM, or
equity exposure, cleared transaction, or
default fund contribution equals the
carrying value of the asset.
(4) Non-material portfolios of
exposures. The risk-weighted asset
amount of a portfolio of exposures for
which the [BANK] has demonstrated to
the [AGENCY]’s satisfaction that the
portfolio (when combined with all other
portfolios of exposures that the [BANK]
seeks to treat under this paragraph) is
not material to the [BANK] is the sum
of the carrying values of on-balance
sheet exposures plus the notional
amounts of off-balance sheet exposures
in the portfolio. For purposes of this
paragraph (e)(4), the notional amount of
an OTC derivative contract that is not a
credit derivative is the EAD of the
derivative as calculated in § ll.132.
§ ll.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
(a) Methodologies for collateral
recognition. (1) Instead of an LGD
estimation methodology, a [BANK] may
use the following methodologies to
recognize the benefits of financial
collateral in mitigating the counterparty
credit risk of repo-style transactions,
eligible margin loans, collateralized
OTC derivative contracts and single
product netting sets of such
transactions, and to recognize the
benefits of any collateral in mitigating
the counterparty credit risk of repo-style
transactions that are included in a
[BANK]’s VaR-based measure under
subpart F:
(i) The collateral haircut approach set
forth in paragraph (b)(2) of this section;
(ii) The internal models methodology
set forth in paragraph (d) of this section;
and
(iii) For single product netting sets of
repo-style transactions and eligible
margin loans, the simple VaR
methodology set forth in paragraph
(b)(3) of this section.
(2) A [BANK] may use any
combination of the three methodologies
for collateral recognition; however, it
must use the same methodology for
transactions in the same category.
(3) A [BANK] must use the
methodology in paragraph (c) of this
section, or with prior [AGENCY]
approval, the internal model
methodology in paragraph (d) of this
section, to calculate EAD for an OTC
derivative contract or a set of OTC
derivative contracts subject to a
qualifying master netting agreement. To
estimate EAD for qualifying crossproduct master netting agreements, a
[BANK] may only use the internal
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models methodology in paragraph (d) of
this section.
(4) A [BANK] must also use the
methodology in paragraph (e) of this
section for calculating the risk-weighted
asset amounts for CVA for OTC
derivatives.
(b) EAD for eligible margin loans and
repo-style transactions. (1) General. A
[BANK] may recognize the credit risk
mitigation benefits of financial collateral
that secures an eligible margin loan,
repo-style transaction, or single-product
netting set of such transactions by
factoring the collateral into its LGD
estimates for the exposure.
Alternatively, a [BANK] may estimate
an unsecured LGD for the exposure, as
well as for any repo-style transaction
that is included in the [BANK]’s VaRbased measure under subpart F of this
part, and determine the EAD of the
exposure using:
(i) The collateral haircut approach
described in paragraph (b)(2) of this
section;
(ii) For netting sets only, the simple
VaR methodology described in
paragraph (b)(3) of this section; or
(iii) The internal models methodology
described in paragraph (d) of this
section.
(2) Collateral haircut approach. (i)
EAD equation. A [BANK] may
determine EAD for an eligible margin
loan, repo-style transaction, or netting
set by setting EAD equal to max {0, [(SE
¥ SC) + S(ES × HS) + S(Efx × Hfx)]},
where:
(A) SE equals the value of the
exposure (the sum of the current market
values of all instruments, gold, and cash
the [BANK] has lent, sold subject to
repurchase, or posted as collateral to the
counterparty under the transaction (or
netting set));
(B) SC equals the value of the
collateral (the sum of the current market
values of all instruments, gold, and cash
the [BANK] has borrowed, purchased
subject to resale, or taken as collateral
from the counterparty under the
transaction (or netting set));
(C) Es equals the absolute value of the
net position in a given instrument or in
gold (where the net position in a given
instrument or in gold equals the sum of
the current market values of the
instrument or gold the [BANK] has lent,
sold subject to repurchase, or posted as
collateral to the counterparty minus the
sum of the current market values of that
same instrument or gold the [BANK] has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty);
(D) Hs equals the market price
volatility haircut appropriate to the
instrument or gold referenced in ES;
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(E) Efx equals the absolute value of the
net position of instruments and cash in
a currency that is different from the
settlement currency (where the net
position in a given currency equals the
sum of the current market values of any
instruments or cash in the currency the
[BANK] has lent, sold subject to
repurchase, or posted as collateral to the
(ii) Standard supervisory haircuts. (A)
Under the standard supervisory haircuts
approach:
(1) A [BANK] must use the haircuts
for market price volatility (Hs) in Table
2, as adjusted in certain circumstances
as provided in paragraphs (b)(2)(ii)(A)(3)
and (4) of this section;
counterparty minus the sum of the
current market values of any
instruments or cash in the currency the
[BANK] has borrowed, purchased
subject to resale, or taken as collateral
from the counterparty); and
(F) Hfx equals the haircut appropriate
to the mismatch between the currency
referenced in Efx and the settlement
currency.
TABLE 2—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
Haircut (in percents) assigned based on:
Sovereign issuers risk weight
under this section 2
Residual maturity
Zero %
Less than or equal to 1 year .................................
Greater than 1 year and less than or equal to 5
years ...................................................................
Greater than 5 years ..............................................
20% or
50%
100%
Non-sovereign issuers risk weight
under this section
20%
50%
Investment grade
securitization
exposures
(in percent)
100%
0.5
1.0
15.0
1.0
2.0
25.0
4.0
2.0
4.0
3.0
6.0
15.0
15.0
4.0
8.0
6.0
12.0
25.0
25.0
12.0
24.0
Main index equities (including convertible bonds) and gold .............................................
15.0
Other publicly-traded equities (including convertible bonds) ............................................
25.0
Mutual funds ......................................................................................................................
Highest haircut applicable to any security in which the
fund can invest.
Cash collateral held ...........................................................................................................
Zero.
1 The
market price volatility haircuts in Table 2 are based on a 10-business-day holding period.
a foreign PSE that receives a zero percent risk weight.
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business days. If over the two previous
quarters more than two margin disputes
on a netting set have occurred that
lasted more than the holding period,
then the [BANK] must adjust the
supervisory haircuts upward for that
netting set on the basis of a holding
period that is at least two times the
minimum holding period for that
netting set. A [BANK] must adjust the
standard supervisory haircuts upward
using the following formula:
Where,
(i) TM equals a holding period of longer than
10 business days for eligible margin
loans and derivative contracts or longer
than 5 business days for repo-style
transactions;
(ii) HS equals the standard supervisory
haircut; and
(iii) TS equals 10 business days for eligible
margin loans and derivative contracts or
5 business days for repo-style
transactions.
(5) If the instrument a [BANK] has
lent, sold subject to repurchase, or
posted as collateral does not meet the
definition of financial collateral, the
[BANK] must use a 25.0 percent haircut
for market price volatility (HS).
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(iii) Own internal estimates for
haircuts. With the prior written
approval of the [AGENCY], a [BANK]
may calculate haircuts (Hs and Hfx)
using its own internal estimates of the
volatilities of market prices and foreign
exchange rates.
(A) To receive [AGENCY] approval to
use its own internal estimates, a [BANK]
must satisfy the following minimum
quantitative standards:
(1) A [BANK] must use a 99th
percentile one-tailed confidence
interval.
(2) The minimum holding period for
a repo-style transaction is five business
days and for an eligible margin loan is
ten business days except for
transactions or netting sets for which
paragraph (b)(2)(iii)(A)(3) of this section
applies. When a [BANK] calculates an
own-estimates haircut on a TN-day
holding period, which is different from
the minimum holding period for the
transaction type, the applicable haircut
(HM) is calculated using the following
square root of time formula:
Where,
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(2) For currency mismatches, a
[BANK] must use a haircut for foreign
exchange rate volatility (Hfx) of 8
percent, as adjusted in certain
circumstances as provided in
paragraphs (b)(2)(ii)(A)(3) and (4) of this
section.
(3) For repo-style transactions, a
[BANK] may multiply the supervisory
haircuts provided in paragraphs
(b)(2)(ii)(A)(1) and (2) of this section by
the square root of 1⁄2 (which equals
0.707107).
(4) A [BANK] must adjust the
supervisory haircuts upward on the
basis of a holding period longer than ten
business days (for eligible margin loans)
or five business days (for repo-style
transactions) where the following
conditions apply. If the number of
trades in a netting set exceeds 5,000 at
any time during a quarter, a [BANK]
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days for the
following quarter (except when a
[BANK] is calculating EAD for a cleared
transaction under § ll.133). If a
netting set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
replaced, a [BANK] must adjust the
supervisory haircuts upward on the
basis of a holding period of twenty
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(i) TM equals 5 for repo-style transactions and
10 for eligible margin loans;
(ii) TN equals the holding period used by the
[BANK] to derive HN; and
(iii) HN equals the haircut based on the
holding period TN.
(3) If the number of trades in a netting
set exceeds 5,000 at any time during a
quarter, a [BANK] must calculate the
haircut using a minimum holding
period of twenty business days for the
following quarter (except when a
[BANK] is calculating EAD for a cleared
transaction under § ll.133). If a
netting set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
replaced, a [BANK] must calculate the
haircut using a minimum holding
period of twenty business days. If over
the two previous quarters more than two
margin disputes on a netting set have
occurred that lasted more than the
holding period, then the [BANK] must
calculate the haircut for transactions in
that netting set on the basis of a holding
period that is at least two times the
minimum holding period for that
netting set.
(4) A [BANK] is required to calculate
its own internal estimates with inputs
calibrated to historical data from a
continuous 12-month period that
reflects a period of significant financial
stress appropriate to the security or
category of securities.
(5) A [BANK] must have policies and
procedures that describe how it
determines the period of significant
financial stress used to calculate the
[BANK]’s own internal estimates for
haircuts under this section and must be
able to provide empirical support for the
period used. The [BANK] must obtain
the prior approval of the [AGENCY] for,
and notify the [AGENCY] if the [BANK]
makes any material changes to, these
policies and procedures.
(6) Nothing in this section prevents
the [AGENCY] from requiring a [BANK]
to use a different period of significant
financial stress in the calculation of own
internal estimates for haircuts.
(7) A [BANK] must update its data
sets and calculate haircuts no less
frequently than quarterly and must also
reassess data sets and haircuts whenever
market prices change materially.
(B) With respect to debt securities that
are investment grade, a [BANK] may
calculate haircuts for categories of
securities. For a category of securities,
the [BANK] must calculate the haircut
on the basis of internal volatility
estimates for securities in that category
that are representative of the securities
in that category that the [BANK] has
lent, sold subject to repurchase, posted
as collateral, borrowed, purchased
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subject to resale, or taken as collateral.
In determining relevant categories, the
[BANK] must at a minimum take into
account:
(1) The type of issuer of the security;
(2) The credit quality of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the
security.
(C) With respect to debt securities that
are not investment grade and equity
securities, a [BANK] must calculate a
separate haircut for each individual
security.
(D) Where an exposure or collateral
(whether in the form of cash or
securities) is denominated in a currency
that differs from the settlement
currency, the [BANK] must calculate a
separate currency mismatch haircut for
its net position in each mismatched
currency based on estimated volatilities
of foreign exchange rates between the
mismatched currency and the
settlement currency.
(E) A [BANK]’s own estimates of
market price and foreign exchange rate
volatilities may not take into account
the correlations among securities and
foreign exchange rates on either the
exposure or collateral side of a
transaction (or netting set) or the
correlations among securities and
foreign exchange rates between the
exposure and collateral sides of the
transaction (or netting set).
(3) Simple VaR methodology. With
the prior written approval of the
[AGENCY], a [BANK] may estimate EAD
for a netting set using a VaR model that
meets the requirements in paragraph
(b)(3)(iii) of this section. In such event,
the [BANK] must set EAD equal to max
{0, [(SE ¥ SC) + PFE]}, where:
(i) SE equals the value of the exposure
(the sum of the current market values of
all instruments, gold, and cash the
[BANK] has lent, sold subject to
repurchase, or posted as collateral to the
counterparty under the netting set);
(ii) SC equals the value of the
collateral (the sum of the current market
values of all instruments, gold, and cash
the [BANK] has borrowed, purchased
subject to resale, or taken as collateral
from the counterparty under the netting
set); and
(iii) PFE (potential future exposure)
equals the [BANK]’s empirically based
best estimate of the 99th percentile, onetailed confidence interval for an
increase in the value of (SE¥ SC) over
a five-business-day holding period for
repo-style transactions, or over a tenbusiness-day holding period for eligible
margin loans except for netting sets for
which paragraph (b)(3)(iv) of this
section applies using a minimum oneyear historical observation period of
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price data representing the instruments
that the [BANK] has lent, sold subject to
repurchase, posted as collateral,
borrowed, purchased subject to resale,
or taken as collateral. The [BANK] must
validate its VaR model by establishing
and maintaining a rigorous and regular
backtesting regime.
(iv) If the number of trades in a
netting set exceeds 5,000 at any time
during a quarter, a [BANK] must use a
twenty-business-day holding period for
the following quarter (except when a
[BANK] is calculating EAD for a cleared
transaction under § ll.133). If a
netting set contains one or more trades
involving illiquid collateral, a [BANK]
must use a twenty-business-day holding
period. If over the two previous quarters
more than two margin disputes on a
netting set have occurred that lasted
more than the holding period, then the
[BANK] must set its PFE for that netting
set equal to an estimate over a holding
period that is at least two times the
minimum holding period for that
netting set.
(c) EAD for OTC derivative contracts.
(1) A [BANK] must determine the EAD
for an OTC derivative contract that is
not subject to a qualifying master
netting agreement using the current
exposure methodology in paragraph
(c)(5) of this section or using the
internal models methodology described
in paragraph (d) of this section.
(2) A [BANK] must determine the
EAD for multiple OTC derivative
contracts that are subject to a qualifying
master netting agreement using the
current exposure methodology in
§ ll.132(c)(6) or using the internal
models methodology described in
paragraph (d) of this section.
(3) Counterparty credit risk for credit
derivatives. Notwithstanding paragraphs
(c) (1) and (c)(2) of this section:
(i) A [BANK] that purchases a credit
derivative that is recognized under
§ ll.134 or § ll.135 as a credit risk
mitigant for an exposure that is not a
covered position under subpart F of this
part is not required to calculate a
separate counterparty credit risk capital
requirement under this section so long
as the [BANK] does so consistently for
all such credit derivatives and either
includes or excludes all such credit
derivatives that are subject to a master
netting agreement from any measure
used to determine counterparty credit
risk exposure to all relevant
counterparties for risk-based capital
purposes.
(ii) A [BANK] that is the protection
provider in a credit derivative must treat
the credit derivative as a wholesale
exposure to the reference obligor and is
not required to calculate a counterparty
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credit risk capital requirement for the
credit derivative under this section, so
long as it does so consistently for all
such credit derivatives and either
includes all or excludes all such credit
derivatives that are subject to a master
netting agreement from any measure
used to determine counterparty credit
risk exposure to all relevant
counterparties for risk-based capital
purposes (unless the [BANK] is treating
the credit derivative as a covered
position under subpart F of this part, in
which case the [BANK] must calculate
a supplemental counterparty credit risk
capital requirement under this section).
(4) Counterparty credit risk for equity
derivatives. A [BANK] must treat an
equity derivative contract as an equity
exposure and compute a risk-weighted
asset amount for the equity derivative
contract under §§ ll.151–ll.155
(unless the [BANK] is treating the
contract as a covered position under
subpart F of this part). In addition, if the
[BANK] is treating the contract as a
covered position under subpart F of this
part, and under certain other
circumstances described in § ll.155,
the [BANK] must also calculate a riskbased capital requirement for the
counterparty credit risk of an equity
derivative contract under this section.
(5) Single OTC derivative contract.
Except as modified by paragraph (c)(7)
of this section, the EAD for a single OTC
derivative contract that is not subject to
a qualifying master netting agreement is
equal to the sum of the [BANK]’s
current credit exposure and potential
future credit exposure (PFE) on the
derivative contract.
(i) Current credit exposure. The
current credit exposure for a single OTC
derivative contract is the greater of the
mark-to-market value of the derivative
contract or zero.
(ii) PFE. The PFE for a single OTC
derivative contract, including an OTC
derivative contract with a negative
mark-to-market value, is calculated by
multiplying the notional principal
amount of the derivative contract by the
appropriate conversion factor in Table
3. For purposes of calculating either the
PFE under paragraph (c)(5) of this
section or the gross PFE under
paragraph (c)(6) of this section for
exchange rate contracts and other
similar contracts in which the notional
principal amount is equivalent to the
cash flows, the notional principal
amount is the net receipts to each party
falling due on each value date in each
currency. For any OTC derivative
contract that does not fall within one of
the specified categories in Table 3, the
PFE must be calculated using the
‘‘other’’ conversion factors. A [BANK]
must use an OTC derivative contract’s
effective notional principal amount (that
is, its apparent or stated notional
principal amount multiplied by any
multiplier in the OTC derivative
contract) rather than its apparent or
stated notional principal amount in
calculating PFE. PFE of the protection
provider of a credit derivative is capped
at the net present value of the amount
of unpaid premiums.
TABLE 3—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 1
Remaining maturity 2
Interest rate
One year or less ......................
Over one to five years .............
Over five years .........................
Foreign
exchange
rate and gold
Credit
(investmentgrade reference
asset) 3
Credit
(non-investment-grade
reference asset)
0.01
0.05
0.075
0.05
0.05
0.05
0.10
0.10
0.10
0.00
0.005
0.015
Equity
0.06
0.08
0.10
Precious
metals
(except
gold)
0.07
0.07
0.08
Other
0.10
0.12
0.15
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1 For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments
in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so
that the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3 A [BANK] must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A [BANK] must use the column labeled ‘‘Credit
(non-investment-grade reference asset)’’ for all other credit derivatives.
(6) Multiple OTC derivative contracts
subject to a qualifying master netting
agreement. Except as modified by
paragraph (c)(7) of this section, the EAD
for multiple OTC derivative contracts
subject to a qualifying master netting
agreement is equal to the sum of the net
current credit exposure and the adjusted
sum of the PFE exposure for all OTC
derivative contracts subject to the
qualifying master netting agreement.
(i) Net current credit exposure. The
net current credit exposure is the greater
of:
(A) The net sum of all positive and
negative mark-to-market values of the
individual OTC derivative contracts
subject to the qualifying master netting
agreement; or
(B) Zero.
(ii) Adjusted sum of the PFE. The
adjusted sum of the PFE, Anet, is
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calculated as Anet = (0.4 × Agross) + (0.6
× NGR × Agross), where:
(A) Agross = the gross PFE (that is, the
sum of the PFE amounts (as determined
under paragraph (c)(5)(ii) of this section)
for each individual derivative contract
subject to the qualifying master netting
agreement); and
(B) NGR = the net to gross ratio (that
is, the ratio of the net current credit
exposure to the gross current credit
exposure). In calculating the NGR, the
gross current credit exposure equals the
sum of the positive current credit
exposures (as determined under
paragraph (c)(6)(i) of this section) of all
individual derivative contracts subject
to the qualifying master netting
agreement.
(7) Collateralized OTC derivative
contracts. A [BANK] may recognize the
credit risk mitigation benefits of
financial collateral that secures an OTC
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derivative contract or single-product
netting set of OTC derivatives by
factoring the collateral into its LGD
estimates for the contract or netting set.
Alternatively, a [BANK] may recognize
the credit risk mitigation benefits of
financial collateral that secures such a
contract or netting set that is marked-tomarket on a daily basis and subject to
a daily margin maintenance requirement
by estimating an unsecured LGD for the
contract or netting set and adjusting the
EAD calculated under paragraph (c)(5)
or (c)(6) of this section using the
collateral haircut approach in paragraph
(b)(2) of this section. The [BANK] must
substitute the EAD calculated under
paragraph (c)(5) or (c)(6) of this section
for SE in the equation in paragraph
(b)(2)(i) of this section and must use a
ten-business day minimum holding
period (TM = 10) unless a longer holding
E:\FR\FM\30AUP4.SGM
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period is required by paragraph
(b)(2)(iii)(A)(3) of this section.
(d) Internal models methodology. (1)
With prior written approval from the
[AGENCY], a [BANK] may use the
internal models methodology in this
paragraph (d) to determine EAD for
counterparty credit risk for derivative
contracts (collateralized or
uncollateralized) and single-product
netting sets thereof, for eligible margin
loans and single-product netting sets
thereof, and for repo-style transactions
and single-product netting sets thereof.
A [BANK] that uses the internal models
methodology for a particular transaction
type (derivative contracts, eligible
margin loans, or repo-style transactions)
must use the internal models
methodology for all transactions of that
transaction type. A [BANK] may choose
to use the internal models methodology
for one or two of these three types of
exposures and not the other types. A
[BANK] may also use the internal
models methodology for derivative
contracts, eligible margin loans, and
repo-style transactions subject to a
qualifying cross-product netting
agreement if:
(i) The [BANK] effectively integrates
the risk mitigating effects of crossproduct netting into its risk
management and other information
technology systems; and
(ii) The [BANK] obtains the prior
written approval of the [AGENCY].
A [BANK] that uses the internal models
methodology for a transaction type must
receive approval from the [AGENCY] to
cease using the methodology for that
transaction type or to make a material
change to its internal model.
(2) Risk-weighted assets using IMM.
Under the IMM, a [BANK] uses an
internal model to estimate the expected
exposure (EE) for a netting set and then
calculates EAD based on that EE. A
[BANK] must calculate two EEs and two
EADs (one stressed and one unstressed)
for each netting set as follows:
(i) EADunstressed is calculated using an
EE estimate based on the most recent
data meeting the requirements of
paragraph (d)(3)(vii) of this section.
(ii) EADstressed is calculated using an
EE estimate based on a historical period
that includes a period of stress to the
credit default spreads of the [BANK]’s
counterparties according to paragraph
(d)(3)(viii) of this section.
(iii) The [BANK] must use its internal
model’s probability distribution for
changes in the market value of a netting
set that are attributable to changes in
market variables to determine EE.
(iv) Under the internal models
methodology, EAD = Max (0, a ×
effective EPE ¥ CVA), or, subject to
[AGENCY] approval as provided in
paragraph (d)(10) of this section, a more
conservative measure of EAD.
(A) CVA equals the credit valuation
adjustment that the [BANK] has
recognized in its balance sheet valuation
of any OTC derivative contracts in the
netting set. For purposes of this
paragraph, CVA does not include any
adjustments to common equity tier 1
capital attributable to changes in the fair
value of the [BANK]’s liabilities that are
due to changes in its own credit risk
since the inception of the transaction
with the counterparty.
(1) EffectiveE Etk = max (EffectiveE Etk −
(that is, for a specific date tk, effective
EE is the greater of EE at that date or the
effective EE at the previous date); and
(2) tk represents the kth future time period
in the model and there are n time periods
represented in the model over the first year,
and
(C) a = 1.4 except as provided in paragraph
(d)(5) of this section, or when the [AGENCY]
has determined that the [BANK] must set a
higher based on the [BANK]’s specific
characteristics of counterparty credit risk or
model performance.
[BANK]’s exposure to the protection
provider of the credit derivative.
(3) To obtain [AGENCY] approval to
calculate the distributions of exposures
upon which the EAD calculation is
based, the [BANK] must demonstrate to
the satisfaction of the [AGENCY] that it
has been using for at least one year an
internal model that broadly meets the
following minimum standards, with
which the [BANK] must maintain
compliance:
(i) The model must have the systems
capability to estimate the expected
exposure to the counterparty on a daily
basis (but is not expected to estimate or
report expected exposure on a daily
basis).
(ii) The model must estimate expected
exposure at enough future dates to
reflect accurately all the future cash
flows of contracts in the netting set.
(iii) The model must account for the
possible non-normality of the exposure
distribution, where appropriate.
(iv) The [BANK] must measure,
monitor, and control current
counterparty exposure and the exposure
to the counterparty over the whole life
of all contracts in the netting set.
(v) The [BANK] must be able to
measure and manage current exposures
gross and net of collateral held, where
appropriate. The [BANK] must estimate
expected exposures for OTC derivative
contracts both with and without the
effect of collateral agreements.
(vi) The [BANK] must have
procedures to identify, monitor, and
control wrong-way risk throughout the
life of an exposure. The procedures
must include stress testing and scenario
analysis.
(vii) The model must use current
market data to compute current
exposures. The [BANK] must estimate
model parameters using historical data
from the most recent three-year period
and update the data quarterly or more
frequently if market conditions warrant.
The [BANK] should consider using
model parameters based on forwardlooking measures, where appropriate.
(viii) When estimating model
parameters based on a stress period, the
[BANK] must use at least three years of
historical data that include a period of
1,EEtk)
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(v) A [BANK] may include financial
collateral currently posted by the
counterparty as collateral (but may not
include other forms of collateral) when
calculating EE.
(vi) If a [BANK] hedges some or all of
the counterparty credit risk associated
with a netting set using an eligible
credit derivative, the [BANK] may take
the reduction in exposure to the
counterparty into account when
estimating EE. If the [BANK] recognizes
this reduction in exposure to the
counterparty in its estimate of EE, it
must also use its internal model to
estimate a separate EAD for the
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stress to the credit default spreads of the
[BANK]’s counterparties. The [BANK]
must review the data set and update the
data as necessary, particularly for any
material changes in its counterparties.
The [BANK] must demonstrate at least
quarterly that the stress period
coincides with increased CDS or other
credit spreads of the [BANK]’s
counterparties. The [BANK] must have
procedures to evaluate the effectiveness
of its stress calibration that include a
process for using benchmark portfolios
that are vulnerable to the same risk
factors as the [BANK]’s portfolio. The
[AGENCY] may require the [BANK] to
modify its stress calibration to better
reflect actual historic losses of the
portfolio.
(ix) A [BANK] must subject its
internal model to an initial validation
and annual model review process. The
model review should consider whether
the inputs and risk factors, as well as the
model outputs, are appropriate. As part
of the model review process, the
[BANK] must have a backtesting
program for its model that includes a
process by which unacceptable model
performance will be determined and
remedied.
(x) A [BANK] must have policies for
the measurement, management and
control of collateral and margin
amounts.
(xi) A [BANK] must have a
comprehensive stress testing program
that captures all credit exposures to
counterparties, and incorporates stress
testing of principal market risk factors
and creditworthiness of counterparties.
(4) Maturity. (i) If the remaining
maturity of the exposure or the longestdated contract in the netting set is
greater than one year, the [BANK] must
set M for the exposure or netting set
equal to the lower of five years or
M(EPE), where:
(B) dfk is the risk-free discount factor for
future time period tk; and
(C) Dtk = tk-1.
liquid collateral that can be delivered
under the terms of the collateral
agreement and, where applicable, the
period of time required to re-hedge the
resulting market risk upon the default of
the counterparty. The minimum margin
period of risk is set according to
paragraph (d)(5)(iii) of this section.
(ii) A [BANK] that can model EPE
without collateral agreements but
cannot achieve the higher level of
modeling sophistication to model EPE
with collateral agreements can set
effective EPE for a collateralized netting
set equal to the lesser of:
(A) An add-on that reflects the
potential increase in exposure of the
netting set over the margin period of
risk, plus the larger of:
(1) The current exposure of the
netting set reflecting all collateral held
or posted by the [BANK] excluding any
collateral called or in dispute; or
(2) The largest net exposure including
all collateral held or posted under the
margin agreement that would not trigger
a collateral call. For purposes of this
section, the add-on is computed as the
largest expected increase in the netting
set’s exposure over any margin period of
risk in the next year (set in accordance
with paragraph (d)(5)(iii) of this
section); or
(B) Effective EPE without a collateral
agreement plus any collateral the
[BANK] posts to the counterparty that
exceeds the required margin amount.
(iii) The margin period of risk for a
netting set subject to a collateral
agreement is:
(A) Five business days for repo-style
transactions subject to daily remargining
and daily marking-to-market, and ten
business days for other transactions
when liquid financial collateral is
posted under a daily margin
maintenance requirement, or
(B) Twenty business days if the
number of trades in a netting set
exceeds 5,000 at any time during the
previous quarter or contains one or
more trades involving illiquid collateral
or any derivative contract that cannot be
easily replaced (except if the [BANK] is
calculating EAD for a cleared
transaction under § ll.133). If over the
two previous quarters more than two
margin disputes on a netting set have
occurred that lasted more than the
margin period of risk, then the [BANK]
must use a margin period of risk for that
netting set that is at least two times the
minimum margin period of risk for that
netting set. If the periodicity of the
receipt of collateral is N-days, the
minimum margin period of risk is the
minimum margin period of risk under
this paragraph plus N minus 1. This
period should be extended to cover any
impediments to prompt re-hedging of
any market risk.
(6) Own estimate of alpha. With prior
written approval of the [AGENCY], a
[BANK] may calculate alpha as the ratio
of economic capital from a full
simulation of counterparty exposure
across counterparties that incorporates a
joint simulation of market and credit
risk factors (numerator) and economic
capital based on EPE (denominator),
subject to a floor of 1.2. For purposes of
this calculation, economic capital is the
unexpected losses for all counterparty
credit risks measured at a 99.9 percent
(ii) If the remaining maturity of the
exposure or the longest-dated contract
in the netting set is one year or less, the
[BANK] must set M for the exposure or
netting set equal to one year, except as
provided in section§ ll.131(d)(7).
