Regulatory Capital Rules:

57725

Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

COMPATIBILITY TABLE FOR DIRECT FINAL RULE

Section

Change

Subject

Compatibility

Existing

New

70.50(c)(2) ............................

Amend .................................

Reporting requirements .....................................................

C ............

C

70.74(b) ................................

Amend .................................

Additional reporting requirements ......................................

NRC .......

NRC

Appendix A ...........................

Amend .................................

Reportable safety events ...................................................

* .............

NRC

* Appendix A compatibility was not previously designated. As it is directly related to § 70.74 it is now designated as NRC.

XIII. Voluntary Consensus Standards

The National Technology Transfer

and Advancement Act of 1995 (Pub. L.

104–113), requires that Federal agencies

use technical standards that are

developed or adopted by voluntary

consensus standards bodies unless the

use of such a standard is inconsistent

with applicable law or otherwise

impractical. In this direct final rule, the

NRC will revise the time allowed to

submit a written follow-up report from

within 30 days to within 60 days after

the initial report of an event, change the

reporting framework for certain

situations, and remove redundant

reporting requirements. This action does

not constitute the establishment of a

standard that establishes generally

applicable requirements.

List of Subjects in 10 CFR Part 70

Criminal penalties, Hazardous

materials transportation, Material

control and accounting, Nuclear

materials, Packaging and containers,

Radiation protection, Reporting and

recordkeeping requirements, Scientific

equipment, Security measures, Special

nuclear material

titute the establishment of a

standard that establishes generally

applicable requirements.

List of Subjects in 10 CFR Part 70

Criminal penalties, Hazardous

materials transportation, Material

control and accounting, Nuclear

materials, Packaging and containers,

Radiation protection, Reporting and

recordkeeping requirements, Scientific

equipment, Security measures, Special

nuclear material.

For the reasons set out in the

preamble and under the authority of the

Atomic Energy Act of 1954, as amended;

the Energy Reorganization Act of 1974,

as amended; and 5 U.S.C. 552 and 553;

the NRC is adopting the following

amendments to 10 CFR Part 70.

PART 70—DOMESTIC LICENSING OF

SPECIAL NUCLEAR MATERIAL

■1. The authority citation for part 70

continues to read as follows:

Authority: Atomic Energy Act secs. 51, 53,

161, 182, 183, 193, 223, 234 (42 U.S.C. 2071,

2073, 2201, 2232, 2233, 2243, 2273, 2282,

2297f); secs. 201, 202, 204, 206, 211 (42

U.S.C. 5841, 5842, 5845, 5846, 5851);

Government Paperwork Elimination Act sec.

1704 (44 U.S.C. 3504 note); Energy Policy Act

of 2005, Pub. L. No. 109–58, 119 Stat. 194

(2005).

Sections 70.1(c) and 70.20a(b) also issued

under secs. 135, 141, Pub. L. 97–425, 96 Stat.

2232, 2241 (42 U.S.C. 10155, 10161).

Section 70.21(g) also issued under Atomic

Energy Act sec. 122 (42 U.S.C. 2152). Section

70.31 also issued under Atomic Energy Act

sec. 57(d) (42 U.S.C. 2077(d)). Sections 70.36

and 70.44 also issued under Atomic Energy

Act sec. 184 (42 U.S.C. 2234). Section 70.81

also issued under Atomic Energy Act secs.

186, 187 (42 U.S.C. 2236, 2237). Section

70.82 also issued under Atomic Energy Act

sec. 108 (42 U.S.C. 2138).

■2. In § 70.50, revise the first sentence

of the introductory text of paragraph

(c)(2) to read as follows:

§ 70.50

Reporting requirements.

*

*

*

*

*

d 70.44 also issued under Atomic Energy

Act sec. 184 (42 U.S.C. 2234). Section 70.81

also issued under Atomic Energy Act secs.

186, 187 (42 U.S.C. 2236, 2237). Section

70.82 also issued under Atomic Energy Act

sec. 108 (42 U.S.C. 2138).

■2. In § 70.50, revise the first sentence

of the introductory text of paragraph

(c)(2) to read as follows:

§ 70.50

Reporting requirements.

*

*

*

*

*

(c) * * *

(2) Written report. Each licensee that

makes a report required by paragraph (a)

or (b) of this section shall submit a

written follow-up report within 30 days

of the initial report. * * *

*

*

*

*

*

■3. In § 70.74, revise paragraph (b) to

read as follows:

§ 70.74

Additional reporting requirements.

*

*

*

*

*

(b) Written reports. Each licensee that

makes a report required by paragraph

(a)(1) of this section shall submit a

written follow-up report within 60 days

of the initial report. The written report

must be sent to the NRC’s Document

Control Desk, using an appropriate

method listed in § 70.5(a), with a copy

to the appropriate NRC regional office

listed in appendix D to part 20 of this

chapter. The reports must include the

information as described in

§ 70.50(c)(2)(i) through (iv).

■Appendix A to Part 70—[Amended]

■4. Amend appendix A to part 70 by:

■a. In the introductory text to

paragraph (a), removing the number

‘‘30’’ and adding, in its place, the

number ‘‘60’’;

■b. Removing paragraph (a)(5);

■c. In the introductory text to

paragraph (b), removing the number

‘‘30’’ and adding, in its place, the

number ‘‘60’’; and

■d. Removing paragraph (b)(5).

Dated at Rockville, Maryland, this 15th day

of September, 2014.

For the Nuclear Regulatory Commission.

Mark A. Satorius,

Executive Director for Operations.

[FR Doc. 2014–22866 Filed 9–25–14; 8:45 am]

BILLING CODE 7590–01–P

DEPARTMENT OF TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket ID OCC–2014–0008]

RIN 1557–AD81

FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulation Q Docket No

Maryland, this 15th day

of September, 2014.

For the Nuclear Regulatory Commission.

Mark A. Satorius,

Executive Director for Operations.

[FR Doc. 2014–22866 Filed 9–25–14; 8:45 am]

BILLING CODE 7590–01–P

DEPARTMENT OF TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket ID OCC–2014–0008]

RIN 1557–AD81

FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulation Q Docket No. R–1487]

RIN 7100–AD16

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 324

RIN 3064–AE12

Regulatory Capital Rules: Regulatory

Capital, Revisions to the

Supplementary Leverage Ratio

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: Final rule.

SUMMARY: In May 2014, 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) issued a

notice of proposed rulemaking (NPR or

proposed rule) to revise the definition of

the denominator of the supplementary

leverage ratio (total leverage exposure)

that the agencies adopted in July 2013

as part of comprehensive revisions to

the agencies’ regulatory capital rules

(2013 revised capital rule). The agencies

are adopting the proposed rule as final

(final rule) with certain revisions and

clarifications based on comments

received on the proposed rule.

The final rule revises total leverage

exposure as defined in the 2013 revised

capital rule to include the effective

notional principal amount of credit

derivatives and other similar

instruments through which a banking

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e proposed rule.

The final rule revises total leverage

exposure as defined in the 2013 revised

capital rule to include the effective

notional principal amount of credit

derivatives and other similar

instruments through which a banking

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57726

Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

1 The Board and the OCC published a joint final

rule in the Federal Register on October 11, 2013 (78

FR 62018) and the FDIC published in the Federal

Register a substantially identical final rule on April

14, 2014 (79 FR 20754).

2 12 CFR 3.10(a)(5) (OCC); 12 CFR 217.10(a)(5)

(Board); and 12 CFR 324.10(a)(5) (FDIC).

3 The eSLR standards were finalized by the

agencies on May 1, 2014 (79 FR 24528).

4 79 FR 24596 (May 1, 2014).

5 See BCBS, ‘‘Basel III leverage ratio framework

and disclosure requirements’’ (January 2014),

available at http://www.bis.org/publ/bcbs270.htm.

See also BCBS, ‘‘Revised Basel III leverage ratio

framework and disclosure requirements—

consultative document’’ (June 2013), available at

http://www.bis.org/publ/bcbs251.htm.

organization provides credit protection

(sold credit protection); modifies the

calculation of total leverage exposure for

derivative and repo-style transactions;

and revises the credit conversion factors

applied to certain off-balance sheet

exposures. The final rule also changes

the frequency with which certain

components of the supplementary

leverage ratio are calculated and

establishes the public disclosure

requirements of certain items associated

with the supplementary leverage ratio

everage exposure for

derivative and repo-style transactions;

and revises the credit conversion factors

applied to certain off-balance sheet

exposures. The final rule also changes

the frequency with which certain

components of the supplementary

leverage ratio are calculated and

establishes the public disclosure

requirements of certain items associated

with the supplementary leverage ratio.

The final rule applies to all banks,

savings associations, bank holding

companies, and savings and loan

holding companies (banking

organizations) that are subject to the

agencies’ advanced approaches risk-

based capital rules, as defined in the

2013 revised capital rule (advanced

approaches banking organizations),

including advanced approaches banking

organizations that are subject to the

enhanced supplementary leverage ratio

standards that the agencies finalized in

May 2014 (eSLR standards). Consistent

with the 2013 revised capital rule,

advanced approaches banking

organizations will be required to

disclose their supplementary leverage

ratios beginning January 1, 2015, and

will be required to comply with a

minimum supplementary leverage ratio

capital requirement of 3 percent and, as

applicable, the eSLR standards

beginning January 1, 2018.

DATES: The final rule is effective January

1, 2015.

FOR FURTHER INFORMATION CONTACT:

OCC: Margot Schwadron, Senior Risk

Expert, (202) 649–6982; or Nicole

Billick, Risk Expert, (202) 649–7932,

Capital Policy; or Carl Kaminski,

Counsel; or Henry Barkhausen,

Attorney, Legislative and Regulatory

Activities Division, (202) 649–5490, for

persons who are deaf or hard of hearing,

TTY (202) 649–5597, Office of the

Comptroller of the Currency, 400 7th

Street SW., Washington, DC 20219.

Board: Constance M

enior Risk

Expert, (202) 649–6982; or Nicole

Billick, Risk Expert, (202) 649–7932,

Capital Policy; or Carl Kaminski,

Counsel; or Henry Barkhausen,

Attorney, Legislative and Regulatory

Activities Division, (202) 649–5490, for

persons who are deaf or hard of hearing,

TTY (202) 649–5597, Office of the

Comptroller of the Currency, 400 7th

Street SW., Washington, DC 20219.

Board: Constance M. Horsley,

Assistant Director, (202) 452–5239;

Thomas Boemio, Manager, (202) 452–

2982; Sviatlana Phelan, Supervisory

Financial Analyst, (202) 912–4306; or

Holly Kirkpatrick, Supervisory

Financial Analyst, (202) 452–2796,

Capital and Regulatory Policy, Division

of Banking Supervision and Regulation;

or April C. Snyder, Senior Counsel,

(202) 452–3099; Christine E. Graham,

Counsel (202) 452–3005; or Mark

Buresh, Attorney, (202) 452–5270, Legal

Division, Board of Governors of the

Federal Reserve System, 20th and C

Streets NW., Washington, DC 20551. For

the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), (202) 263–4869.

FDIC: Bobby R. Bean, Associate

Director, bbean@fdic.gov; Ryan

Billingsley, Chief, Capital Policy

Section, rbillingsley@fdic.gov; Karl

Reitz, Chief, Capital Markets Strategies

Section, kreitz@fdic.gov; Capital

Markets Branch, Division of Risk

Management Supervision,

regulatorycapital@fdic.gov or (202) 898–

6888; or Michael Phillips, Counsel,

mphillips@fdic.gov; or Rachel Ackmann,

Senior Attorney, rackmann@fdic.gov; or

Grace Pyun, Senior Attorney, gpyun@

fdic.gov; Supervision Branch, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I

Division of Risk

Management Supervision,

regulatorycapital@fdic.gov or (202) 898–

6888; or Michael Phillips, Counsel,

mphillips@fdic.gov; or Rachel Ackmann,

Senior Attorney, rackmann@fdic.gov; or

Grace Pyun, Senior Attorney, gpyun@

fdic.gov; Supervision Branch, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

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) adopted the supplementary

leverage ratio in July 2013 as part of

comprehensive revisions to the

agencies’ regulatory capital rule (2013

revised capital rule).1 Under the 2013

revised capital rule, a minimum

supplementary leverage ratio

requirement of 3 percent applies to all

banking organizations that are subject to

the agencies’ advanced approaches risk-

based capital rule (advanced approaches

banking organizations).2 The

supplementary leverage ratio in the

2013 revised capital rule is generally

consistent with the international

leverage ratio introduced by the Basel

Committee on Banking Supervision

(BCBS) in 2010 (Basel III leverage ratio).

Under the enhanced supplementary

leverage ratio standards (eSLR

standards) finalized by the agencies in

May 2014, U.S. top-tier bank holding

companies (BHCs) with more than $700

billion in consolidated total assets or

more than $10 trillion in assets under

custody must maintain a leverage buffer

greater than 2 percentage points above

the minimum supplementary leverage

ratio requirement of 3 percent, for a total

of more than 5 percent, to avoid

restrictions on capital distributions and

discretionary bonus payments.3 Insured

depository institution (IDI) subsidiaries

of such BHCs must maintain at least a

6 percent supplementary leverage ratio

to be considered ‘‘well-capitalized’’

under the agencies’ prompt corrective

action framework

pplementary leverage

ratio requirement of 3 percent, for a total

of more than 5 percent, to avoid

restrictions on capital distributions and

discretionary bonus payments.3 Insured

depository institution (IDI) subsidiaries

of such BHCs must maintain at least a

6 percent supplementary leverage ratio

to be considered ‘‘well-capitalized’’

under the agencies’ prompt corrective

action framework.

On May 1, 2014, the agencies

published in the Federal Register, for

public comment, a notice of proposed

rulemaking (NPR or proposed rule) to

revise the definition of the denominator

of the supplementary leverage ratio

(total leverage exposure).4 The proposed

rule would have revised the

supplementary leverage ratio, consistent

with the January 2014 BCBS revisions to

the Basel III leverage ratio (BCBS 2014

revisions), to incorporate in total

leverage exposure the effective notional

principal amount of credit derivatives or

similar instruments through which a

banking organization provides credit

protection (sold credit protection),

modify the measure of exposure for

derivative and repo-style transactions,

and revise the credit conversion factors

(CCFs) for certain off-balance sheet

exposures.5 It would have required total

leverage exposure to be calculated as the

mean of total leverage exposure,

calculated daily, and would have

required public disclosure of certain

items associated with the

supplementary leverage ratio. In

general, the proposed changes were

designed to strengthen the

supplementary leverage ratio by more

appropriately capturing the exposure of

a banking organization’s on- and off-

balance sheet items.

As discussed further below, the

agencies are adopting the proposed rule

as final (final rule) with certain

revisions and clarifications based on

comments received on the proposed

rule

io. In

general, the proposed changes were

designed to strengthen the

supplementary leverage ratio by more

appropriately capturing the exposure of

a banking organization’s on- and off-

balance sheet items.

As discussed further below, the

agencies are adopting the proposed rule

as final (final rule) with certain

revisions and clarifications based on

comments received on the proposed

rule. In addition, the agencies are

revising the calculation of total leverage

exposure to provide that the on-balance

sheet portion of total leverage exposure

will be calculated as the average of each

day of the reporting quarter, but the off-

balance sheet portion of total leverage

exposure will be calculated as the

average of the three month-end amounts

of the most recent three months.

