Pt. 217 12 CFR Ch. II (1–1–17 Edition)

PART 217—CAPITAL ADEQUACY 217.43 Simplified supervisory formula ap- proach (SSFA) and the gross-up ap- OF HOLDING COMPANIES, proach. SAVINGS AND LOAN HOLDING 217.44 Securitization exposures to which the COMPANIES, AND STATE MEM- SSFA and gross-up approach do not BER (REGULATION Q) apply. 217.45 Recognition of mitigants for securitization exposures. Subpart A—General Provisions 217.46–217.50 [Reserved]

Sec. RISK-WEIGHTED ASSETS FOR EQUITY 217.1 Purpose, applicability, reservations of EXPOSURES authority, and timing. 217.51 Introduction and exposure measure- 217.2 Definitions. ment. 217.3 Operational requirements for certain 217.52 Simple risk-weight approach (SRWA). exposures. 217.53 Equity exposures to investment 217.4–217.9 [Reserved] funds. 217.54–217.60 [Reserved] Subpart B—Capital Ratio Requirements and Buffers DISCLOSURES 217.61 Purpose and scope. 217.10 Minimum capital requirements. 217.62 Disclosure requirements. 217.11 Capital conservation buffer, counter- 217.63 Disclosures by Board-regulated insti- cyclical capital buffer amount, and GSIB tutions described in § 217.61. surcharge. 217.64–217.99 [Reserved] 217.12–217.19 [Reserved] Subpart E—Risk-Weighted Assets—Internal Subpart C—Definition of Capital Ratings-Based and Advanced Meas- 217.20 Capital components and eligibility urement Approaches criteria for regulatory capital instru- 217.100 Purpose, applicability, and principle ments. of conservatism. 217.21 Minority interest. 217.101 Definitions. 217.22 Regulatory capital adjustments and 217.102–217.120 [Reserved] deductions. 217.23–217.29 [Reserved] QUALIFICATION 217.121 Qualification process. Subpart D—Risk-weighted Assets— 217.122 Qualification requirements. Standardized Approach 217.123 Ongoing qualification. 217.124 Merger and acquisition transitional 217.30 Applicability. arrangements. 217.125–217.130 [Reserved] RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK RISK-WEIGHTED ASSETS FOR GENERAL CREDIT 217.31 Mechanics for calculating risk- RISK weighted assets for general credit risk. 217.131 Mechanics for calculating total 217.32 General risk weights. wholesale and retail risk-weighted as- 217.33 Off-balance sheet exposures. sets. 217.34 OTC contracts. 217.132 Counterparty credit risk of repo- 217.35 Cleared transactions. style transactions, eligible margin loans, 217.36 Guarantees and credit derivatives: and OTC derivative contracts. Substitution treatment. 217.133 Cleared transactions. 217.37 Collateralized transactions. 217.134 Guarantees and credit derivatives: PD substitution and LGD adjustment ap- RISK-WEIGHTED ASSETS FOR UNSETTLED proaches. TRANSACTIONS 217.135 Guarantees and credit derivatives: Double default treatment. 217.38 Unsettled transactions. 217.136 Unsettled transactions. 217.39–217.40 [Reserved] 217.137–217.140 [Reserved]

RISK-WEIGHTED ASSETS FOR SECURITIZATION RISK-WEIGHTED ASSETS FOR SECURITIZATION EXPOSURES EXPOSURES 217.41 Operational requirements for 217.141 Operational criteria for recognizing securitization exposures. the transfer of risk. 217.42 Risk-weighted assets for 217.142 Risk-based for securitization exposures. securitization exposures.

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217.143 Supervisory formula approach 217.402 Identification as a global system- (SFA). ically important BHC. 217.144 Simplified supervisory formula ap- 217.403 GSIB surcharge. proach (SSFA). 217.404 Method 1 score. 217.145 Recognition of credit risk mitigants 217.405 Method 2 score. for securitization exposures. 217.406 Short-term wholesale funding score. 217.146–217.150 [Reserved] Subpart I—Application of Capital Rules RISK-WEIGHTED ASSETS FOR EQUITY EXPOSURES 217.501 The Board’s Regulatory Capital Framework for Depository Institution 217.151 Introduction and exposure measure- Holding Companies Organized as Non- ment. Stock Companies. 217.152 Simple risk weight approach 217.502 Application of the Board’s Regu- (SRWA). latory Capital Framework to Employee 217.153 Internal models approach (IMA). Stock Ownership Plans that are Deposi- 217.154 Equity exposures to investment tory Institution Holding Companies and funds. Certain Trusts that are Savings and 217.155 Equity derivative contracts. Loan Holding Companies. 217.156–217.160 [Reserved] APPENDIX A TO PART 217—THE FEDERAL RE- RISK-WEIGHTED ASSETS FOR OPERATIONAL SERVE BOARD’S FRAMEWORK FOR IMPLE- RISK MENTING THE COUNTERCYCLICAL CAPITAL BUFFER 217.161 Qualification requirements for incor- poration of mitigants. AUTHORITY: 12 U.S.C. 248(a), 321–338a, 481– 217.162 Mechanics of risk-weighted asset 486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p– calculation. l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 217.163–217.170 [Reserved] 4808, 5365, 5368, 5371. EFFECTIVE DATE NOTE: At 79 FR 24540, May DISCLOSURES 1, 2014, the authority citation to part 217 was 217.171 Purpose and scope. revised, effective Jan. 1, 2018. For the con- 217.172 Disclosure requirements. venience of the user, the revised text is set 217.173 Disclosures by certain advanced ap- forth as follows: proaches Board-regulated institutions. AUTHORITY: 12 U.S.C. 248(a), 321–338a, 481– 217.174–217.200 [Reserved] 486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p– l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, Subpart F—Risk-weighted Assets—Market 4808, 5365, 5368, 5371. Risk SOURCE: Reg. Q, 78 FR 62157, 62285, Oct. 11, 217.201 Purpose, applicability, and reserva- 2013, unless otherwise noted. tion of authority. 217.202 Definitions. Subpart A—General Provisions 217.203 Requirements for application of this subpart F. § 217.1 Purpose, applicability, reserva- 217.204 Measure for . tions of authority, and timing. 217.205 VaR-based measure. (a) Purpose. This part establishes 217.206 Stressed VaR-based measure. 217.207 Specific risk. minimum capital requirements and 217.208 Incremental risk. overall capital adequacy standards for 217.209 Comprehensive risk. entities described in paragraph (c)(1) of 217.210 Standardized measurement method this section. This part includes meth- for specific risk. odologies for calculating minimum 217.211 Simplified supervisory formula ap- capital requirements, public disclosure proach (SSFA). requirements related to the capital re- 217.212 Market risk disclosures. quirements, and transition provisions 217.213–217.299 [Reserved] for the application of this part. Subpart G—Transition Provisions (b) Limitation of authority. Nothing in this part shall be read to limit the au- 217.300 Transitions. thority of the Board to take action under other provisions of law, includ- Subpart H—Risk-based Capital Surcharge ing action to address unsafe or unsound for Global Systemically Important Bank practices or conditions, deficient cap- Holding Companies ital levels, or violations of law or regu- 217.400 Purpose and applicability. lation, under section 8 of the Federal 217.401 Definitions. Deposit Insurance Act, section 8 of the

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Bank Holding Company Act, or section sures pursuant to the requirements in 10 of the Home Owners’ Loan Act. subpart E of this part, each Board-reg- (c) Applicability. (1) This part applies ulated institution with total consoli- on a consolidated basis to every Board- dated assets of $50 billion or more must regulated institution that is: make the public disclosures described (i) A state member bank; in subpart D of this part. (ii) A bank holding company domi- (ii) Each market risk Board-regu- ciled in the United States that is not lated institution must make the public subject to 12 CFR part 225, appendix C, disclosures described in subpart F of provided that the Board may by order this part. apply any or all of this part 217 to any (iii) Each advanced approaches bank holding company, based on the Board-regulated institution must make institution’s size, level of complexity, the public disclosures described in sub- risk profile, scope of operations, or fi- part E of this part. nancial condition; or (d) Reservation of authority. (1) Addi- (iii) A covered savings and loan hold- tional capital in the aggregate. The ing company domiciled in the United Board may require a Board-regulated States, other than a savings and loan institution to hold an amount of regu- holding company that has total con- latory capital greater than otherwise solidated assets of less than $1 billion required under this part if the Board and meets the requirements of 12 CFR determines that the Board-regulated part 225, appendix C, as if the savings institution’s capital requirements and loan holding company were a bank under this part are not commensurate holding company and the savings asso- with the Board-regulated institution’s ciation were a bank. For purposes of credit, market, operational, or other compliance with the capital adequacy risks. requirements and calculations in this (2) Regulatory capital elements. (i) If part, savings and loan holding compa- the Board determines that a particular nies that do not file the FR Y–9C common equity tier 1, additional tier 1, should follow the instructions to the or tier 2 capital element has character- FR Y–9C. istics or terms that diminish its ability (2) Minimum capital requirements and to absorb losses, or otherwise present overall capital adequacy standards. Each safety and soundness concerns, the Board-regulated institution must cal- Board may require the Board-regulated culate its minimum capital require- institution to exclude all or a portion ments and meet the overall capital of such element from common equity adequacy standards in subpart B of this , additional tier 1 capital, part. or tier 2 capital, as appropriate. (3) Regulatory capital. Each Board- (ii) Notwithstanding the criteria for regulated institution must calculate regulatory capital instruments set its regulatory capital in accordance forth in subpart C of this part, the with subpart C of this part. Board may find that a capital element (4) Risk-weighted assets. (i) Each may be included in a Board-regulated Board-regulated institution must use institution’s common equity tier 1 cap- the methodologies in subpart D of this ital, additional tier 1 capital, or tier 2 part (and subpart F of this part for a capital on a permanent or temporary market risk Board-regulated institu- basis consistent with the loss absorp- tion) to calculate standardized total tion capacity of the element and in ac- risk-weighted assets. cordance with § 217.20(e). (ii) Each advanced approaches Board- (3) Risk-weighted asset amounts. If the regulated institution must use the Board determines that the risk-weight- methodologies in subpart E (and sub- ed asset amount calculated under this part F of this part for a market risk part by the Board-regulated institution Board-regulated institution) to cal- for one or more exposures is not com- culate advanced approaches total risk- mensurate with the risks associated weighted assets. with those exposures, the Board may (5) Disclosures. (i) Except for an ad- require the Board-regulated institution vanced approaches Board-regulated in- to assign a different risk-weighted stitution that is making public disclo- asset amount to the exposure(s) or to

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deduct the amount of the exposure(s) (f) Timing. (1) Subject to the transi- from its regulatory capital. tion provisions in subpart G of this (4) Total leverage. If the Board deter- part, an advanced approaches Board- mines that the total leverage exposure, regulated institution that is not a sav- or the amount reflected in the Board- ings and loan holding company must: regulated institution’s reported aver- (i) Except as described in paragraph age total consolidated assets, for an (f)(1)(ii) of this section, beginning on on- or off-balance sheet exposure cal- January 1, 2014, calculate advanced ap- culated by a Board-regulated institu- proaches total risk-weighted assets in tion under § 217.10 is inappropriate for accordance with subpart E and, if ap- the exposure(s) or the circumstances of plicable, subpart F of this part and, be- the Board-regulated institution, the ginning on January 1, 2015, calculate Board may require the Board-regulated institution to adjust this exposure standardized total risk-weighted assets amount in the numerator and the de- in accordance with subpart D and, if nominator for purposes of the leverage applicable, subpart F of this part; ratio calculations. (ii) From January 1, 2014 to Decem- (5) Consolidation of certain exposures. ber 31, 2014: The Board may determine that the (A) Calculate risk-weighted assets in risk-based capital treatment for an ex- accordance with the general risk-based posure or the treatment provided to an capital rules under 12 CFR parts 208 or entity that is not consolidated on the 225, appendix A, and, if applicable, ap- Board-regulated institution’s balance pendix E (state member banks or bank sheet is not commensurate with the holding companies, respectively) 1 and risk of the exposure and the relation- substitute such risk-weighted assets ship of the Board-regulated institution for standardized total risk-weighted as- to the entity. Upon making this deter- sets for purposes of § 217.10; mination, the Board may require the (B) If applicable, calculate general Board-regulated institution to treat market risk equivalent assets in ac- the exposure or entity as if it were con- cordance with 12 CFR parts 208 or 225, solidated on the balance sheet of the appendix E, section 4(a)(3) (state mem- Board-regulated institution for pur- ber banks or bank holding companies, poses of determining the Board-regu- respectively) and substitute such gen- lated institution’s risk-based capital requirements and calculating the eral market risk equivalent assets for Board-regulated institution’s risk- standardized market risk-weighted as- based capital ratios accordingly. The sets for purposes of § 217.20(d)(3); and Board will look to the substance of, (C) Substitute the corresponding pro- and risk associated with, the trans- vision or provisions of 12 CFR parts 208 action, as well as other relevant fac- or 225, appendix A, and, if applicable, tors the Board deems appropriate in de- appendix E (state member banks or termining whether to require such bank holding companies, respectively) treatment. for any reference to subpart D of this (6) Other reservation of authority. With part in: § 217.121(c); § 217.124(a) and (b); respect to any deduction or limitation § 217.144(b); § 217.154(c) and (d); required under this part, the Board may require a different deduction or limitation, provided that such alter- native deduction or limitation is com- 1 For the purpose of calculating its general mensurate with the Board-regulated risk-based capital ratios from January 1, 2014 institution’s risk and consistent with to December 31, 2014, an advanced approaches safety and soundness. Board-regulated institution shall adjust, as appropriate, its risk-weighted asset measure (e) Notice and response procedures. In (as that amount is calculated under 12 CFR making a determination under this sec- parts 208 and 225, and, if applicable, appendix tion, the Board will apply notice and E (state member banks or bank holding com- response procedures in the same man- panies, respectively) in the general risk- ner and to the same extent as the no- based capital rules) by excluding those assets tice and response procedures in 12 CFR that are deducted from its regulatory capital 263.202. under § 217.22.

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§ 217.202(b) (definition of covered posi- (A) Is not required to maintain a sup- tion in paragraph (b)(3)(iv)); and plementary leverage ratio; and § 217.211(b); 2 (B) Must calculate a supplementary (iii) Beginning on January 1, 2014, leverage ratio in accordance with calculate and maintain minimum cap- § 217.10(c), and must report the cal- ital ratios in accordance with subparts culated supplementary leverage ratio A, B, and C of this part, provided, how- on any applicable regulatory reports. ever, that such Board-regulated insti- (3) Beginning on January 1, 2016, and tution must: subject to the transition provisions in (A) From January 1, 2014 to Decem- subpart G of this part, a Board-regu- ber 31, 2014, maintain a minimum com- lated institution is subject to limita- mon equity tier 1 capital ratio of 4 per- tions on distributions and discre- cent, a minimum tier 1 capital ratio of tionary bonus payments with respect 5.5 percent, a minimum total capital to its capital conservation buffer, any ratio of 8 percent, and a minimum le- applicable countercyclical capital buff- verage ratio of 4 percent; and er amount, and any applicable GSIB (B) From January 1, 2015 to Decem- surcharge, in accordance with subpart ber 31, 2017, an advanced approaches B of this part. Board-regulated institution: (4) This part shall not apply until (1) Is not required to maintain a sup- January 1, 2015, to any Board-regulated plementary leverage ratio; and institution that is not an advanced ap- (2) Must calculate a supplementary proaches Board-regulated institution leverage ratio in accordance with or to any covered savings and loan § 217.10(c), and must report the cal- holding company. culated supplementary leverage ratio on any applicable regulatory reports. [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as (2) Subject to the transition provi- amended at 79 FR 57744, Sept. 26, 2014; 80 FR sions in subpart G of this part, a Board- 5670, Feb. 3, 2015; 80 FR 20157, Apr. 15, 2015; 80 regulated institution that is not an ad- FR 49103, Aug. 14, 2015] vanced approaches Board-regulated in- EFFECTIVE DATE NOTES: 1. At 79 FR 24540, stitution or a savings and loan holding May 1, 2014, § 217.1 was amended by revising company that is an advanced ap- paragraph (f)(4), effective Jan. 1, 2018. For proaches Board-regulated institution the convenience of the user, the revised text must: is set forth as follows: (i) Beginning on January 1, 2015, cal- § 217.1 Purpose, applicability, reservations culate standardized total risk-weighted of authority, and timing. assets in accordance with subpart D, and if applicable, subpart F of this * * * * * part; and (ii) Beginning on January 1, 2015, cal- (f) * * * culate and maintain minimum capital (4) Beginning January 1, 2018, a covered ratios in accordance with subparts A, B BHC (as defined in § 217.2) is subject to limi- and C of this part, provided, however, tations on distributions and discretionary that from January 1, 2015 to December bonus payments in accordance with the 31, 2017, a savings and loan holding lower of the maximum payout amount as de- termined under § 217.11(a)(2)(iii) and the max- company that is an advanced ap- imum leverage payout amount as deter- proaches Board-regulated institution: mined under § 217.11(a)(2)(vi). 2. At 80 FR 49103, Aug. 14, 2015, § 217.1 was 2 In addition, for purposes of § 217.201(c)(3), amended as follows, effective Jan. 1, 2018. Ef- from January 1, 2014 to December 31, 2014, for fective January 1, 2018, in § 217.1, paragraph any circumstance in which the Board may (f)(4) as revised on May 1, 2014 (79 FR 24540) require a Board-regulated institution to cal- is amended by removing the words ‘‘covered culate risk-based capital requirements for BHC’’and adding the words ‘‘global system- specific positions or portfolios under subpart ically important BHC’’ in their place. D of this part, the Board will instead require the Board-regulated institution to make § 217.2 Definitions. such calculations according to 12 CFR parts 208 and 225, appendix A and, if applicable, ap- As used in this part: pendix E (state member banks or bank hold- Additional tier 1 capital is defined in ing companies, respectively). § 217.20(c).

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Advanced approaches Board-regulated (1) Establishes an ABCP program; institution means a Board-regulated in- (2) Approves the sellers permitted to stitution that is described in participate in an ABCP program; § 217.100(b)(1). (3) Approves the exposures to be pur- Advanced approaches total risk-weight- chased by an ABCP program; or ed assets means: (4) Administers the ABCP program (1) The sum of: by monitoring the underlying expo- (i) Credit-risk-weighted assets; sures, underwriting or otherwise ar- (ii) Credit valuation adjustment ranging for the placement of debt or (CVA) risk-weighted assets; other obligations issued by the pro- (iii) Risk-weighted assets for oper- gram, compiling monthly reports, or ational risk; and ensuring compliance with the program (iv) For a market risk Board-regu- documents and with the program’s lated institution only, advanced mar- credit and investment policy. ket risk-weighted assets; minus Bank holding company means a bank (2) Excess eligible credit reserves not holding company as defined in section 2 included in the Board-regulated insti- of the Bank Holding Company Act. tution’s tier 2 capital. Bank Holding Company Act means the Advanced market risk-weighted assets Bank Holding Company Act of 1956, as means the advanced measure for mar- amended (12 U.S.C. 1841 et seq.). ket risk calculated under § 217.204 mul- Bankruptcy remote means, with re- tiplied by 12.5. spect to an entity or asset, that the en- Affiliate with respect to a company, tity or asset would be excluded from an means any company that controls, is insolvent entity’s estate in receiver- controlled by, or is under common con- ship, insolvency, liquidation, or similar trol with, the company. proceeding. Allocated transfer risk reserves means Board means the Board of Governors reserves that have been established in of the Federal Reserve System. accordance with section 905(a) of the International Lending Supervision Act, Board-regulated institution means a against certain assets whose value U.S. state member bank, bank holding com- supervisory authorities have found to pany, or savings and loan holding com- be significantly impaired by protracted pany. transfer risk problems. Call Report means Consolidated Re- Allowances for loan and lease losses ports of Condition and Income. (ALLL) means valuation allowances Carrying value means, with respect to that have been established through a an asset, the value of the asset on the charge against earnings to cover esti- balance sheet of the Board-regulated mated credit losses on loans, lease fi- institution, determined in accordance nancing receivables or other extensions with GAAP. of credit as determined in accordance Central counterparty (CCP) means a with GAAP. ALLL excludes ‘‘allocated counterparty (for example, a clearing transfer risk reserves.’’ For purposes of house) that facilitates trades between this part, ALLL includes allowances counterparties in one or more financial that have been established through a markets by either guaranteeing trades charge against earnings to cover esti- or novating contracts. mated credit losses associated with off- CFTC means the U.S. Commodity Fu- balance sheet credit exposures as deter- tures Trading Commission. mined in accordance with GAAP. Clean-up call means a contractual Asset-backed commercial paper (ABCP) provision that permits an originating program means a program established Board-regulated institution or servicer primarily for the purpose of issuing to call securitization exposures before commercial paper that is investment their stated maturity or call date. grade and backed by underlying expo- Cleared transaction means an exposure sures held in a bankruptcy-remote spe- associated with an outstanding deriva- cial purpose entity (SPE). tive contract or repo-style transaction Asset-backed commercial paper (ABCP) that a Board-regulated institution or program sponsor means a Board-regu- clearing member has entered into with lated institution that: a central counterparty (that is, a

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transaction that a central Clearing member means a member of, counterparty has accepted). or direct participant in, a CCP that is (1) The following transactions are entitled to enter into transactions with cleared transactions: the CCP. (i) A transaction between a CCP and Clearing member client means a party a Board-regulated institution that is a to a cleared transaction associated clearing member of the CCP where the with a CCP in which a clearing member Board-regulated institution enters into acts either as a financial intermediary the transaction with the CCP for the with respect to the party or guarantees Board-regulated institution’s own ac- the performance of the party to the count; CCP. (ii) A transaction between a CCP and Collateral agreement means a legal a Board-regulated institution that is a contract that specifies the time when, clearing member of the CCP where the and circumstances under which, a Board-regulated institution is acting counterparty is required to pledge col- as a financial intermediary on behalf of lateral to a Board-regulated institution a clearing member client and the for a single financial contract or for all transaction offsets another transaction financial contracts in a netting set and that satisfies the requirements set confers upon the Board-regulated insti- forth in § 217.3(a); tution a perfected, first-priority secu- (iii) A transaction between a clearing rity interest (notwithstanding the member client Board-regulated institu- prior security interest of any custodial tion and a clearing member where the agent), or the legal equivalent thereof, clearing member acts as a financial in the collateral posted by the intermediary on behalf of the clearing counterparty under the agreement. member client and enters into an off- This security interest must provide the setting transaction with a CCP, pro- Board-regulated institution with a vided that the requirements set forth right to close-out the financial posi- in § 217.3(a) are met; or tions and liquidate the collateral upon (iv) A transaction between a clearing an event of default of, or failure to per- member client Board-regulated institu- form by, the counterparty under the tion and a CCP where a clearing mem- collateral agreement. A contract would ber guarantees the performance of the not satisfy this requirement if the clearing member client Board-regu- Board-regulated institution’s exercise lated institution to the CCP and the of rights under the agreement may be transaction meets the requirements of stayed or avoided under applicable law § 217.3(a)(2) and (3). in the relevant jurisdictions, other (2) The exposure of a Board-regulated than: institution that is a clearing member (1) In receivership, conservatorship, to its clearing member client is not a or resolution under the Federal Deposit cleared transaction where the Board- Insurance Act, Title II of the Dodd- regulated institution is either acting Frank Act, or under any similar insol- as a financial intermediary and enters vency law applicable to GSEs, or laws into an offsetting transaction with a of foreign jurisdictions that are sub- CCP or where the Board-regulated in- stantially similar 4 to the U.S. laws ref- stitution provides a guarantee to the erenced in this paragraph (1) in order CCP on the performance of the client.3 to facilitate the orderly resolution of the defaulting counterparty; or 3 For the standardized approach treatment (2) Where the agreement is subject by of these exposures, see § 217.34(e) (OTC deriv- its terms to any of the laws referenced ative contracts) or § 217.37(c) (repo-style in paragraph (1) of this definition. transactions). For the advanced approaches Commitment means any legally bind- treatment of these exposures, see ing arrangement that obligates a §§ 217.132(c)(8) and (d) (OTC derivative con- tracts) or §§ 217.132(b) and § 217.132(d) (repo- style transactions) and for calculation of the 4 The Board expects to evaluate jointly margin period of risk, see with the OCC and Federal Deposit Insurance §§ 217.132(d)(5)(iii)(C) (OTC derivative con- Corporation whether foreign special resolu- tracts) and § 217.132(d)(5)(iii)(A) (repo-style tion regimes meet the requirements of this transactions). paragraph.

