Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule
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Text
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
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
AGENCY: 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.
SUMMARY: 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
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 risk-
based capital rule to be consistent with
Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-
Frank 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
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 drop-
down 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
Number OCC–2012–0010’’ in your
comment
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
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
lly 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
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,
k
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
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.
SUPPLEMENTARY INFORMATION: 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
Clougherty, Senior Attorney,
rclougherty@fdic.gov; Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION: 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
assets, including disclosures related to
regulatory capital instruments
ologies 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
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
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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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
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
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).
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).
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
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)
ard), 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
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
ed 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
ts. 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 ratings-
based approach and the internal
assessment approach for securitization
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 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 Risk-
Weighted 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
o 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 risk-
weighted 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 Dodd-
Frank 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
e 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
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)
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
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
ng 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
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.
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
pplicable 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
Residual maturity
Haircut (in percents) assigned based on:
Investment grade
securitization ex-
posures
(in percent)
Sovereign issuers risk weight
under § ___.32 2
Non-sovereign issuers risk weight
under § ___.32
Zero%
20% or
50%
100%
20%
50%
100%
Less than or equal to 1 year .................................
0.5
1.0
15.0
1.0
2.0
25.0
4.0
Greater than 1 year and less than or equal to 5
years ...................................................................
2.0
3.0
15.0
4.0
6.0
25.0
12.0
Greater than 5 years ..............................................
4.0
6.0
15.0
8.0
12.0
25.0
24.0
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
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
e 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).
TABLE 1—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1—Continued
Residual maturity
Haircut (in percents) assigned based on:
Investment grade
securitization ex-
posures
(in percent)
Sovereign issuers risk weight
under § ___.32 2
Non-sovereign issuers risk weight
under § ___.32
Zero%
20% or
50%
100%
20%
50%
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
..........................
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 non-
investment 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.
2. Changes to Holding Periods and the
Margin Period of Risk
During the financial crisis, many
financial institutions experienced
significant delays in settling or closing-
out 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
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
and delays experienced by
institutions when settling or liquidating
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
that netting set
he 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
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
encies 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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6 Equity derivatives that are call options are not
subject to a counterparty credit risk capital
requirement for specific wrong-way risk.
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
sing 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
odel
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
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 (inclu
dent 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
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
t
procedures to identify, monitor, and
control wrong-way risk throughout the
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
o;
(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
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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?
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
alternatives?
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
tion 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,
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
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
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
VA 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
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.
8 The term ‘‘exp’’ is the exponential function.
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 Dodd-
Frank 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.
TABLE 2—ASSIGNMENT OF
COUNTERPARTY WEIGHT UNDER THE
SIMPLE CVA
Internal PD
(in percent)
Weight Wind
(in percent)
0.00–0.07 ..............................
0.70
>0.07–0.15 ............................
0.80
>0.15–0.40 ............................
1.00
>0.4–2.00 ..............................
2.00
>2.0—6.00 ............................
3.00
>6.0 ......................................
dex.
TABLE 2—ASSIGNMENT OF
COUNTERPARTY WEIGHT UNDER THE
SIMPLE CVA
Internal PD
(in percent)
Weight Wind
(in percent)
0.00–0.07 ..............................
0.70
>0.07–0.15 ............................
0.80
>0.15–0.40 ............................
1.00
>0.4–2.00 ..............................
2.00
>2.0—6.00 ............................
3.00
>6.0 .......................................
10.00
EADi total in Formula 1 refers to the
sum of the EAD for all netting sets of
OTC derivative contracts with
counterparty i calculated using the
current exposure methodology
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
organization calculates EAD using the
IMM, EADi total equals EADunstressed.
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 (1-
exp(¥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 (1-
exp(¥0.05 × Mind))/(0.05 × Mind). A
banking organization would be allowed
to treat the notional amount in the index
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
or more CDSind
purchased as protection to hedge CVA
risk for counterparty i multiplied by (1-
exp(¥0.05 × Mind))/(0.05 × Mind). A
banking organization would be allowed
to treat the notional amount in the index
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
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
TC 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
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9 For the final time bucket, i = T.