Consistent with the 2013 revised capital

rule, advanced approaches banking

organizations will be required to

disclose their supplementary leverage

ratios beginning January 1, 2015, and

will be required to comply with the

minimum supplementary leverage ratio

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57727

Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

6 78 FR 51101 (Aug. 20, 2013).

7 The estimates were generated by using

December 2013 Comprehensive Capital Analysis

and Review process data (which reflects banking

organizations’ own projections of their

supplementary leverage ratios under the

supervisory baseline scenario, including banking

organizations’ own assumptions about earnings

retention and other strategic actions), December Y–

9C data, and June 2013 Quantitative Impact Study

data.

capital requirement and, as applicable,

the eSLR standards, beginning January

1, 2018.

II

reflects banking

organizations’ own projections of their

supplementary leverage ratios under the

supervisory baseline scenario, including banking

organizations’ own assumptions about earnings

retention and other strategic actions), December Y–

9C data, and June 2013 Quantitative Impact Study

data.

capital requirement and, as applicable,

the eSLR standards, beginning January

1, 2018.

II. Summary of Comments on the NPR

and Description of the Final Rule

The agencies sought comment on all

aspects of the NPR and received 14

public comments from banking

organizations, trade associations

representing the banking or financial

services industry, an options and

futures exchange, a supervisory

authority, a public interest advocacy

group, three private individuals, and

other interested parties. In general,

comments from financial services firms,

banking organizations, banking trade

associations and other industry groups

were supportive of the proposed rule

because it would enhance international

consistency, but were critical of certain

aspects of the NPR. Comments from an

organization representing smaller

banking organizations, a group of state

bank supervisors, a public interest

advocacy group, and two individuals

were more generally supportive of the

NPR, but they also expressed certain

concerns. One individual commenter

strongly opposed the proposed rule. A

detailed discussion of the proposed

rule, commenters’ concerns, and the

agencies’ responses to those concerns

are provided in the remainder of this

preamble.

A. Calibration of the Supplementary

Leverage Ratio and the eSLR Standards

As noted above in Part I, a U.S

pportive of the

NPR, but they also expressed certain

concerns. One individual commenter

strongly opposed the proposed rule. A

detailed discussion of the proposed

rule, commenters’ concerns, and the

agencies’ responses to those concerns

are provided in the remainder of this

preamble.

A. Calibration of the Supplementary

Leverage Ratio and the eSLR Standards

As noted above in Part I, a U.S. top-

tier BHC with more than $700 billion in

consolidated total assets or more than

$10 trillion in assets under custody

must maintain a leverage buffer greater

than 2 percentage points above the

minimum supplementary leverage ratio

requirement of 3 percent, for a total of

more than 5 percent, to avoid

restrictions on capital distributions and

discretionary bonus payments. IDI

subsidiaries of such BHCs must

maintain at least a 6 percent

supplementary leverage ratio to be

considered ‘‘well capitalized’’ under the

agencies’ prompt corrective action

framework. The NPR did not propose

changes to the minimum supplementary

leverage ratio or eSLR standards, but did

propose changes to the denominator of

the supplementary leverage ratio, which

could require banking organizations

subject to the supplementary leverage

ratio standards (including the eSLR

standards) to hold higher amounts of

tier 1 capital to meet the standards. The

agencies asked in the proposal whether

the proposed changes to the definition

of total leverage exposure warranted any

changes to the calibration of the

minimum ratios, or the well-capitalized

or buffer levels of the supplementary

leverage ratio.

Some commenters encouraged the

agencies to reconsider the eSLR

standards in general, raising issues

similar to the comments that the

agencies received on the proposal to

implement the eSLR standards.6 For

example, commenters expressed the

view that the eSLR standards were not

consistent with the BCBS’s leverage

ratio framework and could therefore

result in competitive disparities across

jurisdictions

s encouraged the

agencies to reconsider the eSLR

standards in general, raising issues

similar to the comments that the

agencies received on the proposal to

implement the eSLR standards.6 For

example, commenters expressed the

view that the eSLR standards were not

consistent with the BCBS’s leverage

ratio framework and could therefore

result in competitive disparities across

jurisdictions. One commenter expressed

disappointment with the decision to

bifurcate the eSLR standards for BHCs

and IDIs. A number of commenters

expressed concern that the NPR, in

combination with the eSLR standards,

could cause the supplementary leverage

ratio to become the binding regulatory

capital constraint, rather than a

backstop to the risk-based capital

measure. These commenters concluded

that a consequence of a binding

supplementary leverage ratio could be

that banking organizations may divest

lower risk assets and assume more risk,

to the detriment of financial stability.

The agencies considered these

comments in connection with adopting

the eSLR standards, and the agencies’

views on those comments are set forth

in the preamble to the final rule

implementing the eSLR standards. As

noted in that preamble, and discussed

further below, the agencies believe that

the maintenance of a complementary

relationship between the leverage and

risk-based capital ratios is important to

ensure that each type of capital

requirement continues to serve as an

appropriate counterbalance to offset

potential weaknesses of the other. The

2013 revised capital rule implemented

the capital conservation buffer

framework (which is only applicable to

risk-based capital ratios) and increased

risk-based capital requirements more

than it increased leverage requirements,

reducing the ability of the leverage

requirements to act as an effective

complement to the risk-based

requirements, as they had historically

ses of the other. The

2013 revised capital rule implemented

the capital conservation buffer

framework (which is only applicable to

risk-based capital ratios) and increased

risk-based capital requirements more

than it increased leverage requirements,

reducing the ability of the leverage

requirements to act as an effective

complement to the risk-based

requirements, as they had historically.

As a result, the degree to which banking

organizations could potentially benefit

from active management of risk-

weighted assets before they breach the

leverage requirements may be greater.

To account for the increases in

stringency in the risk-based capital

framework, the agencies calibrated the

eSLR standards so that they remain in

an effective complementary relationship

with the risk-based capital

requirements. The proposed revisions to

total leverage exposure were designed to

more appropriately capture the

exposure of a banking organization’s on-

and off-balance sheet exposures, which

furthers this complementarity.

In adopting the eSLR standards and

developing the proposed rule, the

agencies considered the combined

impact of the eSLR standards and the

proposed changes to total leverage

exposure.7 The agencies noted that,

quantitatively, compared to the 2013

revised capital rule, the most important

changes in total leverage exposure in the

proposed rule are: (i) The proposed use

of standardized CCFs for certain off-

balance sheet activities, which should

lead to a reduction in total leverage

exposure, and (ii) the proposed

treatment of sold credit derivatives,

which should lead to an increase in

total leverage exposure. However, the

actual total leverage exposure under the

proposed rule would be especially

sensitive to the volume of sold credit

derivative activities and would be

dependent on whether those activities

are hedged in a manner recognized

under the proposed rule

exposure, and (ii) the proposed

treatment of sold credit derivatives,

which should lead to an increase in

total leverage exposure. However, the

actual total leverage exposure under the

proposed rule would be especially

sensitive to the volume of sold credit

derivative activities and would be

dependent on whether those activities

are hedged in a manner recognized

under the proposed rule. As discussed

in the proposed rule, supervisory

estimates suggested that the proposed

changes to the definition of total

leverage exposure would result in an

approximately 8.5 percent aggregate

increase in total leverage exposure

across the BHCs subject to the eSLR

standards, relative to the definition of

total leverage exposure in the 2013

revised capital rule. Based on current

estimates, total leverage exposure across

the eight BHCs subject to the eSLR

standards would increase by an average

of 2.6 percent under the proposed rule

as compared to the definition of total

leverage exposure under the 2013

revised capital rule. In both analyses, on

an individual firm basis, for some BHCs

subject to the eSLR standards, total

leverage exposure increased, while for

others it decreased, relative to the

definition of total leverage exposure in

the 2013 revised capital rule. The

decline from an 8.5 percent to a 2.6

percent aggregate increase reflects a

lower estimate of the impact of

including the notional amount of credit

derivatives, resulting from trade

compression and possibly more

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vised capital rule. The

decline from an 8.5 percent to a 2.6

percent aggregate increase reflects a

lower estimate of the impact of

including the notional amount of credit

derivatives, resulting from trade

compression and possibly more

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57728

Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

8 78 FR 71818 (Nov. 29, 2013).

9 The 2013 revised capital rule implemented the

capital conservation buffer framework (which is

only applicable to risk-based capital ratios) and

increased risk-based capital requirements more than

it increased leverage requirements, reducing the

ability of the leverage requirements to act as an

effective complement to the risk-based

offsetting of credit derivatives in

response to the proposed rule.

Using data as of the second quarter of

2014, the agencies estimate that BHCs

subject to the eSLR standards will need

to raise, in the aggregate, approximately

$14.5 billion of tier 1 capital to exceed

a 5 percent supplementary leverage ratio

under the definition of total leverage

exposure in the final rule, over and

above the amount BHCs subject to the

eSLR standards would have needed to

raise under the definition of total

leverage exposure in the 2013 revised

capital rule. This is less than the

incremental effect estimated in the

proposed rule of $46 billion, based on

data as of the fourth quarter of 2013.

The change is the result of capital

raising by BHCs subject to the eSLR

standards, who increased their tier 1

capital by 9.3 percent, in combination

with a 2.9 percent increase in total

leverage exposure, between the fourth

quarter of 2013 and the second quarter

of 2014

the

incremental effect estimated in the

proposed rule of $46 billion, based on

data as of the fourth quarter of 2013.

The change is the result of capital

raising by BHCs subject to the eSLR

standards, who increased their tier 1

capital by 9.3 percent, in combination

with a 2.9 percent increase in total

leverage exposure, between the fourth

quarter of 2013 and the second quarter

of 2014.

Based on these considerations, the

agencies believe that the revisions to the

definition of total leverage exposure

should not affect the calibration of the

5 and 6 percent supplementary leverage

ratio thresholds under the eSLR

standards.

B. Total Leverage Exposure Definition

The proposed rule would have

adjusted the measure of total leverage

exposure to more appropriately capture

the exposure of a banking organization’s

on- and off-balance sheet items. For

example, the proposed rule would have

included in total leverage exposure the

effective notional principal amount of

credit derivatives and other similar

instruments through which a banking

organization provides credit protection

(sold credit protection), which has the

effect of increasing total leverage

exposure associated with these credit

derivatives, and would have introduced

graduated CCFs for off-balance sheet

exposures, which would have reduced

total leverage exposure with respect to

these items. The proposed rule also

would have modified the total leverage

exposure calculation for derivative

contracts and repo-style transactions in

a manner that is intended to ensure that

the supplementary leverage ratio

appropriately reflects the economic

exposure of these activities.

1. Exclusion of Certain On-balance

Sheet Assets

Many commenters expressed the view

that the definition of total leverage

exposure should exclude certain

categories of assets

xposure calculation for derivative

contracts and repo-style transactions in

a manner that is intended to ensure that

the supplementary leverage ratio

appropriately reflects the economic

exposure of these activities.

1. Exclusion of Certain On-balance

Sheet Assets

Many commenters expressed the view

that the definition of total leverage

exposure should exclude certain

categories of assets. Specifically,

commenters encouraged the agencies to

exclude from total leverage exposure

highly liquid assets, such as cash,

claims on central banks, and sovereign

securities, particularly U.S. Treasuries.

Some commenters expressed concern

that including highly liquid and low-

risk assets in total leverage exposure

could have negative consequences,

including the creation of disincentives

for banking organizations to engage in

prudent risk management practices.

According to commenters, total leverage

exposure as proposed could incentivize

banking organizations to abandon

lower-margin business lines in favor of

higher-risk, higher-return activities, in

order to increase return on equity.

Some commenters also expressed the

view that the inclusion of the full value

of highly liquid and low-risk assets in

total leverage exposure would conflict

with the agencies’ proposed liquidity

coverage ratio (LCR) rulemaking, which

requires holdings of high-quality liquid

assets (HQLA).8 These commenters

maintained that the proposed changes to

the supplementary leverage ratio would

increase capital requirements for

banking organizations that have been

increasing their inventories of HQLA in

an effort to comply with the LCR

requirements because the proposed

supplementary leverage ratio would

effectively penalize HQLA with higher

capital charges per unit of risk

s (HQLA).8 These commenters

maintained that the proposed changes to

the supplementary leverage ratio would

increase capital requirements for

banking organizations that have been

increasing their inventories of HQLA in

an effort to comply with the LCR

requirements because the proposed

supplementary leverage ratio would

effectively penalize HQLA with higher

capital charges per unit of risk.

Certain commenters also expressed

the view that the inclusion of low-risk

assets in the definition of total leverage

exposure penalizes core aspects of the

custody bank business model, including

the intermediation of high-volume, low-

risk, low-return financial activities and

broad reliance on essentially riskless

assets, notably central bank deposits.

Specifically, these commenters

recommended that the final rule

exclude deposits with central banks

(including Federal Reserve Banks) from

total leverage exposure in order to

accommodate increases in banking

organizations’ assets, both temporary

and sustained, that occur as a result of

macroeconomic factors and monetary

policy decisions, particularly during

periods of financial market stress.

Additionally, these commenters

recommended that the agencies adjust

total leverage exposure for central bank

deposits associated with excess amounts

of operationally-linked client deposit

balances. Under this approach, a

banking organization would be

permitted to deduct its excess

operational deposits placed with a

central bank from its measure of total

leverage exposure, subject to a

standardized supervisory factor and

excluding any balances resulting from

reserve or other similar requirements

deposits associated with excess amounts

of operationally-linked client deposit

balances. Under this approach, a

banking organization would be

permitted to deduct its excess

operational deposits placed with a

central bank from its measure of total

leverage exposure, subject to a

standardized supervisory factor and

excluding any balances resulting from

reserve or other similar requirements.

Several commenters noted that custody

banks, which can experience volatility

in deposits tied to day-to-day activities,

could potentially take actions, such as

limiting payment, clearing, and

settlement activities, or placing

unilateral restrictions on deposit

inflows, if the definition of total

leverage exposure is unchanged from

the proposed rule. Some commenters

also noted that the daily averaging

provision in the NPR, which would

have required that banking

organizations calculate quarter-end total

leverage exposure based on the daily

average of exposure amounts throughout

the quarter, would not significantly

address these concerns.

Alternatively, some commenters

suggested that the agencies discount or

cap the amount of such assets included

in total leverage exposure. In particular,

they suggested that the agencies could

set certain threshold levels for particular

low-risk assets relative to total assets

where any holdings of such low-risk

assets beyond this threshold would be

excluded from total leverage exposure.

In addition, some commenters

recommended that the agencies preserve

flexibility during periods of financial

market stress, particularly to address a

large, temporary increase in a banking

organization’s cash account that could

lead to a sharp decrease in the banking

organization’s supplementary leverage

ratio.

The agencies addressed similar

comments in the final rule

implementing the eSLR standards

some commenters

recommended that the agencies preserve

flexibility during periods of financial

market stress, particularly to address a

large, temporary increase in a banking

organization’s cash account that could

lead to a sharp decrease in the banking

organization’s supplementary leverage

ratio.

The agencies addressed similar

comments in the final rule

implementing the eSLR standards. In

general, the supplementary leverage

ratio is designed to require a banking

organization to hold a minimum amount

of capital against total assets and off-

balance sheet exposures, regardless of

the riskiness of the individual assets.