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Board-regulated institution to extend Country risk classification (CRC) with credit or to purchase assets. respect to a sovereign, means the most Commodity derivative contract means a recent consensus CRC published by the commodity-linked swap, purchased Organization for Economic Coopera- commodity-linked option, forward tion and Development (OECD) as of De- commodity-linked contract, or any cember 31st of the prior calendar year other instrument linked to commod- that provides a view of the likelihood ities that gives rise to similar that the sovereign will service its ex- counterparty credit risks. ternal debt. Commodity Exchange Act means the Covered savings and loan holding com- Commodity Exchange Act of 1936 (7 pany means a top-tier savings and loan U.S.C. 1 et seq.) holding company other than: Common equity tier 1 capital is defined (1) A top-tier savings and loan hold- in § 217.20(b). ing company that is: Common equity tier 1 minority interest means the common equity tier 1 cap- (i) An institution that meets the re- ital of a depository institution or for- quirements of section 10(c)(9)(C) of eign bank that is: HOLA (12 U.S.C. 1467a(c)(9)(C)); and (1) A consolidated subsidiary of a (ii) As of June 30 of the previous cal- Board-regulated institution; and endar year, derived 50 percent or more (2) Not owned by the Board-regulated of its total consolidated assets or 50 institution. percent of its total revenues on an en- Company means a corporation, part- terprise-wide basis (as calculated under nership, limited liability company, de- GAAP) from activities that are not fi- pository institution, business trust, nancial in nature under section 4(k) of special purpose entity, association, or the Bank Holding Company Act of 1956 similar organization. (12 U.S.C. 1843(k)); Control. A person or company controls (2) A top-tier savings and loan hold- a company if it: ing company that is an insurance un- (1) Owns, controls, or holds with derwriting company; or power to vote 25 percent or more of a (3)(i) A top-tier savings and loan class of voting securities of the com- holding company that, as of June 30 of pany; or the previous calendar year, held 25 per- (2) Consolidates the company for fi- cent or more of its total consolidated nancial reporting purposes. assets in subsidiaries that are insur- Corporate exposure means an exposure ance underwriting companies (other to a company that is not: than assets associated with insurance (1) An exposure to a sovereign, the for credit risk); and Bank for International Settlements, (ii) For purposes of paragraph (3)(i) of the European , the Euro- this definition, the company must cal- pean Commission, the International Monetary Fund, a multi-lateral devel- culate its total consolidated assets in opment bank (MDB), a depository in- accordance with GAAP, or if the com- stitution, a foreign bank, a credit pany does not calculate its total con- union, or a public sector entity (PSE); solidated assets under GAAP for any (2) An exposure to a GSE; regulatory purpose (including compli- (3) A residential mortgage exposure; ance with applicable securities laws), (4) A pre-sold construction loan; the company may estimate its total (5) A statutory multifamily mort- consolidated assets, subject to review gage; and adjustment by the Board. (6) A high volatility commercial real Credit derivative means a financial estate (HVCRE) exposure; contract executed under standard in- (7) A cleared transaction; dustry credit derivative documentation (8) A default fund contribution; that allows one party (the protection (9) A securitization exposure; purchaser) to transfer the credit risk of (10) An equity exposure; or one or more exposures (reference expo- (11) An unsettled transaction. sure(s)) to another party (the protec- (12) A policy loan; or tion provider) for a certain period of (13) A separate account. time.

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Credit-enhancing interest-only strip Credit-risk-weighted assets means 1.06 (CEIO) means an on-balance sheet asset multiplied by the sum of: that, in form or in substance: (1) Total wholesale and retail risk- (1) Represents a contractual right to weighted assets as calculated under receive some or all of the interest and § 217.131; no more than a minimal amount of (2) Risk-weighted assets for principal due on the underlying expo- securitization exposures as calculated sures of a securitization; and under § 217.142; and (2) Exposes the holder of the CEIO to (3) Risk-weighted assets for equity credit risk directly or indirectly asso- exposures as calculated under § 217.151. ciated with the underlying exposures Credit union means an insured credit that exceeds a pro rata share of the union as defined under the Federal holder’s claim on the underlying expo- Credit Union Act (12 U.S.C. 1752 et seq.). sures, whether through subordination Current exposure means, with respect provisions or other credit-enhancement to a netting set, the larger of zero or techniques. the fair value of a transaction or port- Credit-enhancing representations and folio of transactions within the netting warranties means representations and set that would be lost upon default of warranties that are made or assumed the counterparty, assuming no recov- in connection with a transfer of under- ery on the value of the transactions. lying exposures (including loan serv- Current exposure is also called replace- icing assets) and that obligate a Board- ment cost. regulated institution to protect an- Current exposure methodology means other party from losses arising from the method of calculating the exposure the credit risk of the underlying expo- amount for over-the-counter derivative sures. Credit-enhancing representa- contracts in § 217.34(a) and exposure at tions and warranties include provisions default (EAD) in § 217.132(c)(5) or (6), as to protect a party from losses resulting applicable. from the default or nonperformance of Custodian means a financial institu- the counterparties of the underlying tion that has legal custody of collat- exposures or from an insufficiency in eral provided to a CCP. the value of the collateral backing the Default fund contribution means the underlying exposures. Credit-enhancing funds contributed or commitments representations and warranties do not made by a clearing member to a CCP’s include: mutualized loss sharing arrangement. (1) Early default clauses and similar Depository institution means a deposi- warranties that permit the return of, tory institution as defined in section 3 or premium refund clauses covering, 1– of the Federal Deposit Insurance Act. 4 family residential first mortgage Depository institution holding company loans that qualify for a 50 percent risk means a bank holding company or sav- weight for a period not to exceed 120 ings and loan holding company. days from the date of transfer. These Derivative contract means a financial warranties may cover only those loans contract whose value is derived from that were originated within 1 year of the values of one or more underlying the date of transfer; assets, reference rates, or indices of (2) Premium refund clauses that asset values or reference rates. Deriva- cover assets guaranteed, in whole or in tive contracts include interest rate de- part, by the U.S. Government, a U.S. rivative contracts, exchange rate de- Government agency or a GSE, provided rivative contracts, equity derivative the premium refund clauses are for a contracts, commodity derivative con- period not to exceed 120 days from the tracts, credit derivative contracts, and date of transfer; or any other instrument that poses simi- (3) Warranties that permit the return lar counterparty credit risks. Deriva- of underlying exposures in instances of tive contracts also include unsettled misrepresentation, fraud, or incom- securities, commodities, and foreign plete documentation. exchange transactions with a contrac- Credit risk mitigant means collateral, tual settlement or delivery lag that is a credit derivative, or a guarantee. longer than the lesser of the market

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standard for the particular instrument without triggering an event of default; or five business days. or Discretionary bonus payment means a (5) Any similar transaction that the payment made to an executive officer Board determines to be in substance a of a Board-regulated institution, distribution of capital. where: Dodd-Frank Act means the Dodd- (1) The Board-regulated institution Frank Wall Street Reform and Con- retains discretion as to whether to sumer Protection Act of 2010 (Pub. L. make, and the amount of, the payment 111–203, 124 Stat. 1376). until the payment is awarded to the ex- Early amortization provision means a ecutive officer; provision in the documentation gov- (2) The amount paid is determined by erning a securitization that, when trig- the Board-regulated institution with- gered, causes investors in the out prior promise to, or agreement securitization exposures to be repaid with, the executive officer; and before the original stated maturity of (3) The executive officer has no con- the securitization exposures, unless the tractual right, whether express or im- provision: plied, to the bonus payment. (1) Is triggered solely by events not Distribution means: directly related to the performance of (1) A reduction of tier 1 capital the underlying exposures or the origi- through the repurchase of a tier 1 cap- nating Board-regulated institution ital instrument or by other means, ex- (such as material changes in tax laws cept when a Board-regulated institu- or regulations); or tion, within the same quarter when the (2) Leaves investors fully exposed to repurchase is announced, fully replaces future draws by borrowers on the un- a tier 1 capital instrument it has repur- derlying exposures even after the pro- chased by issuing another capital in- vision is triggered. strument that meets the eligibility cri- Effective notional amount means for an teria for: eligible guarantee or eligible credit de- (i) A common equity tier 1 capital in- rivative, the lesser of the contractual strument if the instrument being re- notional amount of the credit risk purchased was part of the Board-regu- mitigant and the exposure amount (or lated institution’s common equity tier EAD for purposes of subpart E of this 1 capital, or part) of the hedged exposure, multi- (ii) A common equity tier 1 or addi- plied by the percentage coverage of the tional tier 1 capital instrument if the credit risk mitigant. instrument being repurchased was part Eligible ABCP liquidity facility means of the Board-regulated institution’s a liquidity facility supporting ABCP, tier 1 capital; in form or in substance, that is subject (2) A reduction of tier 2 capital to an asset quality test at the time of through the repurchase, or redemption draw that precludes funding against as- prior to maturity, of a tier 2 capital in- sets that are 90 days or more past due strument or by other means, except or in default. Notwithstanding the pre- when a Board-regulated institution, ceding sentence, a liquidity facility is within the same quarter when the re- an eligible ABCP liquidity facility if purchase or redemption is announced, the assets or exposures funded under fully replaces a tier 2 capital instru- the liquidity facility that do not meet ment it has repurchased by issuing an- the eligibility requirements are guar- other capital instrument that meets anteed by a sovereign that qualifies for the eligibility criteria for a tier 1 or a 20 percent risk weight or lower. tier 2 capital instrument; Eligible clean-up call means a clean-up (3) A dividend declaration or pay- call that: ment on any tier 1 capital instrument; (1) Is exercisable solely at the discre- (4) A dividend declaration or interest tion of the originating Board-regulated payment on any tier 2 capital instru- institution or servicer; ment if the Board-regulated institution (2) Is not structured to avoid allo- has full discretion to permanently or cating losses to securitization expo- temporarily suspend such payments sures held by investors or otherwise

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structured to provide credit enhance- tlement, the terms of at least one of ment to the securitization; and the exposures that is permitted to be (3)(i) For a traditional securitization, transferred under the contract provide is only exercisable when 10 percent or that any required consent to transfer less of the principal amount of the un- may not be unreasonably withheld; derlying exposures or securitization ex- (7) If the credit derivative is a credit posures (determined as of the inception default swap or nth-to-default swap, the of the securitization) is outstanding; or contract clearly identifies the parties (ii) For a synthetic securitization, is responsible for determining whether a only exercisable when 10 percent or less credit event has occurred, specifies of the principal amount of the ref- that this determination is not the sole erence portfolio of underlying expo- responsibility of the protection pro- sures (determined as of the inception of vider, and gives the protection pur- the securitization) is outstanding. chaser the right to notify the protec- Eligible credit derivative means a cred- tion provider of the occurrence of a it derivative in the form of a credit de- credit event; and fault swap, nth-to-default swap, total (8) If the credit derivative is a total return swap, or any other form of cred- return swap and the Board-regulated it derivative approved by the Board, institution records net payments re- provided that: ceived on the swap as net income, the (1) The contract meets the require- Board-regulated institution records ments of an eligible guarantee and has offsetting deterioration in the value of been confirmed by the protection pur- the hedged exposure (either through re- chaser and the protection provider; ductions in fair value or by an addition (2) Any assignment of the contract to reserves). has been confirmed by all relevant par- Eligible credit reserves means all gen- ties; eral allowances that have been estab- (3) If the credit derivative is a credit lished through a charge against earn- default swap or nth-to-default swap, the ings to cover estimated credit losses contract includes the following credit associated with on- or off-balance sheet events: wholesale and retail exposures, includ- (i) Failure to pay any amount due ing the ALLL associated with such ex- under the terms of the reference expo- posures, but excluding allocated trans- sure, subject to any applicable minimal fer risk reserves established pursuant payment threshold that is consistent to 12 U.S.C. 3904 and other specific re- with standard market practice and serves created against recognized with a grace period that is closely in losses. line with the grace period of the ref- Eligible guarantee means a guarantee erence exposure; and that: (ii) Receivership, insolvency, liquida- tion, conservatorship or inability of (1) Is written; the reference exposure issuer to pay its (2) Is either: debts, or its failure or admission in (i) Unconditional, or writing of its inability generally to pay (ii) A contingent obligation of the its debts as they become due, and simi- U.S. government or its agencies, the lar events; enforceability of which is dependent (4) The terms and conditions dic- upon some affirmative action on the tating the manner in which the con- part of the beneficiary of the guarantee tract is to be settled are incorporated or a third party (for example, meeting into the contract; servicing requirements); (5) If the contract allows for cash set- (3) Covers all or a pro rata portion of tlement, the contract incorporates a all contractual payments of the obli- robust valuation process to estimate gated party on the reference exposure; loss reliably and specifies a reasonable (4) Gives the beneficiary a direct period for obtaining post-credit event claim against the protection provider; valuations of the reference exposure; (5) Is not unilaterally cancelable by (6) If the contract requires the pro- the protection provider for reasons tection purchaser to transfer an expo- other than the breach of the contract sure to the protection provider at set- by the beneficiary;

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(6) Except for a guarantee by a sov- risk of the exposures for which it has ereign, is legally enforceable against provided guarantees; and the protection provider in a jurisdic- (iii) That is not an insurance com- tion where the protection provider has pany engaged predominately in the sufficient assets against which a judg- business of providing credit protection ment may be attached and enforced; (such as a monoline bond insurer or re- (7) Requires the protection provider insurer). to make payment to the beneficiary on Eligible margin loan means: the occurrence of a default (as defined (1) An extension of credit where: in the guarantee) of the obligated (i) The extension of credit is party on the reference exposure in a collateralized exclusively by liquid and timely manner without the beneficiary readily marketable debt or equity se- first having to take legal actions to curities, or gold; pursue the obligor for payment; (ii) The collateral is marked-to-fair (8) Does not increase the bene- value daily, and the transaction is sub- ficiary’s cost of credit protection on ject to daily margin maintenance re- the guarantee in response to deteriora- quirements; and tion in the credit quality of the ref- (iii) The extension of credit is con- erence exposure; ducted under an agreement that pro- (9) Is not provided by an affiliate of vides the Board-regulated institution the Board-regulated institution, unless the right to accelerate and terminate the affiliate is an insured depository the extension of credit and to liquidate institution, foreign bank, securities or set-off collateral promptly upon an broker or dealer, or insurance company event of default, including upon an that: event of receivership, insolvency, liq- (i) Does not control the Board-regu- uidation, conservatorship, or similar lated institution; and proceeding, of the counterparty, pro- (ii) Is subject to consolidated super- vided that, in any such case, any exer- vision and regulation comparable to cise of rights under the agreement will that imposed on depository institu- not be stayed or avoided under applica- tions, U.S. securities broker-dealers, or ble law in the relevant jurisdictions, U.S. insurance companies (as the case other than in receivership, con- may be); and servatorship, or resolution under the (10) For purposes of §§ 217.141 through Federal Deposit Insurance Act, Title II 217.145 and subpart D of this part, is of the Dodd-Frank Act, or under any provided by an eligible guarantor. similar insolvency law applicable to Eligible guarantor means: GSEs,5 or laws of foreign jurisdictions (1) A sovereign, the Bank for Inter- that are substantially similar 6 to the national Settlements, the Inter- U.S. laws referenced in this paragraph national Monetary Fund, the European in order to facilitate the orderly reso- Central Bank, the European Commis- lution of the defaulting counterparty; sion, a Federal Home Loan Bank, Fed- or eral Agricultural Mortgage Corpora- tion (Farmer Mac), a multilateral de- 5 This requirement is met where all trans- velopment bank (MDB), a depository actions under the agreement are (i) executed institution, a bank holding company, a under U.S. law and (ii) constitute ‘‘securities savings and loan holding company, a contracts’’ under section 555 of the Bank- credit union, a foreign bank, or a quali- ruptcy Code (11 U.S.C. 555), qualified finan- cial contracts under section 11(e)(8) of the fying central counterparty; or Federal Deposit Insurance Act, or netting (2) An entity (other than a special contracts between or among financial insti- purpose entity): tutions under sections 401–407 of the Federal (i) That at the time the guarantee is Deposit Insurance Corporation Improvement issued or anytime thereafter, has Act or the Federal Reserve Board’s Regula- issued and outstanding an unsecured tion EE (12 CFR part 231). 6 debt security without credit enhance- The Board expects to evaluate jointly with the OCC and Federal Deposit Insurance ment that is investment grade; Corporation whether foreign special resolu- (ii) Whose creditworthiness is not tion regimes meet the requirements of this positively correlated with the credit paragraph.

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(2) In order to recognize an exposure rity or instrument described in para- as an eligible margin loan for purposes graph (1) of this definition; of this subpart, a Board-regulated in- (3) An option or warrant that is exer- stitution must comply with the re- cisable for a security or instrument de- quirements of § 217.3(b) with respect to scribed in paragraph (1) of this defini- that exposure. tion; or Eligible servicer cash advance facility (4) Any other security or instrument means a servicer cash advance facility (other than a securitization exposure) in which: to the extent the return on the secu- (1) The servicer is entitled to full re- rity or instrument is based on the per- imbursement of advances, except that formance of a security or instrument a servicer may be obligated to make described in paragraph (1) of this defi- non-reimbursable advances for a par- nition. ticular underlying exposure if any such ERISA means the Employee Retire- advance is contractually limited to an ment Income and Security Act of 1974 insignificant amount of the out- (29 U.S.C. 1001 et seq.). standing principal balance of that ex- Exchange rate derivative contract posure; means a cross-currency interest rate (2) The servicer’s right to reimburse- swap, forward foreign-exchange con- ment is senior in right of payment to tract, currency option purchased, or all other claims on the cash flows from any other instrument linked to ex- the underlying exposures of the change rates that gives rise to similar securitization; and counterparty credit risks. (3) The servicer has no legal obliga- Executive officer means a person who tion to, and does not make advances to holds the title or, without regard to the securitization if the servicer con- title, salary, or compensation, per- cludes the advances are unlikely to be forms the function of one or more of repaid. the following positions: President, Employee stock ownership plan has the chief executive officer, executive chair- same meaning as in 29 CFR 2550.407d–6. man, chief operating officer, chief fi- nancial officer, chief investment offi- Equity derivative contract means an cer, chief legal officer, chief lending of- equity-linked swap, purchased equity- ficer, chief risk officer, or head of a linked option, forward equity-linked major business line, and other staff contract, or any other instrument that the board of directors of the linked to equities that gives rise to Board-regulated institution deems to similar counterparty credit risks. have equivalent responsibility. Equity exposure means: Expected credit loss (ECL) means: (1) A security or instrument (whether (1) For a wholesale exposure to a non- voting or non-voting) that represents a defaulted obligor or segment of non-de- direct or an indirect ownership interest faulted retail exposures that is carried in, and is a residual claim on, the as- at fair value with gains and losses flow- sets and income of a company, unless: ing through earnings or that is classi- (i) The issuing company is consoli- fied as held-for-sale and is carried at dated with the Board-regulated institu- the lower of cost or fair value with tion under GAAP; losses flowing through earnings, zero. (ii) The Board-regulated institution (2) For all other wholesale exposures is required to deduct the ownership in- to non-defaulted obligors or segments terest from tier 1 or tier 2 capital of non-defaulted retail exposures, the under this part; product of the (iii) The ownership interest incor- (PD) times the (LGD) porates a payment or other similar ob- times the (EAD) for ligation on the part of the issuing com- the exposure or segment. pany (such as an obligation to make (3) For a wholesale exposure to a de- periodic payments); or faulted obligor or segment of defaulted (iv) The ownership interest is a retail exposures, the Board-regulated securitization exposure; institution’s impairment estimate for (2) A security or instrument that is allowance purposes for the exposure or mandatorily convertible into a secu- segment.