(iii) Alternatively, a [BANK] that uses
an internal model to calculate a onesided credit valuation adjustment may
use the effective credit duration
estimated by the model as M(EPE) in
place of the formula in paragraph
(d)(4)(i) of this section.
(5) Collateral agreements. A [BANK]
may capture the effect on EAD of a
collateral agreement that requires
receipt of collateral when exposure to
the counterparty increases, but may not
capture the effect on EAD of a collateral
agreement that requires receipt of
collateral when counterparty credit
quality deteriorates. Two methods are
available to capture the effect of a
collateral agreement:
(i) With prior written approval from
the [AGENCY], a [BANK] may include
the effect of a collateral agreement
within its internal model used to
calculate EAD. The [BANK] may set
EAD equal to the expected exposure at
the end of the margin period of risk. The
margin period of risk means, with
respect to a netting set subject to a
collateral agreement, the time period
from the most recent exchange of
collateral with a counterparty until the
next required exchange of collateral,
plus the period of time required to sell
and realize the proceeds of the least
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confidence level over a one-year
horizon. To receive approval, the
[BANK] must meet the following
minimum standards to the satisfaction
of the [AGENCY]:
(i) The [BANK]’s own estimate of
alpha must capture in the numerator the
effects of:
(A) The material sources of stochastic
dependency of distributions of market
values of transactions or portfolios of
transactions across counterparties;
(B) Volatilities and correlations of
market risk factors used in the joint
simulation, which must be related to the
credit risk factor used in the simulation
to reflect potential increases in volatility
or correlation in an economic downturn,
where appropriate; and
(C) The granularity of exposures (that
is, the effect of a concentration in the
proportion of each counterparty’s
exposure that is driven by a particular
risk factor).
(ii) The [BANK] must assess the
potential model uncertainty in its
estimates of alpha.
(iii) The [BANK] must calculate the
numerator and denominator of alpha in
a consistent fashion with respect to
modeling methodology, parameter
specifications, and portfolio
composition.
(iv) The [BANK] must review and
adjust as appropriate its estimates of the
numerator and denominator of alpha on
at least a quarterly basis and more
frequently when the composition of the
portfolio varies over time.
(7) Risk-based capital requirements
for transactions with specific wrong-way
risk. A [BANK] must determine if a
repo-style transaction, eligible margin
loan, bond option, or equity derivative
contract or purchased credit derivative
to which the [BANK] applies the
internal models methodology has
specific wrong-way risk. If a transaction
has specific wrong-way risk, the [BANK]
must exclude it from the model
described in 132(d)(2) and instead
calculate the risk-based capital
requirement for the transaction as
follows:
(i) For an equity derivative contract,
by multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § ll.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The maximum amount the
[BANK] could lose on the equity
derivative.
(ii) For a purchased credit derivative
by multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § ll.131 using
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the PD of the counterparty and LGD
equal to 100 percent, by
(B) The fair value of the reference
asset of the credit derivative.
(iii) For a bond option, by
multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § ll.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The smaller of the notional
amount of the underlying reference
asset and the maximum potential loss
under the bond option contract.
(iv) For a repo-style transaction or
eligible margin loan by multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § ll.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The EAD of the transaction
determined according to the EAD
equation in § ll.131(b)(2), substituting
the estimated value of the collateral
assuming a default of the counterparty
for the value of the collateral in SC of
the equation.
(8) Risk-weighted asset amount for
IMM exposures with specific wrong-way
risk. The aggregate risk-weighted asset
amount for IMM exposures with specific
wrong-way risk is the sum of a [BANK]’s
risk-based capital requirement for
purchased credit derivatives that are not
bond options with specific wrong-way
risk as calculated under paragraph
(d)(7)(ii) of this section, a [BANK]’s riskbased capital requirement for equity
derivatives with specific wrong-way risk
as calculated under paragraph (d)(7)(i)
of this section, a [BANK]’s risk-based
capital requirement for bond options
with specific wrong-way risk as
calculated under paragraph (d)(7)(iii) of
this section, and a [BANK]’s risk-based
capital requirement for repo-style
transactions and eligible margin loans
with specific wrong-way risk as
calculated under paragraph (d)(7)(iv) of
this section, multiplied by 12.5.
(9) Risk-weighted assets for IMM
exposures. (i) The [BANK] must insert
the assigned risk parameters for each
counterparty and netting set into the
appropriate formula specified in Table 1
of § ll.131 and multiply the output of
the formula by the EADunstressed of the
netting set to obtain the unstressed
capital requirement for each netting set.
A [BANK] that uses an advanced CVA
approach that captures migrations in
credit spreads under paragraph (e)(3) of
this section must set the maturity
adjustment (b) in the formula equal to
zero. The sum of the unstressed capital
requirement calculated for each netting
set equals Kunstressed.
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(ii) The [BANK] must insert the
assigned risk parameters for each
wholesale obligor and netting set into
the appropriate formula specified in
Table 1 of § ll.131 and multiply the
output of the formula by the EADstressed
of the netting set to obtain the stressed
capital requirement for each netting set.
A [BANK] that uses an advanced CVA
approach that captures migrations in
credit spreads under paragraph (e)(3) of
this section must set the maturity
adjustment (b) in the formula equal to
zero. The sum of the stressed capital
requirement calculated for each netting
set equals Kstressed.
(iii) The [BANK]’s dollar risk-based
capital requirement under the internal
models methodology equals the larger of
Kunstressed and Kstressed. A [BANK]’s riskweighted assets amount for IMM
exposures is equal to the capital
requirement multiplied by 12.5, plus
risk weighted assets for IMM exposures
with specific wrong-way risk in
paragraph (d)(8) of this section and
those in paragraph (d)(10) of this
section.
(10) Other measures of counterparty
exposure. (i) With prior written
approval of the [AGENCY], a [BANK]
may set EAD equal to a measure of
counterparty credit risk exposure, such
as peak EAD, that is more conservative
than an alpha of 1.4 (or higher under the
terms of paragraph (d)(7)(iv)(C) of this
section) times the larger of EPEunstressed
and EPEstressed for every counterparty
whose EAD will be measured under the
alternative measure of counterparty
exposure. The [BANK] must
demonstrate the conservatism of the
measure of counterparty credit risk
exposure used for EAD.
(A) For material portfolios of new
OTC derivative products, the [BANK]
may assume that the current exposure
methodology in paragraphs (c)(5) and
(c)(6) of this section meets the
conservatism requirement of this section
for a period not to exceed 180 days.
(B) For immaterial portfolios of OTC
derivative contracts, the [BANK]
generally may assume that the current
exposure methodology in paragraphs
(c)(5) and (c)(6) of this section meets the
conservatism requirement of this
section.
(ii) To calculate risk-weighted assets
under this approach, the [BANK] must
insert the assigned risk parameters for
each counterparty and netting set into
the appropriate formula specified in
Table 1 of § ll.131, multiply the
output of the formula by the EAD for the
exposure as specified above, and
multiply by 12.5.
(e) Credit Valuation Adjustment
(CVA) Risk-Weighted Assets. (1) In
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other equivalent hedging instrument
that references the counterparty
directly, and index credit default swaps
(CDSind) as a CVA hedge under
paragraph (e)(5)(ii) of this section or
paragraph (e)(6) of this section,
provided that the position is managed as
a CVA hedge in accordance with the
[BANK]’s hedging policies.
(ii) A [BANK] shall not recognize as
a CVA hedge any tranched or nth-todefault credit derivative.
(4) Total CVA risk-weighted assets.
Total CVA risk-weighted assets is the
sum of the CVA capital requirement,
KCVA, calculated for each of a [BANK]’s
OTC derivative counterparties,
multiplied by 12.5.
(5) Simple CVA approach. (i) Under
the simple CVA approach, the CVA
capital requirement, KCVA, is calculated
according to the following formula:
general. With respect to its OTC
derivative contracts, a [BANK] must
calculate a CVA risk-weighted asset
amount for each counterparty using the
simple CVA approach described in
paragraph (e)(5) of this section or, with
prior written approval of the [AGENCY],
the advanced CVA approach described
in paragraph (e)(6) of this section. A
[BANK] that receives prior [AGENCY]
approval to calculate its CVA riskweighted asset amounts for a class of
counterparties using the advanced CVA
approach must continue to use that
approach for that class of counterparties
until it notifies the [AGENCY] in writing
that the [BANK] expects to begin
calculating its CVA risk-weighted asset
amount using the simple CVA approach.
Such notice must include an
explanation of the [BANK]’s rationale
and the date upon which the [BANK]
will begin to calculate its CVA riskweighted asset amount using the simple
CVA approach.
(2) Market risk [BANK]s.
Notwithstanding the prior approval
requirement in paragraph (e)(1) of this
section, a market risk [BANK] may
calculate its CVA risk-weighted asset
amount for a counterparty using the
advanced CVA approach if the [BANK]
has [AGENCY] approval to:
(i) Determine EAD for OTC derivative
contracts using the internal models
methodology described in paragraph (d)
of this section; and
(ii) Determine its specific risk add-on
for debt positions issued by the
counterparty using a specific risk model
described in § ll.207(b) of subpart F
of this part.
(3) Recognition of Hedges. (i) A
[BANK] may recognize a single name
CDS, single name contingent CDS, any
(A) wi = the weight applicable to
counterparty i under Table 4;
(B) Mi = the EAD-weighted average of the
effective maturity of each netting set
with counterparty i (where each netting
set’s M can be no less than one year.)
(C) EADi total = the sum of the EAD for all
netting sets of OTC derivative contracts
with counterparty i calculated using the
current exposure methodology described
in paragraph (c) of this section or the
internal models methodology described
in paragraph (d) of this section. When
the [BANK] calculates EAD under
paragraph (c) of this section, such EAD
may be adjusted for purposes of
calculating EADi total by multiplying
EAD by (1-exp(-0.05 x Mi))/(0.05 x Mi).2
When the [BANK] calculates EAD under
paragraph (d) of this section, EADi total
equals EADunstressed.
(D) Mi hedge = the notional weighted average
maturity of the hedge instrument.
(E) Bi = the sum of the notional amounts of
any purchased single name CDS
referencing counterparty i that is used to
hedge CVA risk to counterparty i
multiplied by (1-exp(-0.05 x Mi hedge))/
(0.05 x Mi hedge).
(F) Mind = the maturity of the CDSind or the
notional weighted average maturity of
any CDSind purchased to hedge CVA risk
of counterparty i.
(G) B ind = the notional amount of one or
more CDSind purchased to hedge CVA
§ ll.207(b) or another VaR model that
meets the quantitative requirements of
§ ll.205(b) and § ll.207(b)(1) to
calculate its CVA capital requirement
for a counterparty by modeling the
impact of changes in the counterparty’s
(ii) The [BANK] may treat the notional credit spreads, together with any
amount of the index attributable to a
recognized CVA hedges, on the CVA for
counterparty as a single name hedge of
the counterparty.
counterparty i (Bi,) when calculating
(A) The VaR model must incorporate
KCVA, and subtract the notional amount
only changes in the counterparty’s
of Bi from the notional amount of the
credit spreads, not changes in other risk
CDSind. The [BANK] must calculate its
factors. It is not required that the VaR
capital requirement for the remaining
model capture jump-to-default risk.
notional amount of the CDSind as a stand
(B) A [BANK] that qualifies to use the
alone position.
advanced CVA approach must include
in that approach any immaterial OTC
TABLE 4—ASSIGNMENT OF
derivative portfolios for which it uses
COUNTERPARTY WEIGHT
the current exposure methodology in
paragraph (c) of this section according
Internal PD
Weight Wi
to paragraph (e)(6)(viii) of this section.
(in percent)
(in percent)
(C) A [BANK] must have the systems
0.00–0.07 ..............................
0.70 capability to calculate the CVA capital
>0.070–0.15 ..........................
0.80 requirement for a counterparty on a
>0.15–0.40 ............................
1.00
daily basis (but is not required to
>0.40–2.00 ............................
2.00
>2.00–6.00 ............................
3.00 calculate the CVA capital requirement
>6.00 .....................................
10.00 on a daily basis).
(ii) Under the advanced CVA
(6) Advanced CVA Approach. (i) A
approach, the CVA capital requirement,
[BANK] may use the VaR model it uses
KCVA, is calculated according to the
to determine specific risk under
following formulas:
2 The
risk for counterparty i multiplied by (1exp(¥0.05 × Mind))/(0.05 × Mind).
(H) wind = the weight applicable to the CDSind
based on the average weight of the
underlying reference names that
comprise the index under Table 4.
term ‘‘exp’’ is the exponential function.
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(B) If the VaR model uses credit
spread sensitivities to parallel shifts in
credit spreads, the [BANK] must
calculate each credit spread sensitivity
according to the following formula:
(iv) To calculate the CVAUnstressedVaR
measure for purposes of paragraph
(e)(6)(ii) of this section, the [BANK]
must:
(A) Use the EEi calculated using the
calibration of paragraph (d)(3)(vii) of
this section, except as provided in
§ ll.132 (e)(6)(vi), and
(B) Use the historical observation
period required under § ll.205(b)(2)
of subpart F.
(v) To calculate the CVAStressedVaR
measure for purposes of paragraph
(e)(6)(ii) of this section, the [BANK]
must:
(A) Use the EEi calculated using the
stress calibration in paragraph
(d)(3)(viii) of this section except as
provided in § ll.132(e)(6)(vi) of this
section.
(B) Calibrate VaR model inputs to
historical data from the most severe
twelve-month stress period contained
within the three-year stress period used
to calculate EEi. The [AGENCY] may
require a [BANK] to use a different
period of significant financial stress in
the calculation of the CVAStressedVaR
measure.
(vi) If a [BANK] captures the effect of
a collateral agreement on EAD using the
method described in paragraph (d)(5)(ii)
of this section, for purposes of
3 For
(G) Exp is the exponential function.
(iii) A [BANK] must use the formulas
in paragraph (e)(6)(iii)(A) or (e)(6)(iii)(B)
of this section to calculate credit spread
sensitivities if its VaR model is not
based on full repricing.
(A) If the VaR model is based on
credit spread sensitivities for specific
tenors, the [BANK] must calculate each
credit spread sensitivity according to
the following formula:
paragraph (e)(6)(ii) of this section, the
[BANK] must calculate EEi using the
method in paragraph (d)(5)(ii) of this
section and keep that EE constant with
the maturity equal to the maximum of:
(A) Half of the longest maturity of a
transaction in the netting set, and
(B) The notional weighted average
maturity of all transactions in the
netting set.
(vii) The [BANK]’s VaR model must
capture the basis between the spreads of
any CDSind that is used as the hedging
instrument and the hedged counterparty
exposure over various time periods,
including benign and stressed
the final time bucket, i = T.
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(D) LGDMKT = the loss given default of the
counterparty based on the spread of a
publicly-traded debt instrument of the
counterparty, or, where a publicly-traded
debt instrument spread is not available,
a proxy spread based on the credit
quality, industry, and region of the
counterparty.
(E) EEi = the sum of the expected exposures
for all netting sets with the counterparty
at revaluation time ti, calculated above.
(F) Di = the risk-free discount factor at time
ti, where D0 = 1.
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Where:
(A) ti = the time of the i-th revaluation time
bucket starting from t0 = 0.
(B) tT = the longest contractual maturity
across the OTC derivative contracts with
the counterparty.
(C) si = the CDS spread for the counterparty
at tenor ti used to calculate the CVA for
the counterparty. If a CDS spread is not
available, the [BANK] must use a proxy
spread based on the credit quality,
industry and region of the counterparty.
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environments. If the VaR model does
not capture that basis, the [BANK] must
reflect only 50 percent of the notional
amount of the CDSind hedge in the VaR
model. The remaining 50 percent of the
notional amount of the CDSind hedge is
a covered position under subpart F.
(viii) If a [BANK] uses the current
exposure methodology described in
paragraphs (c)(5) and (c)(6) of this
section to calculate the EAD for any
immaterial portfolios of OTC derivative
contracts, the [BANK] must use that
EAD as a constant EE in the formula for
the calculation of CVA with the
maturity equal to the maximum of:
(A) Half of the longest maturity of a
transaction in the netting set, and
(B) The notional weighted average
maturity of all transactions in the
netting set.
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§ ll.133
Cleared transactions.
(a) General requirements. (1) A
[BANK] that is a clearing member client
must use the methodologies set forth in
paragraph (b) of this section to calculate
risk-weighted assets for a cleared
transaction.
(2) A [BANK] that is a clearing
member must use the methodologies set
forth in paragraph (c) of this section to
calculate its risk-weighted assets for
cleared transactions and paragraph (d)
of this section to calculate its riskweighted assets for its default fund
contribution to a CCP.
(b) Clearing member client [BANK]s.
(1) Risk-weighted assets for cleared
transactions.
(i) To determine the risk-weighted
asset amount for a cleared transaction,
a clearing member client [BANK] must
multiply the trade exposure amount for
the cleared transaction, calculated in
accordance with paragraph (b)(2) of this
section, by the risk weight appropriate
for the cleared transaction, determined
in accordance with paragraph (b)(3) of
this section .
(ii) A clearing member client
[BANK]’s total risk-weighted assets for
cleared transactions is the sum of the
risk-weighted asset amounts for all of its
cleared transactions.
(2) Trade exposure amount. (i) For a
cleared transaction that is a derivative
contract or netting set of derivative
contracts, trade exposure amount equals
the EAD for the derivative contract or
netting set calculated using the
methodology used to calculate EAD for
OTC derivative contracts set forth in
§ ll.132(c) or § ll.132(d), plus the
fair value of the collateral posted by the
clearing member client [BANK] and
held by the CCP or a clearing member
in a manner that is not bankruptcy
remote. When the [BANK] calculates
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EAD for the cleared transaction using
the methodology in § ll.132(d), EAD
equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction, trade exposure
amount equals the EAD for the repostyle transaction calculated using the
methodology set forth in
§ ll.132(b)(2), (b)(3), or (d), plus the
fair value of the collateral posted by the
clearing member client [BANK] and
held by the CCP or a clearing member
in a manner that is not bankruptcy
remote. When the [BANK] calculates
EAD for the cleared transaction under
§ ll.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member client [BANK]
must apply a risk weight of:
(A) Two percent if the collateral
posted by the [BANK] to the QCCP or
clearing member is subject to an
arrangement that prevents any loss to
the clearing member client [BANK] due
to the joint default or a concurrent
insolvency, liquidation, or receivership
proceeding of the clearing member and
any other clients of the clearing
member; and the clearing member client
[BANK] has conducted sufficient legal
review to conclude with a well-founded
basis (and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from default or
from liquidation, insolvency,
receivership or similar proceeding) the
relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions.
(B) Four percent, if the requirements
of § ll.132(b)(3)(i)(A) are not met.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member client [BANK] must apply the
risk weight applicable to the CCP under
§ ll.32.
(iii) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
[BANK] that is held by a custodian in
a manner that is bankruptcy remote
from the CCP, clearing member, and
other clearing member clients of the
clearing member, is not subject to a
capital requirement under this section.
A [BANK] must calculate a riskweighted asset amount for any collateral
provided to a CCP, clearing member or
a custodian in connection with a cleared
transaction according to § ll.131.
(c) Clearing member banks. (1) Riskweighted assets for cleared transactions.
(i) To determine the risk-weighted asset
amount for a cleared transaction, a
clearing member [BANK] must multiply
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the trade exposure amount for the
cleared transaction, calculated in
accordance with paragraph (c)(2) of this
section by the risk weight appropriate
for the cleared transaction, determined
in accordance with paragraph (c)(3) of
this section.
(ii) A clearing member [BANK]’s total
risk-weighted assets for cleared
transactions is the sum of the riskweighted asset amounts for all of its
cleared transactions.
(2) Trade exposure amount. A
clearing member [BANK] must calculate
its trade exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a
derivative contract, trade exposure
amount equals the EAD calculated using
the methodology used to calculate EAD
for OTC derivative contracts set forth in
§ ll.132(c) or § ll.132(d), plus the
fair value of the collateral posted by the
[BANK] and held by the CCP in a
manner that is not bankruptcy remote.
When the [BANK] calculates EAD for
the cleared transaction using the
methodology in § ll.132(d), EAD
equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction, trade exposure
amount equals the EAD calculated
under sections § ll.132(b)(2),
§ ll.132(b)(3), or § ll.132(d), plus
the fair value of the collateral posted by
the clearing member [BANK] and held
by the CCP in a manner that is not
bankruptcy remote. When the [BANK]
calculates EAD for the cleared
transaction under § ll.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member [BANK] must
apply a risk weight of 2 percent.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member [BANK] must apply the risk
weight applicable to the CCP according
to § ll.32 of subpart D of this part.
(iii) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member [BANK]
that is held by a custodian in a manner
that is bankruptcy remote from the CCP
is not subject to a capital requirement
under this section. A [BANK] must
calculate a risk-weighted asset amount
for any collateral provided to a CCP or
a custodian in connection with a cleared
transaction according to § ll.131.
(d) Default fund contributions. (1)
General requirement. A clearing
member [BANK] must determine the
risk-weighted asset amount for a default
fund contribution to a CCP at least
quarterly, or more frequently if there is
a material change in the financial
condition of the CCP.
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(2) Risk-weighted asset amount for
default fund contributions to nonqualifying CCPs. A clearing member
[BANK]’s risk-weighted asset amount
for default fund contributions to CCPs
that are not QCCPs equals the sum of
such default fund contributions
multiplied by 1,250 percent.
(3) Risk-weighted asset amount for
default fund contributions to QCCPs. A
clearing member [BANK]’s riskweighted asset amount for default fund
contributions to QCCPs equals the sum
of its capital requirement, KCM for each
QCCP, as calculated under this
paragraph (d)(3), multiplied by 1,250
percent.
(i) The hypothetical capital
requirement of a QCCP (KCCP) equals:
Where:
(A) EBRMi = the EAD for each transaction
cleared through the QCCP by clearing
member i, calculated using the
methodology used to calculate EAD for
OTC derivative contracts set forth in
§ ll.132(c)(5) and § ll.132.(c)(6) or
the methodology used to calculate EAD
for repo-style transactions set forth in
§ ll.132(b)(2) for repo-style
transactions, provided that:
(1) For purposes of this section, when
calculating the EAD, the [BANK] may
replace the formula provided in
§ ll.132 (c)(6)(ii) with the following
formula:
Anet = (0.3 × Agross) + (0.7 × NGR × Agross);
or
(2) If the [BANK] cannot calculate NGR, it
may use a value of 0.30 until March 31,
2013; and
(3) For cleared transactions that are option
derivative contracts, the PFE set forth in
§ ll.132(c)(5) must be adjusted by
multiplying the notional principal
amount of the derivative contract by the
appropriate conversion factor in Table 3
and the absolute value of the option’s
delta, that is, the ratio of the change in
the value of the derivative contract to the
corresponding change in the price of the
underlying asset.
(B) VMi = any collateral posted by clearing
member i to the QCCP that it is entitled
to receive from the QCCP but has not yet
received, and any collateral that the
QCCP is entitled to receive from clearing
member i but has not yet received;
(C) IMi = the collateral posted as initial
margin by clearing member i to the
QCCP;
(D) DFi = the funded portion of clearing
member i’s default fund contribution
that will be applied to reduce the QCCP’s
loss upon a default by clearing member
i; and
(E) RW = 20 percent, except when the
[AGENCY] has determined that a higher
risk weight is more appropriate based on
the specific characteristics of the QCCP
and its clearing members.
Where:
forth in § ll.132(c)(6)(ii) and for
cleared transactions that are repo-style
transactions, ANet is the EAD equation
max {0, [(èE¥èC) + è(Es × Hs) + è(Efx]}
from § ll.132(b)(2(i));
(B) N = the number of clearing members in
the QCCP;
(C) DFCCP = the QCCP’s own funds and other
financial resources that would be used to
cover its losses before clearing members’
default fund contributions are used to
cover losses;
(D) DFCM = Funded default fund
contributions from all clearing members
and any other clearing member
contributed financial resources that are
available to absorb mutualized QCCP
losses;
(E) DF = DFCCP + DFCM (that is, the total
funded default fund contribution);
(ii) For a [BANK] that is a clearing
member of a QCCP with a default fund
supported by funded commitments, KCM
equals:
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EP30AU12.040</GPH>
EP30AU12.041</GPH>
EP30AU12.042</GPH>
Subscripts 1 and 2 denote the clearing
members with the two largest ANet
values. For purposes of this section, for
cleared transactions that are derivatives,
ANet is defined using the definition set
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53021
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Where:
(A) DFi = the [BANK]’s unfunded
commitment to the default fund;
(B) DFCM = the total of all clearing members’
unfunded commitments to the default
fund; and
(C) K*CM as defined in § ll.133(d)(3)(ii).
(D) For a [BANK] that is a clearing
member of a QCCP with a default fund
supported by unfunded commitments
and that is unable to calculate KCM
using the methodology described above
in this paragraph (d)(3)(iii), KCM equals:
Where:
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(iv) Total risk-weighted assets for
default fund contributions. Total riskweighted assets for default fund
contributions is the sum of a clearing
member [BANK]’s risk-weighted assets
for all of its default fund contributions
to all CCPs of which the [BANK] is a
clearing member.
§ ll.134 Guarantees and credit
derivatives: PD substitution and LGD
adjustment approaches.
(a) Scope. (1) This section applies to
wholesale exposures for which:
(i) Credit risk is fully covered by an
eligible guarantee or eligible credit
derivative; or
(ii) Credit risk is covered on a pro rata
basis (that is, on a basis in which the
[BANK] and the protection provider
share losses proportionately) by an
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eligible guarantee or eligible credit
derivative.
(2) Wholesale exposures on which
there is a tranching of credit risk
(reflecting at least two different levels of
seniority) are securitization exposures
subject to § ll.141 through § ll.145.
(3) A [BANK] may elect to recognize
the credit risk mitigation benefits of an
eligible guarantee or eligible credit
derivative covering an exposure
described in paragraph (a)(1) of this
section by using the PD substitution
approach or the LGD adjustment
approach in paragraph (c) of this section
or, if the transaction qualifies, using the
double default treatment in § ll.135.
A [BANK]’s PD and LGD for the hedged
exposure may not be lower than the PD
and LGD floors described in
§ ll.131(d)(2) and (d)(3).
(4) If multiple eligible guarantees or
eligible credit derivatives cover a single
exposure described in paragraph (a)(1)
of this section, a [BANK] may treat the
hedged exposure as multiple separate
exposures each covered by a single
eligible guarantee or eligible credit
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EP30AU12.045</GPH>
(iii) For a [BANK] that is a clearing
member of a QCCP with a default fund
supported by unfunded commitments,
KCM equals:
(1) IMi = the [BANK]’s initial margin posted
to the QCCP;
(2) IMCM = the total of initial margin posted
to the QCCP; and
(3) K*CM as defined above in this paragraph
(d)(3)(iii).
EP30AU12.044</GPH>
(J) c2 = 100 percent; and
(K) m= 1.2;
EP30AU12.046</GPH>
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EP30AU12.043</GPH>
53022
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derivative and may calculate a separate
risk-based capital requirement for each
separate exposure as described
paragraph (a)(3) of this section.
(5) If a single eligible guarantee or
eligible credit derivative covers multiple
hedged wholesale exposures described
in paragraph (a)(1) of this section, a
[BANK] must treat each hedged
exposure as covered by a separate
eligible guarantee or eligible credit
derivative and must calculate a separate
risk-based capital requirement for each
exposure as described in paragraph
(a)(3) of this section.
(6) A [BANK] must use the same risk
parameters for calculating ECL as it uses
for calculating the risk-based capital
requirement for the exposure.
(b) Rules of recognition. (1) A [BANK]
may only recognize the credit risk
mitigation benefits of eligible guarantees
and eligible credit derivatives.
(2) A [BANK] may only recognize the
credit risk mitigation benefits of an
eligible credit derivative to hedge an
exposure that is different from the credit
derivative’s reference exposure used for
determining the derivative’s cash
settlement value, deliverable obligation,
or occurrence of a credit event if:
(i) The reference exposure ranks pari
passu (that is, equally) with or is junior
to the hedged exposure; and
(ii) The reference exposure and the
hedged exposure are exposures to the
same legal entity, and legally
enforceable cross-default or crossacceleration clauses are in place to
assure payments under the credit
derivative are triggered when the obligor
fails to pay under the terms of the
hedged exposure.
(c) Risk parameters for hedged
exposures.
(1) PD substitution approach. (i) Full
coverage. If an eligible guarantee or
eligible credit derivative meets the
conditions in paragraphs (a) and (b) of
this section and the protection amount
(P) of the guarantee or credit derivative
is greater than or equal to the EAD of the
hedged exposure, a [BANK] may
recognize the guarantee or credit
derivative in determining the [BANK]’s
risk-based capital requirement for the
hedged exposure by substituting the PD
associated with the rating grade of the
protection provider for the PD
associated with the rating grade of the
obligor in the risk-based capital formula
applicable to the guarantee or credit
derivative in Table 1 of § ll.131 and
using the appropriate LGD as described
in paragraph (c)(1)(iii) of this section. If
the [BANK] determines that full
substitution of the protection provider’s
PD leads to an inappropriate degree of
risk mitigation, the [BANK] may
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substitute a higher PD than that of the
protection provider.
