# FDIC FIL-45-2014: Regulatory Capital Rules:

> Federal · Agency guidance · Superseded

URL: https://www.frixlaw.com/law-library/statutes/FDIC_FIL14045

## Section

- **Citation:** FDIC FIL-45-2014
- **Heading:** Regulatory Capital Rules:
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** Superseded
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** FDIC Financial Institution Letters / Regulatory Capital Rules:

## Text

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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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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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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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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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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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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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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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 am

[Text truncated at 120,000 characters. The full text is on the page linked above.]

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---

Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FDIC_FIL14045. Check the current official text before relying on it. Not legal advice.