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(4) Total ECL is the sum of expected (5) For an exposure that is an OTC credit losses for all wholesale and re- derivative contract, the exposure tail exposures other than exposures for amount determined under § 217.34. which the Board-regulated institution (6) For an exposure that is a cleared has applied the double default treat- transaction, the exposure amount de- ment in § 217.135. termined under § 217.35. Exposure amount means: (7) For an exposure that is an eligible (1) For the on-balance sheet compo- margin loan or repo-style transaction nent of an exposure (other than an for which the bank calculates the expo- available-for-sale or held-to-maturity sure amount as provided in § 217.37, the security, if the Board-regulated insti- exposure amount determined under tution has made an AOCI opt-out elec- § 217.37. tion (as defined in § 217.22(b)(2)); an OTC (8) For an exposure that is a derivative contract; a repo-style trans- securitization exposure, the exposure action or an eligible margin loan for amount determined under § 217.42. which the Board-regulated institution Federal Deposit Insurance Act means determines the exposure amount under the Federal Deposit Insurance Act (12 § 217.37; a cleared transaction; a default U.S.C. 1813). fund contribution; or a securitization Federal Deposit Insurance Corporation exposure), the Board-regulated institu- Improvement Act means the Federal De- tion’s carrying value of the exposure. posit Insurance Corporation Improve- (2) For a security (that is not a ment Act of 1991 (12 U.S.C. 4401). securitization exposure, equity expo- Financial collateral means collateral: sure, or preferred stock classified as an (1) In the form of: equity security under GAAP) classified (i) Cash on deposit with the Board- as available-for-sale or held-to-matu- regulated institution (including cash rity if the Board-regulated institution held for the Board-regulated institu- has made an AOCI opt-out election (as tion by a third-party custodian or defined in § 217.22(b)(2)), the Board-reg- trustee); ulated institution’s carrying value (in- (ii) Gold bullion; cluding net accrued but unpaid interest (iii) Long-term debt securities that and fees) for the exposure less any net are not resecuritization exposures and unrealized gains on the exposure and that are investment grade; plus any net unrealized losses on the (iv) Short-term debt instruments exposure. that are not resecuritization exposures (3) For available-for-sale preferred and that are investment grade; stock classified as an equity security (v) Equity securities that are pub- under GAAP if the Board-regulated in- licly traded; stitution has made an AOCI opt-out (vi) Convertible bonds that are pub- election (as defined in § 217.22(b)(2)), the licly traded; or Board-regulated institution’s carrying (vii) Money market fund shares and value of the exposure less any net unre- other mutual fund shares if a price for alized gains on the exposure that are the shares is publicly quoted daily; and reflected in such carrying value but ex- (2) In which the Board-regulated in- cluded from the Board-regulated insti- stitution has a perfected, first-priority tution’s regulatory capital compo- security interest or, outside of the nents. United States, the legal equivalent (4) For the off-balance sheet compo- thereof (with the exception of cash on nent of an exposure (other than an OTC deposit and notwithstanding the prior derivative contract; a repo-style trans- security interest of any custodial action or an eligible margin loan for agent). which the Board-regulated institution Financial institution means: calculates the exposure amount under (1) A bank holding company; savings § 217.37; a cleared transaction; a default and loan holding company; nonbank fi- fund contribution; or a securitization nancial institution supervised by the exposure), the notional amount of the Board under Title I of the Dodd-Frank off-balance sheet component multiplied Act; depository institution; foreign by the appropriate credit conversion bank; credit union; industrial loan factor (CCF) in § 217.33. company, industrial bank, or other

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similar institution described in section ble accounting standards) of the com- 2 of the Bank Holding Company Act; pany is either of the two most recent national association, state member calendar years were derived, directly or bank, or state non-member bank that indirectly, by the company on a con- is not a depository institution; insur- solidated basis from the activities; or ance company; securities holding com- (ii) 85 percent or more of the com- pany as defined in section 618 of the pany’s consolidated total assets (as de- Dodd-Frank Act; broker or dealer reg- termined in accordance with applicable istered with the SEC under section 15 accounting standards) as of the end of of the Securities Exchange Act; futures either of the two most recent calendar commission merchant as defined in years were related to the activities. section 1a of the Commodity Exchange (6) Any other company that the Act; swap dealer as defined in section Board may determine is a financial in- 1a of the Commodity Exchange Act; or stitution based on activities similar in security-based swap dealer as defined scope, nature, or operation to those of in section 3 of the Securities Exchange the entities included in paragraphs (1) Act; through (4) of this definition. (2) Any designated financial market (7) For purposes of this part, ‘‘finan- utility, as defined in section 803 of the cial institution’’ does not include the Dodd-Frank Act; following entities: (3) Any entity not domiciled in the (i) GSEs; United States (or a political subdivi- (ii) Small business investment com- sion thereof) that is supervised and panies, as defined in section 102 of the regulated in a manner similar to enti- Small Business Investment Act of 1958 ties described in paragraphs (1) or (2) of (15 U.S.C. 662); this definition; or (iii) Entities designated as Commu- (4) Any other company: nity Development Financial Institu- (i) Of which the Board-regulated in- tions (CDFIs) under 12 U.S.C. 4701 et stitution owns: seq. and 12 CFR part 1805; (A) An investment in GAAP equity (iv) Entities registered with the SEC instruments of the company with an under the Investment Company Act of adjusted carrying value or exposure 1940 (15 U.S.C. 80a–1) or foreign equiva- amount equal to or greater than $10 lents thereof; million; or (v) Entities to the extent that the (B) More than 10 percent of the com- Board-regulated institution’s invest- pany’s issued and outstanding common ment in such entities would qualify as shares (or similar equity interest), and a community development investment (ii) Which is predominantly engaged under section 24 (Eleventh) of the Na- in the following activities: tional Bank Act; and (A) Lending money, securities or (vi) An employee benefit plan as de- other financial instruments, including fined in paragraphs (3) and (32) of sec- servicing loans; tion 3 of ERISA, a ‘‘governmental (B) Insuring, guaranteeing, indem- plan’’ (as defined in 29 U.S.C. 1002(32)) nifying against loss, harm, damage, ill- that complies with the tax deferral ness, disability, or death, or issuing an- qualification requirements provided in nuities; the Internal Revenue Code, or any (C) Underwriting, dealing in, making similar employee benefit plan estab- a market in, or investing as principal lished under the laws of a foreign juris- in securities or other financial instru- diction. ments; or First-lien residential mortgage exposure (D) Asset management activities (not means a residential mortgage exposure including investment or financial advi- secured by a first lien. sory activities). Foreign bank means a foreign bank as (5) For the purposes of this defini- defined in § 211.2 of the Federal Reserve tion, a company is ‘‘predominantly en- Board’s Regulation K (12 CFR 211.2) gaged’’ in an activity or activities if: (other than a depository institution). (i) 85 percent or more of the total Forward agreement means a legally consolidated annual gross revenues (as binding contractual obligation to pur- determined in accordance with applica- chase assets with certain drawdown at

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a specified future date, not including (i) Would qualify as an investment in commitments to make residential community development under 12 mortgage loans or forward foreign ex- U.S.C. 338a or 12 U.S.C. 24 (Eleventh), change contracts. as applicable, or as a ‘‘qualified invest- GAAP means generally accepted ac- ment’’ under 12 CFR part 228, and counting principles as used in the (ii) Is not an ADC loan to any entity United States. described in 12 CFR 208.22(a)(3) or Gain-on-sale means an increase in the 228.12(g)(3), unless it is otherwise de- equity capital of a Board-regulated in- scribed in paragraph (1), (2)(i), (3) or (4) stitution (as reported on [Schedule RC of this definition; of the Call Report or Schedule HC of (3) The purchase or development of the FR Y–9C]) resulting from a tradi- agricultural land, which includes all tional securitization (other than an in- land known to be used or usable for ag- crease in equity capital resulting from ricultural purposes (such as crop and the Board-regulated institution’s re- livestock production), provided that ceipt of cash in connection with the the valuation of the agricultural land securitization or reporting of a mort- is based on its value for agricultural gage servicing asset on [Schedule RC of purposes and the valuation does not the Call Report or Schedule HC of the take into consideration any potential FRY–9C]). use of the land for non-agricultural General obligation means a bond or commercial development or residential similar obligation that is backed by development; or the full faith and credit of a public sec- (4) Commercial real estate projects in tor entity (PSE). which: (i) The loan-to-value ratio is less Global systemically important BHC than or equal to the applicable max- means a bank holding company that is imum supervisory loan-to-value ratio identified as a global systemically im- in the Board’s real estate lending portant BHC pursuant to § 217.402. standards at 12 CFR part 208, appendix (GSE) Government-sponsored enterprise C; means an entity established or char- (ii) The borrower has contributed tered by the U.S. government to serve capital to the project in the form of public purposes specified by the U.S. cash or unencumbered readily market- Congress but whose debt obligations able assets (or has paid development are not explicitly guaranteed by the expenses out-of-pocket) of at least 15 full faith and credit of the U.S. govern- percent of the real estate’s appraised ment. ‘‘as completed’’ value; and GSIB surcharge means the capital sur- (iii) The borrower contributed the charge applicable to a global system- amount of capital required by para- ically important BHC calculated pursu- graph (4)(ii) of this definition before ant to § 217.403. the Board-regulated institution ad- Guarantee means a financial guar- vances funds under the credit facility, antee, letter of credit, insurance, or and the capital contributed by the bor- other similar financial instrument rower, or internally generated by the (other than a credit derivative) that al- project, is contractually required to re- lows one party (beneficiary) to transfer main in the project throughout the life the credit risk of one or more specific of the project. The life of a project con- exposures (reference exposure) to an- cludes only when the credit facility is other party (protection provider). converted to permanent financing or is High volatility commercial real estate sold or paid in full. Permanent financ- (HVCRE) exposure means a credit facil- ing may be provided by the Board-regu- ity that, prior to conversion to perma- lated institution that provided the nent financing, finances or has fi- ADC facility as long as the permanent nanced the acquisition, development, financing is subject to the Board-regu- or construction (ADC) of real property, lated institution’s underwriting cri- unless the facility finances: teria for long-term mortgage loans. (1) One- to four-family residential Home country means the country properties; where an entity is incorporated, char- (2) Real property that: tered, or similarly established.

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Indirect exposure means an exposure and timely repayment of principal and that arises from the Board-regulated interest is expected. institution’s investment in an invest- Investment in the capital of an uncon- ment fund which holds an investment solidated financial institution means a in the Board-regulated institution’s net long position calculated in accord- own capital instrument or an invest- ance with § 217.22(h) in an instrument ment in the capital of an unconsoli- that is recognized as capital for regu- dated financial institution. latory purposes by the primary super- Insurance company means an insur- visor of an unconsolidated regulated fi- ance company as defined in section 201 nancial institution and is an instru- of the Dodd-Frank Act (12 U.S.C. 5381). ment that is part of the GAAP equity Insurance underwriting company of an unconsolidated unregulated fi- means an insurance company as de- nancial institution, including direct, fined in section 201 of the Dodd-Frank indirect, and synthetic exposures to Act (12 U.S.C. 5381) that engages in in- capital instruments, excluding under- surance underwriting activities. writing positions held by the Board- Insured depository institution means regulated institution for five or fewer an insured depository institution as de- business days. fined in section 3 of the Federal De- Investment in the Board-regulated insti- posit Insurance Act. tution’s own capital instrument means a net long position calculated in accord- Interest rate derivative contract means ance with § 217.22(h) in the Board-regu- a single-currency interest rate swap, lated institution’s own common stock basis swap, forward rate agreement, instrument, own additional tier 1 cap- purchased interest rate option, when- ital instrument or own tier 2 capital issued securities, or any other instru- instrument, including direct, indirect, ment linked to interest rates that or synthetic exposures to such capital gives rise to similar counterparty cred- instruments. An investment in the it risks. Board-regulated institution’s own cap- International Lending Supervision Act ital instrument includes any contrac- means the International Lending Su- tual obligation to purchase such cap- pervision Act of 1983 (12 U.S.C. 3907). ital instrument. Investing bank means, with respect to Junior-lien residential mortgage expo- a securitization, a Board-regulated in- sure means a residential mortgage ex- stitution that assumes the credit risk posure that is not a first-lien residen- of a securitization exposure (other than tial mortgage exposure. an originating Board-regulated institu- Main index means the Standard & tion of the securitization). In the typ- Poor’s 500 Index, the FTSE All-World ical synthetic securitization, the in- Index, and any other index for which vesting Board-regulated institution the Board-regulated institution can sells credit protection on a pool of un- demonstrate to the satisfaction of the derlying exposures to the originating Board that the equities represented in Board-regulated institution. the index have comparable liquidity, Investment fund means a company: depth of market, and size of bid-ask (1) Where all or substantially all of spreads as equities in the Standard & the assets of the company are financial Poor’s 500 Index and FTSE All-World assets; and Index. (2) That has no material liabilities. Market risk Board-regulated institution Investment grade means that the enti- means a Board-regulated institution ty to which the Board-regulated insti- that is described in § 217.201(b). tution is exposed through a loan or se- Money market fund means an invest- curity, or the reference entity with re- ment fund that is subject to 17 CFR spect to a credit derivative, has ade- 270.2a–7 or any foreign equivalent quate capacity to meet financial com- thereof. mitments for the projected life of the Mortgage servicing assets (MSAs) asset or exposure. Such an entity or means the contractual rights owned by reference entity has adequate capacity a Board-regulated institution to serv- to meet financial commitments if the ice for a fee mortgage loans that are risk of its default is low and the full owned by others.

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Multilateral development bank (MDB) protection only for the nth-defaulting means the International Bank for Re- reference exposure in a group of ref- construction and Development, the erence exposures. Multilateral Investment Guarantee Operating entity means a company es- Agency, the International Finance Cor- tablished to conduct business with cli- poration, the Inter-American Develop- ents with the intention of earning a ment Bank, the Asian Development profit in its own right. Bank, the African Development Bank, Original maturity with respect to an the European Bank for Reconstruction off-balance sheet commitment means and Development, the European Invest- the length of time between the date a ment Bank, the European Investment commitment is issued and: Fund, the Nordic Investment Bank, the (1) For a commitment that is not Caribbean Development Bank, the Is- subject to extension or renewal, the lamic Development Bank, the Council stated expiration date of the commit- of Europe Development Bank, and any ment; or other multilateral lending institution (2) For a commitment that is subject or regional development bank in which to extension or renewal, the earliest the U.S. government is a shareholder date on which the Board-regulated in- or contributing member or which the stitution can, at its option, uncondi- Board determines poses comparable tionally cancel the commitment. credit risk. Originating Board-regulated institution, National Bank Act means the Na- with respect to a securitization, means tional Bank Act (12 U.S.C. 24). a Board-regulated institution that: Netting set means a group of trans- (1) Directly or indirectly originated actions with a single counterparty that or securitized the underlying exposures are subject to a qualifying master net- included in the securitization; or ting agreement or a qualifying cross- (2) Serves as an ABCP program spon- product master netting agreement. For sor to the securitization. purposes of calculating risk-based cap- Over-the-counter (OTC) derivative con- ital requirements using the internal tract means a derivative contract that models methodology in subpart E of is not a cleared transaction. An OTC this part, this term does not cover a derivative includes a transaction: transaction: (1) Between a Board-regulated insti- (1) That is not subject to such a mas- tution that is a clearing member and a ter netting agreement; or counterparty where the Board-regu- (2) Where the Board-regulated insti- lated institution is acting as a finan- tution has identified specific wrong- cial intermediary and enters into a way risk. cleared transaction with a CCP that Non-guaranteed separate account offsets the transaction with the means a separate account where the in- counterparty; or surance company: (2) In which a Board-regulated insti- (1) Does not contractually guarantee tution that is a clearing member pro- either a minimum return or account vides a CCP a guarantee on the per- value to the contract holder; and formance of the counterparty to the (2) Is not required to hold reserves (in transaction. the general account) pursuant to its Performance standby letter of credit (or contractual obligations to a policy- performance bond) means an irrevocable holder. obligation of a Board-regulated institu- Non-significant investment in the cap- tion to pay a third-party beneficiary ital of an unconsolidated financial insti- when a customer (account party) fails tution means an investment in the cap- to perform on any contractual non- ital of an unconsolidated financial in- financial or commercial obligation. To stitution where the Board-regulated in- the extent permitted by law or regula- stitution owns 10 percent or less of the tion, performance standby letters of issued and outstanding common stock credit include arrangements backing, of the unconsolidated financial institu- among other things, subcontractors’ tion. and suppliers’ performance, labor and Nth-to-default credit derivative means a materials contracts, and construction credit derivative that provides credit bids.

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Policy loan means a loan by an insur- (5) The purchaser has made a sub- ance company to a policy holder pursu- stantial earnest money deposit of no ant to the provisions of an insurance less than 3 percent of the sales price, contract that is secured by the cash which is subject to forfeiture if the surrender value or collateral assign- purchaser terminates the sales con- ment of the related policy or contract. tract; provided that, the earnest money A policy loan includes: deposit shall not be subject to for- (1) A cash loan, including a loan re- feiture by reason of breach or termi- sulting from early payment benefits or nation of the sales contract on the part accelerated payment benefits, on an in- of the builder; surance contract when the terms of (6) The earnest money deposit must contract specify that the payment is a be held in escrow by the Board-regu- policy loan secured by the policy; and lated institution or an independent (2) An automatic premium loan, party in a fiduciary capacity, and the which is a loan that is made in accord- escrow agreement must provide that in ance with policy provisions which pro- an event of default arising from the vide that delinquent premium pay- cancellation of the sales contract by ments are automatically paid from the the purchaser of the residence, the es- cash value at the end of the established crow funds shall be used to defray any grace period for premium payments. cost incurred by the Board-regulated Pre-sold construction loan means any institution; one-to-four family residential con- (7) The builder must incur at least struction loan to a builder that meets the first 10 percent of the direct costs the requirements of section 618(a)(1) or of construction of the residence (that (2) of the Resolution Trust Corporation is, actual costs of the land, labor, and Refinancing, Restructuring, and Im- material) before any drawdown is made provement Act of 1991 (12 U.S.C. 1831n under the loan; note) and the following criteria: (8) The loan may not exceed 80 per- (1) The loan is made in accordance cent of the sales price of the presold with prudent underwriting standards, residence; and meaning that the Board-regulated in- (9) The loan is not more than 90 days stitution has obtained sufficient docu- past due, or on nonaccrual. mentation that the buyer of the home Protection amount (P) means, with re- has a legally binding written sales con- spect to an exposure hedged by an eli- tract and has a firm written commit- gible guarantee or eligible credit deriv- ment for permanent financing of the ative, the effective notional amount of home upon completion; the guarantee or credit derivative, re- (2) The purchaser is an individual(s) duced to reflect any currency mis- that intends to occupy the residence match, maturity mismatch, or lack of and is not a partnership, joint venture, restructuring coverage (as provided in trust, corporation, or any other entity §§ 217.36 or 217.134, as appropriate). (including an entity acting as a sole Publicly-traded means traded on: proprietorship) that is purchasing one or more of the residences for specula- (1) Any exchange registered with the tive purposes; SEC as a national securities exchange under section 6 of the Securities Ex- (3) The purchaser has entered into a legally binding written sales contract change Act; or for the residence; (2) Any non-U.S.-based securities ex- (4) The purchaser has not terminated change that: the contract; however, if the purchaser (i) Is registered with, or approved by, terminates the sales contract, the a national securities regulatory au- Board must immediately apply a 100 thority; and percent risk weight to the loan and re- (ii) Provides a liquid, two-way mar- port the revised risk weight in the next ket for the instrument in question. quarterly Call Report, for a state mem- Public sector entity (PSE) means a ber bank, or the FR Y–9C, for a bank state, local authority, or other govern- holding company or savings and loan mental subdivision below the sovereign holding company, as applicable, level.