Excluding central bank deposits would

not be consistent with this principle. In

response to commenters’ concern that

total leverage exposure as proposed

could incentivize banking organizations

to hold higher-risk, higher-return assets,

the agencies maintain that the

complementary relationship between

the leverage and risk-based capital ratios

is designed to mitigate any regulatory

capital incentives for banking

organizations to inappropriately

increase their risk profile in response to

a strict supplementary leverage ratio.9 If

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

requirements, as they had historically. As a result,

the degree to which banking organizations could

potentially benefit from active management of risk-

weighted assets before they breach the leverage

requirements may be greater. The agencies sought

to calibrate the leverage and risk-based standards

more closely to each other so that they remain in

an effective complementary relationship.

10 See Accounting Standards Codification

paragraphs 815–10–45–1 through 7

banking organizations could

potentially benefit from active management of risk-

weighted assets before they breach the leverage

requirements may be greater. The agencies sought

to calibrate the leverage and risk-based standards

more closely to each other so that they remain in

an effective complementary relationship.

10 See Accounting Standards Codification

paragraphs 815–10–45–1 through 7.

the supplementary leverage ratio were

to become the binding regulatory capital

ratio for a particular banking

organization, and that banking

organization were to acquire more

higher-risk assets, risk-weighted assets

should increase until the risk-based

capital framework becomes binding.

Conversely, if a binding risk-based

capital ratio induces an institution to

expand portfolios whose risk is

insufficiently addressed by the risk-

based capital framework, its total

leverage exposure would increase until

the supplementary leverage ratio would

become binding. Regardless of which

framework is binding, banking

organizations could potentially increase

their holdings of assets whose risks are

not adequately addressed by the binding

framework. In this regard, the agencies

note the importance of the

complementary nature of the two

frameworks in counterbalancing such

incentives. Moreover, the agencies

observe that banking organizations

choose their asset mix based on a

variety of factors, including yields

available relative to the overall cost of

funds, the need to preserve financial

flexibility and liquidity, revenue

generation and the maintenance of

market share and business relationships,

and the likelihood that principal will be

repaid, in addition to regulatory capital

considerations

rve that banking organizations

choose their asset mix based on a

variety of factors, including yields

available relative to the overall cost of

funds, the need to preserve financial

flexibility and liquidity, revenue

generation and the maintenance of

market share and business relationships,

and the likelihood that principal will be

repaid, in addition to regulatory capital

considerations.

In response to commenters’ concern

that the inclusion of the full value of

highly liquid and low-risk assets in total

leverage exposure would conflict with

the agencies’ proposed LCR rulemaking,

the agencies believe that while the

supplementary leverage ratio requires

capital to be held against the HQLA

required by the LCR, there are actions a

banking organization could take to

address an LCR HQLA shortfall, such as

reducing short-term funding sources or

off-balance sheet requirements, that

would not necessarily increase a firm’s

capital requirement under the

supplementary leverage ratio. The

agencies believe that, in many ways, the

LCR and the supplementary leverage

ratio are complementary. In isolation,

the supplementary leverage ratio may

encourage firms to take greater liquidity

risk by purchasing less liquid assets that

have a greater yield. In contrast, the

LCR, in isolation, may allow the firm to

rely on substantial short-term funding as

long as the firm also holds HQLA. The

two measures together provide

assurance that firms that rely

substantially on short-term funding hold

appropriate capital and liquid assets.

The agencies understand the

commenters’ observation that the

custody banks, which act as

intermediaries in high-volume, low-risk,

low-return financial activities, may

experience increases in assets that occur

as a result of macroeconomic factors and

monetary policy decisions, particularly

during periods of financial market

stress

-term funding hold

appropriate capital and liquid assets.

The agencies understand the

commenters’ observation that the

custody banks, which act as

intermediaries in high-volume, low-risk,

low-return financial activities, may

experience increases in assets that occur

as a result of macroeconomic factors and

monetary policy decisions, particularly

during periods of financial market

stress. The agencies also recognize that

certain monetary policy actions, such as

quantitative easing, create additional

reserve balances that banking

organizations must add to their balance

sheets, thereby impacting firms’

leverage ratios. Because the

supplementary leverage ratio is

insensitive to risk, it is possible that

banking organizations’ costs of holding

low-risk, low-return assets—such as

reserve balances—could increase if such

ratio were to become the binding

regulatory capital constraint. However,

as mentioned above, the agencies

observe that banking organizations

consider many factors beyond

regulatory capital requirements, such as

yields available relative to the overall

cost of funds, the need to preserve

financial flexibility and liquidity,

revenue generation and the maintenance

of market share and business

relationships, and the likelihood that

principal will be repaid, when choosing

an appropriate asset mix.

With regard to the commenters’

request to exclude certain low-risk

assets, such as cash, central bank

deposits, or sovereign securities from

total leverage exposure, the agencies

believe that excluding broad categories

of assets from the denominator of the

supplementary leverage ratio is

generally inconsistent with the goal of

limiting leverage without differentiating

across asset types. Such exclusions

could, for example, allow a banking

organization to take on additional debt

without increasing its supplementary

leverage ratio requirements (if the

proceeds from such debt are invested in

certain types of assets)

rom the denominator of the

supplementary leverage ratio is

generally inconsistent with the goal of

limiting leverage without differentiating

across asset types. Such exclusions

could, for example, allow a banking

organization to take on additional debt

without increasing its supplementary

leverage ratio requirements (if the

proceeds from such debt are invested in

certain types of assets). The agencies

therefore believe that all of a banking

organization’s assets, including those

that are viewed as low-risk assets,

should be reflected in the

supplementary leverage ratio. This

makes the supplementary leverage ratio

more difficult to arbitrage and results in

a simpler calculation. Furthermore, the

agencies do not believe that there is

sufficient justification to treat certain

low-risk assets, such as central bank

deposits, differently in the denominator

of the supplementary leverage ratio than

other low-risk assets, such as cash or

U.S. Treasuries. In addition, retaining

the treatment as proposed better aligns

the supplementary leverage ratio with

the Basel III leverage ratio, which

promotes international consistency in

the calculation of total leverage

exposure.

Accordingly, the agencies have

decided to not exempt or limit any

categories of balance sheet assets from

the denominator of the supplementary

leverage ratio in the final rule. Thus, all

categories of assets, including cash, U.S.

Treasuries, and deposits at the Federal

Reserve, are included in the

denominator of the supplementary

leverage ratio.

The agencies note that, under the

2013 revised capital rule, the agencies

reserved the authority to consider

whether average total consolidated

assets or total leverage exposure for a

banking organization’s supplementary

leverage ratio is appropriate given the

banking organization’s exposures or its

circumstances, and the agencies may

require adjustments to those amounts

leverage ratio.

The agencies note that, under the

2013 revised capital rule, the agencies

reserved the authority to consider

whether average total consolidated

assets or total leverage exposure for a

banking organization’s supplementary

leverage ratio is appropriate given the

banking organization’s exposures or its

circumstances, and the agencies may

require adjustments to those amounts.

The final rule clarifies that this

authority would be applicable by

replacing the term ‘‘leverage ratio

exposure amount’’ with the defined

term ‘‘total leverage exposure.’’

2. Cash Variation Margin Associated

With Derivative Transactions

The proposed rule would have

revised the circumstances under which

a banking organization could offset cash

collateral received from a counterparty

against any positive mark-to-fair value

of a derivative contract for purposes of

measuring total leverage exposure.

Under the 2013 revised capital rule,

total leverage exposure includes a

banking organization’s on-balance sheet

assets, including the carrying value, if

any, of derivative contracts on the

banking organization’s balance sheet.

For the purpose of determining the

carrying value of derivative contracts,

U.S. generally accepted accounting

principles (GAAP) provide a banking

organization the option to reduce any

positive mark-to-fair value of a

derivative contract by the amount of any

cash collateral received from the

counterparty, provided the relevant

GAAP criteria for offsetting are met (the

GAAP offset option).10 Similarly, under

the GAAP offset option, a banking

organization has the option to offset the

negative mark-to-fair value of a

derivative contract with a counterparty

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GAAP criteria for offsetting are met (the

GAAP offset option).10 Similarly, under

the GAAP offset option, a banking

organization has the option to offset the

negative mark-to-fair value of a

derivative contract with a counterparty

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

11 Qualifying master netting agreement is defined

in section 2 of the 2013 revised capital rule.

by the amount of any cash collateral

posted to the counterparty.

Under the 2013 revised capital rule,

regardless of whether a banking

organization uses the GAAP offset

option to calculate the on-balance sheet

amount of derivative contracts, a

banking organization must include any

on-balance sheet assets arising from the

receipt of cash collateral from the

counterparty in its total leverage

exposure.

Under the proposed rule, if a banking

organization applies the GAAP offset

option to determine the carrying value

of its derivative contracts, the banking

organization would be required to

reverse the effect of the GAAP offset

option for purposes of determining total

leverage exposure, unless the cash

collateral recognized to reduce the

mark-to-fair value is cash variation

margin that satisfies all of the following

conditions:

(1) For derivative contracts that are

not cleared through a qualifying central

counterparty (QCCP), the cash collateral

received by the recipient counterparty is

not segregated;

(2) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative

contract;

air value is cash variation

margin that satisfies all of the following

conditions:

(1) For derivative contracts that are

not cleared through a qualifying central

counterparty (QCCP), the cash collateral

received by the recipient counterparty is

not segregated;

(2) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative

contract;

(3) The variation margin transferred

under the derivative contract or the

governing rules for a cleared transaction

is the full amount that is necessary to

fully extinguish the current credit

exposure amount to the counterparty of

the derivative contract, subject to the

threshold and minimum transfer

amounts applicable to the counterparty

under the terms of the derivative

contract or the governing rules for a

cleared transaction;

(4) The variation margin is in the form

of cash in the same currency as the

currency of settlement set forth in the

derivative contract, provided that, for

purposes of this paragraph, currency of

settlement means any currency for

settlement specified in the qualifying

master netting agreement,11 the credit

support annex to the qualifying master

netting agreement, or in the governing

rules for a cleared transaction; and

(5) The derivative contract and the

variation margin are governed by a

qualifying master netting agreement

between the legal entities that are the

counterparties to the derivative contract

or by the governing rules for a cleared

transaction. The qualifying master

netting agreement or the governing rules

for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net

basis, taking into account any variation

margin received or provided under the

contract if a credit event involving

either counterparty occurs

ntract

or by the governing rules for a cleared

transaction. The qualifying master

netting agreement or the governing rules

for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net

basis, taking into account any variation

margin received or provided under the

contract if a credit event involving

either counterparty occurs.

With respect to the potential

reduction of gross fair value amounts for

cash variation margin, one commenter

expressed the view that the calculation

of total leverage exposure should follow

the treatment of cash collateral under

IFRS rather than GAAP. The agencies

believe that the netting criteria specified

in the proposal, which were developed

without regard to whether a banking

organization applies GAAP or IFRS,

produce an appropriate measure of a

banking organization’s exposure to

derivative transactions.

With respect to the first proposed

criterion, commenters expressed

concern that a banking organization that

posts cash variation margin to a

counterparty that is not a QCCP may not

know whether that counterparty has

segregated the cash variation margin

that it has received. These commenters

recommended that the agencies clarify

in the final rule that a banking

organization posting cash variation

margin may presume that a counterparty

has not segregated the cash variation

margin received unless required to do so

pursuant to applicable legal

requirements or under contractual

terms. In the final rule, the agencies are

clarifying that unless segregation is

required by law, regulation, or any

agreement with the counterparty, a

banking organization that posts cash

variation margin to a counterparty may

assume that its counterparty has not

segregated the cash variation margin it

has received for purposes of meeting

this criterion

requirements or under contractual

terms. In the final rule, the agencies are

clarifying that unless segregation is

required by law, regulation, or any

agreement with the counterparty, a

banking organization that posts cash

variation margin to a counterparty may

assume that its counterparty has not

segregated the cash variation margin it

has received for purposes of meeting

this criterion. The agencies also note

that ‘‘not segregated’’ in this context

means that the cash variation margin

received is commingled with the

banking organization’s other funds. In

other words, the counterparty that

receives the cash variation margin

should have no unique restrictions on

its ability to use the cash received (e.g.,

the banking organization may use the

cash variation margin received similar

to other cash held by the banking

organization).

With respect to the second criterion,

the agencies received a question about

the calculation and transfer of cash

variation margin on a daily basis. The

commenter asked whether the second

criterion would be met for certain

categories of derivative transactions,

such as exchange-traded options and

energy derivatives, where variation

margin may not be exchanged daily, but

is exchanged on a regular basis. In

addition, buyers of exchange-traded

options do not receive variation margin

from the options CCP, who holds the

margin collected from option sellers

during the course of the contract. For

purposes of meeting the second

criterion, derivative positions must be

valued daily and cash variation margin

must be transferred daily to the

counterparty or to the counterparty’s

account when the threshold and daily

minimum transfer amounts are satisfied

according to the terms of the derivative

contract.

With respect to the third proposed

criterion, commenters expressed the

view that there may be occasional short-

term differences between the amount of

the variation margin provided and the

mark-to-fair value of derivative

contracts

party or to the counterparty’s

account when the threshold and daily

minimum transfer amounts are satisfied

according to the terms of the derivative

contract.

With respect to the third proposed

criterion, commenters expressed the

view that there may be occasional short-

term differences between the amount of

the variation margin provided and the

mark-to-fair value of derivative

contracts. For example, it is common

practice for a morning margin call to be

based on the mark-to-fair value of a

derivative contract based on the

previous end-of-business day’s

valuation. The commenters

recommended that the agencies permit

such small, temporary differences

between the amount of variation margin

provided and the current mark-to-fair

value, so long as it is clear that the

contract governing such transactions

requires variation margin for the full

amount of the current credit exposure.

The agencies agree with the commenters

that such temporary differences should

not invalidate recognition of the

variation margin already received, and

as such, a morning margin call based on

the mark from the end of the previous

day should be considered to satisfy this

criterion. Therefore, the agencies are

clarifying that cash variation margin

exchanged on the morning of the

subsequent trading day would meet the

third criterion for cash variation margin.

As noted in the preamble to the

proposed rule, the regular and timely

exchange of cash variation margin helps

to protect both counterparties from the

effects of a counterparty default. The

proposed conditions under which cash

collateral may be used to offset the

amount of a derivative contract were

developed to ensure that such cash

collateral is, in substance, a form of pre-

settlement payment on a derivative

contract

proposed rule, the regular and timely

exchange of cash variation margin helps

to protect both counterparties from the

effects of a counterparty default. The

proposed conditions under which cash

collateral may be used to offset the

amount of a derivative contract were

developed to ensure that such cash

collateral is, in substance, a form of pre-

settlement payment on a derivative

contract. This approach is consistent

with the design of the supplementary

leverage ratio, which generally does not

permit banking organizations to use

collateral to reduce exposures for

purposes of calculating total leverage

exposure. The proposed conditions also

ensure that the counterparties calculate

their exposures arising from derivative

contracts on a daily basis and transfer

the net amounts owed, as appropriate,

in a timely manner. Therefore, with the

clarifications noted above, the agencies

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

12 A credit event on the senior reference exposure

must result in a credit event on the junior reference

exposure.

are finalizing the criteria as proposed for

permitting the use of cash variation

margin to offset the mark-to-fair value of

derivative contracts.