(ii) Partial coverage. If an eligible
guarantee or eligible credit derivative
meets the conditions in paragraphs (a)
and (b) of this section and P of the
guarantee or credit derivative is less
than the EAD of the hedged exposure,
the [BANK] must treat the hedged
exposure as two separate exposures
(protected and unprotected) in order to
recognize the credit risk mitigation
benefit of the guarantee or credit
derivative.
(A) The [BANK] must calculate its
risk-based capital requirement for the
protected exposure under § ll.131,
where PD is the protection provider’s
PD, LGD is determined under paragraph
(c)(1)(iii) of this section, and EAD is P.
If the [BANK] determines that full
substitution leads to an inappropriate
degree of risk mitigation, the [BANK]
may use a higher PD than that of the
protection provider.
(B) The [BANK] must calculate its
risk-based capital requirement for the
unprotected exposure under § ll.131,
where PD is the obligor’s PD, LGD is the
hedged exposure’s LGD (not adjusted to
reflect the guarantee or credit
derivative), and EAD is the EAD of the
original hedged exposure minus P.
(C) The treatment in paragraph
(c)(1)(ii) is applicable when the credit
risk of a wholesale exposure is covered
on a partial pro rata basis or when an
adjustment is made to the effective
notional amount of the guarantee or
credit derivative under paragraphs (d),
(e), or (f) of this section.
(iii) LGD of hedged exposures. The
LGD of a hedged exposure under the PD
substitution approach is equal to:
(A) The lower of the LGD of the
hedged exposure (not adjusted to reflect
the guarantee or credit derivative) and
the LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative provides the [BANK] with the
option to receive immediate payout
upon triggering the protection; or
(B) The LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative does not provide the [BANK]
with the option to receive immediate
payout upon triggering the protection.
(2) LGD adjustment approach. (i) Full
coverage. If an eligible guarantee or
eligible credit derivative meets the
conditions in paragraphs (a) and (b) of
this section and the protection amount
(P) of the guarantee or credit derivative
is greater than or equal to the EAD of the
hedged exposure, the [BANK]’s riskbased capital requirement for the
hedged exposure is the greater of:
(A) The risk-based capital
requirement for the exposure as
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53023
calculated under § ll.131, with the
LGD of the exposure adjusted to reflect
the guarantee or credit derivative; or
(B) The risk-based capital requirement
for a direct exposure to the protection
provider as calculated under § ll.131,
using the PD for the protection provider,
the LGD for the guarantee or credit
derivative, and an EAD equal to the
EAD of the hedged exposure.
(ii) Partial coverage. If an eligible
guarantee or eligible credit derivative
meets the conditions in paragraphs (a)
and (b) of this section and the protection
amount (P) of the guarantee or credit
derivative is less than the EAD of the
hedged exposure, the [BANK] must treat
the hedged exposure as two separate
exposures (protected and unprotected)
in order to recognize the credit risk
mitigation benefit of the guarantee or
credit derivative.
(A) The [BANK]’s risk-based capital
requirement for the protected exposure
would be the greater of:
(1) The risk-based capital requirement
for the protected exposure as calculated
under § ll.131, with the LGD of the
exposure adjusted to reflect the
guarantee or credit derivative and EAD
set equal to P; or
(2) The risk-based capital requirement
for a direct exposure to the guarantor as
calculated under § ll.131, using the
PD for the protection provider, the LGD
for the guarantee or credit derivative,
and an EAD set equal to P.
(B) The [BANK] must calculate its
risk-based capital requirement for the
unprotected exposure under § ll.131,
where PD is the obligor’s PD, LGD is the
hedged exposure’s LGD (not adjusted to
reflect the guarantee or credit
derivative), and EAD is the EAD of the
original hedged exposure minus P.
(3) M of hedged exposures. The M of
the hedged exposure is the same as the
M of the exposure if it were unhedged.
(d) Maturity mismatch. (1) A [BANK]
that recognizes an eligible guarantee or
eligible credit derivative in determining
its risk-based capital requirement for a
hedged exposure must adjust the
effective notional amount of the credit
risk mitigant to reflect any maturity
mismatch between the hedged exposure
and the credit risk mitigant.
(2) A maturity mismatch occurs when
the residual maturity of a credit risk
mitigant is less than that of the hedged
exposure(s).
(3) The residual maturity of a hedged
exposure is the longest possible
remaining time before the obligor is
scheduled to fulfil its obligation on the
exposure. If a credit risk mitigant has
embedded options that may reduce its
term, the [BANK] (protection purchaser)
must use the shortest possible residual
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maturity for the credit risk mitigant. If
a call is at the discretion of the
protection provider, the residual
maturity of the credit risk mitigant is at
the first call date. If the call is at the
discretion of the [BANK] (protection
purchaser), but the terms of the
arrangement at origination of the credit
risk mitigant contain a positive
incentive for the [BANK] to call the
transaction before contractual maturity,
the remaining time to the first call date
is the residual maturity of the credit risk
mitigant.4
(4) A credit risk mitigant with a
maturity mismatch may be recognized
only if its original maturity is greater
than or equal to one year and its
residual maturity is greater than three
months.
(5) When a maturity mismatch exists,
the [BANK] must apply the following
adjustment to the effective notional
amount of the credit risk mitigant: Pm =
E × (t ¥ 0.25)/(T ¥ 0.25), where:
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(i) Pm = effective notional amount of the
credit risk mitigant, adjusted for maturity
mismatch;
(ii) E = effective notional amount of the
credit risk mitigant;
(iii) t = the lesser of T or the residual
maturity of the credit risk mitigant, expressed
in years; and
(iv) T = the lesser of five or the residual
maturity of the hedged exposure, expressed
in years.
(e) Credit derivatives without
restructuring as a credit event. If a
[BANK] recognizes an eligible credit
derivative that does not include as a
credit event a restructuring of the
hedged exposure involving forgiveness
or postponement of principal, interest,
or fees that results in a credit loss event
(that is, a charge-off, specific provision,
or other similar debit to the profit and
loss account), the [BANK] must apply
the following adjustment to the effective
notional amount of the credit derivative:
Pr = Pm × 0.60, where:
(1) Pr = effective notional amount of
the credit risk mitigant, adjusted for lack
of restructuring event (and maturity
mismatch, if applicable); and
(2) Pm = effective notional amount of
the credit risk mitigant adjusted for
maturity mismatch (if applicable).
(f) Currency mismatch. (1) If a [BANK]
recognizes an eligible guarantee or
eligible credit derivative that is
denominated in a currency different
from that in which the hedged exposure
is denominated, the [BANK] must apply
the following formula to the effective
4 For example, where there is a step-up in cost in
conjunction with a call feature or where the
effective cost of protection increases over time even
if credit quality remains the same or improves, the
residual maturity of the credit risk mitigant will be
the remaining time to the first call.
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notional amount of the guarantee or
credit derivative: Pc = Pr × (1 ¥ HFX),
where:
(i) Pc = effective notional amount of the
credit risk mitigant, adjusted for currency
mismatch (and maturity mismatch and lack
of restructuring event, if applicable);
(ii) Pr = effective notional amount of the
credit risk mitigant (adjusted for maturity
mismatch and lack of restructuring event, if
applicable); and
(iii) HFX = haircut appropriate for the
currency mismatch between the credit risk
mitigant and the hedged exposure.
(2) A [BANK] must set HFX equal to
8 percent unless it qualifies for the use
of and uses its own internal estimates of
foreign exchange volatility based on a
ten-business-day holding period and
daily marking-to-market and
remargining. A [BANK] qualifies for the
use of its own internal estimates of
foreign exchange volatility if it qualifies
for:
(i) The own-estimates haircuts in
§ ll.132(b)(2)(iii);
(ii) The simple VaR methodology in
§ ll.132(b)(3); or
(iii) The internal models methodology
in § ll.132(d).
(3) A [BANK] must adjust HFX
calculated in paragraph (f)(2) of this
section upward if the [BANK] revalues
the guarantee or credit derivative less
frequently than once every ten business
days using the square root of time
formula provided in
§ ll.132(b)(2)(iii)(A)(2).
§ ll.135 Guarantees and credit
derivatives: Double default treatment.
(a) Eligibility and operational criteria
for double default treatment. A [BANK]
may recognize the credit risk mitigation
benefits of a guarantee or credit
derivative covering an exposure
described in § ll.134(a)(1) by
applying the double default treatment in
this section if all the following criteria
are satisfied:
(1) The hedged exposure is fully
covered or covered on a pro rata basis
by:
(i) An eligible guarantee issued by an
eligible double default guarantor; or
(ii) An eligible credit derivative that
meets the requirements of
§ ll.134(b)(2) and that is issued by an
eligible double default guarantor.
(2) The guarantee or credit derivative
is:
(i) An uncollateralized guarantee or
uncollateralized credit derivative (for
example, a credit default swap) that
provides protection with respect to a
single reference obligor; or
(ii) An nth-to-default credit derivative
(subject to the requirements of
§ ll.142(m).
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(3) The hedged exposure is a
wholesale exposure (other than a
sovereign exposure).
(4) The obligor of the hedged
exposure is not:
(i) An eligible double default
guarantor or an affiliate of an eligible
double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The [BANK] does not recognize
any credit risk mitigation benefits of the
guarantee or credit derivative for the
hedged exposure other than through
application of the double default
treatment as provided in this section.
(6) The [BANK] has implemented a
process (which has received the prior,
written approval of the [AGENCY]) to
detect excessive correlation between the
creditworthiness of the obligor of the
hedged exposure and the protection
provider. If excessive correlation is
present, the [BANK] may not use the
double default treatment for the hedged
exposure.
(b) Full coverage. If the transaction
meets the criteria in paragraph (a) of this
section.and the protection amount (P) of
the guarantee or credit derivative is at
least equal to the EAD of the hedged
exposure, the [BANK] may determine its
risk-weighted asset amount for the
hedged exposure under paragraph (e) of
this section.
(c) Partial coverage. If the transaction
meets the criteria in paragraph (a) of this
section and the protection amount (P) of
the guarantee or credit derivative is less
than the EAD of the hedged exposure,
the [BANK] must treat the hedged
exposure as two separate exposures
(protected and unprotected) in order to
recognize double default treatment on
the protected portion of the exposure.
(1) For the protected exposure, the
[BANK] must set EAD equal to P and
calculate its risk-weighted asset amount
as provided in paragraph (e) of this
section.
(2) For the unprotected exposure, the
[BANK] must set EAD equal to the EAD
of the original exposure minus P and
then calculate its risk-weighted asset
amount as provided in § ll.131.
(d) Mismatches. For any hedged
exposure to which a [BANK] applies
double default treatment, the [BANK]
must make applicable adjustments to
the protection amount as required in
§ ll.134(d), (e), and (f).
(e) The double default dollar riskbased capital requirement. The dollar
risk-based capital requirement for a
hedged exposure to which a [BANK] has
applied double default treatment is KDD
multiplied by the EAD of the exposure.
KDD is calculated according to the
following formula: KDD = Ko × (0.15 +
160 × PDg),
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§ ll.136
Unsettled transactions.
(a) Definitions. For purposes of this
section:
(1) Delivery-versus-payment (DvP)
transaction means a securities or
commodities transaction in which the
buyer is obligated to make payment only
if the seller has made delivery of the
securities or commodities and the seller
is obligated to deliver the securities or
commodities only if the buyer has made
payment.
(2) Payment-versus-payment (PvP)
transaction means a foreign exchange
transaction in which each counterparty
is obligated to make a final transfer of
one or more currencies only if the other
counterparty has made a final transfer of
one or more currencies.
(3) Normal settlement period. A
transaction has a normal settlement
period if the contractual settlement
period for the transaction is equal to or
less than the market standard for the
instrument underlying the transaction
and equal to or less than five business
days.
(4) Positive current exposure. The
positive current exposure of a [BANK]
for a transaction is the difference
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between the transaction value at the
agreed settlement price and the current
market price of the transaction, if the
difference results in a credit exposure of
the [BANK] to the counterparty.
(b) Scope. This section applies to all
transactions involving securities, foreign
exchange instruments, and commodities
that have a risk of delayed settlement or
delivery. This section does not apply to:
(1) Cleared transactions that are
subject to daily marking-to-market and
daily receipt and payment of variation
margin;
(2) Repo-style transactions, including
unsettled repo-style transactions (which
are addressed in §§ ll.131 and 132);
(3) One-way cash payments on OTC
derivative contracts (which are
addressed in §§ ll.131 and 132); or
(4) Transactions with a contractual
settlement period that is longer than the
normal settlement period (which are
treated as OTC derivative contracts and
addressed in §§ ll.131 and 132).
(c) System-wide failures. In the case of
a system-wide failure of a settlement or
clearing system, or a central
counterparty, the [AGENCY] may waive
risk-based capital requirements for
unsettled and failed transactions until
the situation is rectified.
(d) Delivery-versus-payment (DvP)
and payment-versus-payment (PvP)
transactions. A [BANK] must hold riskbased capital against any DvP or PvP
transaction with a normal settlement
period if the [BANK]’s counterparty has
not made delivery or payment within
five business days after the settlement
date. The [BANK] must determine its
risk-weighted asset amount for such a
transaction by multiplying the positive
current exposure of the transaction for
the [BANK] by the appropriate risk
weight in Table 5.
TABLE 5—RISK WEIGHTS FOR UNSETTLED DVP AND PVP TRANSACTIONS
Number of business days
after contractual settlement
date
Risk weight to
be applied to
positive current exposure
(in percent)
From 5 to 15 .........................
From 16 to 30 .......................
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100
625
TABLE 5—RISK WEIGHTS FOR UNSETTLED
DVP AND PVP TRANSACTIONS—Continued
Number of business days
after contractual settlement
date
From 31 to 45 .......................
46 or more ............................
Risk weight to
be applied to
positive current exposure
(in percent)
937.5
1,250
(e) Non-DvP/non-PvP (non-deliveryversus-payment/non-payment-versuspayment) transactions. (1) A [BANK]
must hold risk-based capital against any
non-DvP/non-PvP transaction with a
normal settlement period if the [BANK]
has delivered cash, securities,
commodities, or currencies to its
counterparty but has not received its
corresponding deliverables by the end
of the same business day. The [BANK]
must continue to hold risk-based capital
against the transaction until the [BANK]
has received its corresponding
deliverables.
(2) From the business day after the
[BANK] has made its delivery until five
business days after the counterparty
delivery is due, the [BANK] must
calculate its risk-based capital
requirement for the transaction by
treating the current market value of the
deliverables owed to the [BANK] as a
wholesale exposure.
(i) A [BANK] may use a 45 percent
LGD for the transaction rather than
estimating LGD for the transaction
provided the [BANK] uses the 45
percent LGD for all transactions
described in § ll.135(e)(1) and (e)(2).
(ii) A [BANK] may use a 100 percent
risk weight for the transaction provided
the [BANK] uses this risk weight for all
transactions described in sections
135(e)(1) and (e)(2).
(3) If the [BANK] has not received its
deliverables by the fifth business day
after the counterparty delivery was due,
the [BANK] must apply a 1,250 percent
risk weight to the current market value
of the deliverables owed to the [BANK].
(f) Total risk-weighted assets for
unsettled transactions. Total riskweighted assets for unsettled
transactions is the sum of the risk-
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EP30AU12.047</GPH>
(2) PDg = PD of the protection provider.
(3) PDo = PD of the obligor of the hedged
exposure.
(4) LGDg = (i) The lower of the LGD of the
hedged exposure (not adjusted to reflect
the guarantee or credit derivative) and
the LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative provides the [BANK] with the
option to receive immediate payout on
triggering the protection; or
(ii) The LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative does not provide the [BANK]
with the option to receive immediate
payout on triggering the protection.
(5) ros (asset value correlation of the obligor)
is calculated according to the
appropriate formula for (R) provided in
Table 1 in § ll.131, with PD equal to
PDo.
(6) b (maturity adjustment coefficient) is
calculated according to the formula for b
provided in Table 1 in § ll.131, with
PD equal to the lesser of PDo and PDg.
(7) M (maturity) is the effective maturity of
the guarantee or credit derivative, which
may not be less than one year or greater
than five years.
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weighted asset amounts of all DvP, PvP,
and non-DvP/non-PvP transactions.
RISK-WEIGHTED ASSETS FOR
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§ ll.141 Operational criteria for
recognizing the transfer of risk.
(a) Operational criteria for traditional
securitizations. A [BANK] that transfers
exposures it has originated or purchased
to a securitization SPE or other third
party in connection with a traditional
securitization may exclude the
exposures from the calculation of its
risk-weighted assets only if each of the
conditions in this paragraph (a) is
satisfied. A [BANK] that meets these
conditions must hold risk-based capital
against any securitization exposures it
retains in connection with the
securitization. A [BANK] that fails to
meet these conditions must hold riskbased capital against the transferred
exposures as if they had not been
securitized and must deduct from
common equity tier 1 capital any aftertax gain-on-sale resulting from the
transaction. The conditions are:
(1) The exposures are not reported on
the [BANK]’s balance sheet under
GAAP;
(2) The [BANK] has transferred to
third parties credit risk associated with
the underlying exposures;
(3) Any clean-up calls relating to the
securitization are eligible clean-up calls;
and
(4) The securitization does not:
(i) Include one or more underlying
exposures in which the borrower is
permitted to vary the drawn amount
within an agreed limit under a line of
credit; and
(ii) Contain an early amortization
provision.
(b) Operational criteria for synthetic
securitizations. For synthetic
securitizations, a [BANK] may recognize
for risk-based capital purposes the use
of a credit risk mitigant to hedge
underlying exposures only if each of the
conditions in this section is satisfied. A
[BANK] that meets these conditions
must hold risk-based capital against any
credit risk of the exposures it retains in
connection with the synthetic
securitization. A [BANK] that fails to
meet these conditions must hold riskbased capital against the underlying
exposures as if they had not been
synthetically securitized. The
conditions are:
(1) The credit risk mitigant is
financial collateral, an eligible credit
derivative from an eligible guarantor or
an eligible guarantee from an eligible
guarantor;
(2) The [BANK] transfers credit risk
associated with the underlying
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exposures to third parties, and the terms
and conditions in the credit risk
mitigants employed do not include
provisions that:
(i) Allow for the termination of the
credit protection due to deterioration in
the credit quality of the underlying
exposures;
(ii) Require the [BANK] to alter or
replace the underlying exposures to
improve the credit quality of the pool of
underlying exposures;
(iii) Increase the [BANK]’s cost of
credit protection in response to
deterioration in the credit quality of the
underlying exposures;
(iv) Increase the yield payable to
parties other than the [BANK] in
response to a deterioration in the credit
quality of the underlying exposures; or
(v) Provide for increases in a retained
first loss position or credit enhancement
provided by the [BANK] after the
inception of the securitization;
(3) The [BANK] obtains a wellreasoned opinion from legal counsel
that confirms the enforceability of the
credit risk mitigant in all relevant
jurisdictions; and
(4) Any clean-up calls relating to the
securitization are eligible clean-up calls.
(c) Due diligence requirements for
securitization exposures. (1) Except for
exposures that are deducted from
common equity tier 1 capital and
exposures subject to § ll.142(k), if a
[BANK] is unable to demonstrate to the
satisfaction of the [AGENCY] a
comprehensive understanding of a
feature of a securitization exposure that
would materially affect the performance
of the position, the [BANK] must assign
a 1,250 percent risk weight to the
securitization exposure. The [BANK]’s
analysis must be commensurate with
the complexity of the securitization
exposure and the materiality of the
position in relation to capital.
(2) A [BANK] must demonstrate its
comprehensive understanding of a
securitization exposure under paragraph
(c)(1) of this section, for each
securitization exposure by:
(i) Conduct an analysis of the risk
characteristics of a securitization
exposure prior to acquiring the exposure
and document such analysis within
three business days after acquiring the
exposure, considering:
(A) Structural features of the
securitization that would materially
impact the performance of the exposure,
for example, the contractual cash flow
waterfall, waterfall-related triggers,
credit enhancements, liquidity
enhancements, market value triggers,
the performance of organizations that
service the position, and deal-specific
definitions of default;
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(B) Relevant information regarding the
performance of the underlying credit
exposure(s), for example, the percentage
of loans 30, 60, and 90 days past due;
default rates; prepayment rates; loans in
foreclosure; property types; occupancy;
average credit score or other measures of
creditworthiness; average loan-to-value
ratio; and industry and geographic
diversification data on the underlying
exposure(s);
(C) Relevant market data of the
securitization, for example, bid-ask
spreads, most recent sales price and
historical price volatility, trading
volume, implied market rating, and size,
depth and concentration level of the
market for the securitization; and
(D) For resecuritization exposures—
(1) Performance information on the
underlying securitization exposures, for
example, the issuer name and credit
quality, and the characteristics and
performance of the exposures
underlying the securitization exposures;
and
(2) On an on-going basis (no less
frequently than quarterly), evaluate,
review, and update as appropriate the
analysis required under this section for
each securitization exposure.
§ ll.142 Risk-weighted assets for
securitization exposures.
(a) Hierarchy of approaches. Except as
provided elsewhere in this section and
in § ll.141:
(1) A [BANK] must deduct from
common equity tier 1 capital any aftertax gain-on-sale resulting from a
securitization and must apply a 1,250
percent risk weight to the portion of any
CEIO that does not constitute after tax
gain-on-sale.
(2) If a securitization exposure does
not require deduction or a 1,250 percent
risk weight under paragraph (a)(1) of
this section, the [BANK] must apply the
supervisory formula approach in
§ ll.143 to the exposure if the [BANK]
and the exposure qualify for the
supervisory formula approach according
to § ll.143(a).
(3) If a securitization exposure does
not require deduction or a 1,250 percent
risk weight under paragraph (a)(1) of
this section and does not qualify for the
supervisory formula approach, the
[BANK] may apply the simplified
supervisory formula approach under
§ ll.144.
(4) If a securitization exposure does
not require deduction or a 1,250 percent
risk weight under paragraph (a)(1) of
this section, does not qualify for the
supervisory formula approach, and the
[BANK] does not apply the simplified
supervisory formula approach, the
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[BANK] must apply a 1,250 percent risk
weight to the exposure.
(5) If a securitization exposure is a
derivative contract (other than a credit
derivative) that has a first priority claim
on the cash flows from the underlying
exposures (notwithstanding amounts
due under interest rate or currency
derivative contracts, fees due, or other
similar payments), with approval of the
[AGENCY], a [BANK] may choose to set
the risk-weighted asset amount of the
exposure equal to the amount of the
exposure as determined in paragraph (e)
of this section rather than apply the
hierarchy of approaches described in
paragraphs (a)(1) through (4) of this
section.
(b) Total risk-weighted assets for
securitization exposures. A [BANK]’s
total risk-weighted assets for
securitization exposures is equal to the
sum of its risk-weighted assets
calculated using §§ ll.142 through
146.
(c) Deductions. A [BANK] may
calculate any deduction from common
equity tier 1 capital for a securitization
exposure net of any DTLs associated
with the securitization exposure.
(d) Maximum risk-based capital
requirement. Except as provided in
§ ll.141(c), unless one or more
underlying exposures does not meet the
definition of a wholesale, retail,
securitization, or equity exposure, the
total risk-based capital requirement for
all securitization exposures held by a
single [BANK] associated with a single
securitization (excluding any risk-based
capital requirements that relate to the
[BANK]’s gain-on-sale or CEIOs
associated with the securitization) may
not exceed the sum of:
(1) The [BANK]’s total risk-based
capital requirement for the underlying
exposures calculated under this subpart
as if the [BANK] directly held the
underlying exposures; and
(2) The total ECL of the underlying
exposures calculated under this subpart.
(e) Amount of a securitization
exposure. (1) The amount of an onbalance sheet securitization exposure
that is not a repo-style transaction,
eligible margin loan, or OTC derivative
contract (other than a credit derivative)
is the [BANK]’s carrying value.
(2) The amount of an off-balance sheet
securitization exposure that is not an
OTC derivative contract or cleared
transaction (other than a credit
derivative) is the notional amount of the
exposure. For an off-balance-sheet
securitization exposure to an ABCP
program, such as an eligible ABCP
liquidity facility, the notional amount
may be reduced to the maximum
potential amount that the [BANK] could
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be required to fund given the ABCP
program’s current underlying assets
(calculated without regard to the current
credit quality of those assets).
(3) The amount of a securitization
exposure that is a repo-style transaction,
eligible margin loan, or OTC derivative
contract or cleared transaction (other
than a credit derivative) is the EAD of
the exposure as calculated in § ll.132
or § ll.133.
(f) Overlapping exposures. If a
[BANK] has multiple securitization
exposures that provide duplicative
coverage of the underlying exposures of
a securitization (such as when a [BANK]
provides a program-wide credit
enhancement and multiple pool-specific
liquidity facilities to an ABCP program),
the [BANK] is not required to hold
duplicative risk-based capital against
the overlapping position. Instead, the
[BANK] may assign to the overlapping
securitization exposure the applicable
risk-based capital treatment that results
in the highest risk-based capital
requirement.
(g) Securitizations of non-IRB
exposures. Except as provided in
§ ll.141(c), if a [BANK] has a
securitization exposure where any
underlying exposure is not a wholesale
exposure, retail exposure, securitization
exposure, or equity exposure, the
[BANK]:
(1) Must deduct from common equity
tier 1 capital any after-tax gain-on-sale
resulting from the securitization and
apply a 1,250 percent risk weight to the
portion of any CEIO that does not
constitute gain-on-sale, if the [BANK] is
an originating [BANK];
(2) May apply the simplified
supervisory formula approach in
§ ll.144 to the exposure, if the
securitization exposure does not require
deduction or a 1,250 percent risk weight
under paragraph (g)(1) of this section;
(3) Must assign a 1,250 percent risk
weight to the exposure if the
securitization exposure does not require
deduction or a 1,250 percent risk weight
under paragraph (g)(1) of this section,
does not qualify for the supervisory
formula approach, and the [BANK] does
not apply the simplified supervisory
formula approach to the exposure.
(h) Implicit support. If a [BANK]
provides support to a securitization in
excess of the [BANK]’s contractual
obligation to provide credit support to
the securitization (implicit support):
(1) The [BANK] must calculate a riskweighted asset amount for underlying
exposures associated with the
securitization as if the exposures had
not been securitized and must deduct
from common equity tier 1 capital any
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53027
after-tax gain-on-sale resulting from the
securitization; and
(2) The [BANK] must disclose
publicly:
(i) That it has provided implicit
support to the securitization; and
(ii) The regulatory capital impact to
the [BANK] of providing such implicit
support.
(i) Eligible servicer cash advance
facilities. Regardless of any other
provisions of subpart E, a [BANK] is not
required to hold risk-based capital
against the undrawn portion of an
eligible servicer cash advance facility.
(j) Interest-only mortgage-backed
securities. Except as provided in
§ ll.141(c), the risk weight for a noncredit-enhancing interest-only mortgagebacked security may not be less than
100 percent.
(k) Small-business loans and leases
on personal property transferred with
recourse. (1) Notwithstanding any other
provisions of this subpart E, a [BANK]
that has transferred small-business loans
and leases on personal property (smallbusiness obligations) with recourse
must include in risk-weighted assets
only the contractual amount of retained
recourse if all the following conditions
are met:
(i) The transaction is a sale under
GAAP.
(ii) The [BANK] establishes and
maintains, pursuant to GAAP, a noncapital reserve sufficient to meet the
[BANK]’s reasonably estimated liability
under the recourse arrangement.
(iii) The loans and leases are to
businesses that meet the criteria for a
small-business concern established by
the Small Business Administration
under section 3(a) of the Small Business
Act.
(iv) The [BANK] is well capitalized, as
defined in[the [AGENCY]’s [prompt
corrective action regulation]—12 CFR
part 6 (for national banks), 12 CFR part
208, subpart D (for state member banks
or bank holding companies), 12 CFR
part 325, subpart B (for state
nonmember banks), and 12 CFR part
165 (for savings associations)]. For
purposes of determining whether a
[BANK] is well capitalized for purposes
of this paragraph, the [BANK]’s capital
ratios must be calculated without regard
to the capital treatment for transfers of
small-business obligations with recourse
specified in paragraph (k)(1) of this
section.
(2) The total outstanding amount of
recourse retained by a [BANK] on
transfers of small-business obligations
receiving the capital treatment specified
in paragraph (k)(1) of this section cannot
exceed 15 percent of the [BANK]’s total
capital.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
(3) If a [BANK] ceases to be well
capitalized or exceeds the 15 percent
capital limitation, the preferential
capital treatment specified in paragraph
(k)(1) of this section will continue to
apply to any transfers of small-business
obligations with recourse that occurred
during the time that the [BANK] was
well capitalized and did not exceed the
capital limit.
(4) The risk-based capital ratios of the
[BANK] must be calculated without
regard to the capital treatment for
transfers of small-business obligations
with recourse specified in paragraph
(k)(1) of this section .
(l) Nth-to-default credit derivatives.