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Qualifying central counterparty file, failure to meet supervisory risk (QCCP) means a central counterparty management standards, or other weak- that: nesses or supervisory concerns that are (1)(i) Is a designated financial market inconsistent with the risk weight as- utility (FMU) under Title VIII of the signed to qualifying central counter- Dodd-Frank Act; parties under §§ 217.35 and 217.133. (ii) If not located in the United (3) Exception. A QCCP that fails to States, is regulated and supervised in a meet the requirements of a QCCP in manner equivalent to a designated the future may still be treated as a FMU; or QCCP under the conditions specified in (iii) Meets the following standards: § 217.3(f). (A) The central counterparty re- Qualifying master netting agreement quires all parties to contracts cleared means a written, legally enforceable by the counterparty to be fully agreement provided that: collateralized on a daily basis; (1) The agreement creates a single (B) The Board-regulated institution legal obligation for all individual demonstrates to the satisfaction of the transactions covered by the agreement Board that the central counterparty: upon an event of default following any (1) Is in sound financial condition; stay permitted by paragraph (2) of this (2) Is subject to supervision by the definition, including upon an event of Board, the CFTC, or the Securities Ex- receivership, conservatorship, insol- change Commission (SEC), or, if the vency, liquidation, or similar pro- central counterparty is not located in ceeding, of the counterparty; the United States, is subject to effec- (2) The agreement provides the tive oversight by a national super- Board-regulated institution the right visory authority in its home country; to accelerate, terminate, and close-out and on a net basis all transactions under (3) Meets or exceeds the risk-manage- the agreement and to liquidate or set- ment standards for central counterpar- off collateral promptly upon an event ties set forth in regulations established of default, including upon an event of by the Board, the CFTC, or the SEC receivership, conservatorship, insol- under Title VII or Title VIII of the vency, liquidation, or similar pro- Dodd-Frank Act; or if the central ceeding, of the counterparty, provided counterparty is not located in the that, in any such case, any exercise of United States, meets or exceeds simi- rights under the agreement will not be lar risk-management standards estab- stayed or avoided under applicable law in the relevant jurisdictions, other lished under the law of its home coun- than: try that are consistent with inter- (i) In receivership, conservatorship, national standards for central or resolution under the Federal Deposit counterparty risk management as es- Insurance Act, Title II of the Dodd- tablished by the relevant standard set- Frank Act, or under any similar insol- ting body of the Bank of International vency law applicable to GSEs, or laws Settlements; and of foreign jurisdictions that are sub- (2)(i) Provides the Board-regulated stantially similar 7 to the U.S. laws ref- institution with the central counter- erenced in this paragraph (2)(i) in order party’s hypothetical capital require- to facilitate the orderly resolution of ment or the information necessary to the defaulting counterparty; or calculate such hypothetical capital re- (ii) Where the agreement is subject quirement, and other information the by its terms to, or incorporates, any of Board-regulated institution is required the laws referenced in paragraph (2)(i) to obtain under §§ 217.35(d)(3) and of this definition; 217.133(d)(3); (3) The agreement does not contain a (ii) Makes available to the Board and walkaway clause (that is, a provision the CCP’s regulator the information described in paragraph (2)(i) of this def- 7 The Board expects to evaluate jointly inition; and with the OCC and Federal Deposit Insurance (iii) Has not otherwise been deter- Corporation whether foreign special resolu- mined by the Board to not be a QCCP tion regimes meet the requirements of this due to its financial condition, risk pro- paragraph.

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that permits a non-defaulting celerate, terminate, and close-out the counterparty to make a lower payment transaction on a net basis and to liq- than it otherwise would make under uidate or set-off collateral promptly the agreement, or no payment at all, to upon an event of default, including a defaulter or the estate of a defaulter, upon an event of receivership, insol- even if the defaulter or the estate of vency, liquidation, or similar pro- the defaulter is a net creditor under ceeding, of the counterparty, provided the agreement); and that, in any such case, any exercise of (4) In order to recognize an agree- rights under the agreement will not be ment as a qualifying master netting stayed or avoided under applicable law agreement for purposes of this subpart, in the relevant jurisdictions, other a Board-regulated institution must than in receivership, conservatorship, comply with the requirements of or resolution under the Federal Deposit § 217.3(d) with respect to that agree- Insurance Act, Title II of the Dodd- ment. Frank Act, or under any similar insol- Regulated financial institution means a vency law applicable to GSEs, or laws financial institution subject to consoli- of foreign jurisdictions that are sub- dated supervision and regulation com- stantially similar 8 to the U.S. laws ref- parable to that imposed on the fol- erenced in this paragraph (3)(ii)(a) in lowing U.S. financial institutions: De- order to facilitate the orderly resolu- pository institutions, depository insti- tion of the defaulting counterparty; or tution holding companies, nonbank fi- (B) The transaction is: nancial companies supervised by the (1) Either overnight or uncondition- Board, designated financial market ally cancelable at any time by the utilities, securities broker-dealers, Board-regulated institution; and credit unions, or insurance companies. (2) Executed under an agreement that Repo-style transaction means a repur- provides the Board-regulated institu- chase or reverse repurchase trans- tion the right to accelerate, terminate, action, or a securities borrowing or se- and close-out the transaction on a net curities lending transaction, including a transaction in which the Board-regu- basis and to liquidate or set-off collat- lated institution acts as agent for a eral promptly upon an event of customer and indemnifies the customer counterparty default; and against loss, provided that: (4) In order to recognize an exposure (1) The transaction is based solely on as a repo-style transaction for purposes liquid and readily marketable securi- of this subpart, a Board-regulated in- ties, cash, or gold; stitution must comply with the re- (2) The transaction is marked-to-fair quirements of § 217.3(e) of this part with value daily and subject to daily margin respect to that exposure. maintenance requirements; Resecuritization means a (3)(i) The transaction is a ‘‘securities securitization which has more than one contract’’ or ‘‘repurchase agreement’’ underlying exposure and in which one under section 555 or 559, respectively, or more of the underlying exposures is of the Bankruptcy Code (11 U.S.C. 555 a securitization exposure. or 559), a qualified financial contract Resecuritization exposure means: under section 11(e)(8) of the Federal De- (1) An on- or off-balance sheet expo- posit Insurance Act, or a netting con- sure to a resecuritization; tract between or among financial insti- (2) An exposure that directly or indi- tutions under sections 401–407 of the rectly references a resecuritization ex- Federal Deposit Insurance Corporation posure. Improvement Act or the Federal Re- (3) An exposure to an asset-backed serve Board’s Regulation EE (12 CFR commercial paper program is not a part 231); or resecuritization exposure if either: (ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) 8 The Board expects to evaluate jointly of this definition, then either: with the OCC and Federal Deposit Insurance (A) The transaction is executed under Corporation whether foreign special resolu- an agreement that provides the Board- tion regimes meet the requirements of this regulated institution the right to ac- paragraph.

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(i) The program-wide credit enhance- Securitization special purpose entity ment does not meet the definition of a (securitization SPE) means a corpora- resecuritization exposure; or tion, trust, or other entity organized (ii) The entity sponsoring the pro- for the specific purpose of holding un- gram fully supports the commercial derlying exposures of a securitization, paper through the provision of liquid- the activities of which are limited to ity so that the commercial paper hold- those appropriate to accomplish this ers effectively are exposed to the de- purpose, and the structure of which is fault risk of the sponsor instead of the intended to isolate the underlying ex- underlying exposures. posures held by the entity from the Residential mortgage exposure means credit risk of the seller of the under- an exposure (other than a lying exposures to the entity. securitization exposure, equity expo- Separate account means a legally seg- sure, statutory multifamily mortgage, regated pool of assets owned and held or presold construction loan): by an insurance company and main- (1)(i) That is primarily secured by a tained separately from the insurance first or subsequent lien on one-to-four company’s general account assets for family residential property; or the benefit of an individual contract (ii) With an original and outstanding holder. To be a separate account: amount of $1 million or less that is pri- (1) The account must be legally rec- marily secured by a first or subsequent ognized as a separate account under ap- lien on residential property that is not plicable law; one-to-four family; and (2) The assets in the account must be insulated from general liabilities of the (2) For purposes of calculating cap- insurance company under applicable ital requirements under subpart E of law in the event of the insurance com- this part, managed as part of a seg- pany’s insolvency; ment of exposures with homogeneous (3) The insurance company must in- risk characteristics and not on an indi- vest the funds within the account as di- vidual-exposure basis. rected by the contract holder in des- Revenue obligation means a bond or ignated investment alternatives or in similar obligation that is an obligation accordance with specific investment of a PSE, but which the PSE is com- objectives or policies; and mitted to repay with revenues from the (4) All investment gains and losses, specific project financed rather than net of contract fees and assessments, general tax funds. must be passed through to the contract Savings and loan holding company holder, provided that the contract may means a savings and loan holding com- specify conditions under which there pany as defined in section 10 of the may be a minimum guarantee but must Home Owners’ Loan Act (12 U.S.C. not include contract terms that limit 1467a). the maximum investment return avail- Securities and Exchange Commission able to the policyholder. (SEC) means the U.S. Securities and Servicer cash advance facility means a Exchange Commission. facility under which the servicer of the Securities Exchange Act means the Se- underlying exposures of a curities Exchange Act of 1934 (15 U.S.C. securitization may advance cash to en- 78). sure an uninterrupted flow of payments Securitization exposure means: to investors in the securitization, in- (1) An on-balance sheet or off-balance cluding advances made to cover fore- sheet credit exposure (including credit- closure costs or other expenses to fa- enhancing representations and warran- cilitate the timely collection of the un- ties) that arises from a traditional derlying exposures. securitization or synthetic Significant investment in the capital of securitization (including a an unconsolidated financial institution resecuritization), or means an investment in the capital of (2) An exposure that directly or indi- an unconsolidated financial institution rectly references a securitization expo- where the Board-regulated institution sure described in paragraph (1) of this owns more than 10 percent of the definition. issued and outstanding common stock

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of the unconsolidated financial institu- (vi) For a market risk Board-regu- tion. lated institution only, standardized Small Business Act means the Small market risk-weighted assets; minus Business Act (15 U.S.C. 632). (2) Any amount of the Board-regu- Small Business Investment Act means lated institution’s allowance for loan the Small Business Investment Act of and lease losses that is not included in 1958 (15 U.S.C. 682). tier 2 capital and any amount of allo- Sovereign means a central govern- cated transfer risk reserves. ment (including the U.S. government) State bank means any bank incor- or an agency, department, ministry, or porated by special law of any State, or central bank of a central government. organized under the general laws of Sovereign default means noncompli- any State, or of the United States, in- ance by a sovereign with its external cluding a Morris Plan bank, or other debt service obligations or the inabil- incorporated banking institution en- ity or unwillingness of a sovereign gov- gaged in a similar business. ernment to service an existing loan ac- State member bank or member bank cording to its original terms, as evi- means a state bank that is a member of denced by failure to pay principal and the Federal Reserve System. interest timely and fully, arrearages, Statutory multifamily mortgage means or restructuring. a loan secured by a multifamily resi- Sovereign exposure means: dential property that meets the re- quirements under section 618(b)(1) of (1) A direct exposure to a sovereign; the Resolution Trust Corporation Refi- or nancing, Restructuring, and Improve- (2) An exposure directly and uncondi- ment Act of 1991, and that meets the tionally backed by the full faith and following criteria: 9 credit of a sovereign. (1) The loan is made in accordance Specific wrong-way risk means wrong- with prudent underwriting standards; way risk that arises when either: (2) The principal amount of the loan (1) The counterparty and issuer of at origination does not exceed 80 per- the collateral supporting the trans- cent of the value of the property (or 75 action; or percent of the value of the property if (2) The counterparty and the ref- the loan is based on an interest rate erence asset of the transaction, are af- that changes over the term of the loan) filiates or are the same entity. where the value of the property is the Standardized market risk-weighted as- lower of the acquisition cost of the sets means the standardized measure property or the appraised (or, if appro- for market risk calculated under priate, evaluated) value of the prop- § 217.204 multiplied by 12.5. erty; Standardized total risk-weighted assets (3) All principal and interest pay- means: ments on the loan must have been (1) The sum of: made on a timely basis in accordance (i) Total risk-weighted assets for gen- with the terms of the loan for at least eral credit risk as calculated under one year prior to applying a 50 percent § 217.31; risk weight to the loan, or in the case (ii) Total risk-weighted assets for where an existing owner is refinancing cleared transactions and default fund a loan on the property, all principal contributions as calculated under and interest payments on the loan § 217.35; being refinanced must have been made on a timely basis in accordance with (iii) Total risk-weighted assets for the terms of the loan for at least one unsettled transactions as calculated under § 217.38; (iv) Total risk-weighted assets for 9 The types of loans that qualify as loans securitization exposures as calculated secured by multifamily residential prop- under § 217.42; erties are listed in the instructions for prep- aration of the Call Report, for a state mem- (v) Total risk-weighted assets for eq- ber bank, or FR Y–9C, for a bank holding uity exposures as calculated under company or savings and loan holding com- §§ 217.52 and 217.53; and pany, as applicable.

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year prior to applying a 50 percent risk Tier 1 capital means the sum of com- weight to the loan; mon equity tier 1 capital and addi- (4) Amortization of principal and in- tional tier 1 capital. terest on the loan must occur over a Tier 1 minority interest means the tier period of not more than 30 years and 1 capital of a consolidated subsidiary of the minimum original maturity for re- a Board-regulated institution that is payment of principal must not be less not owned by the Board-regulated in- than 7 years; stitution. (5) Annual net operating income (be- Tier 2 capital is defined in § 217.20(d). fore making any payment on the loan) Total capital means the sum of tier 1 generated by the property securing the capital and tier 2 capital. loan during its most recent fiscal year Total capital minority interest means must not be less than 120 percent of the the total capital of a consolidated sub- loan’s current annual debt service (or sidiary of a Board-regulated institution 115 percent of current annual debt serv- that is not owned by the Board-regu- ice if the loan is based on an interest lated institution. rate that changes over the term of the Total leverage exposure is defined in loan) or, in the case of a cooperative or § 217.10(c)(4)(ii). other not-for-profit housing project, Traditional securitization means a the property must generate sufficient transaction in which: cash flow to provide comparable pro- (1) All or a portion of the credit risk tection to the Board-regulated institu- of one or more underlying exposures is tion; and transferred to one or more third par- (6) The loan is not more than 90 days ties other than through the use of cred- past due, or on nonaccrual. it derivatives or guarantees; Subsidiary means, with respect to a company, a company controlled by (2) The credit risk associated with that company. the underlying exposures has been sep- Synthetic exposure means an exposure arated into at least two tranches re- whose value is linked to the value of an flecting different levels of seniority; investment in the Board-regulated in- (3) Performance of the securitization stitution’s own capital instrument or exposures depends upon the perform- to the value of an investment in the ance of the underlying exposures; capital of an unconsolidated financial (4) All or substantially all of the un- institution. derlying exposures are financial expo- Synthetic securitization means a trans- sures (such as loans, commitments, action in which: credit derivatives, guarantees, receiv- (1) All or a portion of the credit risk ables, asset-backed securities, mort- of one or more underlying exposures is gage-backed securities, other debt se- retained or transferred to one or more curities, or equity securities); third parties through the use of one or (5) The underlying exposures are not more credit derivatives or guarantees owned by an operating company; (other than a guarantee that transfers (6) The underlying exposures are not only the credit risk of an individual re- owned by a small business investment tail exposure); company defined in section 302 of the (2) The credit risk associated with Small Business Investment Act; the underlying exposures has been sep- (7) The underlying exposures are not arated into at least two tranches re- owned by a firm an investment in flecting different levels of seniority; which qualifies as a community devel- (3) Performance of the securitization opment investment under section exposures depends upon the perform- 24(Eleventh) of the National Bank Act; ance of the underlying exposures; and (8) The Board may determine that a (4) All or substantially all of the un- transaction in which the underlying derlying exposures are financial expo- exposures are owned by an investment sures (such as loans, commitments, firm that exercises substantially unfet- credit derivatives, guarantees, receiv- tered control over the size and com- ables, asset-backed securities, mort- position of its assets, liabilities, and gage-backed securities, other debt se- off-balance sheet exposures is not a curities, or equity securities). traditional securitization based on the

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transaction’s leverage, risk profile, or cial institution that is not a regulated economic substance; financial institution, including any fi- (9) The Board may deem a trans- nancial institution that would meet action that meets the definition of a the definition of ‘‘financial institu- traditional securitization, notwith- tion’’ under this section but for the standing paragraph (5), (6), or (7) of this ownership interest thresholds set forth definition, to be a traditional in paragraph (4)(i) of that definition. securitization based on the trans- U.S. Government agency means an in- action’s leverage, risk profile, or eco- strumentality of the U.S. Government nomic substance; and whose obligations are fully and explic- (10) The transaction is not: itly guaranteed as to the timely pay- (i) An investment fund; ment of principal and interest by the (ii) A collective investment fund (as defined in 12 CFR 208.34); full faith and credit of the U.S. Govern- (iii) An employee benefit plan (as de- ment. fined in paragraphs (3) and (32) of sec- Value-at-Risk (VaR) means the esti- tion 3 of ERISA), a ‘‘governmental mate of the maximum amount that the plan’’ (as defined in 29 U.S.C. 1002(32)) value of one or more exposures could that complies with the tax deferral decline due to market price or rate qualification requirements provided in movements during a fixed holding pe- the Internal Revenue Code, or any riod within a stated confidence inter- similar employee benefit plan estab- val. lished under the laws of a foreign juris- Wrong-way risk means the risk that diction; arises when an exposure to a particular (iv) A synthetic exposure to the cap- counterparty is positively correlated ital of a financial institution to the ex- with the probability of default of such tent deducted from capital under counterparty itself. § 217.22; or (v) Registered with the SEC under [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as the Investment Company Act of 1940 (15 amended at 79 FR 44124, July 30, 2014; 79 FR U.S.C. 80a–1) or foreign equivalents 57744, Sept. 26, 2014; 79 FR 78295, Dec. 30, 2014; thereof. 80 FR 41418, July 15, 2015; 80 FR 70672, Nov. 16, 2015; 80 FR 49103, Aug. 14, 2015] Tranche means all securitization ex- posures associated with a EFFECTIVE DATE NOTES: 1. At 79 FR 24540, securitization that have the same se- May 1, 2014, § 217.2 was amended by adding a niority level. definition of ‘‘covered BHC’’ in alphabetical Two-way market means a market order, effective Jan. 1, 2018. For the conven- where there are independent bona fide ience of the user, the added text is set forth offers to buy and sell so that a price as follows: reasonably related to the last sales § 217.2 Definitions. price or current bona fide competitive bid and offer quotations can be deter- * * * * * mined within one day and settled at that price within a relatively short Covered BHC means a U.S. top-tier bank time frame conforming to trade cus- holding company that has more than $700 tom. billion in total assets as reported on the Unconditionally cancelable means with company’s most recent Consolidated Finan- respect to a commitment, that a cial Statements for Holding Companies (FR Board-regulated institution may, at Y–9C) or more than $10 trillion in assets any time, with or without cause, refuse under custody as reported on the company’s most recent Banking Organization Systemic to extend credit under the commitment Risk Report (FR Y–15). (to the extent permitted under applica- ble law). Underlying exposures means one or * * * * * more exposures that have been 2. At 80 FR 49103, Aug. 14, 2015, § 217.2 was securitized in a securitization trans- amended as follows, effective Jan. 1, 2018: Ef- action. fective January 1, 2018, in § 217.2, the defini- Unregulated financial institution tion of ‘‘covered BHC’’ published on May 1, means, for purposes of § 217.131, a finan- 2014 (79 FR 24540), is withdrawn.