3. Credit Derivatives

Under the 2013 revised capital rule, a

banking organization would include in

total leverage exposure the potential

future exposure (PFE) associated with a

credit derivative using the current

exposure methodology (CEM) as

specified in section 34 of the 2013

revised capital rule

he use of cash variation

margin to offset the mark-to-fair value of

derivative contracts.

3. Credit Derivatives

Under the 2013 revised capital rule, a

banking organization would include in

total leverage exposure the potential

future exposure (PFE) associated with a

credit derivative using the current

exposure methodology (CEM) as

specified in section 34 of the 2013

revised capital rule. The proposed rule

would have required a banking

organization to include in total leverage

exposure the effective notional principal

amount (that is, the apparent or stated

notional principal amount multiplied by

any multiplier in the derivative

contract) of sold credit protection, but

would have permitted the banking

organization to reduce the effective

notional principal amount of sold credit

protection with credit protection

purchased under certain conditions.

Specifically, a banking organization

would be permitted to reduce the

effective notional principal amount of

sold credit protection on a single

exposure by the effective notional

principal amount of a credit derivative

or similar instrument through which the

banking organization has purchased

credit protection (purchased credit

protection), provided that the purchased

credit protection has a remaining

maturity that is equal to or greater than

the remaining maturity of the sold credit

protection, and that the reference

exposure of the purchased credit

protection refers to the same legal entity

and ranks pari passu with, or is junior

to,12 the reference exposure of the sold

credit protection.

In addition, the NPR would have

permitted a banking organization to

reduce the effective notional principal

amount of sold credit protection that

references a single reference exposure

using purchased credit protection that

references multiple exposures if the

purchased credit protection is

economically equivalent to buying

credit protection separately on each of

the individual reference exposures of

the sold credit protection

d a banking organization to

reduce the effective notional principal

amount of sold credit protection that

references a single reference exposure

using purchased credit protection that

references multiple exposures if the

purchased credit protection is

economically equivalent to buying

credit protection separately on each of

the individual reference exposures of

the sold credit protection. For example,

this would be the case if a banking

organization were to purchase credit

protection on an entire securitization

structure or on an entire index that

includes the reference exposure of the

sold credit protection. However, if a

banking organization purchases credit

protection that references multiple

exposures, but the purchased credit

protection is not economically

equivalent to buying credit protection

separately on each of the individual

reference exposures (for example,

through an nth-to-default credit

derivative or a tranche of a

securitization), the proposed rule would

not have allowed the banking

organization to reduce the effective

notional principal amount of the sold

credit protection that references a single

exposure.

Under the NPR, to reduce the effective

notional principal amount of sold credit

protection that references multiple

exposures, such as an index (e.g., the

CDX) or a tranche of an index or

securitization, the reference exposures

of the purchased credit protection

would need to refer to the same legal

entities and rank pari passu with the

reference exposures of the sold credit

protection. The purchased credit

protection also would need to have a

remaining maturity that is equal to or

greater than the remaining maturity of

the sold credit protection. In addition,

the level of seniority of the purchased

credit protection would need to rank

pari passu with the level of seniority of

the sold credit protection

i passu with the

reference exposures of the sold credit

protection. The purchased credit

protection also would need to have a

remaining maturity that is equal to or

greater than the remaining maturity of

the sold credit protection. In addition,

the level of seniority of the purchased

credit protection would need to rank

pari passu with the level of seniority of

the sold credit protection. Therefore,

offsetting would be recognized only

when all of the reference exposures and

the level of subordination of protection

sold and protection purchased are

identical. For example, a banking

organization may reduce the effective

notional principal amount of the sold

credit protection on an index, or a

tranche of an index, with purchased

credit protection on such index, or a

tranche of equal seniority of such index,

respectively.

In general, commenters expressed the

view that the criteria in the proposed

rule under which a banking

organization could reduce the effective

notional principal amount of sold credit

protection with purchased credit

protection were too narrow and would

result in an overstatement of the actual

economic exposure in some cases. For

example, commenters recommended

that purchased credit protection that has

a residual tenor which is sufficiently

long-term be considered eligible to

reduce the effective notional amount of

sold credit protection if all of the other

criteria are met. These commenters

expressed the view that such an

approach would be appropriate because

it would generally disqualify short-term

purchased credit protection from

reducing the effective notional amount

of sold credit protection. In addition,

these commenters recommended that

purchased credit protection on a junior

tranche of a securitization be allowed to

offset protection sold on a senior

tranche of the same securitization

that such an

approach would be appropriate because

it would generally disqualify short-term

purchased credit protection from

reducing the effective notional amount

of sold credit protection. In addition,

these commenters recommended that

purchased credit protection on a junior

tranche of a securitization be allowed to

offset protection sold on a senior

tranche of the same securitization. One

comment letter recommended a more

restrictive approach, suggesting that

offsetting sold credit protection against

purchased credit protection should only

be allowed if the protection seller has a

very high credit rating and is not

affiliated with the reference entity.

The agencies believe that the criteria

in the proposed rule strike a balance

between recognizing the amount of sold

credit protection and ensuring that the

offsetting purchased credit protection

appropriately matches the risks of the

underlying reference exposure of the

sold credit protection. Further, the

proposed criteria for offsetting sold

credit protection are generally

consistent with the way banking

organizations seek to limit their

exposure to the underlying reference

exposures of sold credit protection by

purchasing credit protection on the

same or similar exposures of the same

or longer maturity. The proposed

criteria result in a significant reduction

of the effective notional amount of sold

credit protection, while capturing the

effective notional amount of sold credit

protection that a banking organization

has not fully hedged. The proposed

criteria are also consistent with the

Basel III leverage ratio standards. With

regard to commenters’ suggestions of

additional adjustments and

modifications to these criteria, changing

the proposed criteria for offsetting sold

credit protection would complicate the

calculation of total leverage exposure

and the impact of any such

modifications would likely be

immaterial

ed. The proposed

criteria are also consistent with the

Basel III leverage ratio standards. With

regard to commenters’ suggestions of

additional adjustments and

modifications to these criteria, changing

the proposed criteria for offsetting sold

credit protection would complicate the

calculation of total leverage exposure

and the impact of any such

modifications would likely be

immaterial. With regard to the comment

that the criteria for reducing the

effective notional amount of sold credit

protection should be stricter, the

agencies believe that restricting the

criteria further would unduly penalize

banking organizations that have

significantly reduced their exposure to

the underlying reference exposures by

purchasing credit protection. Therefore,

the final rule does not modify the

proposed criteria to reduce the effective

notional amount of sold credit

protection.

Commenters also recommended

allowing any purchased credit

protection which covers the entirety of

the subset of exposures covered by the

sold credit protection to reduce the

effective notional amount of sold credit

protection. Specifically, commenters

sought clarity regarding a situation in

which a banking organization has

purchased and sold credit protection on

overlapping portions of the same

reference index or securitization, but

where the purchased credit protection

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commenters

sought clarity regarding a situation in

which a banking organization has

purchased and sold credit protection on

overlapping portions of the same

reference index or securitization, but

where the purchased credit protection

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

does not cover the entirety of the

portion of the index or securitization on

which the banking organization has sold

credit protection.

The agencies note that the final rule

does permit a banking organization that

has purchased and sold credit

protection on overlapping portions of

the same reference index, but where the

purchased credit protection does not

cover the entirety of the portion of the

index or securitization on which the

banking organization has sold credit

protection, to offset the sold credit

protection by the overlapping portion of

purchased credit protection. For

example, if a banking organization has

sold credit protection on the 3–7

percent tranche(s) of an index and

purchased credit protection on the 5–10

percent tranche(s) of the same index, the

banking organization may offset the 5–

7 percent portion of the sold credit

protection, assuming all of the other

relevant criteria are met. In such

situations, offsetting may be recognized

because, in accordance with the final

rule, all of the reference exposures and

the level of subordination of sold credit

protection and purchased credit

protection are identical for the

overlapping portion of purchased and

sold credit protection

ent portion of the sold credit

protection, assuming all of the other

relevant criteria are met. In such

situations, offsetting may be recognized

because, in accordance with the final

rule, all of the reference exposures and

the level of subordination of sold credit

protection and purchased credit

protection are identical for the

overlapping portion of purchased and

sold credit protection.

Commenters recommended that the

agencies clarify that clearing member

banking organizations are not required

to include the effective notional amount

of sold credit protection cleared on

behalf of a client though a CCP, and that

such a derivative transaction, or other

similar instrument, related to the sold

credit protection should instead be

included in total leverage exposure of

the clearing member banking

organization in the same manner as

other cleared derivatives. The agencies

are clarifying that the effective notional

principal amounts of sold credit

protection that are cleared for clearing

member clients through CCPs are not

included in a clearing member banking

organization’s total leverage exposure.

In addition, the clearing member

banking organization would include

such a derivative transaction, or other

similar instrument, related to the sold

credit protection in its total leverage

exposure in the same manner as other

cleared derivative transactions (that is,

if the clearing member banking

organization guarantees the performance

of a clearing member client with respect

to a cleared transaction, the clearing

member banking organization would

treat the exposure to the clearing

member client as a derivative contract).

In addition, under the proposed rule,

for sold credit protection, a banking

organization would have accounted for

the notional amount of sold credit

protection in total leverage exposure

through the effective notional principal

amount, as well as through CEM (that is,

the current credit exposure and the

PFE), as described above

ure to the clearing

member client as a derivative contract).

In addition, under the proposed rule,

for sold credit protection, a banking

organization would have accounted for

the notional amount of sold credit

protection in total leverage exposure

through the effective notional principal

amount, as well as through CEM (that is,

the current credit exposure and the

PFE), as described above. In the

proposed rule, a banking organization

would have been permitted to adjust the

PFE for sold credit protection to avoid

double-counting the notional amounts

of these exposures. For example, if the

sold credit protection was governed by

a qualifying master netting agreement, a

banking organization would have been

permitted to adjust the PFE for sold

credit protection covered by the

qualifying master netting agreement.

However, a banking organization would

have been allowed to adjust only the

amount Agross of the PFE calculation for

sold credit derivatives and would not

have been allowed to adjust the net-to-

gross ratio (NGR) of the PFE calculation.

Finally, a banking organization that

elected to adjust the PFE for sold credit

derivatives would have been required to

do so consistently over time. The

agencies did not receive any comments

on the PFE adjustment, and are

therefore finalizing this aspect of the

rule substantively as proposed.

4. Repo-Style Transactions

Under the 2013 revised capital rule,

total leverage exposure includes the on-

balance sheet carrying value of repo-

style transactions, but not the related

off-balance sheet exposure for such

transactions. The proposed rule set forth

a revised treatment of repo-style

transactions, including the conditions

under which a banking organization

would be permitted to measure the

exposure of repo-style transactions

using the carrying value for the

transactions (using the GAAP offset for

repo-style transactions, as described

below), rather than the gross value of all

receivables due from a counterparty

roposed rule set forth

a revised treatment of repo-style

transactions, including the conditions

under which a banking organization

would be permitted to measure the

exposure of repo-style transactions

using the carrying value for the

transactions (using the GAAP offset for

repo-style transactions, as described

below), rather than the gross value of all

receivables due from a counterparty.

The proposed rule also specified the

treatment for a security-for-security

repo-style transaction, a repurchase or

reverse repurchase transaction, or a

securities borrowing or lending

transaction that is treated as a sale for

accounting purposes, and the

counterparty credit risk component of

repo-style transactions. The proposed

rule also clarified the calculation of total

leverage exposure for repo-style

transactions where a banking

organization acts as an agent.

a. Criteria for Recognizing the GAAP

Offset for Repo-style Transactions

For purposes of determining the on-

balance sheet carrying value of a repo-

style transaction, GAAP permits a

banking organization to offset the gross

values of receivables due from a

counterparty under reverse repurchase

agreements by the amount of the

payments due to the same counterparty

(that is, amounts recognized as payables

to the same counterparty under

repurchase agreements), provided the

relevant accounting criteria are met

(GAAP offset for repo-style

transactions). The proposed rule

specified the criteria for when a banking

organization would have been required

to reverse the GAAP offset for repo-style

transactions for the purpose of

calculating total leverage exposure

is, amounts recognized as payables

to the same counterparty under

repurchase agreements), provided the

relevant accounting criteria are met

(GAAP offset for repo-style

transactions). The proposed rule

specified the criteria for when a banking

organization would have been required

to reverse the GAAP offset for repo-style

transactions for the purpose of

calculating total leverage exposure.

If a banking organization entered into

repurchase and reverse repurchase

transactions with the same counterparty

and applied the GAAP offset for repo-

style transactions, but the transactions

did not meet the criteria described

below, the banking organization would

have been required to replace the net

on-balance sheet assets of the reverse

repurchase transactions determined

according to GAAP, if any, with the

gross value of receivables for those

reverse repurchase transactions. Those

criteria are:

(1) The offsetting transactions have

the same explicit final settlement date

under their governing agreements;

(2) The banking organization’s right to

offset the amount owed to the

counterparty with the amount owed by

the counterparty is legally enforceable

in the normal course of business and in

the event of receivership, insolvency,

liquidation, or similar proceeding; and

(3) Under the governing agreements,

the counterparties intend to settle net,

settle simultaneously, or settle

according to a process that is the

functional equivalent of net settlement.

That is, the cash flows of the

transactions are equivalent, in effect, to

a single net amount on the settlement

date. To achieve this result, both

transactions must be settled through the

same settlement system and the

settlement arrangements must be

supported by cash or intraday credit

facilities intended to ensure that

settlement of both transactions will

occur by the end of the business day,

and the settlement of the underlying

securities does not interfere with the net

cash settlement

tlement

date. To achieve this result, both

transactions must be settled through the

same settlement system and the

settlement arrangements must be

supported by cash or intraday credit

facilities intended to ensure that

settlement of both transactions will

occur by the end of the business day,

and the settlement of the underlying

securities does not interfere with the net

cash settlement.

With respect to the first proposed

criterion, commenters expressed the

view that the agencies clarify or revise

the final rule to provide that undated

repo-style transactions (sometimes

referred to as ‘‘open’’ transactions),

which can be unwound unconditionally

at any time by either counterparty, may

be treated as having an effective one-day

maturity. Because the proposed rule

referred to ‘‘explicit’’ settlement dates, it

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

would not have permitted receivables or

payables from ‘‘open’’ transactions to be

offset against payables or receivables

from overnight transactions (or against

other ‘‘open’’ transactions).

The criterion limiting offsetting to

those repo-style transactions that have

the ‘‘same explicit final settlement date’’

is consistent both with current

accounting standards and with the

BCBS 2014 revisions to the Basel III

leverage ratio. This criterion helps to

ensure that the counterparties agree in

advance what the settlement date for a

repo-style transaction would be, and

thus helps a banking organization

manage its counterparty exposure,

including the net amount owed

explicit final settlement date’’

is consistent both with current

accounting standards and with the

BCBS 2014 revisions to the Basel III

leverage ratio. This criterion helps to

ensure that the counterparties agree in

advance what the settlement date for a

repo-style transaction would be, and

thus helps a banking organization

manage its counterparty exposure,

including the net amount owed. To

promote consistency in the treatment of

repo-style transactions, and to ensure

banking organizations do not understate

their actual exposure to repo-style

transactions for the purpose of

calculating total leverage exposure, the

agencies continue to believe that

explicit identical settlement dates

established at the origination of repo-

style transactions should be a criterion

for offsetting repo-style transactions in

the final rule. Therefore, the agencies

are finalizing this aspect of the rule as

proposed.