(1) Protection provider. A [BANK] must
determine a risk weight using the SFA
or the SSFA for an nth-to-default credit
derivative in accordance with this
paragraph. In the case of credit
protection sold, a [BANK] must
determine its exposure in the nth-todefault credit derivative as the largest
notional dollar amount of all the
underlying exposures
(2) For purposes of determining the
risk weight for an nth-to-default credit
derivative using the SFA or the SSFA,
the [BANK] must calculate the
attachment point and detachment point
of its exposure as follows:
(i) The attachment point (parameter
A) is the ratio of the sum of the notional
amounts of all underlying exposures
that are subordinated to the [BANK]’s
exposure to the total notional amount of
all underlying exposures. For purposes
of using the SFA to calculate the risk
weight for its exposure in an nth-todefault credit derivative, parameter A
must be set equal to the credit
enhancement level (L) input to the SFA
formula. In the case of a first-to-default
credit derivative, there are no
underlying exposures that are
subordinated to the [BANK]’s exposure.
In the case of a second-or-subsequent-todefault credit derivative, the smallest
(n-1) risk-weighted asset amounts of the
underlying exposure(s) are subordinated
to the [BANK]’s exposure.
(ii) The detachment point (parameter
D) equals the sum of parameter A plus
the ratio of the notional amount of the
[BANK]’s exposure in the nth-to-default
credit derivative to the total notional
amount of all underlying exposures. For
purposes of using the SFA to calculate
the risk weight for its exposure in an
nth-to-default credit derivative,
parameter D must be set to equal L plus
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the thickness of tranche T input to the
SFA formula.
(3) A [BANK] that does not use the
SFA or the SSFA to determine a risk
weight for its exposure in an nth-todefault credit derivative must assign a
risk weight of 1,250 percent to the
exposure.
(4) Protection purchaser. (i) First-todefault credit derivatives. A [BANK]
that obtains credit protection on a group
of underlying exposures through a firstto-default credit derivative that meets
the rules of recognition of § ll.134(b)
must determine its risk-based capital
requirement for the underlying
exposures as if the [BANK] synthetically
securitized the underlying exposure
with the lowest risk-based capital
requirement and had obtained no credit
risk mitigant on the other underlying
exposures. A [BANK] must calculate a
risk-based capital requirement for
counterparty credit risk according to
§ ll.132 for a first-to-default credit
derivative that does not meet the rules
of recognition of § ll.134(b).
(ii) Second-or-subsequent-to-default
credit derivatives. (A) A [BANK] that
obtains credit protection on a group of
underlying exposures through a nth -todefault credit derivative that meets the
rules of recognition of § ll.134(b)
(other than a first-to-default credit
derivative) may recognize the credit risk
mitigation benefits of the derivative
only if:
(1) The [BANK] also has obtained
credit protection on the same
underlying exposures in the form of
first-through-(n-1)-to-default credit
derivatives; or
(2) If n-1 of the underlying exposures
have already defaulted.
(B) If a [BANK] satisfies the
requirements of paragraph (l)(3)(ii)(A) of
this section, the [BANK] must determine
its risk-based capital requirement for the
underlying exposures as if the bank had
only synthetically securitized the
underlying exposure with the nth
lowest risk-based capital requirement
and had obtained no credit risk mitigant
on the other underlying exposures.
(C) A [BANK] must calculate a riskbased capital requirement for
counterparty credit risk according to
§ ll.132 for a nth-to-default credit
derivative that does not meet the rules
of recognition of § ll.134(b).
(m) Guarantees and credit derivatives
other than nth-to-default credit
derivatives. (1) Protection provider. For
a guarantee or credit derivative (other
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than an nth-to-default credit derivative)
provided by a [BANK] that covers the
full amount or a pro rata share of a
securitization exposure’s principal and
interest, the [BANK] must risk weight
the guarantee or credit derivative as if
it holds the portion of the reference
exposure covered by the guarantee or
credit derivative.
(2) Protection purchaser. (i) If a
[BANK] chooses (and is able) to
recognize a guarantee or credit
derivative (other than an nth-to-default
credit derivative) that references a
securitization exposure as a credit risk
mitigant, where applicable, the [BANK]
must apply § ll.145.
(ii) If a [BANK] cannot, or chooses not
to, recognize a credit derivative that
references a securitization exposure as a
credit risk mitigant under § ll.145,
the [BANK] must determine its capital
requirement only for counterparty credit
risk in accordance with § ll.131.
§ ll.143
(SFA).
Supervisory formula approach
(a) Eligibility requirements. A [BANK]
must use the SFA to determine its riskweighted asset amount for a
securitization exposure if the [BANK]
can calculate on an ongoing basis each
of the SFA parameters in paragraph (e)
of this section.
(b) Mechanics. The risk-weighted
asset amount for the securitization
exposure equals the SFA risk-based
capital requirement for the exposure
multiplied by 12.5.
(c) The SFA risk-based capital
requirement. (1) If KIRB is greater than
or equal to L + T, the capital
requirement equals the exposure
amount.
(2) If KIRB is less than or equal to L,
the exposure’s SFA risk-based capital
requirement is UE multiplied by TP
multiplied by the greater of:
(i) F × T (where F is 0.016 for all
securitization exposures); or
(ii) S[L + + T] ¥ S[L].
(3) If KIRB is greater than L and less
than L + T, the [BANK] must apply a
1,250 percent risk weight to an amount
equal to UE * TP * (KIRB ¥ L), and the
exposure’s SFA risk-based capital
requirement is UE multiplied by TP
multiplied by the greater of:
(i) F × (T ¥ (KIRB ¥ L) (where F is
0.016for all other securitization
exposures); or
(ii) S[L + + T] ¥ S[KIRB].
(d) The supervisory formula:
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(11) In these expressions, b[Y; a, b]
refers to the cumulative beta
distribution with parameters a and b
evaluated at Y. In the case where N =
1 and EWALGD = 100 percent, S[Y] in
formula (1) must be calculated with
K[Y] set equal to the product of KIRB and
Y, and d set equal to 1 ¥ KIRB.
(e) SFA parameters. (1) Amount of the
underlying exposures (UE). UE is the
EAD of any underlying exposures that
are wholesale and retail exposures
(including the amount of any funded
spread accounts, cash collateral
accounts, and other similar funded
credit enhancements) plus the amount
of any underlying exposures that are
securitization exposures (as defined in
§ ll.142(e)) plus the adjusted carrying
value of any underlying exposures that
are equity exposures (as defined in
§ ll.151(b)).
(2) Tranche percentage (TP). TP is the
ratio of the amount of the [BANK]’s
securitization exposure to the amount of
the tranche that contains the
securitization exposure.
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(3) Capital requirement on underlying
exposures (KIRB).
(i) KIRB is the ratio of:
(A) The sum of the risk-based capital
requirements for the underlying
exposures plus the expected credit
losses of the underlying exposures (as
determined under this subpart E as if
the underlying exposures were directly
held by the [BANK]); to
(B) UE.
(ii) The calculation of KIRB must
reflect the effects of any credit risk
mitigant applied to the underlying
exposures (either to an individual
underlying exposure, to a group of
underlying exposures, or to the entire
pool of underlying exposures).
(iii) All assets related to the
securitization are treated as underlying
exposures, including assets in a reserve
account (such as a cash collateral
account).
(4) Credit enhancement level (L). (i) L
is the ratio of:
(A) The amount of all securitization
exposures subordinated to the tranche
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53029
that contains the [BANK]’s
securitization exposure; to
(B) UE.
(ii) A [BANK] must determine L
before considering the effects of any
tranche-specific credit enhancements.
(iii) Any gain-on-sale or CEIO
associated with the securitization may
not be included in L.
(iv) Any reserve account funded by
accumulated cash flows from the
underlying exposures that is
subordinated to the tranche that
contains the [BANK]’s securitization
exposure may be included in the
numerator and denominator of L to the
extent cash has accumulated in the
account. Unfunded reserve accounts
(that is, reserve accounts that are to be
funded from future cash flows from the
underlying exposures) may not be
included in the calculation of L.
(v) In some cases, the purchase price
of receivables will reflect a discount that
provides credit enhancement (for
example, first loss protection) for all or
certain tranches of the securitization.
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where:
(i) Cm is the ratio of the sum of the amounts
of the ‘m’ largest underlying exposures to
UE; and
(ii) The level of m is to be selected by the
[BANK].
(4) Alternatively, if only C1 is
available and C1 is no more than 0.03,
the [BANK] may set EWALGD = 0.50 if
none of the underlying exposures is a
securitization exposure, or may set
EWALGD = 1 if one or more of the
underlying exposures is a securitization
exposure and may set N = 1/C1.
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§ ll.144 Simplified supervisory formula
approach (SSFA).
(a) General requirements. To use the
SSFA to determine the risk weight for
a securitization exposure, a [BANK]
must have data that enables it to assign
accurately the parameters described in
paragraph (b) of this section. Data used
to assign the parameters described in
paragraph (b) of this section must be the
most currently available data and no
more than 91 calendar days old. A
[BANK] that does not have the
appropriate data to assign the
parameters described in paragraph (b) of
this section must assign a risk weight of
1,250 percent to the exposure.
(b) SSFA parameters. To calculate the
risk weight for a securitization exposure
using the SSFA, a [BANK] must have
accurate information on the five inputs
to the SSFA calculation described and
defined, for purposes of this section, in
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underlying exposures that are themselves
securitization exposures.
where LGDi represents the average LGD
associated with all exposures to the ith
obligor. In the case of a re-securitization, an
LGD of 100 percent must be assumed for the
(f) Simplified method for computing N
and EWALGD. (1) If all underlying
exposures of a securitization are retail
exposures, a [BANK] may apply the SFA
using the following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in sections
143(f)(3) and (f)(4), a [BANK] may
employ a simplified method for
calculating N and EWALGD.
(3) If C1 is no more than 0.03, a
[BANK] may set EWALGD = 0.50 if
none of the underlying exposures is a
securitization exposure, or may set
EWALGD = 1 if one or more of the
underlying exposures is a securitization
exposure, and may set N equal to the
following amount:
paragraphs (b)(1) through (b)(5) of this
section:
(1) KG is the weighted-average (with
unpaid principal used as the weight for
each exposure) total capital requirement
of the underlying exposures calculated
using this subpart. KG is expressed as a
decimal value between zero and 1 (that
is, an average risk weight of 100 percent
represents a value of KG equal to .08).
(2) Parameter W is expressed as a
decimal value between zero and one.
Parameter W is the ratio of the sum of
the dollar amounts of any underlying
exposures within the securitized pool
that meet any of the criteria as set forth
in paragraphs (b)(2)(i) through (vi) of
this section to the ending balance,
measured in dollars, of underlying
exposures.
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or
insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred interest
payments for 90 days or more; or
(vi) Is in default.
(3) Parameter A is the attachment
point for the exposure, which represents
the threshold at which credit losses will
first be allocated to the exposure.
Parameter A equals the ratio of the
current dollar amount of underlying
exposures that are subordinated to the
exposure of the [BANK] to the current
dollar amount of underlying exposures.
Any reserve account funded by the
accumulated cash flows from the
underlying exposures that is
subordinated to the [BANK]’s
securitization exposure may be included
in the calculation of parameter A to the
extent that cash is present in the
account. Parameter A is expressed as a
decimal value between zero and one.
(4) Parameter D is the detachment
point for the exposure, which represents
the threshold at which credit losses of
principal allocated to the exposure
would result in a total loss of principal.
Parameter D equals parameter A plus
the ratio of the current dollar amount of
the securitization exposures that are
pari passu with the exposure (that is,
have equal seniority with respect to
credit risk) to the current dollar amount
of the underlying exposures. Parameter
D is expressed as a decimal value
between zero and one.
(5) A supervisory calibration
parameter, p, is equal to 0.5 for
securitization exposures that are not
resecuritization exposures and equal to
1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. KG and W
are used to calculate KA, the augmented
value of KG, which reflects the observed
credit quality of the underlying pool of
exposures. KA is defined in paragraph
(d) of this section. The values of
parameters A and D, relative to KA
determine the risk weight assigned to a
securitization exposure as described in
paragraph (d) of this section. The risk
weight assigned to a securitization
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where EADi represents the EAD associated
with the ith instrument in the pool of
underlying exposures.
(ii) Multiple exposures to one obligor
must be treated as a single underlying
exposure.
(iii) In the case of a re-securitization,
the [BANK] must treat each underlying
exposure as a single underlying
exposure and must not look through to
the originally securitized underlying
exposures.
(7) Exposure-weighted average loss
given default (EWALGD). EWALGD is
calculated as:
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When this arises, L should be calculated
inclusive of this discount if the discount
provides credit enhancement for the
securitization exposure.
(5) Thickness of tranche (T). T is the
ratio of:
(i) The amount of the tranche that
contains the [BANK]’s securitization
exposure; to
(ii) UE.
(6) Effective number of exposures (N).
(i) Unless the [BANK] elects to use the
formula provided in paragraph (f) of this
section,
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exposure, or portion of an exposure, as
appropriate, is the larger of the risk
weight determined in accordance with
this paragraph and paragraph (d) of this
section and a risk weight of 20 percent.
(1) When the detachment point,
parameter D, for a securitization
exposure is less than or equal to KA, the
exposure must be assigned a risk weight
of 1,250 percent.
(2) When the attachment point,
parameter A, for a securitization
exposure is greater than or equal to KA,
the [BANK] must calculate the risk
weight in accordance with paragraph (d)
of this section.
(3) When A is less than KA and D is
greater than KA, the risk weight is a
weighted-average of 1,250 percent and
1,250 percent times KSSFA calculated in
accordance with paragraph (d) of this
section, but with the parameter A
revised to be set equal to KA. For the
purpose of this weighted-average
calculation:
§ ll.145 Recognition of credit risk
mitigants for securitization exposures.
the credit risk mitigant, but only as
provided in this section.
(b) Collateral. (1) Rules of recognition.
A [BANK] may recognize financial
collateral in determining the [BANK]’s
risk-weighted asset amount for a
securitization exposure (other than a
repo-style transaction, an eligible
margin loan, or an OTC derivative
contract for which the [BANK] has
reflected collateral in its determination
of exposure amount under § ll.132) as
follows. The [BANK]’s risk-weighted
asset amount for the collateralized
securitization exposure is equal to the
risk-weighted asset amount for the
securitization exposure as calculated
under the SSFA in § ll.144 or under
the SFA in § ll.143 multiplied by the
ratio of adjusted exposure amount (SE*)
to original exposure amount (SE),
where:
(a) General. An originating [BANK]
that has obtained a credit risk mitigant
to hedge its securitization exposure to a
synthetic or traditional securitization
that satisfies the operational criteria in
§ ll.141 may recognize the credit risk
mitigant, but only as provided in this
section. An investing [BANK] that has
obtained a credit risk mitigant to hedge
a securitization exposure may recognize
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(i) SE* = max {0, [SE¥C × (1¥Hs¥Hfx)]};
(ii) SE = the amount of the securitization
exposure calculated under § ll.142(e);
(iii) C = the current market value of the
collateral;
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(iv) Hs = the haircut appropriate to the
collateral type; and
(v) Hfx = the haircut appropriate for any
currency mismatch between the collateral
and the exposure.
(2) Mixed collateral. Where the
collateral is a basket of different asset
types or a basket of assets denominated
in different currencies, the haircut on
the basket will be
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where ai is the current market value of the
asset in the basket divided by the current
market value of all assets in the basket and
Hi is the haircut applicable to that asset.
(3) Standard supervisory haircuts.
Unless a [BANK] qualifies for use of and
uses own-estimates haircuts in
paragraph (b)(4) of this section:
(i) A [BANK] must use the collateral
type haircuts (Hs) in Table 2;
(ii) A [BANK] must use a currency
mismatch haircut (Hfx) of 8 percent if
the exposure and the collateral are
denominated in different currencies;
(iii) A [BANK] must multiply the
supervisory haircuts obtained in
paragraphs (b)(3)(i) and (ii) of this
section by the square root of 6.5 (which
equals 2.549510); and
(iv) A [BANK] must adjust the
supervisory haircuts upward on the
basis of a holding period longer than 65
business days where and as appropriate
to take into account the illiquidity of the
collateral.
(4) Own estimates for haircuts. With
the prior written approval of the
[AGENCY], a [BANK] may calculate
haircuts using its own internal estimates
of market price volatility and foreign
exchange volatility, subject to
§ ll.132(b)(2)(iii). The minimum
holding period (TM) for securitization
exposures is 65 business days.
(c) Guarantees and credit derivatives.
(1) Limitations on recognition. A
[BANK] may only recognize an eligible
guarantee or eligible credit derivative
provided by an eligible guarantor in
determining the [BANK]’s risk-weighted
asset amount for a securitization
exposure.
(2) ECL for securitization exposures.
When a [BANK] recognizes an eligible
guarantee or eligible credit derivative
provided by an eligible guarantor in
determining the [BANK]’s risk-weighted
asset amount for a securitization
exposure, the [BANK] must also:
(i) Calculate ECL for the protected
portion of the exposure using the same
risk parameters that it uses for
calculating the risk-weighted asset
amount of the exposure as described in
paragraph (c)(3) of this section; and
(ii) Add the exposure’s ECL to the
[BANK]’s total ECL.
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(3) Rules of recognition. A [BANK]
may recognize an eligible guarantee or
eligible credit derivative provided by an
eligible guarantor in determining the
[BANK]’s risk-weighted asset amount
for the securitization exposure as
follows:
(i) Full coverage. If the protection
amount of the eligible guarantee or
eligible credit derivative equals or
exceeds the amount of the securitization
exposure, the [BANK] may set the riskweighted asset amount for the
securitization exposure equal to the
risk-weighted asset amount for a direct
exposure to the eligible guarantor (as
determined in the wholesale risk weight
function described in § ll.131), using
the [BANK]’s PD for the guarantor, the
[BANK]’s LGD for the guarantee or
credit derivative, and an EAD equal to
the amount of the securitization
exposure (as determined in
§ ll.142(e)).
(ii) Partial coverage. If the protection
amount of the eligible guarantee or
eligible credit derivative is less than the
amount of the securitization exposure,
the [BANK] may set the risk-weighted
asset amount for the securitization
exposure equal to the sum of:
(A) Covered portion. The riskweighted asset amount for a direct
exposure to the eligible guarantor (as
determined in the wholesale risk weight
function described in § ll.131 of this
subpart), using the [BANK]’s PD for the
guarantor, the [BANK]’s LGD for the
guarantee or credit derivative, and an
EAD equal to the protection amount of
the credit risk mitigant; and
(B) Uncovered portion. (1) 1.0 minus
the ratio of the protection amount of the
eligible guarantee or eligible credit
derivative to the amount of the
securitization exposure); multiplied by
(2) The risk-weighted asset amount for
the securitization exposure without the
credit risk mitigant (as determined in
§§ ll.142 through 146).
(4) Mismatches. The [BANK] must
make applicable adjustments to the
protection amount as required in
§ ll.134(d), (e), and (f) for any hedged
securitization exposure and any more
senior securitization exposure that
benefits from the hedge. In the context
of a synthetic securitization, when an
eligible guarantee or eligible credit
derivative covers multiple hedged
exposures that have different residual
maturities, the [BANK] must use the
longest residual maturity of any of the
hedged exposures as the residual
maturity of all the hedged exposures.
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Risk-Weighted Assets for Equity
Exposures
§ ll.151 Introduction and exposure
measurement.
(a) General. To calculate its riskweighted asset amounts for equity
exposures that are not equity exposures
to investment funds, a [BANK] may
apply either the Simple Risk Weight
Approach (SRWA) in § ll.152 or, if it
qualifies to do so, the Internal Models
Approach (IMA) in § ll.153. A
[BANK] must use the look-through
approaches in § ll.154 to calculate its
risk-weighted asset amounts for equity
exposures to investment funds.
(b) Adjusted carrying value. For
purposes of this [PART], the adjusted
carrying value of an equity exposure is:
(1) For the on-balance sheet
component of an equity exposure, the
[BANK]’s carrying value of the
exposure; and
(2) For the off-balance sheet
component of an equity exposure, the
effective notional principal amount of
the exposure, the size of which is
equivalent to a hypothetical on-balance
sheet position in the underlying equity
instrument that would evidence the
same change in fair value (measured in
dollars) for a given small change in the
price of the underlying equity
instrument, minus the adjusted carrying
value of the on-balance sheet
component of the exposure as
calculated in paragraph (b)(1) of this
section. For unfunded equity
commitments that are unconditional,
the effective notional principal amount
is the notional amount of the
commitment. For unfunded equity
commitments that are conditional, the
effective notional principal amount is
the [BANK]’s best estimate of the
amount that would be funded under
economic downturn conditions.
§ ll.152
(SRWA).
Simple risk weight approach
(a) General. Under the SRWA, a
[BANK]’s aggregate risk-weighted asset
amount for its equity exposures is equal
to the sum of the risk-weighted asset
amounts for each of the [BANK]’s
individual equity exposures (other than
equity exposures to an investment fund)
as determined in this section and the
risk-weighted asset amounts for each of
the [BANK]’s individual equity
exposures to an investment fund as
determined in § ll.154.
(b) SRWA computation for individual
equity exposures. A [BANK] must
determine the risk-weighted asset
amount for an individual equity
exposure (other than an equity exposure
to an investment fund) by multiplying
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the adjusted carrying value of the equity
exposure or the effective portion and
ineffective portion of a hedge pair (as
defined in paragraph (c) of this section)
by the lowest applicable risk weight in
this section.
(1) Zero percent risk weight equity
exposures. An equity exposure to an
entity whose credit exposures are
exempt from the 0.03 percent PD floor
in § ll.131(d)(2) is assigned a zero
percent risk weight.
(2) 20 percent risk weight equity
exposures. An equity exposure to a
Federal Home Loan Bank or the Federal
Agricultural Mortgage Corporation
(Farmer Mac) is assigned a 20 percent
risk weight.
(3) 100 percent risk weight equity
exposures. The following equity
exposures are assigned a 100 percent
risk weight:
(i) Community development equity
exposures. An equity exposure that
qualifies as a community development
investment under section 24 (Eleventh)
of the National Bank Act, excluding
equity exposures to an unconsolidated
small business investment company and
equity exposures held through a
consolidated small business investment
company described in section 302 of the
Small Business Investment Act.
(ii) Effective portion of hedge pairs.
The effective portion of a hedge pair.
(iii) Non-significant equity exposures.
Equity exposures, excluding exposures
to an investment firm that would meet
the definition of a traditional
securitization were it not for the
[AGENCY]’s application of paragraph
(8) of that definition in § ll.2 and has
greater than immaterial leverage, to the
extent that the aggregate adjusted
carrying value of the exposures does not
exceed 10 percent of the [BANK]’s total
capital.
(A) To compute the aggregate adjusted
carrying value of a [BANK]’s equity
exposures for purposes of this section,
the [BANK] may exclude equity
exposures described in paragraphs
(b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of
this section, the equity exposure in a
hedge pair with the smaller adjusted
carrying value, and a proportion of each
equity exposure to an investment fund
equal to the proportion of the assets of
the investment fund that are not equity
exposures or that meet the criterion of
paragraph (b)(3)(i) of this section. If a
[BANK] does not know the actual
holdings of the investment fund, the
[BANK] may calculate the proportion of
the assets of the fund that are not equity
exposures based on the terms of the
prospectus, partnership agreement, or
similar contract that defines the fund’s
permissible investments. If the sum of
the investment limits for all exposure
classes within the fund exceeds 100
percent, the [BANK] must assume for
purposes of this section that the
investment fund invests to the
maximum extent possible in equity
exposures.
(B) When determining which of a
[BANK]’s equity exposures qualifies for
a 100 percent risk weight under this
section, a [BANK] first must include
equity exposures to unconsolidated
small business investment companies or
held through consolidated small
business investment companies
described in section 302 of the Small
Business Investment Act, then must
include publicly-traded equity
exposures (including those held
indirectly through investment funds),
and then must include non-publiclytraded equity exposures (including
those held indirectly through
investment funds).
(4) 250 percent risk weight equity
exposures. Significant investments in
the capital of unconsolidated financial
institutions that are not deducted from
capital pursuant to § ll.22(b)(4) of
subpart B are assigned a 250 percent
risk weight.
(5) 300 percent risk weight equity
exposures. A publicly-traded equity
exposure (other than an equity exposure
described in paragraph (b)(6) of this
section and including the ineffective
portion of a hedge pair) is assigned a
300 percent risk weight.
(6) 400 percent risk weight equity
exposures. An equity exposure (other
than an equity exposure described in
paragraph (b)(6) of this section) that is
not publicly-traded is assigned a 400
percent risk weight.
(7) 600 percent risk weight equity
exposures. An equity exposure to an
investment firm that:
(i) Would meet the definition of a
traditional securitization were it not for
the [AGENCY]’s application of
paragraph (8) of that definition in
§ ll.2; and
(ii) Has greater than immaterial
leverage is assigned a 600 percent risk
weight.
(c) Hedge transactions. (1) Hedge pair.
A hedge pair is two equity exposures
that form an effective hedge so long as
each equity exposure is publicly-traded
or has a return that is primarily based
on a publicly-traded equity exposure.
(2) Effective hedge. Two equity
exposures form an effective hedge if the
exposures either have the same
remaining maturity or each has a
remaining maturity of at least three
months; the hedge relationship is
formally documented in a prospective
manner (that is, before the [BANK]
acquires at least one of the equity
exposures); the documentation specifies
the measure of effectiveness (E) the
[BANK] will use for the hedge
relationship throughout the life of the
transaction; and the hedge relationship
has an E greater than or equal to 0.8. A
[BANK] must measure E at least
quarterly and must use one of three
alternative measures of E:
(i) Under the dollar-offset method of
measuring effectiveness, the [BANK]
must determine the ratio of value
change (RVC). The RVC is the ratio of
the cumulative sum of the periodic
changes in value of one equity exposure
to the cumulative sum of the periodic
changes in the value of the other equity
exposure. If RVC is positive, the hedge
is not effective and E equals zero. If RVC
is negative and greater than or equal to
¥1 (that is, between zero and ¥1), then
E equals the absolute value of RVC. If
RVC is negative and less than ¥1, then
E equals 2 plus RVC.
(ii) Under the variability-reduction
method of measuring effectiveness:
where
(A) Xt = At ¥ Bt;
(B) At = the value at time t of one exposure
in a hedge pair; and
(C) Bt = the value at time t of the other
exposure in a hedge pair.
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(iii) Under the regression method of
measuring effectiveness, E equals the
coefficient of determination of a
regression in which the change in value
of one exposure in a hedge pair is the
dependent variable and the change in
value of the other exposure in a hedge
pair is the independent variable.
However, if the estimated regression
coefficient is positive, then the value of
E is zero.
(3) The effective portion of a hedge
pair is E multiplied by the greater of the
adjusted carrying values of the equity
exposures forming a hedge pair.
(4) The ineffective portion of a hedge
pair is (1–E) multiplied by the greater of
the adjusted carrying values of the
equity exposures forming a hedge pair.
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§ ll.153
Internal models approach (IMA).
(a) General. A [BANK] may calculate
its risk-weighted asset amount for equity
exposures using the IMA by modeling
publicly-traded and non-publicly-traded
equity exposures (in accordance with
paragraph (c) of this section) or by
modeling only publicly-traded equity
exposures (in accordance with
paragraphs (c) and (d) of this section).
(b) Qualifying criteria. To qualify to
use the IMA to calculate risk-weighted
assets for equity exposures, a [BANK]
must receive prior written approval
from the [AGENCY]. To receive such
approval, the [BANK] must demonstrate
to the [AGENCY]’s satisfaction that the
[BANK] meets the following criteria:
(1) The [BANK] must have one or
more models that:
(i) Assess the potential decline in
value of its modeled equity exposures;
(ii) Are commensurate with the size,
complexity, and composition of the
[BANK]’s modeled equity exposures;
and
(iii) Adequately capture both general
market risk and idiosyncratic risk.
(2) The [BANK]’s model must produce
an estimate of potential losses for its
modeled equity exposures that is no less
than the estimate of potential losses
produced by a VaR methodology
employing a 99.0 percent, one-tailed
confidence interval of the distribution of
quarterly returns for a benchmark
portfolio of equity exposures
comparable to the [BANK]’s modeled
equity exposures using a long-term
sample period.
(3) The number of risk factors and
exposures in the sample and the data
period used for quantification in the
[BANK]’s model and benchmarking
exercise must be sufficient to provide
confidence in the accuracy and
robustness of the [BANK]’s estimates.
(4) The [BANK]’s model and
benchmarking process must incorporate
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data that are relevant in representing the
risk profile of the [BANK]’s modeled
equity exposures, and must include data
from at least one equity market cycle
containing adverse market movements
relevant to the risk profile of the
[BANK]’s modeled equity exposures. In
addition, the [BANK]’s benchmarking
exercise must be based on daily market
prices for the benchmark portfolio. If the
[BANK]’s model uses a scenario
methodology, the [BANK] must
demonstrate that the model produces a
conservative estimate of potential losses
on the [BANK]’s modeled equity
exposures over a relevant long-term
market cycle. If the [BANK] employs
risk factor models, the [BANK] must
demonstrate through empirical analysis
the appropriateness of the risk factors
used.