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§ 217.3 Operational requirements for of that legal review) that the agree- counterparty credit risk. ment underlying the exposure: For purposes of calculating risk- (1) Meets the requirements of para- weighted assets under subparts D and E graph (1)(iii) of the definition of eligi- ble margin loan in § 217.2, and of this part: (2) Is legal, valid, binding, and en- (a) Cleared transaction. In order to forceable under applicable law in the recognize certain exposures as cleared relevant jurisdictions. transactions pursuant to paragraphs (c) Qualifying cross-product master net- (1)(ii), (iii) or (iv) of the definition of ting agreement. In order to recognize an ‘‘cleared transaction’’ in § 217.2, the ex- agreement as a qualifying cross-prod- posures must meet the applicable re- uct master netting agreement as de- quirements set forth in this paragraph fined in § 217.101, a Board-regulated in- (a). stitution must obtain a written legal (1) The offsetting transaction must opinion verifying the validity and en- be identified by the CCP as a trans- forceability of the agreement under ap- action for the clearing member client. plicable law of the relevant jurisdic- (2) The collateral supporting the tions if the counterparty fails to per- transaction must be held in a manner form upon an event of default, includ- that prevents the Board-regulated in- ing upon receivership, insolvency, liq- stitution from facing any loss due to uidation, or similar proceeding. an event of default, including from a (d) Qualifying master netting agree- liquidation, receivership, insolvency, ment. In order to recognize an agree- or similar proceeding of either the ment as a qualifying master netting clearing member or the clearing mem- agreement as defined in § 217.2, a Board- ber’s other clients. Omnibus accounts regulated institution must: established under 17 CFR parts 190 and (1) Conduct sufficient legal review to 300 satisfy the requirements of this conclude with a well-founded basis (and paragraph (a). maintain sufficient written docu- (3) The Board-regulated institution mentation of that legal review) that: must conduct sufficient legal review to (i) The agreement meets the require- conclude with a well-founded basis (and ments of paragraph (2) of the definition maintain sufficient written docu- of qualifying master netting agreement mentation of that legal review) that in in § 217.2; and the event of a legal challenge (includ- (ii) In the event of a legal challenge ing one resulting from a default or re- (including one resulting from default ceivership, insolvency, liquidation, or or from receivership, insolvency, liq- similar proceeding) the relevant court uidation, or similar proceeding) the and administrative authorities would relevant court and administrative au- find the arrangements of paragraph thorities would find the agreement to (a)(2) of this section to be legal, valid, be legal, valid, binding, and enforceable binding and enforceable under the law under the law of the relevant jurisdic- of the relevant jurisdictions. tions; and (4) The offsetting transaction with a (2) Establish and maintain written clearing member must be transferable procedures to monitor possible changes under the transaction documents and in relevant law and to ensure that the applicable laws in the relevant juris- agreement continues to satisfy the re- diction(s) to another clearing member quirements of the definition of quali- should the clearing member default, fying master netting agreement in become insolvent, or enter receiver- § 217.2. ship, insolvency, liquidation, or similar (e) Repo-style transaction. In order to proceedings. recognize an exposure as a repo-style (b) Eligible margin loan. In order to transaction as defined in § 217.2, a recognize an exposure as an eligible Board-regulated institution must con- margin loan as defined in § 217.2, a duct sufficient legal review to conclude Board-regulated institution must con- with a well-founded basis (and main- duct sufficient legal review to conclude tain sufficient written documentation with a well-founded basis (and main- of that legal review) that the agree- tain sufficient written documentation ment underlying the exposure:

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(1) Meets the requirements of para- of the Board-regulated institution’s graph (3) of the definition of repo-style common equity tier 1 capital to stand- transaction in § 217.2, and ardized total risk-weighted assets; (2) Is legal, valid, binding, and en- (2) Tier 1 capital ratio. A Board-regu- forceable under applicable law in the lated institution’s tier 1 capital ratio is relevant jurisdictions. the ratio of the Board-regulated insti- (f) Failure of a QCCP to satisfy the tution’s tier 1 capital to standardized rule’s requirements. If a Board-regulated total risk-weighted assets; institution determines that a CCP (3) Total capital ratio. A Board-regu- ceases to be a QCCP due to the failure lated institution’s total capital ratio is of the CCP to satisfy one or more of the ratio of the Board-regulated insti- the requirements set forth in para- tution’s total capital to standardized graphs (2)(i) through (2)(iii) of the defi- total risk-weighted assets; and nition of a QCCP in § 217.2, the Board- (4) Leverage ratio. A Board-regulated regulated institution may continue to institution’s leverage ratio is the ratio treat the CCP as a QCCP for up to of the Board-regulated institution’s three months following the determina- tier 1 capital to the Board-regulated in- tion. If the CCP fails to remedy the rel- stitution’s average total consolidated evant deficiency within three months assets as reported on the Board-regu- after the initial determination, or the lated institution’s Call Report, for a CCP fails to satisfy the requirements state member bank, or the Consoli- set forth in paragraphs (2)(i) through dated Financial Statements for Bank (2)(iii) of the definition of a QCCP con- Holding Companies (FR Y–9C), for a tinuously for a three-month period bank holding company or savings and after remedying the relevant defi- loan holding company, as applicable ciency, a Board-regulated institution minus amounts deducted from tier 1 may not treat the CCP as a QCCP for capital under § 217.22(a), (c) and (d). the purposes of this part until after the (c) Advanced approaches capital ratio Board-regulated institution has deter- calculations. An advanced approaches mined that the CCP has satisfied the Board-regulated institution that has requirements in paragraphs (2)(i) completed the parallel run process and through (2)(iii) of the definition of a received notification from the Board QCCP for three continuous months. pursuant to § 217.121(d) must determine its regulatory capital ratios as de- §§ 217.4–217.9 [Reserved] scribed in paragraphs (c)(1) through (3) of this section. An advanced ap- Subpart B—Capital Ratio proaches Board-regulated institution Requirements and Buffers must determine its supplementary le- verage ratio in accordance with para- § 217.10 Minimum capital require- graph (c)(4) of this section, beginning ments. with the calendar quarter immediately (a) Minimum capital requirements. A following the quarter in which the Board-regulated institution must Board-regulated institution meets any maintain the following minimum cap- of the criteria in § 217.100(b)(1). ital ratios: (1) Common equity tier 1 capital ratio. (1) A common equity tier 1 capital The Board-regulated institution’s com- ratio of 4.5 percent. mon equity tier 1 capital ratio is the (2) A tier 1 capital ratio of 6 percent. lower of: (3) A total capital ratio of 8 percent. (i) The ratio of the Board-regulated (4) A leverage ratio of 4 percent. institution’s common equity tier 1 cap- (5) For advanced approaches Board- ital to standardized total risk-weighted regulated institutions, a supple- assets; and mentary leverage ratio of 3 percent. (ii) The ratio of the Board-regulated (b) Standardized capital ratio calcula- institution’s common equity tier 1 cap- tions. Other than as provided in para- ital to advanced approaches total risk- graph (c) of this section: weighted assets. (1) Common equity tier 1 capital ratio. A (2) Tier 1 capital ratio. The Board-reg- Board-regulated institution’s common ulated institution’s tier 1 capital ratio equity tier 1 capital ratio is the ratio is the lower of:

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(i) The ratio of the Board-regulated tion’s on-balance sheet assets, plus the institution’s tier 1 capital to standard- value of securities sold under a repur- ized total risk-weighted assets; and chase transaction or a securities lend- (ii) The ratio of the Board-regulated ing transaction that qualifies for sales institution’s tier 1 capital to advanced treatment under U.S. GAAP, less approaches total risk-weighted assets. amounts deducted from tier 1 capital (3) Total capital ratio. The Board-regu- under § 217.22(a), (c), and (d), and less lated institution’s total capital ratio is the value of securities received in secu- the lower of: rity-for-security repo-style trans- (i) The ratio of the Board-regulated actions, where the Board-regulated in- institution’s total capital to standard- stitution acts as a securities lender and ized total risk-weighted assets; and includes the securities received in its (ii) The ratio of the Board-regulated on-balance sheet assets but has not institution’s advanced-approaches-ad- justed total capital to advanced ap- sold or re-hypothecated the securities proaches total risk-weighted assets. A received; Board-regulated institution’s ad- (B) The PFE for each derivative con- vanced-approaches-adjusted total cap- tract or each single-product netting set ital is the Board-regulated institu- of derivative contracts (including a tion’s total capital after being adjusted cleared transaction except as provided as follows: in paragraph (c)(4)(ii)(I) of this section (A) An advanced approaches Board- and, at the discretion of the Board-su- regulated institution must deduct from pervised institution, excluding a for- its total capital any allowance for loan ward agreement treated as a derivative and lease losses included in its tier 2 contract that is part of a repurchase or capital in accordance with § 217.20(d)(3); reverse repurchase or a securities bor- and rowing or lending transaction that (B) An advanced approaches Board- qualifies for sales treatment under U.S. regulated institution must add to its GAAP), to which the Board-regulated total capital any eligible credit re- institution is a counterparty as deter- serves that exceed the Board-regulated mined under § 217.34, but without re- institution’s total expected credit gard to § 217.34(b), provided that: losses to the extent that the excess re- (1) A Board-regulated institution serve amount does not exceed 0.6 per- may choose to exclude the PFE of all cent of the Board-regulated institu- credit derivatives or other similar in- tion’s credit risk-weighted assets. (4) Supplementary leverage ratio. (i) An struments through which it provides advanced approaches Board-regulated credit protection when calculating the institution’s supplementary leverage PFE under § 217.34, but without regard ratio is the ratio of its tier 1 capital to to § 217.34(b), provided that it does not total leverage exposure, the latter adjust the net-to-gross ratio (NGR); which is calculated as the sum of: and (A) The mean of the on-balance sheet (2) A Board-regulated institution assets calculated as of each day of the that chooses to exclude the PFE of reporting quarter; and credit derivatives or other similar in- (B) The mean of the off-balance sheet struments through which it provides exposures calculated as of the last day credit protection pursuant to para- of each of the most recent three graph (c)(4)(ii)(B)(1) of this section months, minus the applicable deduc- must do so consistently over time for tions under § 217.22(a), (c), and (d). the calculation of the PFE for all such (ii) For purposes of this part, total le- instruments; verage exposure means the sum of the (C) The amount of cash collateral items described in paragraphs that is received from a counterparty to (c)(4)(ii)(A) through (H) of this section, a derivative contract and that has off- as adjusted pursuant to paragraph set the mark-to-fair value of the deriv- (c)(4)(ii)(I) for a clearing member ative asset, or cash collateral that is Board-regulated institution: (A) The balance sheet carrying value posted to a counterparty to a deriva- of all of the Board-regulated institu- tive contract and that has reduced the

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Board-regulated institution’s on-bal- described in § 217.34(a), and not the ance sheet assets, unless such cash col- PFE; and lateral is all or part of variation mar- (7) For the purpose of the calculation gin that satisfies the following require- of the NGR described in ments: § 217.34(a)(2)(ii)(B), variation margin de- (1) For derivative contracts that are scribed in paragraph (c)(4)(ii)(C)(6) of not cleared through a QCCP, the cash this section may not reduce the net collateral received by the recipient current credit exposure or the gross counterparty is not segregated (by law, current credit exposure; regulation or an agreement with the (D) The effective notional principal counterparty); amount (that is, the apparent or stated (2) Variation margin is calculated notional principal amount multiplied and transferred on a daily basis based by any multiplier in the derivative on the mark-to-fair value of the deriva- contract) of a credit derivative, or tive contract; other similar instrument, through (3) The variation margin transferred which the Board-regulated institution under the derivative contract or the provides credit protection, provided governing rules for a cleared trans- that: action is the full amount that is nec- (1) The Board-regulated institution essary to fully extinguish the net cur- may reduce the effective notional prin- rent credit exposure to the cipal amount of the credit derivative counterparty of the derivative con- by the amount of any reduction in the tracts, subject to the threshold and mark-to-fair value of the credit deriva- minimum transfer amounts applicable tive if the reduction is recognized in to the counterparty under the terms of common equity tier 1 capital; the derivative contract or the gov- (2) The Board-regulated institution erning rules for a cleared transaction; may reduce the effective notional prin- (4) The variation margin is in the cipal amount of the credit derivative form of cash in the same currency as by the effective notional principal the currency of settlement set forth in amount of a purchased credit deriva- the derivative contract, provided that tive or other similar instrument, pro- for the purposes of this paragraph, cur- vided that the remaining maturity of rency of settlement means any cur- the purchased credit derivative is equal rency for settlement specified in the to or greater than the remaining matu- governing qualifying master netting rity of the credit derivative through agreement and the credit support which the Board-regulated institution annex to the qualifying master netting provides credit protection and that: agreement, or in the governing rules (i) With respect to a credit derivative for a cleared transaction; that references a single exposure, the (5) The derivative contract and the reference exposure of the purchased variation margin are governed by a credit derivative is to the same legal qualifying master netting agreement entity and ranks pari passu with, or is between the legal entities that are the junior to, the reference exposure of the counterparties to the derivative con- credit derivative through which the tract or by the governing rules for a Board-regulated institution provides cleared transaction, and the qualifying credit protection; or master netting agreement or the gov- (ii) With respect to a credit deriva- erning rules for a cleared transaction tive that references multiple expo- must explicitly stipulate that the sures, the reference exposures of the counterparties agree to settle any pay- purchased credit derivative are to the ment obligations on a net basis, taking same legal entities and rank pari passu into account any variation margin re- with the reference exposures of the ceived or provided under the contract if credit derivative through which the a credit event involving either Board-regulated institution provides counterparty occurs; credit protection, and the level of se- (6) The variation margin is used to niority of the purchased credit deriva- reduce the current credit exposure of tive ranks pari passu to the level of se- the derivative contract, calculated as niority of the credit derivative through

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which the Board-regulated institution (2) The right to offset the amount provides credit protection; owed to the counterparty with the (iii) Where a Board-regulated institu- amount owed by the counterparty is le- tion has reduced the effective notional gally enforceable in the normal course amount of a credit derivative through of business and in the event of receiver- which the Board-regulated institution ship, insolvency, liquidation, or similar provides credit protection in accord- proceeding; and ance with paragraph (c)(4)(ii)(D)(1) of (3) Under the governing agreements, this section, the Board-regulated insti- the counterparties intend to settle net, tution must also reduce the effective settle simultaneously, or settle accord- notional principal amount of a pur- ing to a process that is the functional chased credit derivative used to offset equivalent of net settlement, (that is, the credit derivative through which the the cash flows of the transactions are Board-regulated institution provides equivalent, in effect, to a single net amount on the settlement date), where credit protection, by the amount of both transactions are settled through any increase in the mark-to-fair value the same settlement system, the set- of the purchased credit derivative that tlement arrangements are supported by is recognized in common equity tier 1 cash or intraday credit facilities in- capital; and tended to ensure that settlement of (iv) Where the Board-regulated insti- both transactions will occur by the end tution purchases credit protection of the business day, and the settlement through a total return swap and of the underlying securities does not records the net payments received on a interfere with the net cash settlement; credit derivative through which the (F) The counterparty credit risk of a Board-regulated institution provides repo-style transaction, including where credit protection in net income, but the Board-regulated institution acts as does not record offsetting deterioration an agent for a repo-style transaction in the mark-to-fair value of the credit and indemnifies the customer with re- derivative through which the Board- spect to the performance of the cus- regulated institution provides credit tomer’s counterparty in an amount protection in net income (either limited to the difference between the through reductions in fair value or by fair value of the security or cash its additions to reserves), the Board-regu- customer has lent and the fair value of lated institution may not use the pur- the collateral the borrower has pro- chased credit protection to offset the vided, calculated as follows: effective notional principal amount of (1) If the transaction is not subject to the related credit derivative through a qualifying master netting agreement, which the Board-regulated institution the counterparty credit risk (E*) for provides credit protection; transactions with a counterparty must (E) Where a Board-regulated institu- be calculated on a transaction by tion acting as a principal has more transaction basis, such that each than one repo-style transaction with transaction i is treated as its own net- the same counterparty and has offset ting set, in accordance with the fol- the gross value of receivables due from lowing formula, where Ei is the fair a counterparty under reverse repur- value of the instruments, gold, or cash chase transactions by the gross value that the Board-regulated institution of payables under repurchase trans- has lent, sold subject to repurchase, or actions due to the same counterparty, provided as collateral to the the gross value of receivables associ- counterparty, and Ci is the fair value of ated with the repo-style transactions the instruments, gold, or cash that the less any on-balance sheet receivables Board-regulated institution has bor- amount associated with these repo- rowed, purchased subject to resale, or style transactions included under para- received as collateral from the graph (c)(4)(ii)(A) of this section, un- counterparty: less the following criteria are met: Ei* = max {0, [Ei—Ci]}; and (1) The offsetting transactions have (2) If the transaction is subject to a the same explicit final settlement date qualifying master netting agreement, under their governing agreements; the counterparty credit risk (E*) must

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be calculated as the greater of zero and (2) A clearing member Board-regu- the total fair value of the instruments, lated institution that guarantees the gold, or cash that the Board-regulated performance of a CCP with respect to a institution has lent, sold subject to re- transaction cleared on behalf of a purchase or provided as collateral to a clearing member client must treat its counterparty for all transactions in- exposure to the CCP as a derivative cluded in the qualifying master netting contract for purposes of determining agreement (SEi), less the total fair its total leverage exposure; value of the instruments, gold, or cash (3) A clearing member Board-regu- that the Board-regulated institution lated institution that does not guar- borrowed, purchased subject to resale antee the performance of a CCP with or received as collateral from the respect to a transaction cleared on be- counterparty for those transactions half of a clearing member client may ( C ), in accordance with the following S i exclude its exposure to the CCP for formula: purposes of determining its total lever- { ¥ } E* = max 0, [SEi SCi] age exposure; (G) If a Board-regulated institution (4) A Board-regulated institution acting as an agent for a repo-style that is a clearing member may exclude transaction provides a guarantee to a from its total leverage exposure the ef- customer of the security or cash its fective notional principal amount of customer has lent or borrowed with re- credit protection sold through a credit spect to the performance of the cus- derivative contract, or other similar tomer’s counterparty and the guar- instrument, that it clears on behalf of antee is not limited to the difference a clearing member client through a between the fair value of the security CCP as calculated in accordance with or cash its customer has lent and the part (c)(4)(ii)(D); and fair value of the collateral the bor- ( ) Notwithstanding paragraphs rower has provided, the amount of the 5 guarantee that is greater than the dif- (c)(4)(ii)(I)(1) through (3) of this sec- ference between the fair value of the tion, a Board-regulated institution security or cash its customer has lent may exclude from its total leverage ex- and the value of the collateral the bor- posure a clearing member’s exposure to rower has provided; a clearing member client for a deriva- (H) The credit equivalent amount of tive contract, if the clearing member all off-balance sheet exposures of the client and the clearing member are af- Board-regulated institution, excluding filiates and consolidated for financial repo-style transactions, repurchase or reporting purposes on the Board-regu- reverse repurchase or securities bor- lated institution’s balance sheet. rowing or lending transactions that (d) Capital adequacy. (1) Notwith- qualify for sales treatment under U.S. standing the minimum requirements in GAAP, and derivative transactions, de- this part, a Board-regulated institution termined using the applicable credit must maintain capital commensurate conversation factor under § 217.33(b), with the level and nature of all risks to provided, however, that the minimum which the Board-regulated institution that may be is exposed. The supervisory evaluation assigned to an off-balance sheet expo- of the Board-regulated institution’s sure under this paragraph is 10 percent; capital adequacy is based on an indi- and vidual assessment of numerous factors, (I) For a Board-regulated institution including the character and condition that is a clearing member: of the institution’s assets and its exist- (1) A clearing member Board-regu- ing and prospective liabilities and lated institution that guarantees the other corporate responsibilities. performance of a clearing member cli- (2) A Board-regulated institution ent with respect to a cleared trans- must have a process for assessing its action must treat its exposure to the clearing member client as a derivative overall capital adequacy in relation to contract for purposes of determining its risk profile and a comprehensive its total leverage exposure;

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strategy for maintaining an appro- exposure to a company or an individual priate level of capital. that is not an exposure to a sovereign, [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as the Bank for International Settle- amended at 78 FR 62286, Oct. 11, 2013; 79 FR ments, the European Central Bank, the 57744, Sept. 26, 2014; 80 FR 41419, July 15, 2015] European Commission, the Inter- national Monetary Fund, a MDB, a § 217.11 Capital conservation buffer, PSE, or a GSE. countercyclical capital buffer (3) Calculation of capital conservation amount, and GSIB surcharge. buffer. (i) A Board-regulated institu- (a) Capital conservation buffer. (1) tion’s capital conservation buffer is Composition of the capital conservation equal to the lowest of the following ra- buffer. The capital conservation buffer tios, calculated as of the last day of the is composed solely of common equity previous calendar quarter based on the tier 1 capital. Board-regulated institution’s most re- (2) Definitions. For purposes of this cent Call Report, for a state member section, the following definitions bank, or FR Y–9C, for a bank holding apply: company or savings and loan holding (i) Eligible retained income. The eligi- ble retained income of a Board-regu- company, as applicable: lated institution is the Board-regulated (A) The Board-regulated institution’s institution’s net income for the four common equity tier 1 capital ratio calendar quarters preceding the cur- minus the Board-regulated institu- rent calendar quarter, based on the tion’s minimum common equity tier 1 Board-regulated institution’s quarterly capital ratio requirement under § 217.10; Call Report, for a state member bank, (B) The Board-regulated institution’s or the FR Y–9C, for a bank holding tier 1 capital ratio minus the Board- company or savings and loan holding regulated institution’s minimum tier 1 company, as applicable, net of any dis- capital ratio requirement under § 217.10; tributions and associated tax effects and not already reflected in net income. (C) The Board-regulated institution’s Net income, as reported in the Call Re- total capital ratio minus the Board- port or the FR Y–9C, as applicable, re- regulated institution’s minimum total flects discretionary bonus payments capital ratio requirement under § 217.10; and certain distributions that are ex- or pense items (and their associated tax (ii) Notwithstanding paragraphs effects). (a)(3)(i)(A)–(C) of this section, if the (ii) Maximum payout ratio. The max- Board-regulated institution’s common imum payout ratio is the percentage of equity tier 1, tier 1 or total capital eligible retained income that a Board- ratio is less than or equal to the Board- regulated institution can pay out in regulated institution’s minimum com- the form of distributions and discre- mon equity tier 1, tier 1 or total cap- tionary bonus payments during the ital ratio requirement under § 217.10, re- current calendar quarter. The max- spectively, the Board-regulated insti- imum payout ratio is based on the tution’s capital conservation buffer is Board-regulated institution’s capital conservation buffer, calculated as of zero. the last day of the previous calendar (4) Limits on distributions and discre- quarter, as set forth in Table 1 to tionary bonus payments. (i) A Board-reg- § 217.11. ulated institution shall not make dis- (iii) Maximum payout amount. A tributions or discretionary bonus pay- Board-regulated institution’s max- ments or create an obligation to make imum payout amount for the current such distributions or payments during calendar quarter is equal to the Board- the current calendar quarter that, in regulated institution’s eligible re- the aggregate, exceed the maximum tained income, multiplied by the appli- payout amount. cable maximum payout ratio, as set (ii) A Board-regulated institution forth in Table 1 to § 217.11. with a capital conservation buffer that (iv) Private sector credit exposure. Pri- is greater than 2.5 percent plus 100 per- vate sector credit exposure means an cent of its applicable countercyclical

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capital buffer in accordance with para- (iv) Prior approval. Notwithstanding graph (b) of this section, and 100 per- the limitations in paragraphs (a)(4)(i) cent of its applicable GSIB surcharge, through (iii) of this section, the Board in accordance with paragraph (c) of may permit a Board-regulated institu- this section, is not subject to a max- tion to make a distribution or discre- imum payout amount under this sec- tionary bonus payment upon a request tion. of the Board-regulated institution, if (iii) Negative eligible retained income. the Board determines that the distribu- Except as provided in paragraph tion or discretionary bonus payment (a)(4)(iv) of this section, a Board-regu- would not be contrary to the purposes lated institution may not make dis- tributions or discretionary bonus pay- of this section, or to the safety and ments during the current calendar soundness of the Board-regulated insti- quarter if the Board-regulated institu- tution. In making such a determina- tion’s: tion, the Board will consider the na- (A) Eligible retained income is nega- ture and extent of the request and the tive; and particular circumstances giving rise to (B) Capital conservation buffer was the request. less than 2.5 percent as of the end of the previous calendar quarter.