With respect to the third criterion,

commenters recommended deleting the

proposed requirement that ‘‘settlement

of the underlying securities does not

interfere with the net cash settlement.’’

The commenters expressed the view

that the purpose of this requirement is

unclear. In the final rule the agencies

are clarifying that this criterion requires

that the settlement of the underlying

securities be subject to a settlement

mechanism that results in the functional

equivalence of net settlement. In other

words, the cash flows of the transactions

must be equivalent, in effect, to a single

net amount on the settlement date. To

achieve such equivalence, all

transactions must be settled through the

same settlement system, and any

settlement system used to settle the

transactions must not require all

securities to have successfully settled

before settling any net cash obligations

nt. In other

words, the cash flows of the transactions

must be equivalent, in effect, to a single

net amount on the settlement date. To

achieve such equivalence, all

transactions must be settled through the

same settlement system, and any

settlement system used to settle the

transactions must not require all

securities to have successfully settled

before settling any net cash obligations.

The settlement system’s procedures

must provide that the failure of any

single securities transaction in the

settlement system should only delay the

matching cash leg (payment) or create

an obligation to the settlement system,

supported by an associated credit

facility. The requirement that settlement

of the underlying securities does not

interfere with the net cash settlement is

not intended to exclude any settlement

mechanism, such as a delivery-versus-

payment or other mechanism, if it meets

these functional requirements. If a

settlement system’s procedures allow

for all of the above, then the third

criterion would be met. If the failure of

the securities leg of a transaction in

such a system persists at the end of the

settlement period, however, then this

transaction and its matching cash leg

must be split out from the netting set

and treated gross for the purposes of

total leverage exposure.

In the proposal, the agencies

requested comment on the operational

implications of the proposed netting

criteria for repo-style transactions

compared to GAAP, and the magnitude

of the change in total leverage exposure

for these transactions compared to

GAAP. The agencies also asked about

the potential costs of developing the

necessary systems to offset amounts

recognized as receivables due from a

counterparty under reverse repurchase

agreements. The agencies did not

receive responses to these questions

repo-style transactions

compared to GAAP, and the magnitude

of the change in total leverage exposure

for these transactions compared to

GAAP. The agencies also asked about

the potential costs of developing the

necessary systems to offset amounts

recognized as receivables due from a

counterparty under reverse repurchase

agreements. The agencies did not

receive responses to these questions.

One comment letter stated that if any

additional costs exist, those would not

be a valid reason for not requiring the

netting criteria as a pre-requisite for the

preferential capital treatment for

netting.

b. Treatment of Security-for-Security

Repo-style Transactions

The proposed rule specified how a

banking organization would have

treated security-for-security repo-style

transactions for purposes of calculating

total leverage exposure. Under GAAP, in

a security-for-security repo-style

transaction, the receiver of a security

lent (a securities borrower) does not

include the security borrowed on its

balance sheet provided that the lender

has not defaulted under the terms of the

transaction. A security that a securities

borrower transferred to the lender (a

securities lender) as collateral would

remain on the securities borrower’s

balance sheet. Consistent with GAAP,

under the proposed rule, a securities

borrower would have included a

security that is transferred to a securities

lender in its total leverage exposure, but

the NPR would not have required the

securities borrower to adjust its total

leverage exposure related to such a

transaction, unless and until the

security borrower sold the security or

the securities lender defaulted. The

agencies did not receive any comments

on the proposed treatment from the

securities borrower’s perspective.

Therefore, the agencies are adopting the

treatment in a security-for-security repo-

style transaction for the securities

borrower as proposed

age exposure related to such a

transaction, unless and until the

security borrower sold the security or

the securities lender defaulted. The

agencies did not receive any comments

on the proposed treatment from the

securities borrower’s perspective.

Therefore, the agencies are adopting the

treatment in a security-for-security repo-

style transaction for the securities

borrower as proposed.

Under GAAP, from a securities

lender’s perspective, a security received

as collateral from a securities borrower

is included on the security lender’s

balance sheet as an asset. In addition, a

securities lender also must continue to

include the security that it lent on its

balance sheet if the transaction is

treated as a secured borrowing. Under

the proposal, in a security-for-security

repo-style transaction, a securities

lender would have been allowed to

exclude the security received as

collateral from total leverage exposure,

unless and until the securities lender

sells or re-hypothecates the security. If

the securities lender sold or re-

hypothecated the security, the securities

lender would have been required to

include the amount of cash received or,

in the case of re-hypothecation, the

value of the security pledged as

collateral in its total leverage exposure.

Commenters expressed concern that

the proposed treatment of security-for

security transactions would not achieve

consistency across differing accounting

frameworks in periods subsequent to a

sale or re-hypothecation by a securities

lender, and recommended revising the

proposed rule to permit banking

organizations acting as securities

lenders to reduce total leverage

exposure by the value of the securities

received in a security-for-security repo-

style transaction, regardless of whether

such banking organization sold or re-

hypothecated the securities received.

The agencies have decided not to

change the proposal in response to these

comments

ing the

proposed rule to permit banking

organizations acting as securities

lenders to reduce total leverage

exposure by the value of the securities

received in a security-for-security repo-

style transaction, regardless of whether

such banking organization sold or re-

hypothecated the securities received.

The agencies have decided not to

change the proposal in response to these

comments. The proposed approach,

which is consistent with international

standards, was designed to ensure that

a securities lender would not have

included both a security lent and a

security received in its total leverage

exposure, unless the securities lender

sold or re-hypothecated the security

received. In addition, the agencies

believe the proposed treatment

appropriately captures the exposure

associated with a security that has been

re-hypothecated because a banking

organization is obligated to return or

repurchase the security at a later date.

Further, the agencies note that pursuant

to the BCBS 2014 revisions, total

leverage exposure would include

amounts associated with the sale or re-

hypothecation of collateral by a

securities lender, thereby eliminating

the effect of any differences in

accounting frameworks. The agencies

are therefore finalizing this aspect of the

rule as proposed.

c. Repurchase and Securities Lending

Transactions That Qualify for Sales

Treatment Under U.S. GAAP

The proposed rule specified the

treatment for a repurchase or reverse

repurchase transaction or a securities

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of the

rule as proposed.

c. Repurchase and Securities Lending

Transactions That Qualify for Sales

Treatment Under U.S. GAAP

The proposed rule specified the

treatment for a repurchase or reverse

repurchase transaction or a securities

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

borrowing or lending transaction that

qualifies for sales treatment under U.S.

GAAP (repurchase or securities lending

transaction that qualifies for sales

treatment under U.S. GAAP). The

proposed rule would have required a

banking organization to add the value of

securities sold under such a repurchase

or securities lending transaction that

qualifies for sales treatment under U.S.

GAAP to total leverage exposure for as

long as the transaction is outstanding.

The agencies did not receive any

comments on this particular aspect of

the proposed rule and are finalizing this

aspect of the rule as proposed. The

agencies are providing clarification of

the treatment of a forward agreement

associated with a repurchase or

securities lending transaction that

qualifies for sales treatment under U.S.

GAAP. If a repurchase or securities

lending transaction qualifies for sales

treatment under U.S. GAAP, a banking

organization would generally record an

associated forward purchase agreement

or forward sale agreement, which may

be treated as a derivative exposure

under GAAP. The replacement cost and

PFE associated with this derivative

exposure, in combination with the value

of the security sold may overstate the

actual exposure in total leverage

exposure of such a repurchase or

securities lending transaction that

qualifies for sales treatment under U.S.

GAAP

chase agreement

or forward sale agreement, which may

be treated as a derivative exposure

under GAAP. The replacement cost and

PFE associated with this derivative

exposure, in combination with the value

of the security sold may overstate the

actual exposure in total leverage

exposure of such a repurchase or

securities lending transaction that

qualifies for sales treatment under U.S.

GAAP. Therefore, the PFE related to a

forward agreement associated with a

repurchase or securities lending

transaction that qualifies for sales

treatment under U.S. GAAP may be

excluded from total leverage exposure.

Moreover, a forward agreement

associated with a repurchase or

securities lending transaction that

qualifies for sales treatment under U.S.

GAAP should not be included in total

leverage exposure as an off-balance

sheet exposure subject to a CCF.

d. Counterparty Credit Risk Measure

The proposed rule also included a

counterparty credit risk measure in total

leverage exposure to capture a banking

organization’s exposure to its

counterparty in repo-style transactions.

To determine the counterparty exposure

for a repo-style transaction, including a

transaction in which a banking

organization acts as an agent for a

customer and indemnifies the customer

against loss, the banking organization

would subtract the fair value of the

instruments, gold, and cash received

from a counterparty from the fair value

of any instruments, gold, and cash lent

to the counterparty. For repo-style

transactions that are not subject to a

qualifying master netting agreement or

that are not cleared, the counterparty

exposure measure would be calculated

on a transaction-by-transaction basis

nization

would subtract the fair value of the

instruments, gold, and cash received

from a counterparty from the fair value

of any instruments, gold, and cash lent

to the counterparty. For repo-style

transactions that are not subject to a

qualifying master netting agreement or

that are not cleared, the counterparty

exposure measure would be calculated

on a transaction-by-transaction basis.

However, if a qualifying master netting

agreement were in place, or the

transactions were cleared, the banking

organization would be able to net the

total fair value of instruments, gold, and

cash lent to a counterparty against the

total fair value of instruments, gold, and

cash received from the same

counterparty across all those

transactions. The agencies did not

receive any comments on this part of the

proposed rule and are adopting it as

proposed.

The proposed rule provided that

where a banking organization acts as an

agent for a repo-style transaction and

provides a guarantee (indemnity) to a

customer with regard to the

performance of the customer’s

counterparty that is greater than the

difference between the fair value of the

security or cash lent and the fair value

of the security or cash borrowed, the

banking organization would have been

required to include the amount of the

guarantee that is greater than this

difference in its total leverage exposure.

The agencies did not receive any

comments on this part of the proposed

rule and are adopting it as proposed.

e. Repo-style Transactions Cleared

Through CCPs

One commenter asked the agencies to

clarify the proposed rule with regard to

repo-style transactions cleared through

CCPs, when a banking organization

acting as an agent offers

indemnifications to the client.

According to the commenter, a banking

organization that clears repo-style

transactions through a CCP is generally

required to post cash collateral to the

CCP

Cleared

Through CCPs

One commenter asked the agencies to

clarify the proposed rule with regard to

repo-style transactions cleared through

CCPs, when a banking organization

acting as an agent offers

indemnifications to the client.

According to the commenter, a banking

organization that clears repo-style

transactions through a CCP is generally

required to post cash collateral to the

CCP. The commenter stated that this

would likely result in a larger

counterparty exposure amount added to

total leverage exposure than a similar

repo-style transaction executed as a

bilateral trade, and would discourage

the clearing of repo-style transactions.

However, the commenter did not

provide any specific proposals to

address the disincentives created by the

clearing process, and acknowledged that

most repo-style transactions are not

currently cleared.

The agencies acknowledge that the

mechanics of the clearing process

currently operate in a manner that

results in a larger counterparty exposure

than a similar transaction that is not

cleared. The treatment is consistent

with the approach for repo-style

transactions, and the agencies do not

believe that there is sufficient

justification to provide a different

treatment for repo-style transactions

cleared through CCPs for purposes of

calculating total leverage exposure.

Therefore, the agencies are not making

any revisions in the final rule to address

the clearing of repo-style transactions

and are finalizing this aspect of the rule

as proposed.

5. Off-Balance Sheet Exposures

Under the 2013 revised capital rule,

banking organizations must apply a 100

percent CCF to all off-balance sheet

items to calculate total leverage

exposure, except for unconditionally

cancellable commitments, which are

subject to a 10 percent CCF

rule to address

the clearing of repo-style transactions

and are finalizing this aspect of the rule

as proposed.

5. Off-Balance Sheet Exposures

Under the 2013 revised capital rule,

banking organizations must apply a 100

percent CCF to all off-balance sheet

items to calculate total leverage

exposure, except for unconditionally

cancellable commitments, which are

subject to a 10 percent CCF. The NPR

would have retained the 10 percent CCF

for unconditionally cancellable

commitments, but would have replaced

the uniform 100 percent CCF for other

off-balance sheet items with the CCFs

applicable under the standardized

approach for risk-weighted assets in

section 33 of the 2013 revised capital

rule.

Commenters generally supported the

adoption of the standardized approach

CCFs. However, some commenters

expressed concern over the scope of

exposures that are treated as off-balance

sheet and, therefore, subject to CCFs.

Some commenters also requested that

the agencies revise the CCFs applicable

to certain trade finance exposures to

effectively decrease the amount of such

exposures included in total leverage

exposure, specifically to make the

treatment of these exposures consistent

with the European Union’s treatment

under the CRD–IV Directive.

Commenters also recommended that the

agencies clarify the treatment of certain

exposures for purposes of inclusion in

total leverage exposure. For example,

commenters suggested that the CCF

treatment could result in an

overstatement of off-balance sheet

exposures, specifically with respect to

forward-starting reverse repos and

securities borrowing transactions that

have been entered into at an agreed rate

but have not yet been settled.

Commenters expressed the view that

forward-starting reverse repos should be

treated as derivative exposures rather

than being assigned a CCF, and that the

repo-style transaction counterparty

credit risk measure should apply only

where a qualifying master netting

agreement is in place

ities borrowing transactions that

have been entered into at an agreed rate

but have not yet been settled.

Commenters expressed the view that

forward-starting reverse repos should be

treated as derivative exposures rather

than being assigned a CCF, and that the

repo-style transaction counterparty

credit risk measure should apply only

where a qualifying master netting

agreement is in place. Commenters

further suggested treating deliverable

bond futures and OTC equity forward

purchases as derivative exposures rather

than off-balance sheet exposures subject

to CCFs, because they are trading

positions. These commenters opined

that total leverage exposure should

exclude ‘‘forward forward deposits’’ that

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

represent the renewal of an existing

deposit on its maturity, because

including these would double count

them. Alternatively, commenters

requested that the agencies clarify that

‘‘forward asset purchases,’’ which

receive a 100 percent CCF, do not

include deliverable bond futures or

forward-starting repo transactions.

Under the proposal, off-balance sheet

exposures were included in total

leverage exposure in a manner

consistent with the standardized

approach risk-based capital rules. The

treatment of specific instruments

depended on the characteristics of those

instruments. For example, an exposure

that receives a conversion factor under

section 33 of the 2013 revised capital

rule would receive the same conversion

factor for purposes of calculating total

leverage exposure, subject to the

minimum 10 percent conversion factor

applied to unconditionally cancellable

commitments

atment of specific instruments

depended on the characteristics of those

instruments. For example, an exposure

that receives a conversion factor under

section 33 of the 2013 revised capital

rule would receive the same conversion

factor for purposes of calculating total

leverage exposure, subject to the

minimum 10 percent conversion factor

applied to unconditionally cancellable

commitments.