(5) The [BANK] must be able to
demonstrate, using theoretical
arguments and empirical evidence, that
any proxies used in the modeling
process are comparable to the [BANK]’s
modeled equity exposures and that the
[BANK] has made appropriate
adjustments for differences. The [BANK]
must derive any proxies for its modeled
equity exposures and benchmark
portfolio using historical market data
that are relevant to the [BANK]’s
modeled equity exposures and
benchmark portfolio (or, where not,
must use appropriately adjusted data),
and such proxies must be robust
estimates of the risk of the [BANK]’s
modeled equity exposures.
(c) Risk-weighted assets calculation
for a [BANK] modeling publicly-traded
and non-publicly-traded equity
exposures. If a [BANK] models publiclytraded and non-publicly-traded equity
exposures, the [BANK]’s aggregate riskweighted asset amount for its equity
exposures is equal to the sum of:
(1) The risk-weighted asset amount of
each equity exposure that qualifies for a
0 percent, 20 percent, or 100 percent
risk weight under §§ ll.152(b)(1)
through (b)(3)(i) (as determined under
§ ll.152) and each equity exposure to
an investment fund (as determined
under § ll.154); and
(2) The greater of:
(i) The estimate of potential losses on
the [BANK]’s equity exposures (other
than equity exposures referenced in
paragraph (c)(1) of this section)
generated by the [BANK]’s internal
equity exposure model multiplied by
12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the
aggregate adjusted carrying value of the
[BANK]’s publicly-traded equity
exposures that do not belong to a hedge
pair, do not qualify for a 0 percent, 20
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percent, or 100 percent risk weight
under §§ ll.152(b)(1) through (b)(3)(i),
and are not equity exposures to an
investment fund;
(B) 200 percent multiplied by the
aggregate ineffective portion of all hedge
pairs; and
(C) 300 percent multiplied by the
aggregate adjusted carrying value of the
[BANK]’s equity exposures that are not
publicly-traded, do not qualify for a 0
percent, 20 percent, or 100 percent risk
weight under §§ ll.152(b)(1) through
(b)(3)(i), and are not equity exposures to
an investment fund.
(d) Risk-weighted assets calculation
for a [BANK] using the IMA only for
publicly-traded equity exposures. If a
[BANK] models only publicly-traded
equity exposures, the [BANK]’s
aggregate risk-weighted asset amount for
its equity exposures is equal to the sum
of:
(1) The risk-weighted asset amount of
each equity exposure that qualifies for a
0 percent, 20 percent, or 100 percent
risk weight under §§ ll.152(b)(1)
through (b)(3)(i) (as determined under
§ ll.152), each equity exposure that
qualifies for a 400 percent risk weight
under § ll.152(b)(5) or a 600 percent
risk weight under § ll.152(b)(6) (as
determined under § ll.152), and each
equity exposure to an investment fund
(as determined under § ll.154); and
(2) The greater of:
(i) The estimate of potential losses on
the [BANK]’s equity exposures (other
than equity exposures referenced in
paragraph (d)(1) of this section)
generated by the [BANK]’s internal
equity exposure model multiplied by
12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the
aggregate adjusted carrying value of the
[BANK]’s publicly-traded equity
exposures that do not belong to a hedge
pair, do not qualify for a 0 percent, 20
percent, or 100 percent risk weight
under §§ ll.152(b)(1) through (b)(3)(i),
and are not equity exposures to an
investment fund; and
(B) 200 percent multiplied by the
aggregate ineffective portion of all hedge
pairs.
§ ll.154
funds.
Equity exposures to investment
(a) Available approaches. (1) Unless
the exposure meets the requirements for
a community development equity
exposure in § ll.152(b)(3)(i), a
[BANK] must determine the riskweighted asset amount of an equity
exposure to an investment fund under
the Full Look-Through Approach in
paragraph (b) of this section, the Simple
Modified Look-Through Approach in
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paragraph (c) of this section, or the
Alternative Modified Look-Through
Approach in paragraph (d) of this
section.
(2) The risk-weighted asset amount of
an equity exposure to an investment
fund that meets the requirements for a
community development equity
exposure in § ll.152(b)(3)(i) is its
adjusted carrying value.
(3) If an equity exposure to an
investment fund is part of a hedge pair
and the [BANK] does not use the Full
Look-Through Approach, the [BANK]
may use the ineffective portion of the
hedge pair as determined under
§ ll.152(c) as the adjusted carrying
value for the equity exposure to the
investment fund. The risk-weighted
asset amount of the effective portion of
the hedge pair is equal to its adjusted
carrying value.
(b) Full Look-Through Approach. A
[BANK] that is able to calculate a riskweighted asset amount for its
proportional ownership share of each
exposure held by the investment fund
(as calculated under this subpart E as if
the proportional ownership share of
each exposure were held directly by the
[BANK]) may either:
(1) Set the risk-weighted asset amount
of the [BANK]’s exposure to the fund
equal to the product of:
(i) The aggregate risk-weighted asset
amounts of the exposures held by the
fund as if they were held directly by the
[BANK]; and
(ii) The [BANK]’s proportional
ownership share of the fund; or
(2) Include the [BANK]’s proportional
ownership share of each exposure held
by the fund in the [BANK]’s IMA.
(c) Simple Modified Look-Through
Approach. Under this approach, the
risk-weighted asset amount for a
[BANK]’s equity exposure to an
investment fund equals the adjusted
carrying value of the equity exposure
multiplied by the highest risk weight
assigned according to subpart D that
applies to any exposure the fund is
permitted to hold under its prospectus,
partnership agreement, or similar
contract that defines the fund’s
permissible investments (excluding
derivative contracts that are used for
hedging rather than speculative
purposes and that do not constitute a
material portion of the fund’s
exposures).
(d) Alternative Modified LookThrough Approach. Under this
approach, a [BANK] may assign the
adjusted carrying value of an equity
exposure to an investment fund on a pro
rata basis to different risk weight
categories assigned according to subpart
D of this part based on the investment
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limits in the fund’s prospectus,
partnership agreement, or similar
contract that defines the fund’s
permissible investments. The riskweighted asset amount for the [BANK]’s
equity exposure to the investment fund
equals the sum of each portion of the
adjusted carrying value assigned to an
exposure class multiplied by the
applicable risk weight. If the sum of the
investment limits for all exposure types
within the fund exceeds 100 percent,
the [BANK] must assume that the fund
invests to the maximum extent
permitted under its investment limits in
the exposure type with the highest risk
weight under subpart D of this part, and
continues to make investments in order
of the exposure type with the next
highest risk weight under subpart D
until the maximum total investment
level is reached. If more than one
exposure type applies to an exposure,
the [BANK] must use the highest
applicable risk weight. A [BANK] may
exclude derivative contracts held by the
fund that are used for hedging rather
than for speculative purposes and do
not constitute a material portion of the
fund’s exposures.
§ ll.155
Equity derivative contracts.
(a) Under the IMA, in addition to
holding risk-based capital against an
equity derivative contract under this
[PART], a [BANK] must hold risk-based
capital against the counterparty credit
risk in the equity derivative contract by
also treating the equity derivative
contract as a wholesale exposure and
computing a supplemental riskweighted asset amount for the contract
under § ll.132.
(b) Under the SRWA, a [BANK] may
choose not to hold risk-based capital
against the counterparty credit risk of
equity derivative contracts, as long as it
does so for all such contracts. Where the
equity derivative contracts are subject to
a qualified master netting agreement, a
[BANK] using the SRWA must either
include all or exclude all of the
contracts from any measure used to
determine counterparty credit risk
exposure.
Risk-Weighted Assets for Operational
Risk
§ ll.161 Qualification requirements for
incorporation of operational risk mitigants.
(a) Qualification to use operational
risk mitigants. A [BANK] may adjust its
estimate of operational risk exposure to
reflect qualifying operational risk
mitigants if:
(1) The [BANK]’s operational risk
quantification system is able to generate
an estimate of the [BANK]’s operational
risk exposure (which does not
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53035
incorporate qualifying operational risk
mitigants) and an estimate of the
[BANK]’s operational risk exposure
adjusted to incorporate qualifying
operational risk mitigants; and
(2) The [BANK]’s methodology for
incorporating the effects of insurance, if
the [BANK] uses insurance as an
operational risk mitigant, captures
through appropriate discounts to the
amount of risk mitigation:
(i) The residual term of the policy,
where less than one year;
(ii) The cancellation terms of the
policy, where less than one year;
(iii) The policy’s timeliness of
payment;
(iv) The uncertainty of payment by
the provider of the policy; and
(v) Mismatches in coverage between
the policy and the hedged operational
loss event.
(b) Qualifying operational risk
mitigants. Qualifying operational risk
mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated
company that the [BANK] deems to
have strong capacity to meet its claims
payment obligations and the obligor
rating category to which the [BANK]
assigns the company is assigned a PD
equal to or less than 10 basis points;
(ii) Has an initial term of at least one
year and a residual term of more than
90 days;
(iii) Has a minimum notice period for
cancellation by the provider of 90 days;
(iv) Has no exclusions or limitations
based upon regulatory action or for the
receiver or liquidator of a failed
depository institution; and
(v) Is explicitly mapped to a potential
operational loss event;
(2) Operational risk mitigants other
than insurance for which the [AGENCY]
has given prior written approval. In
evaluating an operational risk mitigant
other than insurance, the [AGENCY]
will consider whether the operational
risk mitigant covers potential
operational losses in a manner
equivalent to holding total capital.
§ ll.162 Mechanics of risk-weighted
asset calculation.
(a) If a [BANK] does not qualify to use
or does not have qualifying operational
risk mitigants, the [BANK]’s dollar riskbased capital requirement for
operational risk is its operational risk
exposure minus eligible operational risk
offsets (if any).
(b) If a [BANK] qualifies to use
operational risk mitigants and has
qualifying operational risk mitigants,
the [BANK]’s dollar risk-based capital
requirement for operational risk is the
greater of:
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(1) The [BANK]’s operational risk
exposure adjusted for qualifying
operational risk mitigants minus eligible
operational risk offsets (if any); or
(2) 0.8 multiplied by the difference
between:
(i) The [BANK]’s operational risk
exposure; and
(ii) Eligible operational risk offsets (if
any).
(c) The [BANK]’s risk-weighted asset
amount for operational risk equals the
[BANK]’s dollar risk-based capital
requirement for operational risk
determined under sections 162(a) or (b)
multiplied by 12.5.
Disclosures
§ ll.171
Purpose and scope.
Sections ll.171 through ll.173
establish public disclosure requirements
related to the capital requirements of a
[BANK] that is an advanced approaches
bank.
§ ll.172
Disclosure requirements.
(a) A [BANK] that is an advanced
approaches bank must publicly disclose
each quarter its total and tier 1 riskbased capital ratios and their
components as calculated under this
subpart (that is, common equity tier 1
capital, additional tier 1 capital, tier 2
capital, total qualifying capital, and total
risk-weighted assets).
(b) A [BANK] that is an advanced
approaches bank must comply with
paragraph (c) of this section unless it is
a consolidated subsidiary of a bank
holding company, savings and loan
holding company, or depository
institution that is subject to these
disclosure requirements or a subsidiary
of a non-U.S. banking organization that
is subject to comparable public
disclosure requirements in its home
jurisdiction.
(c)(1) A [BANK] described in
paragraph (b) of this section and that
has successfully completed its parallel
run must provide timely public
disclosures each calendar quarter of the
information in the applicable tables in
§ ll.173. If a significant change
occurs, such that the most recent
reported amounts are no longer
reflective of the [BANK]’s capital
adequacy and risk profile, then a brief
discussion of this change and its likely
impact must be disclosed as soon as
practicable thereafter. Qualitative
disclosures that typically do not change
each quarter (for example, a general
summary of the [BANK]’s risk
management objectives and policies,
reporting system, and definitions) may
be disclosed annually, provided that
any significant changes to these are
disclosed in the interim. Management is
encouraged to provide all of the
disclosures required by this subpart in
one place on the [BANK]’s public Web
site.5
(2) A [BANK] described in paragraph
(b) of this section must have a formal
disclosure policy approved by the board
of directors that addresses its approach
for determining the disclosures it
makes. The policy must address the
associated internal controls and
disclosure controls and procedures. The
board of directors and senior
management are responsible for
establishing and maintaining an
effective internal control structure over
financial reporting, including the
disclosures required by this subpart,
and must ensure that appropriate review
of the disclosures takes place. One or
more senior officers of the [BANK] must
attest that the disclosures meet the
requirements of this subpart.
(3) If a [BANK] described in paragraph
(b) of this section believes that
disclosure of specific commercial or
financial information would prejudice
seriously its position by making public
information that is either proprietary or
confidential in nature, the [BANK] is
not required to disclose those specific
items, but must disclose more general
information about the subject matter of
the requirement, together with the fact
that, and the reason why, the specific
items of information have not been
disclosed.
§ ll.173 Disclosures by certain
advanced approaches [BANKS].
Except as provided in § ll.172(b), a
[BANK] that is an advanced approaches
bank must make the disclosures
described in Tables 11.1 through 11.12
below. The [BANK] must make these
disclosures publicly available for each
of the last three years (that is, twelve
quarters) or such shorter period
beginning on the effective date of this
subpart E.
TABLE 11.1—SCOPE OF APPLICATION
Qualitative disclosures .........
(a) The name of the top corporate entity in the group to which subpart E of this [PART] applies.
(b) A brief description of the differences in the basis for consolidating entities 6 for accounting and regulatory purposes, with a description of those entities:
(1) That are fully consolidated;
(2) That are deconsolidated and deducted from total capital;
(3) For which the total capital requirement is deducted; and
(4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a
risk weight in accordance with this subpart).
(c) Any restrictions, or other major impediments, on transfer of funds or total capital within the group.
Quantitative disclosures .......
(d) The aggregate amount of surplus capital of insurance subsidiaries included in the total capital of the consolidated group.
(e) The aggregate amount by which actual total capital is less than the minimum total capital requirement in all
subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies.
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TABLE 11.2—CAPITAL STRUCTURE
Qualitative disclosures .........
Quantitative disclosures .......
(a) Summary information on the terms and conditions of the main features of all regulatory capital instruments.
(b) The amount of common equity tier 1 capital, with separate disclosure of:
(1) Common stock and related surplus;
(2) Retained earnings;
(3) Common equity minority interest;
5 Alternatively, a [BANK] may provide the
disclosures in more than one place, as some of them
may be included in public financial reports (for
example, in Management’s Discussion and Analysis
included in SEC filings) or other regulatory reports.
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The [BANK] must publicly provide a summary table
that specifically indicates where all the disclosures
may be found (for example, regulatory report
schedules, page numbers in annual reports).
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6 Such entities include securities, insurance and
other financial subsidiaries, commercial
subsidiaries (where permitted), and significant
minority equity investments in insurance, financial
and commercial entities.
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TABLE 11.2—CAPITAL STRUCTURE—Continued
(4) AOCI (net of tax) and other reserves; and
(5) Regulatory deductions and adjustments made to common equity tier 1 capital.
(c) The amount of tier 1 capital, with separate disclosure of:
(1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest
not included in common equity tier 1 capital; and
(2) Regulatory deductions and adjustments made to tier 1 capital.
(d) The amount of total capital, with separate disclosure of:
(1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included
in tier 1 capital; and
(2) Regulatory deductions and adjustments made to total capital.
TABLE 11.3—CAPITAL ADEQUACY
Qualitative disclosures .........
(a) A summary discussion of the [BANK]’s approach to assessing the adequacy of its capital to support current
and future activities.
(b) Risk-weighted assets for credit risk from:
(1) Wholesale exposures;
(2) Residential mortgage exposures;
(3) Qualifying revolving exposures;
(4) Other retail exposures;
(5) Securitization exposures;
(6) Equity exposures:
(7) Equity exposures subject to the simple risk weight approach; and
(8) Equity exposures subject to the internal models approach.
(c) Standardized market risk-weighted assets and advanced market risk-weighted assets as calculated under
subpart F of this [PART]: 7
(1) Standardized approach for specific risk; and
(2) Internal models approach for specific risk.
(d) Risk-weighted assets for operational risk.
(e) Common equity tier 1, tier 1 and total risk-based capital ratios:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
(f) Total risk-weighted assets.
Quantitative disclosures .......
TABLE 11.4—CAPITAL CONSERVATION AND COUNTERCYCLICAL BUFFERS
Qualitative disclosures .........
Quantitative disclosures .......
(a) The [BANK] must publicly disclose the geographic breakdown of its private sector credit exposures used in
the calculation of the countercyclical capital buffer.
(b) At least quarterly, the [BANK] must calculate and publicly disclose the capital conservation buffer and the
countercyclical capital buffer as described under § ll.11 of subpart B.
(c) At least quarterly, the [BANK] must calculate and publicly disclose the buffer retained income of the [BANK],
as described under § ll.11 of subpart B.
(d) At least quarterly, the [BANK] must calculate and publicly disclose any limitations it has on capital distributions
and discretionary bonus payments resulting from the capital conservation buffer and the countercyclical buffer
framework described under § ll.11 of subpart B, including the maximum payout amount for the quarter.
For each separate risk area described
in Tables 11.5 through 11.12, the
[BANK] must describe its risk
management objectives and policies,
including:
• Strategies and processes;
• The structure and organization of
the relevant risk management function;
• The scope and nature of risk
reporting and/or measurement systems;
and
• Policies for hedging and/or
mitigating risk and strategies and
processes for monitoring the continuing
effectiveness of hedges/mitigants.
7 Standardized market risk-weighted assets and
advanced market risk-weighted assets as calculated
under this subpart are to be disclosed only with
respect to an approach that is used by a [BANK].
8 Table 11.5 does not cover equity exposures.
9 See, for example, ASC Topic 815–10 and 210–
20 (formerly FASB Interpretation Numbers 37 and
41).
10 Geographical areas may comprise individual
countries, groups of countries, or regions within
countries. A [BANK] might choose to define the
geographical areas based on the way the company’s
portfolio is geographically managed. The criteria
used to allocate the loans to geographical areas
must be specified.
11 A [BANK] is encouraged also to provide an
analysis of the aging of past-due loans.
12 The portion of the general allowance that is not
allocated to a geographical area should be disclosed
separately.
13 The reconciliation should include the
following: A description of the allowance; the
opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts
provided (or reversed) for estimated probable loan
losses during the period; any other adjustments (for
example, exchange rate differences, business
combinations, acquisitions and disposals of
subsidiaries), including transfers between
allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have
been recorded directly to the income statement
should be disclosed separately.
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General Qualitative Disclosure
Requirement
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TABLE 11.5 8—CREDIT RISK: GENERAL DISCLOSURES
Qualitative disclosures .........
Quantitative disclosures .......
(a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk
disclosed in accordance with Table 11.7), including:
(1) Policy for determining past due or delinquency status;
(2) Policy for placing loans on nonaccrual;
(3) Policy for returning loans to accrual status;
(4) Definition of and policy for identifying impaired loans (for financial accounting purposes).
(5) Description of the methodology that the entity uses to estimate its allowance for loan losses, including
statistical methods used where applicable;
(6) Policy for charging-off uncollectible amounts; and
(7) Discussion of the [BANK]’s credit risk management policy
(b) Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with
GAAP,9 without taking into account the effects of credit risk mitigation techniques (for example, collateral and
netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, [BANK]s could use categories similar to that used for financial statement purposes. Such categories might
include, for instance:
(1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures;
(2) Debt securities; and
(3) OTC derivatives.
(c) Geographic10 distribution of exposures, categorized in significant areas by major types of credit exposure.
(d) Industry or counterparty type distribution of exposures, categorized by major types of credit exposure.
(e) By major industry or counterparty type:
(1) Amount of impaired loans for which there was a related allowance under GAAP;
(2) Amount of impaired loans for which there was no related allowance under GAAP;
(3) Amount of loans past due 90 days and on nonaccrual;
(4) Amount of loans past due 90 days and still accruing; 11
(5) The balance in the allowance for credit losses at the end of each period, disaggregated on the basis of
the entity’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and
(6) Charge-offs during the period.
(f) Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic
areas including, if practical, the amounts of allowances related to each geographical area,12 further categorized
as required by GAAP.
(g) Reconciliation of changes in ALLL.13
(h) Remaining contractual maturity breakdown (for example, one year or less) of the whole portfolio, categorized
by credit exposure.
TABLE 11.6—CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB RISK-BASED CAPITAL FORMULAS
Qualitative disclosures .........
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Quantitative disclosures:
Risk assessment.
Quantitative disclosures: Historical results.
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(a) Explanation and review of the:
(1) Structure of internal rating systems and relation between internal and external ratings;
(2) Use of risk parameter estimates other than for regulatory capital purposes;
(3) Process for managing and recognizing credit risk mitigation (see Table 11.8); and
(4) Control mechanisms for the rating system, including discussion of independence, accountability, and rating systems review.
(b)(1) Description of the internal ratings process, provided separately for the following:
(i) Wholesale category;
(ii) Retail subcategories—
(A) Residential mortgage exposures;
(B) Qualifying revolving exposures; and
(C) Other retail exposures.
(2) For each category and subcategory above the description should include:
(i) The types of exposure included in the category/subcategories; and
(ii) The definitions, methods and data for estimation and validation of PD, LGD, and EAD, including assumptions employed in the derivation of these variables.14
(c)(1) For wholesale exposures, present the following information across a sufficient number of PD grades (including default) to allow for a meaningful differentiation of credit risk: 15
(i) Total EAD; 16
(ii) Exposure-weighted average LGD (percentage);
(iii) Exposure-weighted average risk weight; and
(iv) Amount of undrawn commitments and exposure-weighted average EAD including average drawdowns
prior to default for wholesale exposures.
(2) For each retail subcategory, present the disclosures outlined above across a sufficient number of segments to allow for a meaningful differentiation of credit risk.
(d) Actual losses in the preceding period for each category and subcategory and how this differs from past experience. A discussion of the factors that impacted the loss experience in the preceding period—for example, has
the [BANK] experienced higher than average default rates, loss rates or EADs.
(e) [BANK]’s estimates compared against actual outcomes over a longer period.17 At a minimum, this should include information on estimates of losses against actual losses in the wholesale category and each retail subcategory over a period sufficient to allow for a meaningful assessment of the performance of the internal rating
processes for each category/subcategory.18 Where appropriate, the [BANK] should further decompose this to
provide analysis of PD, LGD, and EAD outcomes against estimates provided in the quantitative risk assessment disclosures above.19
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53039
TABLE 11.7—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK OF OTC DERIVATIVE CONTRACTS, REPO-STYLE
TRANSACTIONS, AND ELIGIBLE MARGIN LOANS
Qualitative disclosures .........
Quantitative disclosures .......
(a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and
repo-style transactions, including:
(1) Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures;
(2) Discussion of policies for securing collateral, valuing and managing collateral, and establishing credit reserves;
(3) Discussion of the primary types of collateral taken;
(4) Discussion of policies with respect to wrong-way risk exposures; and
(5) Discussion of the impact of the amount of collateral the [BANK] would have to provide if the [BANK] were
to receive a credit rating downgrade.
(b) Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held (including
type, for example, cash, government securities), and net unsecured credit exposure. 20 Also report measures
for EAD used for regulatory capital for these transactions, the notional value of credit derivative hedges purchased for counterparty credit risk protection, and, for [BANK]s not using the internal models methodology in
§ ll.132(d), the distribution of current credit exposure by types of credit exposure. 21
(c) Notional amount of purchased and sold credit derivatives, segregated between use for the [BANK]’s own credit portfolio and for its intermediation activities, including the distribution of the credit derivative products used,
categorized further by protection bought and sold within each product group.
(d) The estimate of alpha if the [BANK] has received supervisory approval to estimate alpha.
TABLE 11.8—CREDIT RISK MITIGATION 22 23
Qualitative disclosures .........
Quantitative disclosures .......
(a) The general qualitative disclosure requirement with respect to credit risk mitigation, including:
(1) Policies and processes for, and an indication of the extent to which the [BANK] uses, on- or off-balance
sheet netting;
(2) Policies and processes for collateral valuation and management;
(3) A description of the main types of collateral taken by the [BANK];
(4) The main types of guarantors/credit derivative counterparties and their creditworthiness; and
(5) Information about (market or credit) risk concentrations within the mitigation taken.
(b) For each separately disclosed portfolio, the total exposure (after, where applicable, on- or off-balance sheet
netting) that is covered by guarantees/credit derivatives.
TABLE 11.9—SECURITIZATION
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Qualitative disclosures .........
(a) The general qualitative disclosure requirement with respect to securitization (including synthetic
securitizations), including a discussion of:
(1) The [BANK]’s objectives for securitizing assets, including the extent to which these activities transfer
credit risk of the underlying exposures away from the [BANK] to other entities and including the type of
risks assumed and retained with resecuritization activity; 24
(2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets;
14 This disclosure item does not require a detailed
description of the model in full—it should provide
the reader with a broad overview of the model
approach, describing definitions of the variables
and methods for estimating and validating those
variables set out in the quantitative risk disclosures
below. This should be done for each of the four
category/subcategories. The [BANK] must disclose
any significant differences in approach to
estimating these variables within each category/
subcategories.
15 The PD, LGD and EAD disclosures in Table
11.6(c) should reflect the effects of collateral,
qualifying master netting agreements, eligible
guarantees and eligible credit derivatives as defined
under this part. Disclosure of each PD grade should
include the exposure-weighted average PD for each
grade. Where a [BANK] aggregates PD grades for the
purposes of disclosure, this should be a
representative breakdown of the distribution of PD
grades used for regulatory capital purposes.
16 Outstanding loans and EAD on undrawn
commitments can be presented on a combined basis
for these disclosures.
17 These disclosures are a way of further
informing the reader about the reliability of the
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information provided in the ‘‘quantitative
disclosures: risk assessment’’ over the long run. The
disclosures are requirements from year-end 2010; in
the meantime, early adoption is encouraged. The
phased implementation is to allow a [BANK]
sufficient time to build up a longer run of data that
will make these disclosures meaningful.
18 This disclosure item is not intended to be
prescriptive about the period used for this
assessment. Upon implementation, it is expected
that a [BANK] would provide these disclosures for
as long a set of data as possible—for example, if a
[BANK] has 10 years of data, it might choose to
disclose the average default rates for each PD grade
over that 10-year period. Annual amounts need not
be disclosed.
19 A [BANK] must provide this further
decomposition where it will allow users greater
insight into the reliability of the estimates provided
in the ‘‘quantitative disclosures: risk assessment.’’
In particular, it must provide this information
where there are material differences between its
estimates of PD, LGD or EAD compared to actual
outcomes over the long run. The [BANK] must also
provide explanations for such differences.
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20 Net unsecured credit exposure is the credit
exposure after considering the benefits from legally
enforceable netting agreements and collateral
arrangements, without taking into account haircuts
for price volatility, liquidity, etc.
21 This may include interest rate derivative
contracts, foreign exchange derivative contracts,
equity derivative contracts, credit derivatives,
commodity or other derivative contracts, repostyle
transactions, and eligible margin loans.
22 At a minimum, a [BANK] must provide the
disclosures in Table 11.8 in relation to credit risk
mitigation that has been recognized for the
purposes of reducing capital requirements under
this subpart. Where relevant, [BANK]s are
encouraged to give further information about
mitigants that have not been recognized for that
purpose.
23 Credit derivatives and other credit mitigation
that are treated for the purposes of this subpart as
synthetic securitization exposures should be
excluded from the credit risk mitigation disclosures
(in Table 11.8) and included within those relating
to securitization (in Table 11.9).
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TABLE 11.9—SECURITIZATION—Continued
Quantitative disclosures .......
(3) The roles played by the [BANK] in the securitization process 25 and an indication of the extent of the
[BANK]’s involvement in each of them;
(4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures;
(5) The [BANK]’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and
(6) The risk-based capital approaches that the [BANK] follows for its securitization exposures including the
type of securitization exposure to which each approach applies.
(b) A list of:
(1) The type of securitization SPEs that the [BANK], as sponsor, uses to securitize third-party exposures.
The [BANK] must indicate whether it has exposure to these SPEs, either on- or off- balance sheet; and
(2) Affiliated entities:
(i) That the [BANK] manages or advises; and
(ii) That invest either in the securitization exposures that the [BANK] has securitized or in securitization
SPEs that the [BANK] sponsors.26
(c) Summary of the [BANK]’s accounting policies for securitization activities, including:
(1) Whether the transactions are treated as sales or financings;
(2) Recognition of gain-on-sale;
(3) Methods and key assumptions and inputs applied in valuing retained or purchased interests;
(4) Changes in methods and key assumptions and inputs from the previous period for valuing retained interests and impact of the changes;
(5) Treatment of synthetic securitizations;
(6) How exposures intended to be securitized are valued and whether they are recorded under subpart E of
this part; and
(7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the [BANK] to
provide financial support for securitized assets.
(d) An explanation of significant changes to any of the quantitative information set forth below since the last reporting period.
(e) The total outstanding exposures securitized 27 by the [BANK] in securitizations that meet the operational criteria in § ll.141 (categorized into traditional/synthetic), by underlying exposure type,28 separately for
securitizations of third-party exposures for which the bank acts only as sponsor.