TABLE 1 TO § 217.11—CALCULATION OF MAXIMUM PAYOUT AMOUNT

Maximum payout ratio Capital conservation buffer (as a percentage of eligible retained income)

Greater than 2.5 percent plus 100 percent of the Board-regulated institution’s applicable No payout ratio limitation applies. countercyclical capital buffer amount and 100 percent of the Board-regulated institution’s applicable GSIB surcharge. Less than or equal to 2.5 percent plus 100 percent of the Board-regulated institution’s appli- 60 percent. cable countercyclical capital buffer amount and 100 percent of the Board-regulated institu- tion’s applicable GSIB surcharge, and greater than 1.875 percent plus 75 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount and 75 per- cent of the Board-regulated institution’s applicable GSIB surcharge. Less than or equal to 1.875 percent plus 75 percent of the Board-regulated institution’s ap- 40 percent. plicable countercyclical capital buffer amount and 75 percent of the Board-regulated insti- tution’s applicable GSIB surcharge, and greater than 1.25 percent plus 50 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount and 50 per- cent of the Board-regulated institution’s applicable GSIB surcharge. Less than or equal to 1.25 percent plus 50 percent of the Board-regulated institution’s appli- 20 percent. cable countercyclical capital buffer amount and 50 percent of the Board-regulated institu- tion’s applicable GSIB surcharge, and greater than 0.625 percent plus 25 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount and 25 per- cent of the Board-regulated institution’s applicable GSIB surcharge. Less than or equal to 0.625 percent plus 25 percent of the Board-regulated institution’s ap- 0 percent. plicable countercyclical capital buffer amount and 25 percent of the Board-regulated insti- tution’s applicable GSIB surcharge.

(v) Other limitations on distributions. buffer amount is an extension of the Additional limitations on distributions capital conservation buffer as de- may apply to a Board-regulated insti- scribed in paragraph (a) of this section. tution under 12 CFR 225.4, 12 CFR 225.8, (ii) Amount. An advanced approaches and 12 CFR 263.202. Board-regulated institution has a coun- (b) Countercyclical capital buffer tercyclical capital buffer amount de- amount. (1) General. An advanced ap- termined by calculating the weighted proaches Board-regulated institution average of the countercyclical capital must calculate a countercyclical cap- buffer amounts established for the na- ital buffer amount in accordance with tional jurisdictions where the Board- the following paragraphs for purposes regulated institution’s private sector of determining its maximum payout credit exposures are located, as speci- ratio under Table 1 to § 217.11. fied in paragraphs (b)(2) and (3) of this (i) Extension of capital conservation section. buffer. The countercyclical capital

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(iii) Weighting. The weight assigned countercyclical capital buffer amount to a jurisdiction’s countercyclical cap- in the United States is zero. ital buffer amount is calculated by di- (ii) Adjustment of the countercyclical viding the total risk-weighted assets capital buffer amount. The Board will for the Board-regulated institution’s adjust the countercyclical capital buff- private sector credit exposures located er amount for credit exposures in the in the jurisdiction by the total risk- United States in accordance with appli- weighted assets for all of the Board- cable law.10 regulated institution’s private sector (iii) Range of countercyclical capital credit exposures. The methodology a buffer amount. The Board will adjust Board-regulated institution uses for de- the countercyclical capital buffer termining risk-weighted assets for pur- amount for credit exposures in the poses of this paragraph (b) must be the United States between zero percent and methodology that determines its risk- 2.5 percent of risk-weighted assets. based capital ratios under § 217.10. Not- (iv) Adjustment determination. The withstanding the previous sentence, Board will base its decision to adjust the risk-weighted asset amount for a the countercyclical capital buffer private sector credit exposure that is a amount under this section on a range covered position under subpart F of of macroeconomic, financial, and su- this part is its specific risk add-on as pervisory information indicating an in- determined under § 217.210 multiplied crease in systemic risk including, but by 12.5. not limited to, the ratio of credit to (iv) Location. (A) Except as provided gross domestic product, a variety of in paragraphs (b)(1)(iv)(B) and asset prices, other factors indicative of (b)(1)(iv)(C) of this section, the location relative credit and liquidity expansion of a private sector credit exposure is or contraction, funding spreads, credit the national jurisdiction where the condition surveys, indices based on borrower is located (that is, where it is credit default swap spreads, options implied volatility, and measures of sys- incorporated, chartered, or similarly temic risk. established or, if the borrower is an in- (v) Effective date of adjusted counter- dividual, where the borrower resides). cyclical capital buffer amount. (A) In- (B) If, in accordance with subparts D crease adjustment. A determination by or E of this part, the Board-regulated the Board under paragraph (b)(2)(ii) of institution has assigned to a private this section to increase the counter- sector credit exposure a risk weight as- cyclical capital buffer amount will be sociated with a protection provider on effective 12 months from the date of a guarantee or credit derivative, the lo- announcement, unless the Board estab- cation of the exposure is the national lishes an earlier effective date and in- jurisdiction where the protection pro- cludes a statement articulating the vider is located. reasons for the earlier effective date. (C) The location of a securitization (B) Decrease adjustment. A determina- exposure is the location of the under- tion by the Board to decrease the es- lying exposures, or, if the underlying tablished countercyclical capital buffer exposures are located in more than one amount under paragraph (b)(2)(ii) of national jurisdiction, the national ju- this section will be effective on the day risdiction where the underlying expo- following announcement of the final sures with the largest aggregate unpaid determination or the earliest date per- principal balance are located. For pur- missible under applicable law or regu- poses of this paragraph (b), the loca- lation, whichever is later. tion of an underlying exposure shall be (vi) Twelve month sunset. The counter- the location of the borrower, deter- cyclical capital buffer amount will re- mined consistent with paragraph turn to zero percent 12 months after (b)(1)(iv)(A) of this section. the effective date that the adjusted (2) Countercyclical capital buffer countercyclical capital buffer amount amount for credit exposures in the United States—(i) Initial countercyclical capital 10 The Board expects that any adjustment buffer amount with respect to credit expo- will be based on a determination made joint- sures in the United States. The initial ly by the Board, OCC, and FDIC.

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is announced, unless the Board an- payout amount or, as applicable, the max- nounces a decision to maintain the ad- imum leverage payout amount. justed countercyclical capital buffer (ii) A Board-regulated institution that has amount or adjust it again before the a capital conservation buffer that is greater than 2.5 percent plus 100 percent of its appli- expiration of the 12-month period. cable countercyclical capital buffer, in ac- (3) Countercyclical capital buffer cordance with paragraph (b) of this section, amount for foreign jurisdictions. The and, if applicable, that has a leverage buffer Board will adjust the countercyclical that is greater than 2.0 percent, in accord- capital buffer amount for private sec- ance with paragraph (c) of this section, is tor credit exposures to reflect decisions not subject to a maximum payout amount or made by foreign jurisdictions con- maximum leverage payout amount under sistent with due process requirements this section. described in paragraph (b)(2) of this (iii) Negative eligible retained income. Except as provided in paragraph (a)(4)(iv) of this sec- section. tion, a Board-regulated institution may not (c) GSIB surcharge. A global system- make distributions or discretionary bonus ically important BHC must use its payments during the current calendar quar- GSIB surcharge calculated in accord- ter if the Board-regulated institution’s: ance with subpart H of this part for (A) Eligible retained income is negative; purposes of determining its maximum and payout ratio under Table 1 to § 217.11. (B) Capital conservation buffer was less than 2.5 percent, or, if applicable, leverage [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as buffer was less than 2.0 percent, as of the end amended at 78 FR 62286, Oct. 11, 2013; 79 FR of the previous calendar quarter. 78295, Dec. 30, 2014; 80 FR 49103, Aug. 14, 2015] EFFECTIVE DATE NOTES: 1. At 79 FR 24540, * * * * * May 1, 2014, § 217.11 was amended by adding new paragraphs (a)(2)(v) and (a)(2)(vi), and (c) Leverage buffer—(1) General. A covered (c); revising paragraph (a)(4); and adding BHC is subject to the lower of the maximum Table 2, effective Jan. 1, 2018. For the con- payout amount as determined under para- venience of the user, the added and revised graph (a)(2)(iii) of this section and the max- text is set forth as follows: imum leverage payout amount as deter- mined under paragraph (a)(2)(vi) of this sec- § 217.11 Capital conservation buffer and tion. countercyclical capital buffer amount. (2) Composition of the leverage buffer. The le- (a) * * * verage buffer is composed solely of tier 1 (2) * * * capital. (v) Maximum leverage payout ratio. The (3) Calculation of the leverage buffer. (i) A maximum leverage payout ratio is the per- covered BHC’s leverage buffer is equal to the centage of eligible retained income that a covered BHC’s supplementary leverage ratio covered BHC can pay out in the form of dis- minus 3 percent, calculated as of the last day tributions and discretionary bonus payments of the previous calendar quarter based on the during the current calendar quarter. The covered BHC’s most recent Consolidated Fi- maximum leverage payout ratio is based on nancial Statement for Bank Holding Compa- the covered BHC’s leverage buffer, calculated nies (FR Y–9C). as of the last day of the previous calendar (ii) Notwithstanding paragraph (c)(3)(i) of quarter, as set forth in Table 2 of this sec- this section, if the covered BHC’s supple- tion. mentary leverage ratio is less than or equal (vi) Maximum leverage payout amount. A to 3 percent, the covered BHC’s leverage covered BHC’s maximum leverage payout buffer is zero. amount for the current calendar quarter is equal to the covered BHC’s eligible retained TABLE 2 TO § 217.11—CALCULATION OF income, multiplied by the applicable max- MAXIMUM LEVERAGE PAYOUT AMOUNT imum leverage payout ratio, as set forth in Table 2 of this section. Maximum leverage payout ratio (as a Leverage buffer percentage of eligible * * * * * retained income) (4) Limits on distributions and discretionary Greater than 2.0 percent ...... No payout ratio limita- bonus payments. (i) A Board-regulated insti- tion applies. tution shall not make distributions or dis- Less than or equal to 2.0 percent, 60 percent. and greater than 1.5 percent. cretionary bonus payments or create an obli- Less than or equal to 1.5 percent, 40 percent. gation to make such distributions or pay- and greater than 1.0 percent. ments during the current calendar quarter Less than or equal to 1.0 percent, 20 percent. that, in the aggregate, exceed the maximum and greater than 0.5 percent.

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TABLE 2 TO § 217.11—CALCULATION OF MAX- tion’s issued capital after all senior IMUM LEVERAGE PAYOUT AMOUNT—Contin- claims have been satisfied in a receiv- ued ership, insolvency, liquidation, or simi- lar proceeding; Maximum leverage payout ratio (as a (iii) The instrument has no maturity Leverage buffer percentage of eligible date, can only be redeemed via discre- retained income) tionary repurchases with the prior ap- Less than or equal to 0.5 percent ..... 0 percent. proval of the Board, and does not con- tain any term or feature that creates 2. At 80 FR 49103, Aug. 14, 2015, § 217.11 was an incentive to redeem; amended as follows, effective Jan. 1, 2018: (iv) The Board-regulated institution a. Paragraphs (a)(2)(v) and (a)(2)(vi), para- did not create at issuance of the instru- graph (c), and Table 2 added on May 1, 2014 (79 FR 24540) are amended by removing the ment through any action or commu- words ‘‘covered BHC’’ or ‘‘covered BHC’s’’ nication an expectation that it will wherever they appear and adding in their buy back, cancel, or redeem the instru- place the words ‘‘global systemically impor- ment, and the instrument does not in- tant BHC’’ or ‘‘global systemically impor- clude any term or feature that might tant BHC’s’’ respectively. give rise to such an expectation; b. Paragraph (c) added on May 1, 2014 (79 (v) Any cash dividend payments on FR 24540) is redesignated as paragraph (d). the instrument are paid out of the §§ 217.12–217.19 [Reserved] Board-regulated institution’s net in- come, retained earnings, or surplus re- Subpart C—Definition of Capital lated to common stock, and are not subject to a limit imposed by the con- § 217.20 Capital components and eligi- tractual terms governing the instru- bility criteria for regulatory capital ment. State member banks are subject instruments. to other legal restrictions on reduc- (a) Regulatory capital components. A tions in capital resulting from cash Board-regulated institution’s regu- dividends, including out of the capital latory capital components are: surplus account, under 12 U.S.C. 324 (1) Common equity tier 1 capital; and 12 CFR 208.5. (2) Additional tier 1 capital; and (vi) The Board-regulated institution (3) Tier 2 capital. has full discretion at all times to re- (b) Common equity tier 1 capital. Com- frain from paying any dividends and mon equity tier 1 capital is the sum of making any other distributions on the the common equity tier 1 capital ele- instrument without triggering an ments in this paragraph (b), minus reg- event of default, a requirement to ulatory adjustments and deductions in make a payment-in-kind, or an imposi- § 217.22. The common equity tier 1 cap- tion of any other restrictions on the ital elements are: Board-regulated institution; (1) Any common stock instruments (vii) Dividend payments and any (plus any related surplus) issued by the other distributions on the instrument Board-regulated institution, net of may be paid only after all legal and treasury stock, and any capital instru- contractual obligations of the Board- ments issued by mutual banking orga- regulated institution have been satis- nizations, that meet all the following fied, including payments due on more criteria: senior claims; (i) The instrument is paid-in, issued (viii) The holders of the instrument directly by the Board-regulated insti- bear losses as they occur equally, pro- tution, and represents the most subor- portionately, and simultaneously with dinated claim in a receivership, insol- the holders of all other common stock vency, liquidation, or similar pro- instruments before any losses are ceeding of the Board-regulated institu- borne by holders of claims on the tion; Board-regulated institution with great- (ii) The holder of the instrument is er priority in a receivership, insol- entitled to a claim on the residual as- vency, liquidation, or similar pro- sets of the Board-regulated institution ceeding; that is proportional with the holder’s (ix) The paid-in amount is classified share of the Board-regulated institu- as equity under GAAP;

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(x) The Board-regulated institution, (ii) The instrument is subordinated or an entity that the Board-regulated to depositors, general creditors, and institution controls, did not purchase subordinated debt holders of the Board- or directly or indirectly fund the pur- regulated institution in a receivership, chase of the instrument; insolvency, liquidation, or similar pro- (xi) The instrument is not secured, ceeding; not covered by a guarantee of the (iii) The instrument is not secured, Board-regulated institution or of an af- not covered by a guarantee of the filiate of the Board-regulated institu- Board-regulated institution or of an af- tion, and is not subject to any other ar- filiate of the Board-regulated institu- rangement that legally or economi- tion, and not subject to any other ar- cally enhances the seniority of the in- rangement that legally or economi- strument; cally enhances the seniority of the in- (xii) The instrument has been issued strument; in accordance with applicable laws and (iv) The instrument has no maturity regulations; and date and does not contain a dividend (xiii) The instrument is reported on step-up or any other term or feature the Board-regulated institution’s regu- that creates an incentive to redeem; latory financial statements separately and from other capital instruments. (v) If callable by its terms, the in- (2) Retained earnings. strument may be called by the Board- (3) Accumulated other comprehensive regulated institution only after a min- income (AOCI) as reported under imum of five years following issuance, GAAP.11 except that the terms of the instru- (4) Any common equity tier 1 minor- ment may allow it to be called earlier ity interest, subject to the limitations than five years upon the occurrence of in § 217.21(c). a regulatory event that precludes the (5) Notwithstanding the criteria for instrument from being included in ad- common stock instruments referenced ditional tier 1 capital, a tax event, or if above, a Board-regulated institution’s the issuing entity is required to reg- common stock issued and held in trust ister as an investment company pursu- for the benefit of its employees as part ant to the Investment Company Act of of an employee stock ownership plan 1940 (15 U.S.C. 80a–1 et seq.). In addition: does not violate any of the criteria in (A) The Board-regulated institution paragraph (b)(1)(iii), paragraph must receive prior approval from the (b)(1)(iv) or paragraph (b)(1)(xi) of this Board to exercise a call option on the section, provided that any repurchase instrument. of the stock is required solely by virtue (B) The Board-regulated institution of ERISA for an instrument of a Board- does not create at issuance of the in- regulated institution that is not pub- strument, through any action or com- licly-traded. In addition, an instrument munication, an expectation that the issued by a Board-regulated institution call option will be exercised. to its employee stock ownership plan (C) Prior to exercising the call op- does not violate the criterion in para- tion, or immediately thereafter, the graph (b)(1)(x) of this section. Board-regulated institution must ei- (c) Additional tier 1 capital. Additional ther: Replace the instrument to be tier 1 capital is the sum of additional called with an equal amount of instru- tier 1 capital elements and any related ments that meet the criteria under surplus, minus the regulatory adjust- paragraph (b) of this section or this ments and deductions in § 217.22. Addi- paragraph (c); 12 or demonstrate to the tional tier 1 capital elements are: satisfaction of the Board that following (1) Instruments (plus any related sur- redemption, the Board-regulated insti- plus) that meet the following criteria: tution will continue to hold capital (i) The instrument is issued and paid- commensurate with its risk. in; 12 Replacement can be concurrent with re- 11 See § 217.22 for specific adjustments re- demption of existing additional tier 1 capital lated to AOCI. instruments.

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(vi) Redemption or repurchase of the tion, and proceeds must be imme- instrument requires prior approval diately available without limitation to from the Board. the Board-regulated institution or to (vii) The Board-regulated institution the Board-regulated institution’s top- has full discretion at all times to can- tier holding company in a form which cel dividends or other distributions on meets or exceeds all of the other cri- the instrument without triggering an teria for additional tier 1 capital in- event of default, a requirement to struments.13 make a payment-in-kind, or an imposi- (xiv) For an advanced approaches tion of other restrictions on the Board- Board-regulated institution, the gov- regulated institution except in relation erning agreement, offering circular, or to any distributions to holders of com- prospectus of an instrument issued mon stock or instruments that are pari after the date upon which the Board- passu with the instrument. regulated institution becomes subject (viii) Any distributions on the instru- to this part as set forth in § 217.1(f) ment are paid out of the Board-regu- must disclose that the holders of the lated institution’s net income, retained instrument may be fully subordinated earnings, or surplus related to other to interests held by the U.S. govern- additional tier 1 capital instruments. ment in the event that the Board-regu- State member banks are subject to lated institution enters into a receiver- other legal restrictions on reductions ship, insolvency, liquidation, or similar in capital resulting from cash divi- proceeding. dends, including out of the capital sur- (2) Tier 1 minority interest, subject plus account, under 12 U.S.C. 324 and 12 to the limitations in § 217.21(d), that is CFR 208.5. not included in the Board-regulated in- (ix) The instrument does not have a stitution’s common equity tier 1 cap- credit-sensitive feature, such as a divi- ital. dend rate that is reset periodically (3) Any and all instruments that based in whole or in part on the Board- qualified as tier 1 capital under the regulated institution’s credit quality, Board’s general risk-based capital rules but may have a dividend rate that is under 12 CFR part 208, appendix A or 12 adjusted periodically independent of CFR part 225, appendix A, as then in ef- the Board-regulated institution’s cred- fect, that were issued under the Small it quality, in relation to general mar- Business Jobs Act of 2010 14 or prior to ket interest rates or similar adjust- October 4, 2010, under the Emergency ments. Economic Stabilization Act of 2008.15 (x) The paid-in amount is classified (4) Notwithstanding the criteria for as equity under GAAP. additional tier 1 capital instruments (xi) The Board-regulated institution, referenced above: or an entity that the Board-regulated (i) An instrument issued by a Board- institution controls, did not purchase regulated institution and held in trust or directly or indirectly fund the pur- for the benefit of its employees as part chase of the instrument. of an employee stock ownership plan (xii) The instrument does not have does not violate any of the criteria in any features that would limit or dis- paragraph (c)(1)(iii) of this section, pro- courage additional issuance of capital vided that any repurchase is required by the Board-regulated institution, solely by virtue of ERISA for an in- such as provisions that require the strument of a Board-regulated institu- Board-regulated institution to com- tion that is not publicly-traded. In ad- pensate holders of the instrument if a dition, an instrument issued by a new instrument is issued at a lower Board-regulated institution to its em- price during a specified time frame. ployee stock ownership plan does not (xiii) If the instrument is not issued violate the criteria in paragraph directly by the Board-regulated insti- tution or by a subsidiary of the Board- 13 De minimis assets related to the operation regulated institution that is an oper- of the issuing entity can be disregarded for ating entity, the only asset of the purposes of this criterion. issuing entity is its investment in the 14 Public Law 111–240; 124 Stat. 2504 (2010). capital of the Board-regulated institu- 15 Public Law 110–343, 122 Stat. 3765 (2008).