Regarding the comment to revise the

CCFs applicable to certain trade finance

exposures, the agencies have decided

not to modify the applicable CCFs for

the purposes of calculating total

leverage exposure. The proposed

approach incorporates off-balance sheet

exposures in total leverage exposure in

a straightforward manner consistent

with existing regulatory approaches and

that already have proven effective.

Thus, the agencies believe that the

standardized CCFs, which also are

consistent with international standards,

are appropriate for measuring total

leverage exposure for off-balance sheet

exposures. Accordingly, the agencies

have decided to adopt this aspect of the

final rule as proposed.

6. Central Clearing of Derivative

Transactions

The 2013 revised capital rule provides

that a banking organization must

include in total leverage exposure the

PFE for each derivative contract (or each

single-product netting set of such

transactions) to which the banking

organization is a counterparty

calculated in accordance with section

34 of the 2013 revised capital rule, but

without regard to any collateral used to

reduce risk-based capital requirements

pursuant to section 34(b) of the 2013

revised capital rule. Although cleared

transactions are generally addressed in

section 35 of the 2013 revised capital

rule, section 35 refers to section 34 for

the purpose of determining the PFE of

cleared derivative transactions

n

34 of the 2013 revised capital rule, but

without regard to any collateral used to

reduce risk-based capital requirements

pursuant to section 34(b) of the 2013

revised capital rule. Although cleared

transactions are generally addressed in

section 35 of the 2013 revised capital

rule, section 35 refers to section 34 for

the purpose of determining the PFE of

cleared derivative transactions. Thus,

for the purpose of measuring total

leverage exposure, the PFE for each

derivative transaction to which a

banking organization is a counterparty,

including cleared derivative

transactions, should be determined

pursuant to section 34. The proposed

rule would have revised the description

of total leverage exposure to make this

point more clear.

When a clearing member banking

organization does not guarantee the

performance of the CCP, the clearing

member banking organization has no

payment obligation to the clearing

member client in the event of a CCP

default. In these circumstances,

requiring the clearing member banking

organization to include an exposure to

the CCP in its total leverage exposure

would generally result in an

overstatement of total leverage

exposure. Therefore, under the

proposed rule, and consistent with the

Basel III leverage ratio, a clearing

member banking organization would not

have been required to include in its total

leverage exposure an exposure to the

CCP for client-cleared transactions if the

clearing member banking organization

does not guarantee the performance of

the CCP to the clearing member client.

However, if a clearing member banking

organization does guarantee the

performance of the CCP to the clearing

member client, then the proposed rule

would have required a clearing member

banking organization to include an

exposure to the CCP for the client-

cleared transactions in its total leverage

exposure

tion

does not guarantee the performance of

the CCP to the clearing member client.

However, if a clearing member banking

organization does guarantee the

performance of the CCP to the clearing

member client, then the proposed rule

would have required a clearing member

banking organization to include an

exposure to the CCP for the client-

cleared transactions in its total leverage

exposure.

One commenter requested that the

agencies clarify in the final rule the

treatment of a cleared derivative

transaction where the clearing member

and the clearing member client are

affiliates. Without clarification, the

commenter expressed concern that such

a situation could result in a double

counting of the transaction in the

consolidated banking organization’s

total leverage exposure.

The agencies are clarifying in the final

rule that a banking organization may

exclude from its total leverage exposure

the clearing member’s exposure to its

clearing member client for a derivative

transaction if the clearing member client

and the clearing member are affiliates

and consolidated on the banking

organization’s balance sheet.

Commenters also recommended

excluding from a clearing member

banking organization’s total leverage

exposure cash provided by a clearing

member client as initial margin and

held in a segregated account. The

commenters stated that a clearing

member banking organization may

reflect on its balance sheet both the

initial margin passed on to the CCP as

well as additional cash initial margin

(excess initial margin) requested by the

clearing member banking organization

but not passed on to the CCP.

Commenters further stated that under

the customer asset protection rules

issued by the CFTC, the clearing

member banking organization may not

use any segregated cash posted by a

clearing member client to support the

clearing member banking organization’s

own operations

tial margin

(excess initial margin) requested by the

clearing member banking organization

but not passed on to the CCP.

Commenters further stated that under

the customer asset protection rules

issued by the CFTC, the clearing

member banking organization may not

use any segregated cash posted by a

clearing member client to support the

clearing member banking organization’s

own operations. In effect, commenters

asserted that such segregated cash

constitutes an asset of the clearing

member client. Commenters also argued

that the proposed LCR rules recognize

that such segregated cash cannot be

treated as an asset available to meet a

clearing member banking organization’s

liquidity needs, even though cash is

typically an optimal asset for providing

liquidity.

As a general matter the agencies do

not believe it is appropriate to exclude

segregated or otherwise restricted assets

from a banking organization’s total

leverage exposure and are finalizing this

aspect of the rule as proposed.

C. Daily Averaging

The 2013 revised capital rule defines

the supplementary leverage ratio as the

mean of the ratio of tier 1 capital to total

leverage exposure calculated as of the

last day of each month in the reporting

quarter. Under the proposed rule, the

numerator of the supplementary

leverage ratio, tier 1 capital, would have

been calculated as of the last day of each

reporting quarter, while total leverage

exposure, the denominator of the

supplementary leverage ratio, would

have been calculated as the mean of

total leverage exposure calculated daily.

After calculating quarter-end tier 1

capital, banking organizations would

have subtracted from the measure of

total leverage exposure the applicable

deductions from the quarter-end tier 1

capital for purposes of calculating the

quarter-end supplementary leverage

ratio

of the

supplementary leverage ratio, would

have been calculated as the mean of

total leverage exposure calculated daily.

After calculating quarter-end tier 1

capital, banking organizations would

have subtracted from the measure of

total leverage exposure the applicable

deductions from the quarter-end tier 1

capital for purposes of calculating the

quarter-end supplementary leverage

ratio.

In the NPR, the agencies asked

specific questions about the operational

burden of the proposed use of average

of daily calculations and the burden

associated with several alternatives,

such as only requiring daily averaging

for on-balance sheet assets. Commenters

expressed the view that that the

application of daily averaging to off-

balance sheet exposures would

introduce significant practical

complexities with no offsetting

compliance benefit. Several commenters

supported an alternative approach in

which a banking organization would

calculate its total leverage exposure for

a quarterly reporting period based on

the daily average of on-balance sheet

assets and the quarter-end balance or an

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

13 See BCBS, ‘‘The standardised approach for

measuring counterparty credit risk exposures’’

(March 2014), available at http://www.bis.org/publ/

bcbs279.htm.

average of month-end off-balance sheet

exposures. Commenters expressed the

view that such an alternative approach

strikes an appropriate balance between

the accuracy of reported minimum

ratios and operational complexity.

Commenters maintained that off-balance

sheet exposure volatility is far less

significant than on-balance sheet

exposure volatility

http://www.bis.org/publ/

bcbs279.htm.

average of month-end off-balance sheet

exposures. Commenters expressed the

view that such an alternative approach

strikes an appropriate balance between

the accuracy of reported minimum

ratios and operational complexity.

Commenters maintained that off-balance

sheet exposure volatility is far less

significant than on-balance sheet

exposure volatility. In addition,

commenters expressed the view that the

industry has no operational processes

that would permit the daily calculation

of certain components of off-balance

sheet exposures and that significant

systems changes would be required to

calculate off-balance sheet exposures on

a daily basis. Commenters also

recommended that if the final rule were

to require the daily averaging of off-

balance sheet exposures, this

requirement should be implemented on

a phased-in basis to allow more time for

banking organizations to comply with

the requirement.

While calculating total leverage

exposure as the mean of total leverage

exposure for each day of the reporting

quarter provides the more accurate

depiction of total leverage exposure, the

agencies recognize the operational

burden associated with such calculation

for off-balance sheet exposures. For this

reason, the agencies are modifying the

calculation of total leverage exposure so

that total leverage exposure is calculated

as the mean of the on-balance sheet

assets calculated as of each day of the

reporting quarter, plus the mean of the

off-balance sheet exposures calculated

as of the last day of each of the most

recent three months, minus the

applicable deductions under the 2013

revised capital rules. In addition, the

agencies have removed the proposed

reference to the calculation of tier 1

capital as of the end of the quarter to

avoid the implication that the

supplementary leverage ratio is

calculated only at the end of the quarter

eet exposures calculated

as of the last day of each of the most

recent three months, minus the

applicable deductions under the 2013

revised capital rules. In addition, the

agencies have removed the proposed

reference to the calculation of tier 1

capital as of the end of the quarter to

avoid the implication that the

supplementary leverage ratio is

calculated only at the end of the quarter.

For purposes of public disclosures

and reporting the supplementary

leverage ratio on the applicable

regulatory reports, a banking

organization would calculate the off-

balance exposure component of total

leverage exposure as the mean of its off-

balance sheet exposures as of the last

day of each month in the applicable

reporting quarter. For example, when a

banking organization prepares a

regulatory report for the quarter ending

December 31, it would calculate the

mean of its off-balance sheet exposures

as of October 31, November 30, and

December 31. The agencies will

continue to monitor this issue and may

revisit it at a future date if it is

determined that monthly calculation of

off-balance sheet exposure raises

supervisory concerns. In addition, the

agencies are evaluating the calculation

methodology for the leverage ratio

applicable to all banking organizations

and may seek comment on a proposal

applicable to advanced approaches

banking organizations to align the

methodology for calculating on-balance

sheet assets for purposes of that leverage

ratio and the supplementary leverage

ratio in the future.

D. Supervisory Flexibility

Some commenters recommended that

the agencies preserve supervisory

flexibility during periods of financial

market stress, particularly to address a

large, temporary increase in a banking

organizations’ cash that could lead to a

sharp decrease in the banking

organization’s supplementary leverage

ratio

e

ratio and the supplementary leverage

ratio in the future.

D. Supervisory Flexibility

Some commenters recommended that

the agencies preserve supervisory

flexibility during periods of financial

market stress, particularly to address a

large, temporary increase in a banking

organizations’ cash that could lead to a

sharp decrease in the banking

organization’s supplementary leverage

ratio. Commenters suggested that the

agencies emphasize that falling below

the minimum supplementary leverage

ratio would not necessarily result in

supervisory action, but, at a minimum,

would result in heightened supervisory

monitoring. Commenters expressed the

view that the agencies should adopt a

formal process to address compliance

with the supplementary leverage ratio

minimums on a case-by-case basis

during periods of financial stress.

As previously noted, under the 2013

revised capital rule, the agencies

reserved the authority to consider

whether the average total consolidated

assets or total leverage exposure for a

banking organization’s supplementary

leverage ratio is appropriate given the

banking organization’s exposures or

circumstances, and the agencies may

require adjustments to such exposures.

The final rule clarifies that this

authority applies to the supplementary

leverage ratio calculation by replacing

the term ‘‘leverage exposure amount’’

with the defined term ‘‘total leverage

exposure.’’

E. Replacement of the Current Exposure

Method (CEM)

The NPR proposed to use the current

exposure method (CEM) to measure the

total leverage exposure associated with

derivative contracts

The final rule clarifies that this

authority applies to the supplementary

leverage ratio calculation by replacing

the term ‘‘leverage exposure amount’’

with the defined term ‘‘total leverage

exposure.’’

E. Replacement of the Current Exposure

Method (CEM)

The NPR proposed to use the current

exposure method (CEM) to measure the

total leverage exposure associated with

derivative contracts. However, some

commenters recommended that the

agencies consider the replacement of the

CEM with the standardized approach for

measuring counterparty credit risk

exposures (SA–CCR), recently agreed to

by the BCBS though not yet

incorporated into its leverage ratio

framework.13 The commenters

requested that the agencies address, in

the preamble to the final rule, their

intention to consider the replacement of

the CEM with the SA–CCR, consistent

with any final agreement of the BCBS

with regard to the SA–CCR and the

Basel III leverage ratio, which is

currently under consideration. In

general, the commenters supported

adoption of SA–CCR. The agencies are

participating in the BCBS’s

development of the international

leverage ratio standards, and will

consider the extent to which any

changes should be made to the

calculation of total leverage exposure for

derivative contracts in the United States

once the BCBS has reached an

agreement on whether and how to

incorporate the SA–CCR into its

leverage ratio.

III. Disclosures

The agencies have long supported

meaningful public disclosure by

banking organizations of their regulatory

capital with the goals of disclosing

information in a comparable and

consistent manner, and improving

market discipline. Consistent with the

BCBS 2014 revisions, the agencies are

applying additional disclosure

requirements related to the calculation

of the supplementary leverage ratio to

top-tier advanced approaches banking

organizations

sure by

banking organizations of their regulatory

capital with the goals of disclosing

information in a comparable and

consistent manner, and improving

market discipline. Consistent with the

BCBS 2014 revisions, the agencies are

applying additional disclosure

requirements related to the calculation

of the supplementary leverage ratio to

top-tier advanced approaches banking

organizations. The agencies believe that

the additional disclosures will enhance

the transparency and promote

consistency among the disclosures

related to the supplementary leverage

ratio for all internationally active

banking organizations.

Specifically, under the final rule,

banking organizations will complete

two parts of a supplementary leverage

ratio disclosure table. Part 1 is designed

to summarize the differences between

the total consolidated accounting assets

reported on a banking organization’s

published financial statements and

regulatory reports and the calculation of

total leverage exposure. Part 2 is

designed to collect information on the

components of total leverage exposure

in more detail, similar to the version of

FFIEC 101, Schedule A. The agencies

plan to reconsider the regulatory

reporting requirements related to the

supplementary leverage ratio on FFIEC

101, Schedule A, in the future, to reflect

these disclosures and the revisions to

the calculation of total leverage

exposure.

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lan to reconsider the regulatory

reporting requirements related to the

supplementary leverage ratio on FFIEC

101, Schedule A, in the future, to reflect

these disclosures and the revisions to

the calculation of total leverage

exposure.

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

TABLE 13 TO SECTION 173 OF THE 2013 REVISED CAPITAL RULE—SUPPLEMENTARY LEVERAGE RATIO

Dollar amounts in thousands

Tril

Bil

Mil

Thou

Part 1: Summary comparison of accounting assets and total leverage exposure

1

Total consolidated assets as reported in published financial statements

2

Adjustment for investments in banking, financial, insurance or commercial entities

that are consolidated for accounting purposes but outside the scope of regulatory

consolidation

3

Adjustment for fiduciary assets recognized on balance sheet but excluded from

total leverage exposure

4

Adjustment for derivative exposures

5

Adjustment for repo-style transactions

6

Adjustment for off-balance sheet exposures (that is, conversion to credit equiva-

lent amounts of off-balance sheet exposures)

7

Other adjustments

8

Total leverage exposure

Part 2: Supplementary leverage ratio

On-balance sheet exposures

1

On-balance sheet assets (excluding on-balance sheet assets for repo-style trans-

actions and derivative exposures, but including cash collateral received in deriva-

tive transactions)

2

LESS: Amounts deducted from tier 1 capital

3

Total on-balance sheet exposures (excluding on-balance sheet assets for repo-

style transactions and derivative exposures, but including cash collateral received

in derivative transactions) (sum of lines 1 and 2)

Derivative exposures

4

Replacement cost for derivative exposures (that is, net of cash variation margin)

5

Add-on amounts for potential future exposure (PFE) for derivative exposures

6

Gross

balance sheet exposures (excluding on-balance sheet assets for repo-

style transactions and derivative exposures, but including cash collateral received

in derivative transactions) (sum of lines 1 and 2)

Derivative exposures

4

Replacement cost for derivative exposures (that is, net of cash variation margin)

5

Add-on amounts for potential future exposure (PFE) for derivative exposures

6

Gross-up for cash collateral posted if deducted from the on-balance sheet assets,

except for cash variation margin

7

LESS: Deductions of receivable assets for cash variation margin posted in deriva-

tive transactions, if included in on-balance sheet assets

8

LESS: Exempted CCP leg of client-cleared transactions

9

Effective notional principal amount of sold credit protection

10

LESS: Effective notional principal amount offsets and PFE adjustments for sold

credit protection

11

Total derivative exposures (sum of lines 4 to 10)

Repo-style transactions

12

On-balance sheet assets for repo-style transactions, except include the gross

value of receivables for reverse repurchase transactions. Exclude from this item the

value of securities received in a security-for-security repo-style transaction where

the securities lender has not sold or re-hypothecated the securities received. In-

clude in this item the value of securities that qualified for sales treatment that must

be reversed.