(f) For exposures securitized by the [BANK] in securitizations that meet the operational criteria in § ll.141:
(1) Amount of securitized assets that are impaired 29/past due categorized by exposure type; and
(2) Losses recognized by the [BANK] during the current period categorized by exposure type.30
(g) The total amount of outstanding exposures intended to be securitized categorized by exposure type.
(h) Aggregate amount of:
(1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and
(2) Off-balance sheet securitization exposures categorized by exposure type.
(i)(1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g. SA, SFA, or
SSFA).
(2) Exposures that have been deducted entirely from tier 1 capital, credit enhancing I/Os deducted from total
capital (as described in § ll.42(a)(1), and other exposures deducted from total capital should be disclosed separately by exposure type.
(j) Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure
type), and recognized gain or loss on sale by asset type.
(k) Aggregate amount of resecuritization exposures retained or purchased categorized according to:
(1) Exposures to which credit risk mitigation is applied and those not applied; and
(2) Exposures to guarantors categorized according to guarantor credit worthiness categories or guarantor
name.
TABLE 11.10—OPERATIONAL RISK
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Qualitative disclosures .........
(a) The general qualitative disclosure requirement for operational risk.
(b) Description of the AMA, including a discussion of relevant internal and external factors considered in the
[BANK]’s measurement approach.
24 The [BANK] must describe the structure of
resecuritizations in which it participates; this
description must be provided for the main
categories of resecuritization products in which the
[BANK] is active.
25 For example, these roles would include
originator, investor, servicer, provider of credit
enhancement, sponsor, liquidity provider, or swap
provider.
26 For example, money market mutual funds
should be listed individually, and personal and
private trusts should be noted collectively.
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27 ‘‘Exposures securitized’’ include underlying
exposures originated by the bank, whether
generated by them or purchased, and recognized in
the balance sheet, from third parties, and thirdparty exposures included in sponsored transactions.
Securitization transactions (including underlying
exposures originally on the bank’s balance sheet
and underlying exposures acquired by the bank
from third-party entities) in which the originating
bank does not retain any securitization exposure
should be shown separately but need only be
reported for the year of inception.
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28 A [BANK] is required to disclose exposures
regardless of whether there is a capital charge under
Pillar 1.
29 A [BANK] must include credit-related other
than temporary impairment (OTTI).
30 For example, charge-offs/allowances (if the
assets remain on the bank’s balance sheet) or creditrelated OTTI of I/O strips and other retained
residual interests, as well as recognition of
liabilities for probable future financial support
required of the bank with respect to securitized
assets.
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TABLE 11.10—OPERATIONAL RISK—Continued
(c) A description of the use of insurance for the purpose of mitigating operational risk.
TABLE 11.11—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART
Qualitative disclosures .........
Quantitative disclosures .......
(a) The general qualitative disclosure requirement with respect to the equity risk of equity holdings not subject to
subpart F of this part, including:
(1) Differentiation between holdings on which capital gains are expected and those held for other objectives,
including for relationship and strategic reasons; and
(2) Discussion of important policies covering the valuation of and accounting for equity holdings not subject
to subpart F of this [PART]. This includes the accounting methodology and valuation methodologies used,
including key assumptions and practices affecting valuation as well as significant changes in these practices.
(b) Carrying value on the balance sheet of equity investments, as well as the fair value of those investments.
(c) The types and nature of investments, including the amount that is:
(1) Publicly-traded; and
(2) Non-publicly-traded.
(d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period.
(e)(1) Total unrealized gains (losses) 31
(2) Total latent revaluation gains (losses) 32
(3) Any amounts of the above included in tier 1 and/or tier 2 capital.
(f) Capital requirements categorized by appropriate equity groupings, consistent with the [BANK]’s methodology,
as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding total capital requirements.33
TABLE 11.12—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES
Qualitative disclosures .........
Quantitative disclosures .......
(a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities.
(b) The increase (decline) in earnings or economic value (or relevant measure used by management) for upward
and downward rate shocks according to management’s method for measuring interest rate risk for non-trading
activities, categorized by currency (as appropriate).
Subpart F—Risk-Weighted Assets—
Market Risk
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§ ll.201 Purpose, applicability, and
reservation of authority.
(a) Purpose. This subpart F establishes
risk-based capital requirements for
[BANK]s with significant exposure to
market risk, provides methods for these
[BANK]s to calculate their standardized
measure for market risk and, if
applicable, advanced measure for
market risk, and establishes public
disclosure requirements.
(b) Applicability. (1) This subpart
applies to any [BANK] with aggregate
trading assets and trading liabilities (as
reported in the [BANK]’s most recent
quarterly [regulatory report]), equal to:
(i) 10 percent or more of quarter-end
total assets as reported on the most
recent quarterly [Call Report or FR Y–
9C]; or
(ii) $1 billion or more.
31 Unrealized gains (losses) recognized in the
balance sheet but not through earnings.
32 Unrealized gains (losses) not recognized either
in the balance sheet or through earnings.
33 This disclosure must include a breakdown of
equities that are subject to the 0 percent, 20 percent,
100 percent, 300 percent, 400 percent, and 600
percent risk weights, as applicable.
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(2) The [AGENCY] may apply this
subpart to any [BANK] if the [AGENCY]
deems it necessary or appropriate
because of the level of market risk of the
[BANK] or to ensure safe and sound
banking practices.
(3) The [AGENCY] may exclude a
[BANK] that meets the criteria of
paragraph (b)(1) of this section from
application of this subpart if the
[AGENCY] determines that the
exclusion is appropriate based on the
level of market risk of the [BANK] and
is consistent with safe and sound
banking practices.
(c) Reservation of authority. (1) The
[AGENCY] may require a [BANK] to
hold an amount of capital greater than
otherwise required under this subpart if
the [AGENCY] determines that the
[BANK]’s capital requirement for market
risk as calculated under this subpart is
not commensurate with the market risk
of the [BANK]’s covered positions. In
making determinations under
paragraphs (c)(1) through (c)(3) of this
section, the [AGENCY] will apply notice
and response procedures generally in
the same manner as the notice and
response procedures set forth in [12 CFR
3.12, 12 CFR 263.202, 12 CFR 325.6(c),
12 CFR 567.3(d)].
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(2) If the [AGENCY] determines that
the risk-based capital requirement
calculated under this subpart by the
[BANK] for one or more covered
positions or portfolios of covered
positions is not commensurate with the
risks associated with those positions or
portfolios, the [AGENCY] may require
the [BANK] to assign a different riskbased capital requirement to the
positions or portfolios that more
accurately reflects the risk of the
positions or portfolios.
(3) The [AGENCY] may also require a
[BANK] to calculate risk-based capital
requirements for specific positions or
portfolios under this subpart, or under
subpart D or subpart E of this part, as
appropriate, to more accurately reflect
the risks of the positions.
(4) Nothing in this subpart limits the
authority of the [AGENCY] under any
other provision of law or regulation to
take supervisory or enforcement action,
including action to address unsafe or
unsound practices or conditions,
deficient capital levels, or violations of
law.
§ ll.202
Definitions.
(a) Terms set forth in § ll.2 and
used in this subpart have the definitions
assigned thereto in § ll.2.
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(b) For the purposes of this subpart,
the following terms are defined as
follows:
Backtesting means the comparison of
a [BANK]’s internal estimates with
actual outcomes during a sample period
not used in model development. For
purposes of this subpart, backtesting is
one form of out-of-sample testing.
Commodity position means a position
for which price risk arises from changes
in the price of a commodity.
Corporate debt position means a debt
position that is an exposure to a
company that is not a sovereign entity,
the Bank for International Settlements,
the European Central Bank, the
European Commission, the International
Monetary Fund, a multilateral
development bank, a depository
institution, a foreign bank, a credit
union, a public sector entity, a
government-sponsored entity, or a
securitization.
Correlation trading position means:
(1) A securitization position for which
all or substantially all of the value of the
underlying exposures is based on the
credit quality of a single company for
which a two-way market exists, or on
commonly traded indices based on such
exposures for which a two-way market
exists on the indices; or
(2) A position that is not a
securitization position and that hedges
a position described in paragraph (1) of
this definition; and
(3) A correlation trading position does
not include:
(i) A resecuritization position;
(ii) A derivative of a securitization
position that does not provide a pro rata
share in the proceeds of a securitization
tranche; or
(iii) A securitization position for
which the underlying assets or reference
exposures are retail exposures,
residential mortgage exposures, or
commercial mortgage exposures.
Covered position means the following
positions:
(1) A trading asset or trading liability
(whether on- or off-balance sheet),1 as
reported on Schedule RC–D of the Call
Report or Schedule HC–D of the FR Y–
9C, that meets the following conditions:
(i) The position is a trading position
or hedges another covered position; 2
and
(ii) The position is free of any
restrictive covenants on its tradability or
the [BANK] is able to hedge the material
1 Securities subject to repurchase and lending
agreements are included as if they are still owned
by the lender.
2 A position that hedges a trading position must
be within the scope of the bank’s hedging strategy
as described in paragraph (a)(2) of section 203 of
this subpart.
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risk elements of the position in a twoway market;
(2) A foreign exchange or commodity
position, regardless of whether the
position is a trading asset or trading
liability (excluding any structural
foreign currency positions that the
[BANK] chooses to exclude with prior
supervisory approval); and
(3) Notwithstanding paragraphs (1)
and (2) of this definition, a covered
position does not include:
(i) An intangible asset, including any
servicing asset;
(ii) Any hedge of a trading position
that the [AGENCY] determines to be
outside the scope of the [BANK]’s
hedging strategy required in paragraph
(a)(2) of § ll.203;
(iii) Any position that, in form or
substance, acts as a liquidity facility that
provides support to asset-backed
commercial paper;
(iv) A credit derivative the [BANK]
recognizes as a guarantee for riskweighted asset amount calculation
purposes under subpart D or subpart E
of this part;
(v) Any position that is recognized as
a credit valuation adjustment hedge
under § ll.132(e)(5) or
§ ll.132(e)(6), except as provided in
§ ll.132(e)(6)(vii);
(vi) Any equity position that is not
publicly traded, other than a derivative
that references a publicly traded equity;
(vii) Any position a [BANK] holds
with the intent to securitize; or
(viii) Any direct real estate holding.
Debt position means a covered
position that is not a securitization
position or a correlation trading position
and that has a value that reacts
primarily to changes in interest rates or
credit spreads.
Default by a sovereign entity has the
same meaning as the term sovereign
default under § ll.2.
Equity position means a covered
position that is not a securitization
position or a correlation trading position
and that has a value that reacts
primarily to changes in equity prices.
Event risk means the risk of loss on
equity or hybrid equity positions as a
result of a financial event, such as the
announcement or occurrence of a
company merger, acquisition, spin-off,
or dissolution.
Foreign exchange position means a
position for which price risk arises from
changes in foreign exchange rates.
General market risk means the risk of
loss that could result from broad market
movements, such as changes in the
general level of interest rates, credit
spreads, equity prices, foreign exchange
rates, or commodity prices.
Hedge means a position or positions
that offset all, or substantially all, of one
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or more material risk factors of another
position.
Idiosyncratic risk means the risk of
loss in the value of a position that arises
from changes in risk factors unique to
that position.
Incremental risk means the default
risk and credit migration risk of a
position. Default risk means the risk of
loss on a position that could result from
the failure of an obligor to make timely
payments of principal or interest on its
debt obligation, and the risk of loss that
could result from bankruptcy,
insolvency, or similar proceeding.
Credit migration risk means the price
risk that arises from significant changes
in the underlying credit quality of the
position.
Market risk means the risk of loss on
a position that could result from
movements in market prices.
Resecuritization position means a
covered position that is:
(1) An on- or off-balance sheet
exposure to a resecuritization; or
(2) An exposure that directly or
indirectly references a resecuritization
exposure in paragraph (1) of this
definition.
Securitization means a transaction in
which:
(1) All or a portion of the credit risk
of one or more underlying exposures is
transferred to one or more third parties;
(2) The credit risk associated with the
underlying exposures has been
separated into at least two tranches that
reflect different levels of seniority;
(3) Performance of the securitization
exposures depends upon the
performance of the underlying
exposures;
(4) All or substantially all of the
underlying exposures are financial
exposures (such as loans, commitments,
credit derivatives, guarantees,
receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, or equity securities);
(5) For non-synthetic securitizations,
the underlying exposures are not owned
by an operating company;
(6) The underlying exposures are not
owned by a small business investment
company described in section 302 of the
Small Business Investment Act;
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under section 24 (Eleventh)
of the National Bank Act;
(8) The [AGENCY] may determine
that a transaction in which the
underlying exposures are owned by an
investment firm that exercises
substantially unfettered control over the
size and composition of its assets,
liabilities, and off-balance sheet
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exposures is not a securitization based
on the transaction’s leverage, risk
profile, or economic substance;
(9) The [AGENCY] may deem an
exposure to a transaction that meets the
definition of a securitization,
notwithstanding paragraph (5), (6), or
(7) of this definition, to be a
securitization based on the transaction’s
leverage, risk profile, or economic
substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as
defined in 12 CFR 208.34 (Board), 12
CFR 9.18 (OCC), and 12 CFR 344.3
(FDIC);
(iii) A pension fund regulated under
the ERISA or a foreign equivalent
thereof; or
(iv) Regulated under the Investment
Company Act of 1940 (15 U.S.C. 80a–1)
or a foreign equivalent thereof.
Securitization position means a
covered position that is:
(1) An on-balance sheet or off-balance
sheet credit exposure (including creditenhancing representations and
warranties) that arises from a
securitization (including a
resecuritization); or
(2) An exposure that directly or
indirectly references a securitization
exposure described in paragraph (1) of
this definition.
Sovereign debt position means a
direct exposure to a sovereign entity.
Specific risk means the risk of loss on
a position that could result from factors
other than broad market movements and
includes event risk, default risk, and
idiosyncratic risk.
Structural position in a foreign
currency means a position that is not a
trading position and that is:
(1) Subordinated debt, equity, or
minority interest in a consolidated
subsidiary that is denominated in a
foreign currency;
(2) Capital assigned to foreign
branches that is denominated in a
foreign currency;
(3) A position related to an
unconsolidated subsidiary or another
item that is denominated in a foreign
currency and that is deducted from the
[BANK]’s tier 1 or tier 2 capital; or
(4) A position designed to hedge a
[BANK]’s capital ratios or earnings
against the effect on paragraphs (1), (2),
or (3) of this definition of adverse
exchange rate movements.
Term repo-style transaction means a
repo-style transaction that has an
original maturity in excess of one
business day.
Trading position means a position
that is held by the [BANK] for the
purpose of short-term resale or with the
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intent of benefiting from actual or
expected short-term price movements,
or to lock in arbitrage profits.
Two-way market means a market
where there are independent bona fide
offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a relatively short timeframe
conforming to trade custom.
Value-at-Risk (VaR) means the
estimate of the maximum amount that
the value of one or more positions could
decline due to market price or rate
movements during a fixed holding
period within a stated confidence
interval.
§ ll.203 Requirements for application of
this subpart F.
(a) Trading positions. (1)
Identification of trading positions. A
[BANK] must have clearly defined
policies and procedures for determining
which of its trading assets and trading
liabilities are trading positions and
which of its trading positions are
correlation trading positions. These
policies and procedures must take into
account:
(i) The extent to which a position, or
a hedge of its material risks, can be
marked-to-market daily by reference to
a two-way market; and
(ii) Possible impairments to the
liquidity of a position or its hedge.
(2) Trading and hedging strategies. A
[BANK] must have clearly defined
trading and hedging strategies for its
trading positions that are approved by
senior management of the [BANK].
(i) The trading strategy must articulate
the expected holding period of, and the
market risk associated with, each
portfolio of trading positions.
(ii) The hedging strategy must
articulate for each portfolio of trading
positions the level of market risk the
[BANK] is willing to accept and must
detail the instruments, techniques, and
strategies the [BANK] will use to hedge
the risk of the portfolio.
(b) Management of covered positions.
(1) Active management. A [BANK] must
have clearly defined policies and
procedures for actively managing all
covered positions. At a minimum, these
policies and procedures must require:
(i) Marking positions to market or to
model on a daily basis;
(ii) Daily assessment of the [BANK]’s
ability to hedge position and portfolio
risks, and of the extent of market
liquidity;
(iii) Establishment and daily
monitoring of limits on positions by a
risk control unit independent of the
trading business unit;
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53043
(iv) Daily monitoring by senior
management of information described in
paragraphs (b)(1)(i) through (b)(1)(iii) of
this section;
(v) At least annual reassessment of
established limits on positions by senior
management; and
(vi) At least annual assessments by
qualified personnel of the quality of
market inputs to the valuation process,
the soundness of key assumptions, the
reliability of parameter estimation in
pricing models, and the stability and
accuracy of model calibration under
alternative market scenarios.
(2) Valuation of covered positions.
The [BANK] must have a process for
prudent valuation of its covered
positions that includes policies and
procedures on the valuation of
positions, marking positions to market
or to model, independent price
verification, and valuation adjustments
or reserves. The valuation process must
consider, as appropriate, unearned
credit spreads, close-out costs, early
termination costs, investing and funding
costs, liquidity, and model risk.
(c) Requirements for internal models.
(1) A [BANK] must obtain the prior
written approval of the [AGENCY]
before using any internal model to
calculate its risk-based capital
requirement under this subpart.
(2) A [BANK] must meet all of the
requirements of this section on an
ongoing basis. The [BANK] must
promptly notify the [AGENCY] when:
(i) The [BANK] plans to extend the
use of a model that the [AGENCY] has
approved under this subpart to an
additional business line or product type;
(ii) The [BANK] makes any change to
an internal model approved by the
[AGENCY] under this subpart that
would result in a material change in the
[BANK]’s risk-weighted asset amount
for a portfolio of covered positions; or
(iii) The [BANK] makes any material
change to its modeling assumptions.
(3) The [AGENCY] may rescind its
approval of the use of any internal
model (in whole or in part) or of the
determination of the approach under
§ ll.209(a)(2)(ii) for a [BANK]’s
modeled correlation trading positions
and determine an appropriate capital
requirement for the covered positions to
which the model would apply, if the
[AGENCY] determines that the model
no longer complies with this subpart or
fails to reflect accurately the risks of the
[BANK]’s covered positions.
(4) The [BANK] must periodically, but
no less frequently than annually, review
its internal models in light of
developments in financial markets and
modeling technologies, and enhance
those models as appropriate to ensure
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that they continue to meet the
[AGENCY]’s standards for model
approval and employ risk measurement
methodologies that are most appropriate
for the [BANK]’s covered positions.
(5) The [BANK] must incorporate its
internal models into its risk
management process and integrate the
internal models used for calculating its
VaR-based measure into its daily risk
management process.
(6) The level of sophistication of a
[BANK]’s internal models must be
commensurate with the complexity and
amount of its covered positions. A
[BANK]’s internal models may use any
of the generally accepted approaches,
including but not limited to variancecovariance models, historical
simulations, or Monte Carlo
simulations, to measure market risk.
(7) The [BANK]’s internal models
must properly measure all the material
risks in the covered positions to which
they are applied.
(8) The [BANK]’s internal models
must conservatively assess the risks
arising from less liquid positions and
positions with limited price
transparency under realistic market
scenarios.
(9) The [BANK] must have a rigorous
and well-defined process for reestimating, re-evaluating, and updating
its internal models to ensure continued
applicability and relevance.
(10) If a [BANK] uses internal models
to measure specific risk, the internal
models must also satisfy the
requirements in paragraph (b)(1) of
§ ll.207.
(d) Control, oversight, and validation
mechanisms. (1) The [BANK] must have
a risk control unit that reports directly
to senior management and is
independent from the business trading
units.
(2) The [BANK] must validate its
internal models initially and on an
ongoing basis. The [BANK]’s validation
process must be independent of the
internal models’ development,
implementation, and operation, or the
validation process must be subjected to
an independent review of its adequacy
and effectiveness. Validation must
include:
(i) An evaluation of the conceptual
soundness of (including developmental
evidence supporting) the internal
models;
(ii) An ongoing monitoring process
that includes verification of processes
and the comparison of the [BANK]’s
model outputs with relevant internal
and external data sources or estimation
techniques; and
(iii) An outcomes analysis process
that includes backtesting. For internal
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models used to calculate the VaR-based
measure, this process must include a
comparison of the changes in the
[BANK]’s portfolio value that would
have occurred were end-of-day
positions to remain unchanged
(therefore, excluding fees, commissions,
reserves, net interest income, and
intraday trading) with VaR-based
measures during a sample period not
used in model development.
(3) The [BANK] must stress test the
market risk of its covered positions at a
frequency appropriate to each portfolio,
and in no case less frequently than
quarterly. The stress tests must take into
account concentration risk (including
but not limited to concentrations in
single issuers, industries, sectors, or
markets), illiquidity under stressed
market conditions, and risks arising
from the [BANK]’s trading activities that
may not be adequately captured in its
internal models.
(4) The [BANK] must have an internal
audit function independent of businessline management that at least annually
assesses the effectiveness of the controls
supporting the [BANK]’s market risk
measurement systems, including the
activities of the business trading units
and independent risk control unit,
compliance with policies and
procedures, and calculation of the
[BANK]’s measures for market risk
under this subpart. At least annually,
the internal audit function must report
its findings to the [BANK]’s board of
directors (or a committee thereof).
(e) Internal assessment of capital
adequacy. The [BANK] must have a
rigorous process for assessing its overall
capital adequacy in relation to its
market risk. The assessment must take
into account risks that may not be
captured fully in the VaR-based
measure, including concentration and
liquidity risk under stressed market
conditions.
(f) Documentation. The [BANK] must
adequately document all material
aspects of its internal models,
management and valuation of covered
positions, control, oversight, validation
and review processes and results, and
internal assessment of capital adequacy.
§ ll.204
Measure for market risk.
(a) General requirement. (1) A [BANK]
must calculate its standardized measure
for market risk by following the steps
described in paragraph (a)(2) of this
section. An advanced approaches
[BANK] also must calculate an
advanced measure for market risk by
following the steps in paragraph (a)(2) of
this section.
(2) Measure for market risk. A [BANK]
must calculate the standardized
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measure for market risk, which equals
the sum of the VaR-based capital
requirement, stressed VaR-based capital
requirement, specific risk add-ons,
incremental risk capital requirement,
comprehensive risk capital requirement,
and capital requirement for de minimis
exposures all as defined under this
paragraph (a)(2), (except, that the
[BANK] may not use the SFA in section
210(b)(2)(vii)(B) of this subpart for
purposes of this calculation). An
advanced approaches [BANK] also must
calculate the advanced measure for
market risk, which equals the sum of the
VaR-based capital requirement, stressed
VaR-based capital requirement, specific
risk add-ons, incremental risk capital
requirement, comprehensive risk capital
requirement, and capital requirement
for de minimis exposures as defined
under this paragraph (a)(2).
(i) VaR-based capital requirement. A
[BANK]’s VaR-based capital
requirement equals the greater of:
(A) The previous day’s VaR-based
measure as calculated under § ll.205;
or
(B) The average of the daily VaRbased measures as calculated under
§ ll.205 for each of the preceding 60
business days multiplied by three,
except as provided in paragraph (b) of
this section.
(ii) Stressed VaR-based capital
requirement. A [BANK]’s stressed VaRbased capital requirement equals the
greater of:
(A) The most recent stressed VaRbased measure as calculated under
§ ll.206; or
(B) The average of the stressed VaRbased measures as calculated under
§ ll.206 for each of the preceding 12
weeks multiplied by three, except as
provided in paragraph (b) of this
section.
(iii) Specific risk add-ons. A [BANK]’s
specific risk add-ons equal any specific
risk add-ons that are required under
§ ll.207 and are calculated in
accordance with § ll.210.
(iv) Incremental risk capital
requirement. A [BANK]’s incremental
risk capital requirement equals any
incremental risk capital requirement as
calculated under section 208 of this
subpart.
(v) Comprehensive risk capital
requirement. A [BANK]’s
comprehensive risk capital requirement
equals any comprehensive risk capital
requirement as calculated under section
209 of this subpart.
(vi) Capital requirement for de
minimis exposures. A [BANK]’s capital
requirement for de minimis exposures
equals:
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(A) The absolute value of the market
value of those de minimis exposures
that are not captured in the [BANK]’s
VaR-based measure or under paragraph
(a)(2)(vi)(B) of this section; and
(B) With the prior written approval of
the [AGENCY], the capital requirement
for any de minimis exposures using
alternative techniques that
appropriately measure the market risk
associated with those exposures.
(b) Backtesting. A [BANK] must
compare each of its most recent 250
business days’ trading losses (excluding
fees, commissions, reserves, net interest
income, and intraday trading) with the
corresponding daily VaR-based
measures calibrated to a one-day
holding period and at a one-tail, 99.0
percent confidence level. A [BANK]
must begin backtesting as required by
this paragraph no later than one year
after the later of January 1, 2013 and the
date on which the [BANK] becomes
subject to this subpart. In the interim,
consistent with safety and soundness
principles, a [BANK] subject to this
subpart as of its effective date should
continue to follow backtesting
procedures in accordance with the
[AGENCY]’s supervisory expectations.
(1) Once each quarter, the [BANK]
must identify the number of exceptions
(that is, the number of business days for
which the actual daily net trading loss,
if any, exceeds the corresponding daily
VaR-based measure) that have occurred
over the preceding 250 business days.
(2) A [BANK] must use the
multiplication factor in table 1 that
corresponds to the number of
exceptions identified in paragraph (b)(1)
of this section to determine its VaRbased capital requirement for market
risk under paragraph (a)(2)(i) of this
section and to determine its stressed
VaR-based capital requirement for
market risk under paragraph (a)(2)(ii) of
this section until it obtains the next
quarter’s backtesting results, unless the
[AGENCY] notifies the [BANK] in
writing that a different adjustment or
other action is appropriate.
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TABLE 1—MULTIPLICATION FACTORS
BASED ON RESULTS OF BACKTESTING
Number of exceptions
Multiplication factor
4 or fewer .....................
5 ....................................
6 ....................................
7 ....................................
8 ....................................
9 ....................................
10 or more ....................
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3.00
3.40
3.50
3.65
3.75
3.85
4.00
Jkt 226001
§ ll.205
VaR-based measure.
(a) General requirement. A [BANK]
must use one or more internal models
to calculate daily a VaR-based measure
of the general market risk of all covered
positions. The daily VaR-based measure
also may reflect the [BANK]’s specific
risk for one or more portfolios of debt
and equity positions, if the internal
models meet the requirements of
paragraph (b)(1) of § ll.207. The daily
VaR-based measure must also reflect the
[BANK]’s specific risk for any portfolio
of correlation trading positions that is
modeled under § ll.209. A [BANK]
may elect to include term repo-style
transactions in its VaR-based measure,
provided that the [BANK] includes all
such term repo-style transactions
consistently over time.
(1) The [BANK]’s internal models for
calculating its VaR-based measure must
use risk factors sufficient to measure the
market risk inherent in all covered
positions. The market risk categories
must include, as appropriate, interest
rate risk, credit spread risk, equity price
risk, foreign exchange risk, and
commodity price risk. For material
positions in the major currencies and
markets, modeling techniques must
incorporate enough segments of the
yield curve—in no case less than six—
to capture differences in volatility and
less than perfect correlation of rates
along the yield curve.
(2) The VaR-based measure may
incorporate empirical correlations
within and across risk categories,
provided the [BANK] validates and
demonstrates the reasonableness of its
process for measuring correlations. If
the VaR-based measure does not
incorporate empirical correlations
across risk categories, the [BANK] must
add the separate measures from its
internal models used to calculate the
VaR-based measure for the appropriate
market risk categories (interest rate risk,
credit spread risk, equity price risk,
foreign exchange rate risk, and/or
commodity price risk) to determine its
aggregate VaR-based measure.
(3) The VaR-based measure must
include the risks arising from the
nonlinear price characteristics of
options positions or positions with
embedded optionality and the
sensitivity of the market value of the
positions to changes in the volatility of
the underlying rates, prices, or other
material risk factors. A [BANK] with a
large or complex options portfolio must
measure the volatility of options
positions or positions with embedded
optionality by different maturities and/
or strike prices, where material.
(4) The [BANK] must be able to justify
to the satisfaction of the [AGENCY] the
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omission of any risk factors from the
calculation of its VaR-based measure
that the [BANK] uses in its pricing
models.
(5) The [BANK] must demonstrate to
the satisfaction of the [AGENCY] the
appropriateness of any proxies used to
capture the risks of the [BANK]’s actual
positions for which such proxies are
used.
(b) Quantitative requirements for VaRbased measure. (1) The VaR-based
measure must be calculated on a daily
basis using a one-tail, 99.0 percent
confidence level, and a holding period
equivalent to a 10-business-day
movement in underlying risk factors,
such as rates, spreads, and prices. To
calculate VaR-based measures using a
10-business-day holding period, the
[BANK] may calculate 10-business-day
measures directly or may convert VaRbased measures using holding periods
other than 10 business days to the
equivalent of a 10-business-day holding
period. A [BANK] that converts its VaRbased measure in such a manner must
be able to justify the reasonableness of
its approach to the satisfaction of the
[AGENCY].