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(c)(1)(v) or paragraph (c)(1)(xi) of this that the terms of the instrument may section; and allow it to be called sooner upon the (ii) An instrument with terms that occurrence of an event that would pre- provide that the instrument may be clude the instrument from being in- called earlier than five years upon the cluded in tier 2 capital, a tax event, or occurrence of a rating agency event if the issuing entity is required to reg- does not violate the criterion in para- ister as an investment company pursu- graph (c)(1)(v) of this section provided ant to the Investment Company Act of that the instrument was issued and in- 1940 (15 U.S.C. 80a–1 et seq.). In addition: cluded in a Board-regulated institu- tion’s tier 1 capital prior to January 1, (A) The Board-regulated institution 2014, and that such instrument satisfies must receive the prior approval of the all other criteria under this § 217.20(c). Board to exercise a call option on the (d) Tier 2 Capital. Tier 2 capital is the instrument. sum of tier 2 capital elements and any (B) The Board-regulated institution related surplus, minus regulatory ad- does not create at issuance, through justments and deductions in § 217.22. action or communication, an expecta- Tier 2 capital elements are: tion the call option will be exercised. (1) Instruments (plus related surplus) (C) Prior to exercising the call op- that meet the following criteria: tion, or immediately thereafter, the (i) The instrument is issued and paid- Board-regulated institution must ei- in; ther: Replace any amount called with (ii) The instrument is subordinated an equivalent amount of an instrument to depositors and general creditors of that meets the criteria for regulatory the Board-regulated institution; capital under this section; 17 or dem- (iii) The instrument is not secured, not covered by a guarantee of the onstrate to the satisfaction of the Board-regulated institution or of an af- Board that following redemption, the filiate of the Board-regulated institu- Board-regulated institution would con- tion, and not subject to any other ar- tinue to hold an amount of capital that rangement that legally or economi- is commensurate with its risk. cally enhances the seniority of the in- (vi) The holder of the instrument strument in relation to more senior must have no contractual right to ac- claims; celerate payment of principal or inter- (iv) The instrument has a minimum est on the instrument, except in the original maturity of at least five years. event of a receivership, insolvency, liq- At the beginning of each of the last uidation, or similar proceeding of the five years of the life of the instrument, state member bank or depository insti- the amount that is eligible to be in- tution holding company, as applicable, cluded in tier 2 capital is reduced by 20 or of a major subsidiary depository in- percent of the original amount of the stitution of the depository institution instrument (net of redemptions) and is holding company. excluded from regulatory capital when the remaining maturity is less than (vii) The instrument has no credit- one year. In addition, the instrument sensitive feature, such as a dividend or must not have any terms or features interest rate that is reset periodically that require, or create significant in- based in whole or in part on the Board- centives for, the Board-regulated insti- regulated institution’s credit standing, tution to redeem the instrument prior but may have a dividend rate that is to maturity; 16 and adjusted periodically independent of (v) The instrument, by its terms, the Board-regulated institution’s cred- may be called by the Board-regulated it standing, in relation to general mar- institution only after a minimum of ket interest rates or similar adjust- five years following issuance, except ments.

16 An instrument that by its terms auto- matically converts into a tier 1 capital in- 17 A Board-regulated institution may re- strument prior to five years after issuance place tier 2 capital instruments concurrent complies with the five-year maturity re- with the redemption of existing tier 2 capital quirement of this criterion. instruments.

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(viii) The Board-regulated institu- appendix A as then in effect, that were tion, or an entity that the Board-regu- issued under the Small Business Jobs lated institution controls, has not pur- Act of 2010,19 or prior to October 4, 2010, chased and has not directly or indi- under the Emergency Economic Sta- rectly funded the purchase of the in- bilization Act of 2008.20 strument. (5) For a Board-regulated institution (ix) If the instrument is not issued di- that makes an AOCI opt-out election rectly by the Board-regulated institu- (as defined in paragraph (b)(2) of this tion or by a subsidiary of the Board- section), 45 percent of pretax net unre- regulated institution that is an oper- alized gains on available-for-sale pre- ating entity, the only asset of the ferred stock classified as an equity se- issuing entity is its investment in the curity under GAAP and available-for- capital of the Board-regulated institu- sale equity exposures. tion, and proceeds must be imme- (6) Notwithstanding the criteria for diately available without limitation to tier 2 capital instruments referenced the Board-regulated institution or the above, an instrument with terms that Board-regulated institution’s top-tier provide that the instrument may be holding company in a form that meets called earlier than five years upon the or exceeds all the other criteria for tier occurrence of a rating agency event 2 capital instruments under this sec- does not violate the criterion in para- tion.18 graph (d)(1)(v) of this section provided (x) Redemption of the instrument that the instrument was issued and in- prior to maturity or repurchase re- cluded in a Board-regulated institu- quires the prior approval of the Board. tion’s tier 1 or tier 2 capital prior to (xi) For an advanced approaches January 1, 2014, and that such instru- Board-regulated institution, the gov- ment satisfies all other criteria under erning agreement, offering circular, or this paragraph (d). prospectus of an instrument issued (e) Board approval of a capital element. after the date on which the advanced (1) A Board-regulated institution must approaches Board-regulated institution receive Board prior approval to include becomes subject to this part under a capital element (as listed in this sec- § 217.1(f) must disclose that the holders tion) in its common equity tier 1 cap- of the instrument may be fully subordi- ital, additional tier 1 capital, or tier 2 nated to interests held by the U.S. gov- capital unless the element: ernment in the event that the Board- (i) Was included in a Board-regulated regulated institution enters into a re- institution’s tier 1 capital or tier 2 cap- ceivership, insolvency, liquidation, or ital prior to May 19, 2010 in accordance similar proceeding. with the Board’s risk-based capital (2) Total capital minority interest, rules that were effective as of that date subject to the limitations set forth in and the underlying instrument may § 217.21(e), that is not included in the continue to be included under the cri- Board-regulated institution’s tier 1 teria set forth in this section; or capital. (ii) Is equivalent, in terms of capital (3) ALLL up to 1.25 percent of the quality and ability to absorb losses Board-regulated institution’s standard- with respect to all material terms, to a ized total risk-weighted assets not in- regulatory capital element the Board cluding any amount of the ALLL (and determined may be included in regu- excluding in the case of a market risk latory capital pursuant to paragraph Board-regulated institution, its stand- (e)(3) of this section. ardized market risk-weighted assets). (2) When considering whether a (4) Any instrument that qualified as Board-regulated institution may in- tier 2 capital under the Board’s general clude a regulatory capital element in risk-based capital rules under 12 CFR its common equity tier 1 capital, addi- part 208, appendix A, 12 CFR part 225, tional tier 1 capital, or tier 2 capital, the Federal Reserve Board will consult 18 A Board-regulated institution may dis- with the FDIC and OCC. regard de minimis assets related to the oper- ation of the issuing entity for purposes of 19 Public Law 111–240; 124 Stat. 2504 (2010). this criterion. 20 Public Law 110–343, 122 Stat. 3765 (2008).

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(3) After determining that a regu- (i) The amount of common equity latory capital element may be included tier 1 capital the subsidiary must hold, in a Board-regulated institution’s com- or would be required to hold pursuant mon equity tier 1 capital, additional to paragraph (b) of this section, to tier 1 capital, or tier 2 capital, the avoid restrictions on distributions and Board will make its decision publicly discretionary bonus payments under available, including a brief description § 217.11 or equivalent standards estab- of the material terms of the regulatory lished by the subsidiary’s home coun- capital element and the rationale for try supervisor; or the determination. (ii)(A) The standardized total risk- weighted assets of the Board-regulated [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as institution that relate to the sub- amended at 78 FR 62286, Oct. 11, 2013; 78 FR 76973, Dec. 20, 2013; 79 FR 78295, Dec. 30, 2014] sidiary multiplied by (B) The common equity tier 1 capital § 217.21 Minority interest. ratio the subsidiary must maintain to avoid restrictions on distributions and (a) Applicability. For purposes of discretionary bonus payments under § 217.20, a Board-regulated institution is § 217.11 or equivalent standards estab- subject to the minority interest limita- lished by the subsidiary’s home coun- tions in this section if: try supervisor. (1) A consolidated subsidiary of the (d) Tier 1 minority interest includable in Board-regulated institution has issued the tier 1 capital of the Board-regulated regulatory capital that is not owned by institution. For each consolidated sub- the Board-regulated institution; and sidiary of the Board-regulated institu- (2) For each relevant regulatory cap- tion, the amount of tier 1 minority in- ital ratio of the consolidated sub- terest the Board-regulated institution sidiary, the ratio exceeds the sum of may include in tier 1 capital is equal the subsidiary’s minimum regulatory to: capital requirements plus its capital (1) The tier 1 minority interest of the conservation buffer. subsidiary; minus (b) Difference in capital adequacy (2) The percentage of the subsidiary’s standards at the subsidiary level. For tier 1 capital that is not owned by the purposes of the minority interest cal- Board-regulated institution multiplied culations in this section, if the consoli- by the difference between the tier 1 dated subsidiary issuing the capital is capital of the subsidiary and the lower not subject to capital adequacy stand- of: ards similar to those of the Board-regu- (i) The amount of tier 1 capital the lated institution, the Board-regulated subsidiary must hold, or would be re- institution must assume that the cap- quired to hold pursuant to paragraph ital adequacy standards of the Board- (b) of this section, to avoid restrictions regulated institution apply to the sub- on distributions and discretionary sidiary. bonus payments under § 217.11 or equiv- (c) Common equity tier 1 minority inter- alent standards established by the sub- est includable in the common equity tier 1 sidiary’s home country supervisor, or capital of the Board-regulated institution. (ii)(A) The standardized total risk- For each consolidated subsidiary of a weighted assets of the Board-regulated Board-regulated institution, the institution that relate to the sub- amount of common equity tier 1 minor- sidiary multiplied by ity interest the Board-regulated insti- (B) The tier 1 capital ratio the sub- tution may include in common equity sidiary must maintain to avoid restric- tier 1 capital is equal to: tions on distributions and discre- (1) The common equity tier 1 minor- tionary bonus payments under § 217.11 ity interest of the subsidiary; minus or equivalent standards established by (2) The percentage of the subsidiary’s the subsidiary’s home country super- common equity tier 1 capital that is visor. not owned by the Board-regulated in- (e) Total capital minority interest in- stitution, multiplied by the difference cludable in the total capital of the Board- between the common equity tier 1 cap- regulated institution. For each consoli- ital of the subsidiary and the lower of: dated subsidiary of the Board-regulated

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institution, the amount of total capital valuation allowances and net of DTLs minority interest the Board-regulated in accordance with paragraph (e) of institution may include in total capital this section; is equal to: (4) Any gain-on-sale in connection (1) The total capital minority inter- with a securitization exposure; est of the subsidiary; minus (5)(i) Any defined benefit pension (2) The percentage of the subsidiary’s fund net asset, net of any associated total capital that is not owned by the DTL in accordance with paragraph (e) Board-regulated institution multiplied of this section, held by a depository in- by the difference between the total stitution holding company. With the capital of the subsidiary and the lower prior approval of the Board, this deduc- of: tion is not required for any defined (i) The amount of total capital the benefit pension fund net asset to the subsidiary must hold, or would be re- extent the depository institution hold- quired to hold pursuant to paragraph (b) of this section, to avoid restrictions ing company has unrestricted and un- on distributions and discretionary fettered access to the assets in that bonus payments under § 217.11 or equiv- fund. alent standards established by the sub- (ii) For an insured depository institu- sidiary’s home country supervisor, or tion, no deduction is required. (ii)(A) The standardized total risk- (iii) A Board-regulated institution weighted assets of the Board-regulated must risk weight any portion of the de- institution that relate to the sub- fined benefit pension fund asset that is sidiary multiplied by not deducted under paragraphs (a)(5)(i) (B) The total capital ratio the sub- or (a)(5)(ii) of this section as if the sidiary must maintain to avoid restric- Board-regulated institution directly tions on distributions and discre- holds a proportional ownership share of tionary bonus payments under § 217.11 each exposure in the defined benefit or equivalent standards established by pension fund. the subsidiary’s home country super- (6) For an advanced approaches visor. Board-regulated institution that has completed the parallel run process and § 217.22 Regulatory capital adjust- that has received notification from the ments and deductions. Board pursuant to § 217.121(d), the (a) Regulatory capital deductions from amount of expected credit loss that ex- common equity tier 1 capital. A Board- ceeds its eligible credit reserves; and regulated institution must deduct from (7) Financial subsidiaries. (i) A state the sum of its common equity tier 1 member bank must deduct the aggre- capital elements the items set forth in gate amount of its outstanding equity this paragraph (a): investment, including retained earn- (1) Goodwill, net of associated de- ings, in its financial subsidiaries (as ferred tax liabilities (DTLs) in accord- defined in 12 CFR 208.77) and may not ance with paragraph (e) of this section, consolidate the assets and liabilities of including goodwill that is embedded in the valuation of a significant invest- a financial subsidiary with those of the ment in the capital of an unconsoli- state member bank. dated financial institution in the form (ii) No other deduction is required of common stock (and that is reflected under § 217.22(c) for investments in the in the consolidated financial state- capital instruments of financial sub- ments of the Board-regulated institu- sidiaries. tion), in accordance with paragraph (d) (b) Regulatory adjustments to common of this section; equity tier 1 capital. (1) A Board-regu- (2) Intangible assets, other than lated institution must adjust the sum MSAs, net of associated DTLs in ac- of common equity tier 1 capital ele- cordance with paragraph (e) of this sec- ments pursuant to the requirements tion; set forth in this paragraph (b). Such (3) Deferred tax assets (DTAs) that adjustments to common equity tier 1 arise from net operating loss and tax capital must be made net of the associ- credit carryforwards net of any related ated deferred tax effects.

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(i) A Board-regulated institution that of the relevant GAAP standards that makes an AOCI opt-out election (as de- pertain to such plans (excluding, at the fined in paragraph (b)(2) of this sec- Board-regulated institution’s option, tion), must make the adjustments re- the portion relating to pension assets quired under § 217.22(b)(2)(i). deducted under paragraph (a)(5) of this (ii) A Board-regulated institution section); and that is an advanced approaches Board- (E) Subtract any net unrealized gains regulated institution, and a Board-reg- and add any net unrealized losses on ulated institution that has not made held-to-maturity securities that are in- an AOCI opt-out election (as defined in cluded in AOCI. paragraph (b)(2) of this section), must (ii) A Board-regulated institution deduct any accumulated net gains and that is not an advanced approaches add any accumulated net losses on cash Board-regulated institution must make flow hedges included in AOCI that re- its AOCI opt-out election in the Call late to the hedging of items that are Report, for a state member bank, FR not recognized at fair value on the bal- Y–9C or FR Y–9SP, as applicable, for ance sheet. bank holding companies or savings and (iii) A Board-regulated institution loan holding companies, filed by the must deduct any net gain and add any Board-regulated institution for the net loss related to changes in the fair first reporting period after the Board- value of liabilities that are due to regulated institution is required to changes in the Board-regulated institu- comply with subpart A of this part as tion’s own credit risk. An advanced ap- set forth in § 217.1(f). proaches Board-regulated institution (iii) Each depository institution sub- must deduct the difference between its sidiary of a Board-regulated institution credit spread premium and the risk- that is not an advanced approaches free rate for derivatives that are liabil- Board-regulated institution must elect ities as part of this adjustment. the same option as the Board-regulated (2) AOCI opt-out election. (i) A Board- regulated institution that is not an ad- institution pursuant to paragraph vanced approaches Board-regulated in- (b)(2). stitution may make a one-time elec- (iv) With prior notice to the Board, a tion to opt out of the requirement to Board-regulated institution resulting include all components of AOCI (with from a merger, acquisition, or purchase the exception of accumulated net gains transaction may make a new AOCI opt- and losses on cash flow hedges related out election in the Call Report (for a to items that are not fair-valued on the state member bank), or FR Y–9C or FR balance sheet) in common equity tier 1 Y–9SP, as applicable (for bank holding capital (AOCI opt-out election). A companies or savings and loan holding Board-regulated institution that companies) filed by the resulting makes an AOCI opt-out election in ac- Board-regulated institution for the cordance with this paragraph (b)(2) first reporting period after it is re- must adjust common equity tier 1 cap- quired to comply with subpart A of this ital as follows: part as set forth in § 217.1(f) if: (A) Subtract any net unrealized gains (A) Other than as set forth in para- and add any net unrealized losses on graph (b)(2)(iv)(C) of this section, the available-for-sale securities; merger, acquisition, or purchase trans- (B) Subtract any net unrealized action involved the acquisition or pur- losses on available-for-sale preferred chase of all or substantially all of ei- stock classified as an equity security ther the assets or voting stock of an- under GAAP and available-for-sale eq- other banking organization that is sub- uity exposures; ject to regulatory capital requirements (C) Subtract any accumulated net issued by the Board of Governors of the gains and add any accumulated net Federal Reserve, the Federal Deposit losses on cash flow hedges; Insurance Corporation, or the Office of (D) Subtract any amounts recorded the Comptroller of the Currency; 22 in AOCI attributed to defined benefit postretirement plans resulting from 22 These rules include the regulatory cap- the initial and subsequent application ital requirements set forth at 12 CFR part 3

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(B) Prior to the merger, acquisition, mon stock instruments from its com- or purchase transaction, only one of mon equity tier 1 capital elements to the banking organizations involved in the extent such instruments are not the transaction made an AOCI opt-out excluded from regulatory capital under election under this section; and § 217.20(b)(1); (C) A Board-regulated institution (ii) A Board-regulated institution may, with the prior approval of the must deduct an investment in the Board, change its AOCI opt-out elec- Board-regulated institution’s own addi- tion under this paragraph (b) in the tional tier 1 capital instruments from case of a merger, acquisition, or pur- its additional tier 1 capital elements; chase transaction that meets the re- and quirements set forth at paragraph (iii) A Board-regulated institution (b)(2)(iv)(B) of this section, but does must deduct an investment in the not meet the requirements of para- Board-regulated institution’s own tier graph (b)(2)(iv)(A). In making such a 2 capital instruments from its tier 2 determination, the Board may consider capital elements. the terms of the merger, acquisition, or purchase transaction, as well as the ex- (2) Corresponding deduction approach. tent of any changes to the risk profile, For purposes of subpart C of this part, complexity, and scope of operations of the corresponding deduction approach the Board-regulated institution result- is the methodology used for the deduc- ing from the merger, acquisition, or tions from regulatory capital related purchase transaction. to reciprocal cross holdings (as de- (3) Regulatory capital requirement for scribed in paragraph (c)(3) of this sec- insurance underwriting risks. A bank tion), non-significant investments in holding company or savings and loan the capital of unconsolidated financial holding company must deduct an institutions (as described in paragraph amount equal to the regulatory capital (c)(4) of this section), and non-common requirement for insurance under- stock significant investments in the writing risks established by the regu- capital of unconsolidated financial in- lator of any insurance underwriting ac- stitutions (as described in paragraph tivities of the company. The bank hold- (c)(5) of this section). Under the cor- ing company or savings and loan hold- responding deduction approach, a ing company must take the deduction Board-regulated institution must make 50 percent from tier 1 capital and 50 deductions from the component of cap- percent from tier 2 capital. If the ital for which the underlying instru- amount deductible from tier 2 capital ment would qualify if it were issued by exceeds the Board-regulated institu- the Board-regulated institution itself, tion’s tier 2 capital, the Board-regu- as described in paragraphs (c)(2)(i)–(iii) lated institution must deduct the ex- of this section. If the Board-regulated cess from tier 1 capital. institution does not have a sufficient (c) Deductions from regulatory capital amount of a specific component of cap- related to investments in capital instru- ital to effect the required deduction, ments 23—(1) Investment in the Board-reg- the shortfall must be deducted accord- ulated institution’s own capital instru- ing to paragraph (f) of this section. ments. A Board-regulated institution (i) If an investment is in the form of must deduct an investment in the an instrument issued by a financial in- Board-regulated institution’s own cap- stitution that is not a regulated finan- ital instruments as follows: cial institution, the Board-regulated (i) A Board-regulated institution institution must treat the instrument must deduct an investment in the as: Board-regulated institution’s own com- (A) A common equity tier 1 capital instrument if it is common stock or (OCC); 12 CFR part 225 (Board); 12 CFR part represents the most subordinated claim 325, and 12 CFR part 390 (FDIC). in liquidation of the financial institu- 23 The Board-regulated institution must tion; and calculate amounts deducted under para- graphs (c) through (f) of this section after it (B) An additional tier 1 capital in- calculates the amount of ALLL includable in strument if it is subordinated to all tier 2 capital under § 217.20(d)(3). creditors of the financial institution

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and is senior in liquidation only to 10 percent of the sum of the Board-reg- common shareholders. ulated institution’s common equity (ii) If an investment is in the form of tier 1 capital elements minus all deduc- an instrument issued by a regulated fi- tions from and adjustments to common nancial institution and the instrument equity tier 1 capital elements required does not meet the criteria for common under paragraphs (a) through (c)(3) of equity tier 1, additional tier 1 or tier 2 this section (the 10 percent threshold capital instruments under § 217.20, the for non-significant investments) by ap- Board-regulated institution must treat plying the corresponding deduction ap- the instrument as: proach.24 The deductions described in (A) A common equity tier 1 capital this section are net of associated DTLs instrument if it is common stock in- in accordance with paragraph (e) of cluded in GAAP equity or represents this section. In addition, a Board-regu- the most subordinated claim in liq- lated institution that underwrites a uidation of the financial institution; (B) An additional tier 1 capital in- failed underwriting, with the prior strument if it is included in GAAP eq- written approval of the Board, for the uity, subordinated to all creditors of period of time stipulated by the Board, the financial institution, and senior in is not required to deduct a non-signifi- a receivership, insolvency, liquidation, cant investment in the capital of an or similar proceeding only to common unconsolidated financial institution shareholders; and pursuant to this paragraph (c) to the (C) A tier 2 capital instrument if it is extent the investment is related to the not included in GAAP equity but con- failed underwriting.25 sidered regulatory capital by the pri- (ii) The amount to be deducted under mary supervisor of the financial insti- this section from a specific capital tution. component is equal to: (iii) If an investment is in the form of (A) The Board-regulated institution’s a non-qualifying capital instrument (as non-significant investments in the cap- defined in § 217.300(c)), the Board-regu- ital of unconsolidated financial institu- lated institution must treat the instru- tions exceeding the 10 percent thresh- ment as: old for non-significant investments, (A) An additional tier 1 capital in- multiplied by strument if such instrument was in- (B) The ratio of the Board-regulated cluded in the issuer’s tier 1 capital institution’s non-significant invest- prior to May 19, 2010; or ments in the capital of unconsolidated (B) A tier 2 capital instrument if financial institutions in the form of such instrument was included in the such capital component to the Board- issuer’s tier 2 capital (but not includ- regulated institution’s total non-sig- able in tier 1 capital) prior to May 19, nificant investments in unconsolidated 2010. financial institutions. (3) Reciprocal cross holdings in the cap- ital of financial institutions. A Board- regulated institution must deduct in- 24 With the prior written approval of the vestments in the capital of other finan- Board, for the period of time stipulated by cial institutions it holds reciprocally, the Board, a Board-regulated institution is where such reciprocal cross holdings not required to deduct a non-significant in- vestment in the capital instrument of an un- result from a formal or informal ar- consolidated financial institution pursuant rangement to swap, exchange, or other- to this paragraph if the financial institution wise intend to hold each other’s capital is in distress and if such investment is made instruments, by applying the cor- for the purpose of providing financial sup- responding deduction approach. port to the financial institution, as deter- (4) Non-significant investments in the mined by the Board. capital of unconsolidated financial insti- 25 Any non-significant investments in the tutions. (i) A Board-regulated institu- capital of unconsolidated financial institu- tions that do not exceed the 10 percent tion must deduct its non-significant in- threshold for non-significant investments vestments in the capital of unconsoli- under this section must be assigned the ap- dated financial institutions (as defined propriate risk weight under subparts D, E, or in § 217.2) that, in the aggregate, exceed F of this part, as applicable.