13

LESS: Reduction of the gross value of receivables in reverse repurchase trans-

actions by cash payables in repurchase transactions under netting agreements

14

Counterparty credit risk for all repo-style transactions

15

Exposure for repo-style transactions where a banking organization acts as an

agent

16

Total exposures for repo-style transactions (sum of lines 12 to 15)

Other off-balance sheet exposures

17

Off-balance sheet exposures at gross notional amounts

18

LESS: Adjustments for conversion to credit equivalent amounts

19

Off-balance sheet exposures (sum of lines 17 and 18)

Capital and total leverage exposure

20

Tier 1 capita

ansactions where a banking organization acts as an

agent

16

Total exposures for repo-style transactions (sum of lines 12 to 15)

Other off-balance sheet exposures

17

Off-balance sheet exposures at gross notional amounts

18

LESS: Adjustments for conversion to credit equivalent amounts

19

Off-balance sheet exposures (sum of lines 17 and 18)

Capital and total leverage exposure

20

Tier 1 capital

21

Total leverage exposure (sum of lines 3, 11, 16 and 19)

Supplementary leverage ratio

22

Supplementary leverage ratio

(in percent)

Consistent with the BCBS 2014

revisions, if a banking organization has

material differences between its total

consolidated assets as reported in

published financial statements and

regulatory reports and its reported on-

balance sheet assets for purposes of

calculating the supplementary leverage

ratio, the banking organization must

disclose and explain the source of the

material differences. In addition, if a

banking organization’s supplementary

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leverage ratio changes significantly from

one reporting period to another, the

banking organization must explain the

key drivers of the material changes.

Banking organizations must disclose

this information quarterly, using the

template set forth in Table 13, and make

the disclosures publicly available.

In the NPR, the agencies proposed to

apply additional disclosure

requirements for the calculation of the

supplementary leverage ratio to top-tier

advanced approaches banking

organizations. One comment letter

recommended that the final rule clarify

that Part 1, line 2 of the disclosure table

include associated entities reflected on

a banking organization’s balance sheet

on the basis of proportionate

consolidation

roposed to

apply additional disclosure

requirements for the calculation of the

supplementary leverage ratio to top-tier

advanced approaches banking

organizations. One comment letter

recommended that the final rule clarify

that Part 1, line 2 of the disclosure table

include associated entities reflected on

a banking organization’s balance sheet

on the basis of proportionate

consolidation. The commenter noted

that it sent the same suggestion to the

BCBS to revise the Basel III leverage

ratio disclosure requirements. The

agencies proposed disclosure

requirements for purposes of reporting

of the supplementary leverage ratio

consistent with the disclosure

requirements in the Basel III leverage

ratio. The agencies decided not to revise

the disclosure table in response to this

comment because proportionate

consolidation generally does not apply

to the U.S. banking organizations

subject to the supplementary leverage

ratio. If the BCBS reconsiders the Basel

III leverage ratio disclosure

requirements in light of this comment,

then the agencies will consider a

revision of the disclosure requirements

in the U.S.

Another comment letter stated that

the required disclosures do not appear

to provide a meaningful breakout of off-

balance sheet exposures beyond

derivative and repo-style transactions.

The comment letter recommended that

the agencies consider a more detailed

breakout of off-balance sheet exposures

for Part 2, lines 17 and 18. The agencies

believe that the table is sufficiently

granular, particularly when viewed in

combination with the other regulatory

disclosure requirements, including the

Call Report and FR Y–9C. Therefore,

under the final rule, the agencies are not

making any changes to the required

disclosures.

IV. Regulatory Analyses

A. Paperwork Reduction Act (PRA)

Certain provisions of the final rule

contain ‘‘collection of information’’

requirements within the meaning of the

Paperwork Reduction Act (PRA) of 1995

(44 U.S.C. 3501–3521)

ure requirements, including the

Call Report and FR Y–9C. Therefore,

under the final rule, the agencies are not

making any changes to the required

disclosures.

IV. Regulatory Analyses

A. Paperwork Reduction Act (PRA)

Certain provisions of the final rule

contain ‘‘collection of information’’

requirements within the meaning of the

Paperwork Reduction Act (PRA) of 1995

(44 U.S.C. 3501–3521). In accordance

with the requirements of the PRA, the

agencies may not conduct or sponsor,

and a respondent is not required to

respond to, an information collection

unless it displays a currently valid

Office of Management and Budget

(OMB) control number. The OCC and

FDIC will be seeking new OMB Control

Numbers. The OMB control number for

the Board is 7100–0313 and will be

extended, with revision. The

information collection requirements

contained in this final rule were

submitted to OMB for review and

approval by the OCC and FDIC under

section 3507(d) of the PRA and section

1320.11 of OMB’s implementing

regulations (5 CFR part 1320). The

Board reviewed the final rule under the

authority delegated to the Board by

OMB. The final rule contains

requirements subject to the PRA. The

disclosure requirements are found in

section l.173. The disclosure

requirements in section l.172 are

accounted for in section l.173. This

information collection requirement

would be consistent with the BCBS

2014 revisions to the Basel III leverage

ratio, as mentioned in the Abstract

below. The respondents are for-profit

financial institutions, not including

small businesses (see the agencies’

Regulatory Flexibility Analysis).

The agencies received two comments

on the disclosure requirements. One

comment letter recommended that the

final rule clarify that Part 1, line 2 of the

disclosure table include associated

entities reflected on a banking

organization’s balance sheet on the basis

of proportionate consolidation

nstitutions, not including

small businesses (see the agencies’

Regulatory Flexibility Analysis).

The agencies received two comments

on the disclosure requirements. One

comment letter recommended that the

final rule clarify that Part 1, line 2 of the

disclosure table include associated

entities reflected on a banking

organization’s balance sheet on the basis

of proportionate consolidation. The

commenter noted that it sent the same

suggestion to the BCBS to revise the

Basel III leverage ratio disclosure

requirements. The agencies decided not

to revise the disclosure table in response

to this comment because proportionate

consolidation generally does not apply

to the U.S. banking organizations

subject to the supplementary leverage

ratio.

Another comment letter expressed the

view that the required disclosures do

not appear to provide a meaningful

breakout of off-balance sheet exposures

beyond derivative and repo-style

transactions. The comment letter

recommended that the agencies

consider a more detailed breakout of off-

balance sheet exposures for Part 2, lines

17 and 18. The agencies believe that the

table is sufficiently granular,

particularly when viewed in

combination with the other regulatory

disclosure requirements, including the

Call Report and FR Y–9C. Therefore,

under the final rule, the agencies are

finalizing the disclosures requirements

as proposed.

The agencies also received three

supportive comments regarding the

disclosure requirements. These

commenters supported the agencies’

efforts to increase transparency and

consistency in identifying and

collecting off-balance sheet activity,

aiding both market equity and

regulatory oversight.

The agencies have a continuing

interest in the public’s opinions of our

collections of information. At any time,

comments are invited on:

(a) Whether the collections of

information are necessary for the proper

performance of the agencies’ functions,

including whether the information has

practical utility;

g off-balance sheet activity,

aiding both market equity and

regulatory oversight.

The agencies have a continuing

interest in the public’s opinions of our

collections of information. At any time,

comments are invited on:

(a) Whether the collections of

information are necessary for the proper

performance of the agencies’ functions,

including whether the information has

practical utility;

(b) The accuracy of the estimates of

the burden of the information

collections, including the validity of the

methodology and assumptions used;

(c) Ways to enhance the quality,

utility, and clarity of the information to

be collected;

(d) Ways to minimize the burden of

the information collections on

respondents, including through the use

of automated collection techniques or

other forms of information technology;

and

(e) Estimates of capital or start-up

costs and costs of operation,

maintenance, and purchase of services

to provide information.

All comments will become a matter of

public record. Comments on aspects of

this final rule that may affect reporting,

recordkeeping, or disclosure

requirements and burden estimates

should be sent to the addresses listed in

the ADDRESSES section. A copy of the

comments may also be submitted to the

OMB desk officer for the agencies: By

mail to U.S. Office of Management and

Budget, 725 17th Street NW., #10235,

Washington, DC 20503; by facsimile to

202–395–6974; or by email to: oira_

submission@omb.eop.gov, Attention,

Federal Banking Agency Desk Officer.

Proposed Information Collection

Title of Information Collection:

Disclosure Requirements Associated

with Supplementary Leverage Ratio.

Frequency of Response: Quarterly.

Affected Public: Businesses or other

for-profit.

Respondents:

OCC: National banks and federal

savings associations that are subject to

the OCC’s advanced approaches risk-

based capital rules

Banking Agency Desk Officer.

Proposed Information Collection

Title of Information Collection:

Disclosure Requirements Associated

with Supplementary Leverage Ratio.

Frequency of Response: Quarterly.

Affected Public: Businesses or other

for-profit.

Respondents:

OCC: National banks and federal

savings associations that are subject to

the OCC’s advanced approaches risk-

based capital rules.

FDIC: Insured state nonmember banks

and state savings associations that are

subject to the FDIC’s advanced

approaches risk-based capital rules.

Board: State member banks, bank

holding companies, and savings and

loan holding companies that are subject

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

14 The OCC calculated the number of small

entities using the SBA’s size thresholds for

commercial banks and savings institutions, and

trust companies, which are $550 million and $38.5

million, respectively. Consistent with the General

Principles of Affiliation, 13 CFR 121.103(a), the

OCC counted the assets of affiliated financial

institutions when determining whether to classify

a national bank or Federal savings association as a

small entity. The OCC used December 31, 2013, to

determine size because a ‘‘financial institution’s

assets are determined by averaging the assets

reported on its four quarterly financial statements

for the preceding year.’’ See footnote 8 of the U.S.

Small Business Administration’s Table of Size

Standards.

15 See 13 CFR 121.201. Effective July 14, 2014, the

SBA revised the size standards for banking

organizations to $550 million in assets from $500

million in assets. 79 FR 33647 (June 12, 2014).

to the Board’s advanced approaches

risk-based capital rules

arterly financial statements

for the preceding year.’’ See footnote 8 of the U.S.

Small Business Administration’s Table of Size

Standards.

15 See 13 CFR 121.201. Effective July 14, 2014, the

SBA revised the size standards for banking

organizations to $550 million in assets from $500

million in assets. 79 FR 33647 (June 12, 2014).

to the Board’s advanced approaches

risk-based capital rules.

Abstract: All banking organizations

that are subject to the agencies’

advanced approaches risk-based capital

rules (advanced approaches banking

organizations), as defined in the 2013

revised capital rule, are required to

disclose their supplementary leverage

ratios beginning January 1, 2015.

Advanced approaches banking

organizations must report their

supplementary leverage ratios on the

applicable regulatory reports. Under the

final rule, advanced approaches banking

organizations would disclose two parts

of a supplementary leverage ratio table

beginning January 1, 2015. The

disclosure requirements are consistent

with the calculation of the

supplementary leverage ratio in the final

rule and with the BCBS 2014 revisions

to the Basel III leverage ratio. The

agencies believe that the disclosures

would enhance the transparency and

consistency of reporting requirements

for the supplementary leverage ratio by

all internationally active organizations.

Disclosure Requirements

Section l.173 states that advanced

approaches banking organizations that

have successfully completed parallel

run must make the disclosures

described in Tables 1 through 12. Under

the final rule, advanced approaches

banking organizations would be

required to make the disclosures

described in Table 13 beginning January

1, 2015, regardless of the parallel run

status

isclosure Requirements

Section l.173 states that advanced

approaches banking organizations that

have successfully completed parallel

run must make the disclosures

described in Tables 1 through 12. Under

the final rule, advanced approaches

banking organizations would be

required to make the disclosures

described in Table 13 beginning January

1, 2015, regardless of the parallel run

status. The agencies do not anticipate an

additional initial setup burden for

complying with the disclosure

requirements because advanced

approaches banking organizations are

already subject to reporting the

supplementary leverage ratio on the

applicable regulatory reports.

Estimated Burden per Response:

Disclosure Burden

Section l.173—5 hours.

OCC

Number of respondents: 26.

Total estimated annual burden: 520

hours.

FDIC

Number of respondents: 8.

Total estimated annual burden: 160

hours.

Board

Number of respondents: 20.

Current estimated annual burden:

413,986 hours.

Proposed revisions only estimated

annual burden: 400 hours.

Total estimated annual burden:

414,386 hours.

B. Regulatory Flexibility Act Analysis

OCC: The Regulatory Flexibility Act,

5 U.S.C. 601 et seq. (RFA), requires an

agency, in connection with a final rule,

to prepare an final regulatory flexibility

analysis describing the impact of the

rule on small entities (defined by the

Small Business Administration for

purposes of the RFA to include banking

entities with total assets of $550 million

or less) or to certify that the rule will not

have a significant economic impact on

a substantial number of small entities.

Using the SBA’s size standards, as of

December 31, 2013, the OCC supervised

1,231 small entities.14

As described in the SUPPLEMENTARY

INFORMATION section of the preamble, the

final rule would apply only to advanced

approaches banking organizations

ts of $550 million

or less) or to certify that the rule will not

have a significant economic impact on

a substantial number of small entities.

Using the SBA’s size standards, as of

December 31, 2013, the OCC supervised

1,231 small entities.14

As described in the SUPPLEMENTARY

INFORMATION section of the preamble, the

final rule would apply only to advanced

approaches banking organizations.

Advanced approaches banking

organization is defined to include a

national bank or Federal savings

associations that has, or is a subsidiary

of a bank holding company or savings

and loan holding company that has,

total consolidated assets of $250 billion

or more, total consolidated on-balance

sheet foreign exposure of $10 billion or

more, or that has elected to use the

advanced approaches framework. After

considering the SBA’s size standards

and General Principals of Affiliation to

identify small entities, the OCC

determined that no small national banks

or Federal savings associations are

advanced approaches banking

organizations. Because the final rule

applies only to advanced approaches

banking organizations, it does not

impact any OCC-supervised small

entities. Therefore, the OCC certifies

that the final rule will not have a

significant economic impact on a

substantial number of OCC-supervised

small entities.