(2) The VaR-based measure must be
based on a historical observation period
of at least one year. Data used to
determine the VaR-based measure must
be relevant to the [BANK]’s actual
exposures and of sufficient quality to
support the calculation of risk-based
capital requirements. The [BANK] must
update data sets at least monthly or
more frequently as changes in market
conditions or portfolio composition
warrant. For a [BANK] that uses a
weighting scheme or other method for
the historical observation period, the
[BANK] must either:
(i) Use an effective observation period
of at least one year in which the average
time lag of the observations is at least
six months; or
(ii) Demonstrate to the [AGENCY] that
its weighting scheme is more effective
than a weighting scheme with an
average time lag of at least six months
representing the volatility of the
[BANK]’s trading portfolio over a full
business cycle. A [BANK] using this
option must update its data more
frequently than monthly and in a
manner appropriate for the type of
weighting scheme.
(c) A [BANK] must divide its portfolio
into a number of significant
subportfolios approved by the
[AGENCY] for subportfolio backtesting
purposes. These subportfolios must be
sufficient to allow the [BANK] and the
[AGENCY] to assess the adequacy of the
VaR model at the risk factor level; the
[AGENCY] will evaluate the
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appropriateness of these subportfolios
relative to the value and composition of
the [BANK]’s covered positions. The
[BANK] must retain and make available
to the [AGENCY] the following
information for each subportfolio for
each business day over the previous two
years (500 business days), with no more
than a 60-day lag:
(1) A daily VaR-based measure for the
subportfolio calibrated to a one-tail, 99.0
percent confidence level;
(2) The daily profit or loss for the
subportfolio (that is, the net change in
price of the positions held in the
portfolio at the end of the previous
business day); and
(3) The p-value of the profit or loss on
each day (that is, the probability of
observing a profit that is less than, or a
loss that is greater than, the amount
reported for purposes of paragraph (c)(2)
of this section based on the model used
to calculate the VaR-based measure
described in paragraph (c)(1) of this
section).
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§ ll.206
Stressed VaR-based measure.
(a) General requirement. At least
weekly, a [BANK] must use the same
internal model(s) used to calculate its
VaR-based measure to calculate a
stressed VaR-based measure.
(b) Quantitative requirements for
stressed VaR-based measure. (1) A
[BANK] must calculate a stressed VaRbased measure for its covered positions
using the same model(s) used to
calculate the VaR-based measure,
subject to the same confidence level and
holding period applicable to the VaRbased measure under § ll.205, but
with model inputs calibrated to
historical data from a continuous 12month period that reflects a period of
significant financial stress appropriate
to the [BANK]’s current portfolio.
(2) The stressed VaR-based measure
must be calculated at least weekly and
be no less than the [BANK]’s VaR-based
measure.
(3) A [BANK] must have policies and
procedures that describe how it
determines the period of significant
financial stress used to calculate the
[BANK]’s stressed VaR-based measure
under this section and must be able to
provide empirical support for the period
used. The [BANK] must obtain the prior
approval of the [AGENCY] for, and
notify the [AGENCY] if the [BANK]
makes any material changes to, these
policies and procedures. The policies
and procedures must address:
(i) How the [BANK] links the period
of significant financial stress used to
calculate the stressed VaR-based
measure to the composition and
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directional bias of its current portfolio;
and
(ii) The [BANK]’s process for
selecting, reviewing, and updating the
period of significant financial stress
used to calculate the stressed VaR-based
measure and for monitoring the
appropriateness of the period to the
[BANK]’s current portfolio.
(4) Nothing in this section prevents
the [AGENCY] from requiring a [BANK]
to use a different period of significant
financial stress in the calculation of the
stressed VaR-based measure.
§ ll.207
Specific risk.
(a) General requirement. A [BANK]
must use one of the methods in this
section to measure the specific risk for
each of its debt, equity, and
securitization positions with specific
risk.
(b) Modeled specific risk. A [BANK]
may use models to measure the specific
risk of covered positions as provided in
paragraph (a) of section 205 of this
subpart (therefore, excluding
securitization positions that are not
modeled under section 209 of this
subpart). A [BANK] must use models to
measure the specific risk of correlation
trading positions that are modeled
under § ll.209.
(1) Requirements for specific risk
modeling. (i) If a [BANK] uses internal
models to measure the specific risk of a
portfolio, the internal models must:
(A) Explain the historical price
variation in the portfolio;
(B) Be responsive to changes in
market conditions;
(C) Be robust to an adverse
environment, including signaling rising
risk in an adverse environment; and
(D) Capture all material components
of specific risk for the debt and equity
positions in the portfolio. Specifically,
the internal models must:
(1) Capture event risk and
idiosyncratic risk;
(2) Capture and demonstrate
sensitivity to material differences
between positions that are similar but
not identical and to changes in portfolio
composition and concentrations.
(ii) If a [BANK] calculates an
incremental risk measure for a portfolio
of debt or equity positions under section
208 of this subpart, the [BANK] is not
required to capture default and credit
migration risks in its internal models
used to measure the specific risk of
those portfolios.
(2) Specific risk fully modeled for one
or more portfolios. If the [BANK]’s VaRbased measure captures all material
aspects of specific risk for one or more
of its portfolios of debt, equity, or
correlation trading positions, the
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[BANK] has no specific risk add-on for
those portfolios for purposes of
paragraph (a)(2)(iii) of § ll.204.
(c) Specific risk not modeled. (1) If the
[BANK]’s VaR-based measure does not
capture all material aspects of specific
risk for a portfolio of debt, equity, or
correlation trading positions, the
[BANK] must calculate a specific-risk
add-on for the portfolio under the
standardized measurement method as
described in § ll.210.
(2) A [BANK] must calculate a
specific risk add-on under the
standardized measurement method as
described in § ll.210 for all of its
securitization positions that are not
modeled under § ll.209.
§ ll.208
Incremental risk.
(a) General requirement. A [BANK]
that measures the specific risk of a
portfolio of debt positions under
§ ll.207(b) using internal models
must calculate at least weekly an
incremental risk measure for that
portfolio according to the requirements
in this section. The incremental risk
measure is the [BANK]’s measure of
potential losses due to incremental risk
over a one-year time horizon at a onetail, 99.9 percent confidence level,
either under the assumption of a
constant level of risk, or under the
assumption of constant positions. With
the prior approval of the [AGENCY], a
[BANK] may choose to include
portfolios of equity positions in its
incremental risk model, provided that it
consistently includes such equity
positions in a manner that is consistent
with how the [BANK] internally
measures and manages the incremental
risk of such positions at the portfolio
level. If equity positions are included in
the model, for modeling purposes
default is considered to have occurred
upon the default of any debt of the
issuer of the equity position. A [BANK]
may not include correlation trading
positions or securitization positions in
its incremental risk measure.
(b) Requirements for incremental risk
modeling. For purposes of calculating
the incremental risk measure, the
incremental risk model must:
(1) Measure incremental risk over a
one-year time horizon and at a one-tail,
99.9 percent confidence level, either
under the assumption of a constant level
of risk, or under the assumption of
constant positions.
(i) A constant level of risk assumption
means that the [BANK] rebalances, or
rolls over, its trading positions at the
beginning of each liquidity horizon over
the one-year horizon in a manner that
maintains the [BANK]’s initial risk
level. The [BANK] must determine the
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frequency of rebalancing in a manner
consistent with the liquidity horizons of
the positions in the portfolio. The
liquidity horizon of a position or set of
positions is the time required for a
[BANK] to reduce its exposure to, or
hedge all of its material risks of, the
position(s) in a stressed market. The
liquidity horizon for a position or set of
positions may not be less than the
shorter of three months or the
contractual maturity of the position.
(ii) A constant position assumption
means that the [BANK] maintains the
same set of positions throughout the
one-year horizon. If a [BANK] uses this
assumption, it must do so consistently
across all portfolios.
(iii) A [BANK]’s selection of a
constant position or a constant risk
assumption must be consistent between
the [BANK]’s incremental risk model
and its comprehensive risk model
described in section 209 of this subpart,
if applicable.
(iv) A [BANK]’s treatment of liquidity
horizons must be consistent between the
[BANK]’s incremental risk model and its
comprehensive risk model described in
section 209, if applicable.
(2) Recognize the impact of
correlations between default and
migration events among obligors.
(3) Reflect the effect of issuer and
market concentrations, as well as
concentrations that can arise within and
across product classes during stressed
conditions.
(4) Reflect netting only of long and
short positions that reference the same
financial instrument.
(5) Reflect any material mismatch
between a position and its hedge.
(6) Recognize the effect that liquidity
horizons have on dynamic hedging
strategies. In such cases, a [BANK] must:
(i) Choose to model the rebalancing of
the hedge consistently over the relevant
set of trading positions;
(ii) Demonstrate that the inclusion of
rebalancing results in a more
appropriate risk measurement;
(iii) Demonstrate that the market for
the hedge is sufficiently liquid to permit
rebalancing during periods of stress; and
(iv) Capture in the incremental risk
model any residual risks arising from
such hedging strategies.
(7) Reflect the nonlinear impact of
options and other positions with
material nonlinear behavior with
respect to default and migration
changes.
(8) Maintain consistency with the
[BANK]’s internal risk management
methodologies for identifying,
measuring, and managing risk.
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(c) Calculation of incremental risk
capital requirement. The incremental
risk capital requirement is the greater of:
(1) The average of the incremental risk
measures over the previous 12 weeks; or
(2) The most recent incremental risk
measure.
§ ll.209
Comprehensive risk.
(a) General requirement. (1) Subject to
the prior approval of the [AGENCY], a
[BANK] may use the method in this
section to measure comprehensive risk,
that is, all price risk, for one or more
portfolios of correlation trading
positions.
(2) A [BANK] that measures the price
risk of a portfolio of correlation trading
positions using internal models must
calculate at least weekly a
comprehensive risk measure that
captures all price risk according to the
requirements of this section. The
comprehensive risk measure is either:
(i) The sum of:
(A) The [BANK]’s modeled measure of
all price risk determined according to
the requirements in paragraph (b) of this
section; and
(B) A surcharge for the [BANK]’s
modeled correlation trading positions
equal to the total specific risk add-on for
such positions as calculated under
section 210 of this subpart multiplied by
8.0 percent; or
(ii) With approval of the [AGENCY]
and provided the [BANK] has met the
requirements of this section for a period
of at least one year and can demonstrate
the effectiveness of the model through
the results of ongoing model validation
efforts including robust benchmarking,
the greater of:
(A) The [BANK]’s modeled measure of
all price risk determined according to
the requirements in paragraph (b) of this
section; or
(B) The total specific risk add-on that
would apply to the bank’s modeled
correlation trading positions as
calculated under section 210 of this
subpart multiplied by 8.0 percent.
(b) Requirements for modeling all
price risk. If a [BANK] uses an internal
model to measure the price risk of a
portfolio of correlation trading
positions:
(1) The internal model must measure
comprehensive risk over a one-year time
horizon at a one-tail, 99.9 percent
confidence level, either under the
assumption of a constant level of risk,
or under the assumption of constant
positions.
(2) The model must capture all
material price risk, including but not
limited to the following:
(i) The risks associated with the
contractual structure of cash flows of
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the position, its issuer, and its
underlying exposures;
(ii) Credit spread risk, including
nonlinear price risks;
(iii) The volatility of implied
correlations, including nonlinear price
risks such as the cross-effect between
spreads and correlations;
(iv) Basis risk;
(v) Recovery rate volatility as it relates
to the propensity for recovery rates to
affect tranche prices; and
(vi) To the extent the comprehensive
risk measure incorporates the benefits of
dynamic hedging, the static nature of
the hedge over the liquidity horizon
must be recognized. In such cases, a
[BANK] must:
(A) Choose to model the rebalancing
of the hedge consistently over the
relevant set of trading positions;
(B) Demonstrate that the inclusion of
rebalancing results in a more
appropriate risk measurement;
(C) Demonstrate that the market for
the hedge is sufficiently liquid to permit
rebalancing during periods of stress; and
(D) Capture in the comprehensive risk
model any residual risks arising from
such hedging strategies;
(3) The [BANK] must use market data
that are relevant in representing the risk
profile of the [BANK]’s correlation
trading positions in order to ensure that
the [BANK] fully captures the material
risks of the correlation trading positions
in its comprehensive risk measure in
accordance with this section; and
(4) The [BANK] must be able to
demonstrate that its model is an
appropriate representation of
comprehensive risk in light of the
historical price variation of its
correlation trading positions.
(c) Requirements for stress testing. (1)
A [BANK] must at least weekly apply
specific, supervisory stress scenarios to
its portfolio of correlation trading
positions that capture changes in:
(i) Default rates;
(ii) Recovery rates;
(iii) Credit spreads;
(iv) Correlations of underlying
exposures; and
(v) Correlations of a correlation
trading position and its hedge.
(2) Other requirements. (i) A [BANK]
must retain and make available to the
[AGENCY] the results of the supervisory
stress testing, including comparisons
with the capital requirements generated
by the [BANK]’s comprehensive risk
model.
(ii) A [BANK] must report to the
[AGENCY] promptly any instances
where the stress tests indicate any
material deficiencies in the
comprehensive risk model.
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(d) Calculation of comprehensive risk
capital requirement. The comprehensive
risk capital requirement is the greater of:
(1) The average of the comprehensive
risk measures over the previous 12
weeks; or
(2) The most recent comprehensive
risk measure.
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§ ll.210 Standardized measurement
method for specific risk.
(a) General requirement. A [BANK]
must calculate a total specific risk addon for each portfolio of debt and equity
positions for which the [BANK]’s VaRbased measure does not capture all
material aspects of specific risk and for
all securitization positions that are not
modeled under § ll.209. A [BANK]
must calculate each specific risk add-on
in accordance with the requirements of
this section. Notwithstanding any other
definition or requirement in this
appendix, a position that would have
qualified as a debt position or an equity
position but for the fact that it qualifies
as a correlation trading position under
paragraph (2) of the definition of
correlation trading position in § ll.2,
shall be considered a debt position or an
equity position, respectively, for
purposes of this section 210 of this
subpart.
(1) The specific risk add-on for an
individual debt or securitization
position that represents sold credit
protection is capped at the notional
amount of the credit derivative contract.
The specific risk add-on for an
individual debt or securitization
position that represents purchased
credit protection is capped at the
current market value of the transaction
plus the absolute value of the present
value of all remaining payments to the
protection seller under the transaction.
This sum is equal to the value of the
protection leg of the transaction.
(2) For debt, equity, or securitization
positions that are derivatives with linear
payoffs, a [BANK] must assign a specific
risk-weighting factor to the market value
of the effective notional amount of the
underlying instrument or index
portfolio, except for a securitization
position for which the [BANK] directly
calculates a specific risk add-on using
the SFA in paragraph (b)(2)(vii)(B) of
this section. A swap must be included
as an effective notional position in the
underlying instrument or portfolio, with
the receiving side treated as a long
position and the paying side treated as
a short position. For debt, equity, or
securitization positions that are
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derivatives with nonlinear payoffs, a
[BANK] must risk weight the market
value of the effective notional amount of
the underlying instrument or portfolio
multiplied by the derivative’s delta.
(3) For debt, equity, or securitization
positions, a [BANK] may net long and
short positions (including derivatives)
in identical issues or identical indices.
A [BANK] may also net positions in
depositary receipts against an opposite
position in an identical equity in
different markets, provided that the
[BANK] includes the costs of
conversion.
(4) A set of transactions consisting of
either a debt position and its credit
derivative hedge or a securitization
position and its credit derivative hedge
has a specific risk add-on of zero if:
(i) The debt or securitization position
is fully hedged by a total return swap (or
similar instrument where there is a
matching of swap payments and
changes in market value of the debt or
securitization position);
(ii) There is an exact match between
the reference obligation of the swap and
the debt or securitization position;
(iii) There is an exact match between
the currency of the swap and the debt
or securitization position; and
(iv) There is either an exact match
between the maturity date of the swap
and the maturity date of the debt or
securitization position; or, in cases
where a total return swap references a
portfolio of positions with different
maturity dates, the total return swap
maturity date must match the maturity
date of the underlying asset in that
portfolio that has the latest maturity
date.
(5) The specific risk add-on for a set
of transactions consisting of either a
debt position and its credit derivative
hedge or a securitization position and
its credit derivative hedge that does not
meet the criteria of paragraph (a)(4) of
this section is equal to 20.0 percent of
the capital requirement for the side of
the transaction with the higher specific
risk add-on when:
(i) The credit risk of the position is
fully hedged by a credit default swap or
similar instrument;
(ii) There is an exact match between
the reference obligation of the credit
derivative hedge and the debt or
securitization position;
(iii) There is an exact match between
the currency of the credit derivative
hedge and the debt or securitization
position; and
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(iv) There is either an exact match
between the maturity date of the credit
derivative hedge and the maturity date
of the debt or securitization position; or,
in the case where the credit derivative
hedge has a standard maturity date:
(A) The maturity date of the credit
derivative hedge is within 30 business
days of the maturity date of the debt or
securitization position; or
(B) For purchased credit protection,
the maturity date of the credit derivative
hedge is later than the maturity date of
the debt or securitization position, but
is no later than the standard maturity
date for that instrument that
immediately follows the maturity date
of the debt or securitization position.
The maturity date of the credit
derivative hedge may not exceed the
maturity date of the debt or
securitization position by more than 90
calendar days.
(6) The specific risk add-on for a set
of transactions consisting of either a
debt position and its credit derivative
hedge or a securitization position and
its credit derivative hedge that does not
meet the criteria of either paragraph
(a)(4) or (a)(5) of this section, but in
which all or substantially all of the price
risk has been hedged, is equal to the
specific risk add-on for the side of the
transaction with the higher specific risk
add-on.
(b) Debt and securitization positions.
(1) The total specific risk add-on for a
portfolio of debt or securitization
positions is the sum of the specific risk
add-ons for individual debt or
securitization positions, as computed
under this section. To determine the
specific risk add-on for individual debt
or securitization positions, a [BANK]
must multiply the absolute value of the
current market value of each net long or
net short debt or securitization position
in the portfolio by the appropriate
specific risk-weighting factor as set forth
in paragraphs (b)(2)(i) through (b)(2)(vii)
of this section.
(2) For the purpose of this section, the
appropriate specific risk-weighting
factors include: (i) Sovereign debt
positions. (A) In general. A [BANK]
must assign a specific risk-weighting
factor to a sovereign debt position based
on the CRC applicable to the sovereign
entity and, as applicable, the remaining
contractual maturity of the position, in
accordance with table 2 of this section.
Sovereign debt positions that are backed
by the full faith and credit of the United
States are treated as having a CRC of 0.
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TABLE 2—SPECIFIC RISK-WEIGHTING FACTORS FOR SOVEREIGN DEBT POSITIONS
Specific risk-weighting factor
Sovereign CRC ..............................................................
Percent
0–1
2–3
0.0
Remaining contractual maturity is 6 months or less .....
0.25
Remaining contractual maturity is greater than 6 and
up to and including 24 months.
1.0
Remaining contractual maturity exceeds 24 months ....
1.6
4–6
8.0
7
12.0
No CRC .................................................................................................
8.0
Default by the Sovereign Entity .............................................................
12.0
(B) Notwithstanding paragraph
(b)(2)(i)(A) of this section, a [BANK]
may assign to a sovereign debt position
a specific risk-weighting factor that is
lower than the applicable specific riskweighting factor in table 2 if:
(1) The position is denominated in the
sovereign entity’s currency;
(2) The [BANK] has at least an
equivalent amount of liabilities in that
currency; and
(3) The sovereign entity allows banks
under its jurisdiction to assign the lower
specific risk-weighting factor to the
same exposures to the sovereign entity.
(C) A [BANK] must assign a 12.0
percent specific risk-weighting factor to
a sovereign debt position immediately
upon determination a default has
occurred; or if a default has occurred
within the previous five years.
(D) A [BANK] must assign an 8.0
percent specific risk-weighting factor to
a sovereign debt position if the
sovereign entity does not have a CRC
assigned to it, unless the sovereign debt
position must be assigned a higher
specific risk-weighting factor under
paragraph (b)(2)(i)(C) of this section.
(ii) Certain supranational entity and
multilateral development bank debt
positions. A [BANK] may assign a 0.0
percent specific risk-weighting factor to
a debt position that is an exposure to the
Bank for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, or an MDB.
(iii) GSE debt positions. A [BANK]
must assign a 1.6 percent specific riskweighting factor to a debt position that
is an exposure to a GSE.
Notwithstanding the foregoing, a
[BANK] must assign an 8.0 percent
specific risk-weighting factor to
preferred stock issued by a GSE.
(iv) Depository institution, foreign
bank, and credit union debt positions.
(A) Except as provided in paragraph
(b)(2)(iv)(B) of this section, a [BANK]
must assign a specific risk-weighting
factor to a debt position that is an
exposure to a depository institution, a
foreign bank, or a credit union using the
specific risk-weighting factor that
corresponds to that entity’s home
country and, as applicable, the
remaining contractual maturity of the
position, in accordance with table 3 of
this section.
TABLE 3—SPECIFIC RISK-WEIGHTING FACTORS FOR DEPOSITORY INSTITUTIONS, FOREIGN BANK, AND CREDIT UNION DEBT
PENSIONS
Specific risk-weighting factor
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Sovereign CRC ..............................................................
0–2
Percent
Remaining contractual maturity of 6 months or less ....
0.25
Remaining contractual maturity of greater than 6 and
up to and including 24 months.
1.0
Remaining contractual maturity exceeds 24 months ....
1.6
3
8.0
4–7
12.0
No CRC .................................................................................................
8.0
Default by the Sovereign Entity .............................................................
12.0
(B) A [BANK] must assign a specific
risk-weighting factor of 8.0 percent to a
debt position that is an exposure to a
depository institution or a foreign bank
that is includable in the depository
institution’s or foreign bank’s regulatory
capital and that is not subject to
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deduction as a reciprocal holding under
§ ll.22.
(C) A [BANK] must assign a 12.0
percent specific risk-weighting factor to
a debt position that is an exposure to a
foreign bank immediately upon
determination that a default by the
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foreign bank’s home country has
occurred or if a default by the foreign
bank’s home country has occurred
within the previous five years.
(v) PSE debt positions. (A) Except as
provided in paragraph (b)(2)(v)(B) of
this section, a [BANK] must assign a
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specific risk-weighting factor to a debt
position that is an exposure to a PSE
based on the specific risk-weighting
factor that corresponds to the PSE’s
home country and to the position’s
categorization as a general obligation or
revenue obligation and, as applicable,
the remaining contractual maturity of
the position, as set forth in tables 4 and
5 of this section.
(B) A [BANK] may assign a lower
specific risk-weighting factor than
would otherwise apply under tables 4
and 5 of this section to a debt position
that is an exposure to a foreign PSE if:
(1) The PSE’s home country allows
banks under its jurisdiction to assign a
lower specific risk-weighting factor to
such position; and
(2) The specific risk-weighting factor
is not lower than the risk weight that
corresponds to the PSE’s home country
in accordance with tables 4 and 5 of this
section.
(C) A [BANK] must assign a 12.0
percent specific risk-weighting factor to
a PSE debt position immediately upon
determination that a default by the
PSE’s home country has occurred or if
a default by the PSE’s home country has
occurred within the previous five years.
TABLE 4—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE GENERAL OBLIGATION DEBT POSITIONS
General obligations specific risk-weighting factor
Sovereign CRC ................................
0–2
Percent
Remaining contractual maturity of 6 months or less ..............................
0.25
Remaining contractual maturity of greater than 6 and up to and including 24 months.
1.0
Remaining contractual maturity exceeds 24 months ..............................
1.6
3
8.0
4–7
12.0
No CFR
8.0
Default by the Sovereign Entity
12.0
TABLE 5—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE REVENUE OBLIGATION DEBT POSITIONS
Revenue obligation specific risk-weighting factor
Sovereign CRC ................................
0–1
Percent
Remaining contractual maturity of 6 months or less ..............................
0.25
Remaining contractual maturity of greater than 6 and up to and including 24 months.
1.0
Remaining contractual maturity exceeds 24 months ..............................
1.6
2–3
8.0
4–7
12.0
No CFR
8.0
Default by the Sovereign Entity
12.0
(vi) Corporate debt positions. Except
as otherwise provided in paragraph
(b)(2)(vi)(B) of this section, a [BANK]
must assign a specific risk-weighting
factor to a corporate debt position in
accordance with the investment grade
methodology in paragraph (b)(2)(vi)(A)
of this section.
(A) Investment grade methodology. (1)
For corporate debt positions that are
exposures to entities that have issued
and outstanding publicly traded
instruments, a [BANK] must assign a
specific risk-weighting factor based on
the category and remaining contractual
maturity of the position, in accordance
with table 6. For purposes of this
paragraph (b)(2)(vi)(A)(1), the [BANK]
must determine whether the position is
in the investment grade or not
investment grade category.
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TABLE 6—SPECIFIC RISK-WEIGHTING FACTORS FOR CORPORATE DEBT POSITIONS UNDER THE INVESTMENT GRADE
METHODOLOGY
Specific riskweighting factor
(in percent)
Category
Remaining contractual maturity
Investment Grade ....................................
6 months or less ........................................................................................................
Greater than 6 and up to and including 24 months ..................................................
Greater than 24 months ............................................................................................
....................................................................................................................................
Non-investment Grade ............................
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2.00
4.00
12.00
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(2) A [BANK] must assign an 8.0
percent specific risk-weighting factor for
corporate debt positions that are
exposures to entities that do not have
publicly traded instruments
outstanding.
(B) Limitations. (1) A [BANK] must
assign a specific risk-weighting factor of
at least 8.0 percent to an interest-only
mortgage-backed security that is not a
securitization position.
(2) A [BANK] shall not assign a
corporate debt position a specific riskweighting factor that is lower than the
specific risk-weighting factor that
corresponds to the CRC of the issuer’s
home country in table 2 of this section.
(vii) Securitization positions. (A)
General requirements. (1) A [BANK] that
is not an advanced approaches bank
must assign a specific risk-weighting
factor to a securitization position using
either the simplified supervisory
formula approach (SSFA) in paragraph
(b)(2)(vii)(C) of this section (and
§ ll.211) or assign a specific riskweighting factor of 100 percent to the
position.
(2) A [BANK] that is an advanced
approaches bank must calculate a
specific risk add-on for a securitization
position in accordance with paragraph
(b)(2)(vii)(B) of this section if the
[BANK] and the securitization position
each qualifies to use the SFA in
§ ll.143. A [BANK] that is an
advanced approaches bank with a
securitization position that does not
qualify for the SFA under paragraph
(b)(2)(vii)(B) of this section may assign
a specific risk-weighting factor to the
securitization position using the SSFA
in accordance with paragraph
(b)(2)(vii)(C) of this section or assign a
specific risk-weighting factor of 100
percent to the position.
(3) A [BANK] must treat a short
securitization position as if it is a long
securitization position solely for
calculation purposes when using the
SFA in paragraph (b)(2)(vii)(B) of this
section or the SSFA in paragraph
(b)(2)(vii)(C) of this section.
(B) SFA. To calculate the specific risk
add-on for a securitization position
using the SFA, a [BANK] that is an
advanced approaches bank must set the
specific risk add-on for the position
equal to the risk-based capital
requirement as calculated under
§ ll.143.
(C) SSFA. To use the SSFA to
determine the specific risk-weighting
factor for a securitization position, a
[BANK] must calculate the specific riskweighting factor in accordance with
§ ll.211.
(D) Nth-to-default credit derivatives.
A [BANK] must determine a specific
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risk add-on using the SFA in paragraph
(b)(2)(vii)(B) of this section, or assign a
specific risk-weighting factor using the
SSFA in paragraph (b)(2)(vii)(C) of this
section to an nth-to-default credit
derivative in accordance with this
paragraph (b)(2)(vii)(D), regardless of
whether the [BANK] is a net protection
buyer or net protection seller. A [BANK]
must determine its position in the nthto-default credit derivative as the largest
notional dollar amount of all the
underlying exposures.
(1) For purposes of determining the
specific risk add-on using the SFA in
paragraph (b)(2)(vii)(B) of this section or
the specific risk-weighting factor for an
nth-to-default credit derivative using the
SSFA in paragraph (b)(2)(vii)(C) of this
section the [BANK] must calculate the
attachment point and detachment point
of its position as follows:
(i) The attachment point (parameter
A) is the ratio of the sum of the notional
amounts of all underlying exposures
that are subordinated to the [BANK]’s
position to the total notional amount of
all underlying exposures. For purposes
of using the SFA in paragraph
(b)(2)(vii)(B) of this section to calculate
the specific add-on for its position in an
nth-to-default credit derivative,
parameter A must be set equal to the
credit enhancement level (L) input to
the SFA formula in section 143 of this
subpart. In the case of a first-to-default
credit derivative, there are no
underlying exposures that are
subordinated to the [BANK]’s position.
In the case of a second-or-subsequent-todefault credit derivative, the smallest (n1) notional amounts of the underlying
exposure(s) are subordinated to the
[BANK]’s position.