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
e
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.
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:
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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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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10 See CPSS, ‘‘Recommendations for Central
Counterparties,’’ (November 2004), available at
http://www.bis.org/publ/cpss64.pdf?
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
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
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
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 repo-
style 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
ognized 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
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:
inancial 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
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 repo-
style 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:
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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11 See Securities Investor Protection Act of 1970,
15 U.S.C Section 78aaa—78lll; 17 CFR part 300; 17
CFR part 190.
12 See 76 FR 79380 (Dec. 21, 2011).
would find the arrangements to be legal,
valid, binding, and enforceable under
the law of the relevant jurisdiction,
provided certain additional criteria are
met
deral Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
11 See Securities Investor Protection Act of 1970,
15 U.S.C Section 78aaa—78lll; 17 CFR part 300; 17
CFR part 190.
12 See 76 FR 79380 (Dec. 21, 2011).
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
action.
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
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 risk-
based 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
ement 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 risk-
based 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 risk-
sensitive 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
one year, among other criteria
vanced 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
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
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
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of its default is low and the full and
timely repayment of principal and
interest is expected.
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
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of its default is low and the full and
timely repayment of principal and
interest is expected.
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.
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
proposed definition of ‘‘investment
grade.’’
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 2a-
7 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
pproach
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 2a-
7 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)
posal, 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
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
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 on-
balance 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 on-
or 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 asset-
backed securities (ABS), generally
present greater levels of risk relative to
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on exposure.
The recent financial crisis
demonstrated that resecuritization
exposures, such as collateralized debt
obligations (CDOs) comprised of asset-
backed 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 ratings-
based 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
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
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
ddition, if the conduit from the
example funds itself entirely with a
single class of commercial paper, then
the commercial paper generally would
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
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.
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 investment-
grade 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:
nization
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
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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13 For more information on the changes in GAAP
related to the transfer of exposures, see Financial
Accounting Standards Board, Topics 810 and 860.
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).
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 risk-
weighted 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)
on 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 risk-
weighted 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.
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 interest-
only strip (CEIO) that does not
constitute after-tax gain-on-sale.
er 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 interest-
only 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
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
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.
4. Guarantees and Credit Derivatives
Referencing a Securitization Exposure
The advanced approaches rule
includes methods for calculating risk-
weighted assets for nth-to-default credit
derivatives, including first-to-default
credit derivatives and second-or-
subsequent-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
o
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
sk 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.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
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)
e 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).
Question 12: The agencies request
comment on the proposed revisions to
the treatment of guarantees and credit
derivatives that reference a
securitization exposure.
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
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
SFA, parameter A would be set equal to
the credit enhancement level (L) used in
the SFA formula. In the case of a first-
to-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
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-to-
default 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-to-
default credit derivative that meets the
rules of recognition of section 134(b) of
the proposal (other than a first-to-
default 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
n 134(b) of
the proposal (other than a first-to-
default 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
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
e 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
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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
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
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).
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 risk-
based 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
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 risk-
based 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 risk-
weighted assets under the advanced
approaches rule.
Question 15: The agencies request
comment on the proposed 1,250 percent
risk weighting approach to CEIOs, low-
rated 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.
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
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.
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
50 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.
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 ‘‘foreign-
office 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
n 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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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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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
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)
onsistency 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 12-
month time horizon of Pillar 1. It thus
falls more appropriately under longer-
term 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.
6
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.
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
ly
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.
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
f ‘‘other retail’’
exposure and are therefore proposing to
amend the definition of QRE in order to
allow such products to qualify as QRE.
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
posure 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 quarter-
end. The preamble did not specify
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17 See 76 FR 22663 (April, 22, 2011).
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
ations 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.
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 ex
redit 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
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
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 requir
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