Board: The RFA requires an agency to

provide a final regulatory flexibility

analysis with a final rule or to certify

that the rule will not have a significant

economic impact on a substantial

number of small entities. Under

regulations issued by the SBA, a small

entity includes a depository institution,

bank holding company, or savings and

loan holding company with total assets

of $550 million or less (a small banking

organization).15 As of June 30, 2014,

there were approximately 657 small

state member banks, 3,716 small bank

holding companies, and 254 small

savings and loan holding companies

ntities. Under

regulations issued by the SBA, a small

entity includes a depository institution,

bank holding company, or savings and

loan holding company with total assets

of $550 million or less (a small banking

organization).15 As of June 30, 2014,

there were approximately 657 small

state member banks, 3,716 small bank

holding companies, and 254 small

savings and loan holding companies.

The Board is providing a final

regulatory flexibility analysis with

respect to this final rule. As discussed

above, this final rule would amend the

calculation of total leverage exposure in

sections 2 and 10 of the 2013 revised

capital rule, and amend sections 172

and 173 of the rule by adding additional

disclosure requirements. These

amendments would implement changes

in line with the BCBS 2014 revisions.

The Board received no comments from

the public in response to the initial

regulatory flexibility analysis or from

the Chief Counsel for Advocacy of the

Small Business Administration. Thus,

no issues were raised in public

comments related to the Board’s initial

regulatory flexibility act analysis and no

changes are being made in response to

such comments.

The final rule would apply only to

advanced approaches banking

organizations, which, generally, are

banking organizations with total

consolidated assets of $250 billion or

more, that have total consolidated on-

balance sheet foreign exposure of $10

billion or more, are a subsidiary of a

depository institution that uses the

advanced risk-based capital approaches

framework, or that elect to use the

advanced risk-based capital approaches

framework. Currently, no small top-tier

bank holding company, top-tier savings

and loan holding company, or state

member bank is an advanced

approaches banking organization, so

there would be no additional projected

compliance requirements imposed on

small bank holding companies, savings

and loan holding companies, or state

member banks

to use the

advanced risk-based capital approaches

framework. Currently, no small top-tier

bank holding company, top-tier savings

and loan holding company, or state

member bank is an advanced

approaches banking organization, so

there would be no additional projected

compliance requirements imposed on

small bank holding companies, savings

and loan holding companies, or state

member banks. The Board expects that

any small bank holding companies,

savings and loan holding companies, or

state member banks that would be

covered by this final rule would rely on

its parent banking organization for

compliance and would not bear

additional costs.

The Board is aware of no other

Federal rules that duplicate, overlap, or

conflict with the final rule. The Board

believes that the final rule will not have

a significant economic impact on small

banking organizations supervised by the

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

16 Effective July 14, 2014, the SBA revised the size

standards for banking organizations to $550 million

in assets from $500 million in assets. 79 FR 33647

(Jun 12, 2014).

Board and therefore believes that there

are no significant alternatives to the

final rule that would reduce the

economic impact on small banking

organizations supervised by the Board.

FDIC

The Regulatory Flexibility Act, 5

U.S.C. 601 et seq

014, the SBA revised the size

standards for banking organizations to $550 million

in assets from $500 million in assets. 79 FR 33647

(Jun 12, 2014).

Board and therefore believes that there

are no significant alternatives to the

final rule that would reduce the

economic impact on small banking

organizations supervised by the Board.

FDIC

The Regulatory Flexibility Act, 5

U.S.C. 601 et seq. (RFA) requires an

agency to provide, in connection with a

notice of final rulemaking, to prepare a

Final Regulatory Flexibility Act analysis

describing the impact of the rule on

small entities (defined by the Small

Business Administration for the

purposes of the RFA to include banking

entities with total assets of $550 million

or less) or to certify that the rule will not

have a significant economic impact on

a substantial number of small entities.16

As described above in this preamble,

the final rule amends the definition of

total leverage exposure in section 2 of

the 2013 revised capital rule, the

methodology for determining total

leverage exposure under section 10 of

the 2013 revised capital rule, and adds

an additional disclosure requirement in

sections 172 and 173 of the 2013 revised

capital rule. All of these changes apply

only to advanced approaches banking

organizations. Generally, the advanced

approaches framework applies to

banking organizations that have

consolidated total assets equal to $250

billion or more; have consolidated total

on-balance sheet foreign exposure equal

to $10 billion or more; are a subsidiary

of a depository institution that uses the

advanced approaches framework; or

elects to use the advanced approaches

framework.

As of June 30, 2014, based on a $550

million threshold, 2 (out of 3,267) small

state nonmember banks and no (out of

306) small state savings associations

were under the advanced approaches

framework

t foreign exposure equal

to $10 billion or more; are a subsidiary

of a depository institution that uses the

advanced approaches framework; or

elects to use the advanced approaches

framework.

As of June 30, 2014, based on a $550

million threshold, 2 (out of 3,267) small

state nonmember banks and no (out of

306) small state savings associations

were under the advanced approaches

framework. Therefore, the FDIC does

not believe that the final rule will result

in a significant economic impact on a

substantial number of small entities

under its supervisory jurisdiction.

The FDIC certifies that the final rule

would not have a significant economic

impact on a substantial number of small

FDIC-supervised institutions.

C. OCC Unfunded Mandates Reform Act

of 1995 Determination

The OCC has analyzed the final rule

under the factors set forth in the

Unfunded Mandates Reform Act of 1995

(UMRA) (2 U.S.C. 1532). Under this

analysis, the OCC considered whether

the final rule includes a Federal

mandate that may result in the

expenditure by State, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

in any one year (adjusted annually for

inflation).

The final rule revises the calculation

of the denominator of the

supplementary leverage ratio (total

leverage exposure) in a manner that is

generally consistent with revisions to

the international leverage ratio

framework published by the BCBS in

January 2014. The final rule revises total

leverage exposure, as defined in the

2013 revised capital rule, to include the

effective notional principal amount of

credit derivatives and other similar

instruments through which a banking

organization provides credit protection

(sold credit protection); modifies the

calculation of total leverage exposure for

derivative and repo-style transactions;

and revises the CCFs applied to certain

off-balance sheet exposures

in the

2013 revised capital rule, to include the

effective notional principal amount of

credit derivatives and other similar

instruments through which a banking

organization provides credit protection

(sold credit protection); modifies the

calculation of total leverage exposure for

derivative and repo-style transactions;

and revises the CCFs applied to certain

off-balance sheet exposures. The final

rule also changes the frequency with

which certain components of the

supplementary leverage ratio are

calculated and requires the public

disclosure of certain items associated

with the supplementary leverage ratio.

To estimate the impact of the final

rule on capital, OCC staff assumed that

all of the affected national banks and

Federal savings associations will seek to

meet their minimum standard of three

percent, or effective minimum of six

percent, as appropriate. OCC staff

estimated the amount of tier 1 capital

that national banks and Federal savings

associations will need to comply with

the final rule relative to the amount

already required to meet existing

requirements. To estimate the impact of

the final rule on total leverage exposure,

OCC staff used a combination of data

from regulatory reports and data

collected from BHCs as part of a BCBS

sponsored quantitative impact study.

After comparing existing capital

requirements with the revised

requirements, and considering the cost

of systems changes necessary to comply

with its final rule, the OCC has

determined that its final rule will not

result in expenditures by State, local,

and Tribal governments, or by the

private sector, of $100 million or more.

Accordingly, the OCC has not prepared

a written statement to accompany its

final rule.

D. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act requires the Federal banking

agencies to use plain language in all

proposed and final rules published after

January 1, 2000. The agencies have

sought to present the final rule in a

simple and straightforward manner

, of $100 million or more.

Accordingly, the OCC has not prepared

a written statement to accompany its

final rule.

D. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act requires the Federal banking

agencies to use plain language in all

proposed and final rules published after

January 1, 2000. The agencies have

sought to present the final rule in a

simple and straightforward manner. The

agencies did not receive any comment

on their use of plain language.

List of Subjects

12 CFR Part 3

Administrative practice and

procedure, Capital, National banks,

Reporting and recordkeeping

requirements, Risk.

12 CFR Part 217

Administrative practice and

procedure, Banks, Banking, Capital,

Federal Reserve System, Holding

companies, Reporting and

recordkeeping requirements, Securities.

12 CFR Part 324

Administrative practice and

procedure, Banks, Banking, Capital

Adequacy, Reporting and recordkeeping

requirements, Savings associations,

State non-member banks.

Office of the Comptroller of the

Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set forth in the

preamble and under the authority of 12

U.S.C. 93a, 1462, 1462a, 1463, 3907,

3909, 1831o, and 5312(b)(2)(B), the

Office of the Comptroller of the

Currency amends part 3 of chapter I of

title 12 of the Code of Federal

Regulations amended as follows:

PART 3—CAPITAL ADEQUACY

STANDARDS

■1. The authority citation for part 3

continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1462, 1462a,

1463, 1464, 1818, 1828(n), 1828 note, 1831n

notes, 1835, 3907, 3909, and 5412(b)(2)(B).

§ 3.1

[Amended]

■2. In § 3.1 in the first sentence of

paragraph (d)(4), remove ‘‘leverage

exposure amount’’ and add in its place

‘‘total leverage exposure’’.

■3. In § 3.2, revise the definition of

‘‘total leverage exposure’’ to read as

follows:

§ 3.2

Definitions.

*

*

*

*

*

Total leverage exposure is defined in

§ 3.10(c)(4)(ii) of this part.

*

*

*

*

*

■4

09, and 5412(b)(2)(B).

§ 3.1

[Amended]

■2. In § 3.1 in the first sentence of

paragraph (d)(4), remove ‘‘leverage

exposure amount’’ and add in its place

‘‘total leverage exposure’’.

■3. In § 3.2, revise the definition of

‘‘total leverage exposure’’ to read as

follows:

§ 3.2

Definitions.

*

*

*

*

*

Total leverage exposure is defined in

§ 3.10(c)(4)(ii) of this part.

*

*

*

*

*

■4. In § 3.10, revise paragraph (c)(4) to

read as follows:

§ 3.10

Minimum capital requirements.

*

*

*

*

*

(c) * * *

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Federal Register / Vol. 79, No. 187 / Friday, September 26, 2014 / Rules and Regulations

(4) Supplementary leverage ratio. (i)

An advanced approaches national

bank’s or Federal savings association’s

supplementary leverage ratio is the ratio

of its tier 1 capital to total leverage

exposure, the latter which is calculated

as the sum of:

(A) The mean of the on-balance sheet

assets calculated as of each day of the

reporting quarter; and

(B) The mean of the off-balance sheet

exposures calculated as of the last day

of each of the most recent three months,

minus the applicable deductions under

§ 3.22(a), (c), and (d).

(ii) For purposes of this part, total

leverage exposure means the sum of the

items described in paragraphs

(c)(4)(ii)(A) through (H) of this section,

as adjusted pursuant to paragraph

reporting quarter; and

(B) The mean of the off-balance sheet

exposures calculated as of the last day

of each of the most recent three months,

minus the applicable deductions under

§ 3.22(a), (c), and (d).

(ii) For purposes of this part, total

leverage exposure means the sum of the

items described in paragraphs

(c)(4)(ii)(A) through (H) of this section,

as adjusted pursuant to paragraph

(c)(4)(ii)(I) for a clearing member

national bank or Federal savings

association:

(A) The balance sheet carrying value

of all of the national bank’s or Federal

savings association’s on-balance sheet

assets, plus the value of securities sold

under a repurchase transaction or a

securities lending transaction that

qualifies for sales treatment under U.S.

GAAP, less amounts deducted from tier

1 capital under § 3.22(a), (c), and (d),

and less the value of securities received

in security-for-security repo-style

transactions, where the national bank or

Federal savings association acts as a

securities lender and includes the

securities received in its on-balance

sheet assets but has not sold or re-

hypothecated the securities received;

(B) The PFE for each derivative

contract or each single-product netting

set of derivative contracts (including a

cleared transaction except as provided

in paragraph (c)(4)(ii)(I) of this section

and, at the discretion of the national

bank or Federal savings association,

excluding a forward agreement treated

as a derivative contract that is part of a

repurchase or reverse repurchase or a

securities borrowing or lending

transaction that qualifies for sales

treatment under U.S. GAAP), to which

the national bank or Federal savings

association is a counterparty as

determined under § 3.34, but without

regard to § 3.34(b), provided that:

savings association,

excluding a forward agreement treated

as a derivative contract that is part of a

repurchase or reverse repurchase or a

securities borrowing or lending

transaction that qualifies for sales

treatment under U.S. GAAP), to which

the national bank or Federal savings

association is a counterparty as

determined under § 3.34, but without

regard to § 3.34(b), provided that:

(1) A national bank or Federal savings

association may choose to exclude the

PFE of all credit derivatives or other

similar instruments through which it

provides credit protection when

calculating the PFE under § 3.34, but

without regard to § 3.34(b), provided

that it does not adjust the net-to-gross

ratio (NGR); and

(2) A national bank or Federal savings

association that chooses to exclude the

PFE of credit derivatives or other similar

instruments through which it provides

credit protection pursuant to paragraph

(c)(4)(ii)(B)(1) of this section must do so

consistently over time for the

calculation of the PFE for all such

instruments;

(C) The amount of cash collateral that

is received from a counterparty to a

derivative contract and that has offset

the mark-to-fair value of the derivative

asset, or cash collateral that is posted to

a counterparty to a derivative contract

and that has reduced the national bank’s

or Federal savings association’s on-

balance sheet assets, unless such cash

collateral is all or part of variation

margin that satisfies the following

requirements:

(1) For derivative contracts that are

not cleared through a QCCP, the cash

collateral received by the recipient

counterparty is not segregated (by law,

regulation or an agreement with the

counterparty);

(2) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative

contract;

iation

margin that satisfies the following

requirements:

(1) For derivative contracts that are

not cleared through a QCCP, the cash

collateral received by the recipient

counterparty is not segregated (by law,

regulation or an agreement with the

counterparty);

(2) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative

contract;

(3) The variation margin transferred

under the derivative contract or the

governing rules for a cleared transaction

is the full amount that is necessary to

fully extinguish the net current credit

exposure to the counterparty of the

derivative contracts, subject to the

threshold and minimum transfer

amounts applicable to the counterparty

under the terms of the derivative

contract or the governing rules for a

cleared transaction;

(4) The variation margin is in the form

of cash in the same currency as the

currency of settlement set forth in the

derivative contract, provided that for the

purposes of this paragraph, currency of

settlement means any currency for

settlement specified in the governing

qualifying master netting agreement and

the credit support annex to the

qualifying master netting agreement, or

in the governing rules for a cleared

transaction;

(5) The derivative contract and the

variation margin are governed by a

qualifying master netting agreement

between the legal entities that are the

counterparties to the derivative contract

or by the governing rules for a cleared

transaction, and the qualifying master

netting agreement or the governing rules

for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net

basis, taking into account any variation

margin received or provided under the

contract if a credit event involving

either counterparty occurs;

or by the governing rules for a cleared

transaction, and the qualifying master

netting agreement or the governing rules

for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net

basis, taking into account any variation

margin received or provided under the

contract if a credit event involving

either counterparty occurs;

(6) The variation margin is used to

reduce the current credit exposure of

the derivative contract, calculated as

described in § 3.34(a), and not the PFE;

and

(7) For the purpose of the calcula

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