(ii) The detachment point (parameter
D) equals the sum of parameter A plus
the ratio of the notional amount of the
[BANK]’s position in the nth-to-default
credit derivative to the total notional
amount of all underlying exposures. For
purposes of using the SFA in paragraph
(b)(2)(vii)(B) of this section to calculate
the specific risk add-on for its position
in an nth-to-default credit derivative,
parameter D must be set to equal the L
input plus the thickness of tranche T
input to the SFA formula in § ll.143
of this subpart.
(2) A [BANK] that does not use the
SFA in paragraph (b)(2)(vii)(B) of this
section to determine a specific risk-add
on, or the SSFA in paragraph
(b)(2)(vii)(C) of this section to determine
a specific risk-weighting factor for its
position in an nth-to-default credit
derivative must assign a specific riskweighting factor of 100 percent to the
position.
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53051
(c) Modeled correlation trading
positions. For purposes of calculating
the comprehensive risk measure for
modeled correlation trading positions
under either paragraph (a)(2)(i) or
(a)(2)(ii) of § ll.209, the total specific
risk add-on is the greater of:
(1) The sum of the [BANK]’s specific
risk add-ons for each net long
correlation trading position calculated
under this section; or
(2) The sum of the [BANK]’s specific
risk add-ons for each net short
correlation trading position calculated
under this section.
(d) Non-modeled securitization
positions. For securitization positions
that are not correlation trading positions
and for securitizations that are
correlation trading positions not
modeled under § ll.209, the total
specific risk add-on is the greater of:
(1) The sum of the [BANK]’s specific
risk add-ons for each net long
securitization position calculated under
this section; or
(2) The sum of the [BANK]’s specific
risk add-ons for each net short
securitization position calculated under
this section.
(e) Equity positions. The total specific
risk add-on for a portfolio of equity
positions is the sum of the specific risk
add-ons of the individual equity
positions, as computed under this
section. To determine the specific risk
add-on of individual equity positions, a
[BANK] must multiply the absolute
value of the current market value of
each net long or net short equity
position by the appropriate specific riskweighting factor as determined under
this paragraph:
(1) The [BANK] must multiply the
absolute value of the current market
value of each net long or net short
equity position by a specific riskweighting factor of 8.0 percent. For
equity positions that are index contracts
comprising a well-diversified portfolio
of equity instruments, the absolute
value of the current market value of
each net long or net short position is
multiplied by a specific risk-weighting
factor of 2.0 percent.3
(2) For equity positions arising from
the following futures-related arbitrage
strategies, a [BANK] may apply a 2.0
percent specific risk-weighting factor to
one side (long or short) of each position
with the opposite side exempt from an
additional capital requirement:
(i) Long and short positions in exactly
the same index at different dates or in
different market centers; or
3 A portfolio is well-diversified if it contains a
large number of individual equity positions, with
no single position representing a substantial portion
of the portfolio’s total market value.
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(ii) Long and short positions in index
contracts at the same date in different,
but similar indices.
(3) For futures contracts on main
indices that are matched by offsetting
positions in a basket of stocks
comprising the index, a [BANK] may
apply a 2.0 percent specific riskweighting factor to the futures and stock
basket positions (long and short),
provided that such trades are
deliberately entered into and separately
controlled, and that the basket of stocks
is comprised of stocks representing at
least 90.0 percent of the capitalization of
the index. A main index refers to the
Standard & Poor’s 500 Index, the FTSE
All-World Index, and any other index
for which the [BANK] can demonstrate
to the satisfaction of the [AGENCY] that
the equities represented in the index
have liquidity, depth of market, and size
of bid-ask spreads comparable to
equities in the Standard & Poor’s 500
Index and FTSE All-World Index.
(f) Due diligence requirements. (1) A
[BANK] must demonstrate to the
satisfaction of the [AGENCY] a
comprehensive understanding of the
features of a securitization position that
would materially affect the performance
of the position by conducting and
documenting the analysis set forth in
paragraph (f)(2) of this section. The
[BANK]’s analysis must be
commensurate with the complexity of
the securitization position and the
materiality of the position in relation to
capital.
(2) A [BANK] must demonstrate its
comprehensive understanding for each
securitization position by:
(i) Conduct an analysis of the risk
characteristics of a securitization
position prior to acquiring the position
and document such analysis within
three business days after acquiring
position, considering:
(A) Structural features of the
securitization that would materially
impact the performance of the position,
for example, the contractual cash flow
waterfall, waterfall-related triggers,
credit enhancements, liquidity
enhancements, market value triggers,
the performance of organizations that
service the position, and deal-specific
definitions of default;
(B) Relevant information regarding the
performance of the underlying credit
exposure(s), for example, the percentage
of loans 30, 60, and 90 days past due;
default rates; prepayment rates; loans in
foreclosure; property types; occupancy;
average credit score or other measures of
creditworthiness; average loan-to-value
ratio; and industry and geographic
diversification data on the underlying
exposure(s);
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(C) Relevant market data of the
securitization, for example, bid-ask
spreads, most recent sales price and
historical price volatility, trading
volume, implied market rating, and size,
depth and concentration level of the
market for the securitization; and
(D) For resecuritization positions,
performance information on the
underlying securitization exposures, for
example, the issuer name and credit
quality, and the characteristics and
performance of the exposures
underlying the securitization exposures;
and
(ii) On an on-going basis (no less
frequently than quarterly), evaluating,
reviewing, and updating as appropriate
the analysis required under paragraph
(f)(1) of this section for each
securitization position.
§ 211 Simplified supervisory formula
approach (SSFA).
(a) General requirements. To use the
SSFA to determine the specific riskweighting factor for a securitization
position, a [BANK] must have data that
enables it to assign accurately the
parameters described in paragraph (b) of
this section. Data used to assign the
parameters described in paragraph (b) of
this section must be the most currently
available data and no more than 91
calendar days old. A [BANK] that does
not have the appropriate data to assign
the parameters described in paragraph
(b) of this section must assign a specific
risk-weighting factor of 100 percent to
the position.
(b) SSFA parameters. To calculate the
specific risk-weighting factor for a
securitization position using the SSFA,
a [BANK] must have accurate
information on the five inputs to the
SSFA calculation described in
paragraphs (b)(1) through (b)(5) of this
section.
(1) KG is the weighted-average (with
unpaid principal used as the weight for
each exposure) total capital requirement
of the underlying exposures calculated
using subpart D. KG is expressed as a
decimal value between zero and 1 (that
is, an average risk weight of 100 percent
represents a value of KG equal to .08).
(2) Parameter W is expressed as a
decimal value between zero and one.
Parameter W is the ratio of the sum of
the dollar amounts of any underlying
exposures within the securitized pool
that meet any of the criteria are set forth
in paragraphs (i) through (vi) of this
paragraph (b)(2) to the ending balance,
measured in dollars, of underlying
exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or
insolvency proceeding;
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(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred interest
payments for 90 days or more; or
(vi) Is in default.
(3) Parameter A is the attachment
point for the position, which represents
the threshold at which credit losses will
first be allocated to the position.
Parameter A equals the ratio of the
current dollar amount of underlying
exposures that are subordinated to the
position of the [BANK] to the current
dollar amount of underlying exposures.
Any reserve account funded by the
accumulated cash flows from the
underlying exposures that is
subordinated to the position that
contains the [BANK]’s securitization
exposure may be included in the
calculation of parameter A to the extent
that cash is present in the account.
Parameter A is expressed as a decimal
value between zero and one.
(4) Parameter D is the detachment
point for the position, which represents
the threshold at which credit losses of
principal allocated to the position
would result in a total loss of principal.
Parameter D equals parameter A plus
the ratio of the current dollar amount of
the securitization positions that are pari
passu with the position (that is, have
equal seniority with respect to credit
risk) to the current dollar amount of the
underlying exposures. Parameter D is
expressed as a decimal value between
zero and one.
(5) A supervisory calibration
parameter, p, is equal to 0.5 for
securitization positions that are not
resecuritization positions and equal to
1.5 for resecuritization positions.
(c) Mechanics of the SSFA. KG and W
are used to calculate KA, the augmented
value of KG, which reflects the observed
credit quality of the underlying pool of
exposures. KA is defined in paragraph
(d) of this section. The values of
parameters A and D, relative to KA
determine the specific risk-weighting
factor assigned to a position as
described in this paragraph and
paragraph (d) of this section. The
specific risk-weighting factor assigned
to a securitization position, or portion of
a position, as appropriate, is the larger
of the specific risk-weighting factor
determined in accordance with this
paragraph and paragraph (d) of this
section and a specific risk-weighting
factor of 1.6 percent.
(1) When the detachment point,
parameter D, for a securitization
position is less than or equal to KA, the
position must be assigned a specific
risk-weighting factor of 100 percent.
(2) When the attachment point,
parameter A, for a securitization
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position is greater than or equal to KA,
the [BANK] must calculate the specific
risk-weighting factor in accordance with
paragraph (d) of this section.
(3) When A is less than KA and D is
greater than KA, the specific riskweighting factor is a weighted-average
of 1.00 and KSSFA calculated under
paragraphs (c)(3)(i) and (c)(3)(ii) of this
section, but with the parameter A
revised to be set equal to KA. For the
purpose of this calculation:
§ ll.212
profile, then a brief discussion of this
change and its likely impact must be
provided as soon as practicable
thereafter. Qualitative disclosures that
typically do not change each quarter
may be disclosed annually, provided
any significant changes are disclosed in
the interim. If a [BANK] believes that
disclosure of specific commercial or
financial information would prejudice
seriously its position by making public
certain information that is either
proprietary or confidential in nature, the
[BANK] is not required to disclose these
specific items, but must disclose more
general information about the subject
matter of the requirement, together with
the fact that, and the reason why, the
specific items of information have not
been disclosed.
(b) Disclosure policy. The [BANK]
must have a formal disclosure policy
approved by the board of directors that
addresses the [BANK]’s approach for
determining its market risk disclosures.
The policy must address the associated
internal controls and disclosure controls
and procedures. The board of directors
and senior management must ensure
that appropriate verification of the
disclosures takes place and that
effective internal controls and
Market risk disclosures.
(a) Scope. A [BANK] must comply
with this section unless it is a
consolidated subsidiary of a bank
holding company or a depository
institution that is subject to these
requirements or of a non-U.S. banking
organization that is subject to
comparable public disclosure
requirements in its home jurisdiction. A
[BANK] must make quantitative
disclosures publicly each calendar
quarter. If a significant change occurs,
such that the most recent reporting
amounts are no longer reflective of the
[BANK]’s capital adequacy and risk
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disclosure controls and procedures are
maintained. One or more senior officers
of the [BANK] must attest that the
disclosures meet the requirements of
this subpart, and the board of directors
and senior management are responsible
for establishing and maintaining an
effective internal control structure over
financial reporting, including the
disclosures required by this section.
(c) Quantitative disclosures. (1) For
each material portfolio of covered
positions, the [BANK] must disclose
publicly the following information at
least quarterly:
(i) The high, low, and mean VaRbased measures over the reporting
period and the VaR-based measure at
period-end;
(ii) The high, low, and mean stressed
VaR-based measures over the reporting
period and the stressed VaR-based
measure at period-end;
(iii) The high, low, and mean
incremental risk capital requirements
over the reporting period and the
incremental risk capital requirement at
period-end;
(iv) The high, low, and mean
comprehensive risk capital
requirements over the reporting period
and the comprehensive risk capital
requirement at period-end, with the
period-end requirement broken down
into appropriate risk classifications (for
example, default risk, migration risk,
correlation risk);
(v) Separate measures for interest rate
risk, credit spread risk, equity price risk,
foreign exchange risk, and commodity
price risk used to calculate the VaRbased measure; and
(vi) A comparison of VaR-based
estimates with actual gains or losses
experienced by the [BANK], with an
analysis of important outliers.
(2) In addition, the [BANK] must
disclose publicly the following
information at least quarterly:
(i) The aggregate amount of onbalance sheet and off-balance sheet
securitization positions by exposure
type; and
(ii) The aggregate amount of
correlation trading positions.
(d) Qualitative disclosures. For each
material portfolio of covered positions,
the [BANK] must disclose publicly the
following information at least annually,
or more frequently in the event of
material changes for each portfolio:
(1) The composition of material
portfolios of covered positions;
(2) The [BANK]’s valuation policies,
procedures, and methodologies for
covered positions including, for
securitization positions, the methods
and key assumptions used for valuing
such positions, any significant changes
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since the last reporting period, and the
impact of such change;
(3) The characteristics of the internal
models used for purposes of this
subpart. For the incremental risk capital
requirement and the comprehensive risk
capital requirement, this must include:
(i) The approach used by the [BANK]
to determine liquidity horizons;
(ii) The methodologies used to
achieve a capital assessment that is
consistent with the required soundness
standard; and
(iii) The specific approaches used in
the validation of these models;
(4) A description of the approaches
used for validating and evaluating the
accuracy of internal models and
modeling processes for purposes of this
subpart;
(5) For each market risk category (that
is, interest rate risk, credit spread risk,
equity price risk, foreign exchange risk,
and commodity price risk), a
description of the stress tests applied to
the positions subject to the factor;
(6) The results of the comparison of
the [BANK]’s internal estimates for
purposes of this subpart with actual
outcomes during a sample period not
used in model development;
(7) The soundness standard on which
the [BANK]’s internal capital adequacy
assessment under this subpart is based,
including a description of the
methodologies used to achieve a capital
adequacy assessment that is consistent
with the soundness standard;
(8) A description of the [BANK]’s
processes for monitoring changes in the
credit and market risk of securitization
positions, including how those
processes differ for resecuritization
positions; and
(9) A description of the [BANK]’s
policy governing the use of credit risk
mitigation to mitigate the risks of
securitization and resecuritization
positions.
End of Common Rule
List of Subjects
12 CFR Part 3
Administrative practices and
procedure, Capital, National banks,
Reporting and recordkeeping
requirements, Risk.
12 CFR Part 217
Banks, banking, Federal Reserve
System, Holding companies, Reporting
and recordkeeping requirements,
Securities.
requirements, Savings associations,
State non-member banks.
Adoption of Proposed Common Rule
The adoption of the proposed
common rules by the agencies, as
modified by agency-specific text, is set
forth below:
Department of the Treasury
Office of the Comptroller of the
Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the
common preamble, the Office of the
Comptroller of the Currency proposes to
further amend part 3 of chapter I of title
12 of the Code of Federal Regulations is
proposed to be amended elsewhere in
this issue of the Federal Register under
Docket ID OCC–2012–0008 and OCC–
2012–0009, as follows:
PART 3—MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES
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 and 3909, and 5412(b)(2)(B).
2. Designate the text set forth at the
end of the common preamble as part 3,
subparts E and F.
3. Newly designated subparts E and F
of part 3 are amended as set forth below:
i. Remove ‘‘[AGENCY]’’ and add
‘‘OCC’’ in its place, wherever it appears;
ii. Remove ‘‘[BANK]’’ and add
‘‘national bank or Federal savings
association’’ in its place, wherever it
appears;
iii. Remove ‘‘[BANKS]’’ and
‘‘[BANK]s’’ and add ‘‘national banks
and Federal savings associations’’ in
their places, wherever they appear;
iv. Remove ‘‘[BANK]’s’’ and add
‘‘national bank’s and Federal savings
association’s’’ in its place, wherever it
appears;
v. Remove ‘‘[PART]’’ and add ‘‘Part 3’’
in its place, wherever it appears; and
vi. Remove ‘‘[Regulatory Reports]’’
and add ‘‘Call Report’’ in its place,
wherever it appears; and
vii. Remove ‘‘[regulatory report]’’ and
add ‘‘Call Reports’’ in its place,
wherever it appears.
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
12 CFR Part 325
Authority and Issuance
Administrative practice and
procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping
For the reasons set forth in the
common preamble, part 217 of chapter
II of title 12 of the Code of Federal
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Regulations are proposed to be amended
as follows:
PART 217—CAPITAL ADEQUACY OF
BANK HOLDING COMPANIES,
SAVINGS AND LOAN HOLDING
COMPANIES, AND STATE MEMBER
BANKS
1. 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), 3904,
3906–3909, 4808, 5365, 5371.
Subpart E—Risk-Weighted Assets—
Internal Ratings-Based and Advanced
Measurement Approaches
Subpart F—Risk-weighted Assets—
Market Risk
2. Designate the text set forth at the
end of the common preamble as part
217, subparts E and F.
3. Part 217 is amended as set forth
below:
a. Remove ‘‘[AGENCY]’’ and add
‘‘Board’’ in its place wherever it
appears.
b. Remove ‘‘[BANK]’’ and add ‘‘Boardregulated institution’’ in its place
wherever it appears.
c. Remove ‘‘[PART]’’ and add ‘‘part’’
in its place wherever it appears.
d. Remove ‘‘[Regulatory Reports]’’ and
add in its place ‘‘Consolidated Reports
of Condition and Income (Call Report),
for a state member bank, or
Consolidated Financial Statements for
Bank Holding Companies (FR Y–9C), for
a bank holding company or savings and
loan holding company, as applicable’’
the first time it appears; and
e. Remove ‘‘[regulatory report]’’ and
add in its place ‘‘Call Report, for a state
member bank or FR Y–9C, for a bank
holding company or savings and loan
holding company, as applicable’’.
4. In § 217.100, revise paragraph (b)(1)
to read as follows:
§ 217.100 Purpose, Applicability, and
Principle of Conservatism.
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(b) Applicability. (1) This subpart
applies to:
(i) A top-tier bank holding company
or savings and loan holding company
domiciled in the United States that:
(A) Is not a consolidated subsidiary of
another bank holding company or
savings and loan holding company that
uses 12 CFR part 217, subpart E, to
calculate its risk-based capital
requirements; and
(B) That:
(1) Has total consolidated assets
(excluding assets held by an insurance
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underwriting subsidiary), as defined on
schedule HC–K of the FR Y–9C, equal
to $250 billion or more;
(2) Has consolidated total on-balance
sheet foreign exposure at the most
recent year-end equal to $10 billion
(excluding exposures held by an
insurance underwriting subsidiary).
Total on-balance sheet foreign exposure
equals total cross-border claims less
claims with head office or guarantor
located in another country plus
redistributed guaranteed amounts to the
country of head office or guarantor plus
local country claims on local residents
plus revaluation gains on foreign
exchange and derivative products,
calculated in accordance with the
Federal Financial Institutions
Examination Council (FFIEC) 009
Country Exposure Report); or
(3) Has a subsidiary depository
institution that is required, or has
elected, to use 12 CFR part 3, subpart E
(OCC), 12 CFR part 217, subpart E
(Board), or 12 CFR part 325, subpart E
(FDIC) to calculate its risk-based capital
requirements;
(ii) A state member bank that:
(A) Has total consolidated assets, as
reported on the most recent year-end
Consolidated Report of Condition and
Income (Call Report), equal to $250
billion or more;
(B) Has consolidated total on-balance
sheet foreign exposure at the most
recent year-endequal to $10 billion or
more (where total on-balance sheet
foreign exposure equals total crossborder claims less claims with head
office or guarantor located in another
country plus redistributed guaranteed
amounts to the country of head office or
guarantor plus local country claims on
local residents plus revaluation gains on
foreign exchange and derivative
products, calculated in accordance with
the Federal Financial Institutions
Examination Council (FFIEC) 009
Country Exposure Report);
(C) Is a subsidiary of a depository
institution that uses 12 CFR part 3,
subpart E (OCC), 12 CFR part 217,
subpart E (Board), or 12 CFR part 325,
subpart E (FDIC) to calculate its riskbased capital requirements; or
(D) Is a subsidiary of a bank holding
company that uses 12 CFR part 217,
subpart E, to calculate its risk-based
capital requirements; and
(iii) Any Board-regulated institution
that elects to use this subpart to
calculate its risk-based capital
requirements.
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5. In § 217.121, revise paragraph (a) to
read as follows:
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§ 217.121
53055
Qualification process.
(a) Timing. (1) A Board-regulated
institution that is described in
§ 217.100(b)(1)(i) and (ii) must adopt a
written implementation plan no later
than six months after the date the
Board-regulated institution meets a
criterion in that section. The
implementation plan must incorporate
an explicit start date no later than 36
months after the date the Boardregulated institution meets at least one
criterion under § 217.100(b)(1)(i) and
(ii). The Board may extend the start
date.
(2) A Board-regulated institution that
elects to be subject to this subpart under
§ 217.101(b)(1)(iii) must adopt a written
implementation plan.
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6. In § 217.122(g), revise paragraph
(g)(3)(ii) to read as follows:
§ ll.122
Qualification requirements.
*
*
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*
*
(g) * * *
(3) * * *
(ii)(A) With the prior written approval
of the Board, a state member bank may
generate an estimate of its operational
risk exposure using an alternative
approach to that specified in paragraph
(g)(3)(i) of this section. A state member
bank proposing to use such an
alternative operational risk
quantification system must submit a
proposal to the Board. In determining
whether to approve a state member
bank’s proposal to use an alternative
operational risk quantification system,
the Board will consider the following
principles:
(A) Use of the alternative operational
risk quantification system will be
allowed only on an exception basis,
considering the size, complexity, and
risk profile of the state member bank;
(B) The state member bank must
demonstrate that its estimate of its
operational risk exposure generated
under the alternative operational risk
quantification system is appropriate and
can be supported empirically; and
(C) A state member bank must not use
an allocation of operational risk capital
requirements that includes entities other
than depository institutions or the
benefits of diversification across
entities.
*
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7. In § 217.131, revise paragraph (b)
and paragraphs (e)(3)(i) and (ii), and add
a new paragraph (e)(5) to read as
follows:
§ 217.131 Mechanics for calculating total
wholesale and retail risk-weighted assets.
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(b) Phase 1—Categorization. The
Board-regulated institution must
determine which of its exposures are
wholesale exposures, retail exposures,
securitization exposures, or equity
exposures. The Board-regulated
institution must categorize each retail
exposure as a residential mortgage
exposure, a QRE, or an other retail
exposure. The Board-regulated
institution must identify which
wholesale exposures are HVCRE
exposures, sovereign exposures, OTC
derivative contracts, repo-style
transactions, eligible margin loans,
eligible purchased wholesale exposures,
cleared transactions, default fund
contributions, and unsettled
transactions to which § 217.136 applies,
and eligible guarantees or eligible credit
derivatives that are used as credit risk
mitigants. The Board-regulated
institution must identify any on-balance
sheet asset that does not meet the
definition of a wholesale, retail, equity,
or securitization exposure, any nonmaterial portfolio of exposures
described in paragraph (e)(4) of this
section, and for bank holding companies
and savings and loan holding
companies, any on-balance sheet asset
that is held in a non-guaranteed separate
account.
*
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(e) * * *
(3) * * *
(i) A bank holding company or
savings and loan holding company may
assign a risk-weighted asset amount of
zero to cash owned and held in all
offices of subsidiary depository
institutions or in transit; and for gold
bullion held in a subsidiary depository
institution’s own vaults, or held in
another depository institution’s vaults
on an allocated basis, to the extent the
gold bullion assets are offset by gold
bullion liabilities.
(ii) A state member bank may assign
a risk-weighted asset amount to cash
owned and held in all offices of the state
member bank or in transit and for gold
bullion held in the state member bank’s
own vaults, or held in another
depository institution’s vaults on an
allocated basis, to the extent the gold
bullion assets are offset by gold bullion
liabilities.
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(5) Assets held in non-guaranteed
separate accounts. The risk-weighted
asset amount for an on-balance sheet
asset that is held in a non-guaranteed
separate account is zero percent of the
carrying value of the asset.
8. In § 217.142, revise paragraph
(k)(1)(iv) to read as follows:
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§ 217.142 Risk-based capital requirement
for securitization exposures.
*
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(k) * * *
(1) * * *
(iv) * * *
(A) In the case of a state member
bank, the bank is well capitalized, as
defined in 12 CFR 208.43. For purposes
of determining whether a state member
bank is well capitalized for purposes of
this paragraph, the state member bank’s
capital ratios must be calculated
without regard to the capital treatment
for transfers of small-business
obligations with recourse specified in
paragraph (k)(1) of this section.
(B) In the case of a bank holding
company or savings and loan holding
company, the bank holding company or
savings and loan holding company is
well capitalized, as defined in 12 CFR
225.2. For purposes of determining
whether a bank holding company or
savings and loan holding company is
well capitalized for purposes of this
paragraph, the bank holding company or
savings and loan holding company’s
capital ratios must be calculated
without regard to the capital treatment
for transfers of small-business
obligations with recourse specified in
paragraph (k)(1) of this section.
*
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*
9. In § 217.152, revise paragraph
(b)(3)(i) to read as follows:
§ 217.152
(SRWA).
Simple risk weight approach
*
*
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*
*
(b) * * *
(3) * * *
(i) Community development equity
exposures. (A) For state member banks
and bank holding companies, an equity
exposure that qualifies as a community
development investment under 12
U.S.C. 24 (Eleventh), excluding equity
exposures to an unconsolidated small
business investment company and
equity exposures held through a
consolidated small business investment
company described in section 302 of the
Small Business Investment Act of 1958
(15 U.S.C. 682).
(B) For savings and loan holding
companies, an equity exposure that is
designed primarily to promote
community welfare, including the
welfare of low- and moderate-income
communities or families, such as by
providing services or employment, and
excluding equity exposures to an
unconsolidated small business
investment company and equity
exposures held through a small business
investment company described in
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section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682).
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10. In § 217.201, revise paragraph
(b)(1) introductory text to read as
follows:
§ 271.201 Purpose, Applicability, and
Reservation of Authority.
(b) Applicability. (1) This subpart
applies to any Board-regulated
institution with aggregate trading assets
and trading liabilities (as reported in the
Board-regulated institution’s most
recent quarterly Call Report, for a state
member bank, or FR Y–9C, for a bank
holding company or savings and loan
holding company, as applicable, any
savings and loan holding company that
does not file the FR Y–9C should follow
the instructions to the FR Y–9C), equal
to:
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*
11. In § 217.202, amend paragraph (b)
by revising paragraph (1) of the
definition of ‘‘Covered position’’ to read
as follows:
§ ll.202
Definitions.
*
*
*
*
*
Covered position means the following
positions:
(1) A trading asset or trading liability
(whether on- or off-balance sheet),1 as
reported on Schedule RC–D of the Call
Report or Schedule HC–D of the FR Y–
9C (any savings and loan holding
companies that do not file the FR Y–9C
should follow the instructions to the FR
Y–9C)), that meets the following
conditions:
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*
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the
common preamble, the Federal Deposit
Insurance Corporation proposes to
amend part 324 of chapter III of title 12
of the Code of Federal Regulations as
follows:
PART 324—CAPITAL ADEQUACY
1. 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
1 Securities subject to repurchase and lending
agreements are included as if they are still owned
by the lender.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
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).
mstockstill on DSK4VPTVN1PROD with PROPOSALS4
2. Subparts E and F are added as set
forth at the end of the common
preamble.
3. Subparts E and F are amended as
set forth below:
a. Remove ‘‘[AGENCY]’’ and add
‘‘FDIC’’ in its place, wherever it appears;
b. Remove ‘‘[Agency]’’ and add
‘‘FDIC’’ in its place, wherever it appears;
c. Remove ‘‘[12 CFR 3.12, 12 CFR
263.202, 12 CFR 325.6(c), 12 CFR
567.3(d)]’’ and add ‘‘12 CFR 325.6’’ in
its place, wherever it appears;
d. Remove ‘‘[BANK]’’ and add ‘‘bank
or state savings association’’ in its place,
wherever it appears in the phrases ‘‘A
[BANK]’’, ‘‘a [BANK]’’, ‘‘The [BANK]’’,
or ‘‘the [BANK]’’;
e. Remove ‘‘[BANK]’’ and add ‘‘bank
and state savings association’’ in its
place, wherever it appears in the
phrases ‘‘Each [BANK]’’ or ‘‘each
[BANK]’’;
f. Remove ‘‘[BANKS]’’ and ‘‘[BANK]s’’
and add ‘‘banks and state savings
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associations’’ in their place, wherever
they appear;
g. Remove ‘‘[PART]’’ and add ‘‘Part
324’’ in its place, wherever it appears;
h. Remove ‘‘[Regulatory Reports]’’ and
add ‘‘Consolidated Report of Condition
and Income (Call Report)’’ in its place;
i. Remove ‘‘of 12 CFR part 3 (OCC),
12 CFR part 208 (Board), or 12 CFR part
325 (FDIC)’’ and add ‘‘of 12 CFR part
324’’ in its place, wherever it appears;
j. Remove ‘‘[prompt corrective action
regulation]’’ and add ‘‘Subpart H of this
part’’ in its place, wherever it appears;
k. Remove ‘‘banking organization’’
and add ‘‘bank and/or state savings
associations, as’’
l. Remove ‘‘[Regulatory Reports]’’ and
add ‘‘Consolidated Report of Condition
and Income (Call Report)’’ in its place;
and
m. Remove ‘‘[regulatory report]’’ and
add ‘‘Call Report’’ in its place wherever
it appears; and
PART 325—CAPITAL MAINTENANCE
4. The authority citation for part 325
continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819
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(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 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).
Appendix D to Part 325—[Removed and
reserved]
5. Appendix D to part 325 is removed and
reserved.
Dated: June 11, 2012.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, July 3, 2012.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 12th day of
June, 2012.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012–16761 Filed 8–10–12; 8:45 am]
BILLING CODE P
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