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(5) Significant investments in the cap- in accordance with § 217.22(e)) arising ital of unconsolidated financial institu- from timing differences that the tions that are not in the form of common Board-regulated institution could real- stock. A Board-regulated institution ize through net operating loss must deduct its significant invest- carrybacks. The Board-regulated insti- ments in the capital of unconsolidated tution must risk weight these assets at financial institutions that are not in 100 percent. For a state member bank the form of common stock by applying that is a member of a consolidated the corresponding deduction ap- group for tax purposes, the amount of proach.26 The deductions described in DTAs that could be realized through this section are net of associated DTLs net operating loss carrybacks may not in accordance with paragraph (e) of exceed the amount that the state mem- this section. In addition, with the prior ber bank could reasonably expect to written approval of the Board, for the have refunded by its parent holding period of time stipulated by the Board, company. a Board-regulated institution that un- (ii) MSAs net of associated DTLs, in derwrites a failed underwriting is not accordance with paragraph (e) of this required to deduct a significant invest- section. ment in the capital of an unconsoli- (iii) Significant investments in the dated financial institution pursuant to capital of unconsolidated financial in- this paragraph (c) if such investment is stitutions in the form of common related to such failed underwriting. stock, net of associated DTLs in ac- (d) Items subject to the 10 and 15 per- cordance with paragraph (e) of this sec- cent common equity tier 1 capital deduc- tion.27 Significant investments in the tion thresholds. (1) A Board-regulated capital of unconsolidated financial in- institution must deduct from common stitutions in the form of common stock equity tier 1 capital elements the subject to the 10 percent common eq- amount of each of the items set forth uity tier 1 capital deduction threshold in this paragraph (d) that, individually, may be reduced by any goodwill embed- exceeds 10 percent of the sum of the ded in the valuation of such invest- Board-regulated institution’s common ments deducted by the Board-regulated equity tier 1 capital elements, less ad- institution pursuant to paragraph justments to and deductions from com- (a)(1) of this section. In addition, with mon equity tier 1 capital required the prior written approval of the under paragraphs (a) through (c) of this section (the 10 percent common equity Board, for the period of time stipulated tier 1 capital deduction threshold). by the Board, a Board-regulated insti- (i) DTAs arising from temporary dif- tution that underwrites a failed under- ferences that the Board-regulated in- writing is not required to deduct a sig- stitution could not realize through net nificant investment in the capital of an operating loss carrybacks, net of any unconsolidated financial institution in related valuation allowances and net of the form of common stock pursuant to DTLs, in accordance paragraph (e) of this paragraph (d) if such investment is this section. A Board-regulated institu- related to such failed underwriting. tion is not required to deduct from the (2) A Board-regulated institution sum of its common equity tier 1 capital must deduct from common equity tier elements DTAs (net of any related 1 capital elements the items listed in valuation allowances and net of DTLs, paragraph (d)(1) of this section that are

26 With prior written approval of the Board, 27 With the prior written approval of the for the period of time stipulated by the Board, for the period of time stipulated by Board, a Board-regulated institution is not the Board, a Board-regulated institution is required to deduct a significant investment not required to deduct a significant invest- in the capital instrument of an unconsoli- ment in the capital instrument of an uncon- dated financial institution in distress which solidated financial institution in distress in is not in the form of common stock pursuant the form of common stock pursuant to this to this section if such investment is made for section if such investment is made for the the purpose of providing financial support to purpose of providing financial support to the the financial institution as determined by financial institution as determined by the the Board. Board.

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not deducted as a result of the applica- old deduction in paragraph (d) of this tion of the 10 percent common equity section, the amount of DTAs that arise tier 1 capital deduction threshold, and from net operating loss and tax credit that, in aggregate, exceed 17.65 percent carryforwards, net of any related valu- of the sum of the Board-regulated in- ation allowances, and of DTAs arising stitution’s common equity tier 1 cap- from temporary differences that the ital elements, minus adjustments to Board-regulated institution could not and deductions from common equity realize through net operating loss tier 1 capital required under para- carrybacks, net of any related valu- graphs (a) through (c) of this section, ation allowances, may be offset by minus the items listed in paragraph DTLs (that have not been netted (d)(1) of this section (the 15 percent against assets subject to deduction common equity tier 1 capital deduction pursuant to paragraph (e)(1) of this sec- threshold). Any goodwill that has been tion) subject to the conditions set forth deducted under paragraph (a)(1) of this in this paragraph (e). section can be excluded from the sig- (i) Only the DTAs and DTLs that re- nificant investments in the capital of late to taxes levied by the same tax- unconsolidated financial institutions ation authority and that are eligible in the form of common stock.28 for offsetting by that authority may be (3) For purposes of calculating the offset for purposes of this deduction. amount of DTAs subject to the 10 and (ii) The amount of DTLs that the 15 percent common equity tier 1 capital Board-regulated institution nets deduction thresholds, a Board-regu- against DTAs that arise from net oper- lated institution may exclude DTAs ating loss and tax credit carryforwards, and DTLs relating to adjustments net of any related valuation allow- made to common equity tier 1 capital ances, and against DTAs arising from under paragraph (b) of this section. A temporary differences that the Board- Board-regulated institution that elects regulated institution could not realize to exclude DTAs relating to adjust- through net operating loss carrybacks, ments under paragraph (b) of this sec- net of any related valuation allow- tion also must exclude DTLs and must ances, must be allocated in proportion do so consistently in all future calcula- to the amount of DTAs that arise from tions. A Board-regulated institution net operating loss and tax credit may change its exclusion preference carryforwards (net of any related valu- only after obtaining the prior approval ation allowances, but before any offset- of the Board. ting of DTLs) and of DTAs arising from (e) Netting of DTLs against assets sub- temporary differences that the Board- ject to deduction. (1) Except as described regulated institution could not realize in paragraph (e)(3) of this section, net- through net operating loss carrybacks ting of DTLs against assets that are (net of any related valuation allow- subject to deduction under this section ances, but before any offsetting of is permitted, but not required, if the DTLs), respectively. following conditions are met: (4) A Board-regulated institution (i) The DTL is associated with the may offset DTLs embedded in the car- asset; and rying value of a leveraged lease port- (ii) The DTL would be extinguished if folio acquired in a business combina- the associated asset becomes impaired tion that are not recognized under or is derecognized under GAAP. GAAP against DTAs that are subject to (2) A DTL may only be netted against paragraph (d) of this section in accord- a single asset. ance with this paragraph (e). (3) For purposes of calculating the (5) A Board-regulated institution amount of DTAs subject to the thresh- must net DTLs against assets subject to deduction under this section in a 28 The amount of the items in paragraph (d) consistent manner from reporting pe- of this section that is not deducted from riod to reporting period. A Board-regu- common equity tier 1 capital pursuant to this section must be included in the risk- lated institution may change its pref- weighted assets of the Board-regulated insti- erence regarding the manner in which tution and assigned a 250 percent risk it nets DTLs against specific assets weight. subject to deduction under this section

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only after obtaining the prior approval tion held through a position in an of the Board. index; or (f) Insufficient amounts of a specific (B) A Board-regulated institution regulatory capital component to effect de- may calculate the gross long position ductions. Under the corresponding de- for the Board-regulated institution’s duction approach, if a Board-regulated own capital instruments or the capital institution does not have a sufficient of an unconsolidated financial institu- amount of a specific component of cap- tion by multiplying the Board-regu- ital to effect the required deduction lated institution’s carrying value of its after completing the deductions re- investment in the investment fund by quired under paragraph (d) of this sec- either: tion, the Board-regulated institution (1) The highest stated investment must deduct the shortfall from the limit (in percent) for investments in next higher (that is, more subordi- the Board-regulated institution’s own nated) component of regulatory cap- capital instruments or the capital of ital. unconsolidated financial institutions (g) Treatment of assets that are de- as stated in the prospectus, partnership ducted. A Board-regulated institution agreement, or similar contract defin- must exclude from standardized total ing permissible investments of the in- risk-weighted assets and, as applicable, vestment fund; or advanced approaches total risk-weight- (2) The investment fund’s actual ed assets any item deducted from regu- holdings of own capital instruments or latory capital under paragraphs (a), (c), the capital of unconsolidated financial and (d) of this section. institutions. (h) Net long position. (1) For purposes (iv) For a synthetic exposure, the of calculating an investment in the amount of the Board-regulated institu- Board-regulated institution’s own cap- tion’s loss on the exposure if the ref- ital instrument and an investment in erence capital instrument were to have the capital of an unconsolidated finan- a value of zero. cial institution under this section, the (3) Adjustments to reflect a short posi- net long position is the gross long posi- tion. In order to adjust the gross long tion in the underlying instrument de- position to recognize a short position termined in accordance with paragraph in the same instrument, the following (h)(2) of this section, as adjusted to rec- criteria must be met: ognize a short position in the same in- (i) The maturity of the short position strument calculated in accordance must match the maturity of the long with paragraph (h)(3) of this section. position, or the short position has a re- (2) Gross long position. The gross long sidual maturity of at least one year position is determined as follows: (maturity requirement); or (i) For an equity exposure that is (ii) For a position that is a trading held directly, the adjusted carrying asset or trading liability (whether on- value as that term is defined in or off-balance sheet) as reported on the § 217.51(b); Board-regulated institution’s Call Re- (ii) For an exposure that is held di- port, for a state member bank, or FR rectly and is not an equity exposure or Y–9C, for a bank holding company or a securitization exposure, the exposure savings and loan holding company, as amount as that term is defined in applicable, if the Board-regulated insti- § 217.2; tution has a contractual right or obli- (iii) For an indirect exposure, the gation to sell the long position at a Board-regulated institution’s carrying specific point in time and the value of the investment in the invest- counterparty to the contract has an ment fund, provided that, alter- obligation to purchase the long posi- natively: tion if the Board-regulated institution (A) A Board-regulated institution exercises its right to sell, this point in may, with the prior approval of the time may be treated as the maturity of Board, use a conservative estimate of the long position such that the matu- the amount of its investment in its rity of the long position and short posi- own capital instruments or the capital tion are deemed to match for purposes of an unconsolidated financial institu- of the maturity requirement, even if

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the maturity of the short position is §§ 217.23–217.29 [Reserved] less than one year; and (iii) For an investment in the Board- Subpart D—Risk-Weighted regulated institution’s own capital in- Assets—Standardized Approach strument under paragraph (c)(1) of this section or an investment in a capital of § 217.30 Applicability. an unconsolidated financial institution (a) This subpart sets forth meth- under paragraphs (c)(4), (c)(5), and odologies for determining risk-weight- (d)(1)(iii) of this section. ed assets for purposes of the generally (A) A Board-regulated institution applicable risk-based capital require- may only net a short position against a ments for all Board-regulated institu- long position in the Board-regulated tions. institution’s own capital instrument (b) Notwithstanding paragraph (a) of under paragraph (c)(1) of this section if this section, a market risk Board-regu- the short position involves no lated institution must exclude from its counterparty credit risk. calculation of risk-weighted assets (B) A gross long position in a Board- under this subpart the risk-weighted regulated institution’s own capital in- asset amounts of all covered positions, as defined in subpart F of this part (ex- strument or in a capital instrument of cept foreign exchange positions that an unconsolidated financial institution are not trading positions, OTC deriva- resulting from a position in an index tive positions, cleared transactions, may be netted against a short position and unsettled transactions). in the same index. Long and short posi- tions in the same index without matu- RISK-WEIGHTED ASSETS FOR GENERAL rity dates are considered to have CREDIT RISK matching maturities. (C) A short position in an index that § 217.31 Mechanics for calculating risk-weighted assets for general is hedging a long cash or synthetic po- credit risk. sition in a Board-regulated institu- tion’s own capital instrument or in a (a) General risk-weighting requirements. capital instrument of an unconsoli- A Board-regulated institution must apply risk weights to its exposures as dated financial institution can be de- follows: composed to provide recognition of the (1) A Board-regulated institution hedge. More specifically, the portion of must determine the exposure amount the index that is composed of the same of each on-balance sheet exposure, each underlying instrument that is being OTC derivative contract, and each off- hedged may be used to offset the long balance sheet commitment, trade and position if both the long position being transaction-related contingency, guar- hedged and the short position in the antee, repo-style transaction, financial index are reported as a trading asset or standby letter of credit, forward agree- trading liability (whether on- or off- ment, or other similar transaction that balance sheet) on the Board-regulated is not: institution’s Call Report, for a state (i) An unsettled transaction subject member bank, or FR Y–9C, for a bank to § 217.38; holding company or savings and loan (ii) A cleared transaction subject to holding company, as applicable, and § 217.35; the hedge is deemed effective by the (iii) A default fund contribution sub- Board-regulated institution’s internal ject to § 217.35; control processes, which have not been (iv) A securitization exposure subject found to be inadequate by the Board. to §§ 217.41 through 217.45; or (v) An equity exposure (other than an [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as equity OTC derivative contract) sub- amended at 78 FR 62287, Oct. 11, 2013; 79 FR ject to §§ 217.51 through 217.53. 78295, Dec. 30, 2014; 80 FR 41419, July 15, 2015] (2) The Board-regulated institution must multiply each exposure amount by the risk weight appropriate to the exposure based on the exposure type or

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counterparty, eligible guarantor, or fi- TABLE 1 TO § 217.32—RISK WEIGHTS FOR nancial collateral to determine the SOVEREIGN EXPOSURES—Continued risk-weighted asset amount for each Risk weight exposure. (in percent) (b) Total risk-weighted assets for general credit risk equals the sum of Sovereign Default ...... 150 the risk-weighted asset amounts cal- culated under this section. (3) Certain sovereign exposures. Not- withstanding paragraph (a)(2) of this § 217.32 General risk weights. section, a Board-regulated institution (a) Sovereign exposures—(1) Exposures may assign to a sovereign exposure a to the U.S. government. (i) Notwith- risk weight that is lower than the ap- standing any other requirement in this plicable risk weight in Table 1 to subpart, a Board-regulated institution § 217.32 if: must assign a zero percent risk weight (i) The exposure is denominated in to: the sovereign’s currency; (A) An exposure to the U.S. govern- (ii) The Board-regulated institution ment, its central bank, or a U.S. gov- has at least an equivalent amount of li- ernment agency; and abilities in that currency; and (B) The portion of an exposure that is (iii) The risk weight is not lower directly and unconditionally guaran- than the risk weight that the home teed by the U.S. government, its cen- country supervisor allows Board-regu- tral bank, or a U.S. government agen- lated institutions under its jurisdiction cy. This includes a deposit or other ex- to assign to the same exposures to the posure, or the portion of a deposit or sovereign. other exposure, that is insured or oth- (4) Exposures to a non-OECD member erwise unconditionally guaranteed by sovereign with no CRC. Except as pro- the FDIC or National Credit Union Ad- vided in paragraphs (a)(3), (a)(5) and ministration. (a)(6) of this section, a Board-regulated (ii) A Board-regulated institution institution must assign a 100 percent must assign a 20 percent risk weight to risk weight to an exposure to a sov- the portion of an exposure that is con- ereign if the sovereign does not have a ditionally guaranteed by the U.S. gov- CRC. ernment, its central bank, or a U.S. (5) Exposures to an OECD member sov- government agency. This includes an ereign with no CRC. Except as provided exposure, or the portion of an exposure, in paragraph (a)(6) of this section, a that is conditionally guaranteed by the Board-regulated institution must as- FDIC or National Credit Union Admin- sign a 0 percent risk weight to an expo- istration. (2) Other sovereign exposures. In ac- sure to a sovereign that is a member of cordance with Table 1 to § 217.32, a the OECD if the sovereign does not Board-regulated institution must as- have a CRC. sign a risk weight to a sovereign expo- (6) Sovereign default. A Board-regu- sure based on the CRC applicable to the lated institution must assign a 150 per- sovereign or the sovereign’s OECD cent risk weight to a sovereign expo- membership status if there is no CRC sure immediately upon determining applicable to the sovereign. that an event of sovereign default has occurred, or if an event of sovereign de- TABLE 1 TO § 217.32—RISK WEIGHTS FOR fault has occurred during the previous SOVEREIGN EXPOSURES five years. (b) Certain supranational entities and Risk weight (in percent) multilateral development banks (MDBs). A Board-regulated institution must as- CRC: sign a zero percent risk weight to an 0–1 ...... 0 2 ...... 20 exposure to the Bank for International 3 ...... 50 Settlements, the European Central 4–6 ...... 100 Bank, the European Commission, the 7 ...... 150 OECD Member with No CRC ...... 0 International Monetary Fund, or an Non-OECD Member with No CRC ...... 100 MDB.

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(c) Exposures to GSEs. (1) A Board-reg- less, which may be assigned a 20 per- ulated institution must assign a 20 per- cent risk weight. cent risk weight to an exposure to a (iv) A Board-regulated institution GSE other than an equity exposure or must assign a 150 percent risk weight preferred stock. to an exposure to a foreign bank imme- (2) A Board-regulated institution diately upon determining that an event must assign a 100 percent risk weight of sovereign default has occurred in the to preferred stock issued by a GSE. bank’s home country, or if an event of (d) Exposures to depository institutions, sovereign default has occurred in the foreign banks, and credit unions—(1) Ex- foreign bank’s home country during posures to U.S. depository institutions the previous five years. and credit unions. A Board-regulated in- (3) A Board-regulated institution stitution must assign a 20 percent risk must assign a 100 percent risk weight weight to an exposure to a depository to an exposure to a financial institu- institution or credit union that is orga- tion if the exposure may be included in nized under the laws of the United that financial institution’s capital un- States or any state thereof, except as less the exposure is: otherwise provided under paragraph (i) An equity exposure; (d)(3) of this section. (ii) A significant investment in the (2) Exposures to foreign banks. (i) Ex- capital of an unconsolidated financial cept as otherwise provided under para- institution in the form of common graphs (d)(2)(iv) and (d)(3) of this sec- stock pursuant to § 217.22(d)(iii); tion, a Board-regulated institution (iii) Deducted from regulatory cap- must assign a risk weight to an expo- ital under § 217.22; or sure to a foreign bank, in accordance (iv) Subject to a 150 percent risk with Table 2 to § 217.32, based on the weight under paragraph (d)(2)(iv) or CRC that corresponds to the foreign Table 2 of paragraph (d)(2) of this sec- bank’s home country or the OECD tion. membership status of the foreign (e) Exposures to public sector entities bank’s home country if there is no CRC (PSEs)—(1) Exposures to U.S. PSEs. (i) A applicable to the foreign bank’s home Board-regulated institution must as- country. sign a 20 percent risk weight to a gen- eral obligation exposure to a PSE that TABLE 2 TO § 217.32—RISK WEIGHTS FOR is organized under the laws of the EXPOSURES TO FOREIGN BANKS United States or any state or political subdivision thereof. Risk weight (in percent) (ii) A Board-regulated institution must assign a 50 percent risk weight to CRC: a revenue obligation exposure to a PSE 0–1 ...... 20 2 ...... 50 that is organized under the laws of the 3 ...... 100 United States or any state or political 4–7 ...... 150 subdivision thereof. OECD Member with No CRC ...... 20 Non-OECD Member with No CRC ...... 100 (2) Exposures to foreign PSEs. (i) Ex- Sovereign Default ...... 150 cept as provided in paragraphs (e)(1) and (e)(3) of this section, a Board-regu- (ii) A Board-regulated institution lated institution must assign a risk must assign a 20 percent risk weight to weight to a general obligation exposure an exposure to a foreign bank whose to a PSE, in accordance with Table 3 to home country is a member of the OECD § 217.32, based on the CRC that cor- and does not have a CRC. responds to the PSE’s home country or (iii) A Board-regulated institution the OECD membership status of the must assign a 100 percent risk weight PSE’s home country if there is no CRC to an exposure to a foreign bank whose applicable to the PSE’s home country. home country is not a member of the (ii) Except as provided in paragraphs OECD and does not have a CRC, with (e)(1) and (e)(3) of this section, a Board- the exception of self-liquidating, trade- regulated institution must assign a related contingent items that arise risk weight to a revenue obligation ex- from the movement of goods, and that posure to a PSE, in accordance with have a maturity of three months or Table 4 to § 217.32, based on the CRC

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that corresponds to the PSE’s home home country is not a member of the country; or the OECD membership sta- OECD and does not have a CRC. tus of the PSE’s home country if there (6) A Board-regulated institution is no CRC applicable to the PSE’s home must assign a 150 percent risk weight country. to a PSE exposure immediately upon (3) A Board-regulated institution determining that an event of sovereign may assign a lower risk weight than default has occurred in a PSE’s home would otherwise apply under Tables 3 country or if an event of sovereign de- or 4 to § 217.32 to an exposure to a for- fault has occurred in the PSE’s home eign PSE if: country during the previous five years. (i) The PSE’s home country super- (f) Corporate exposures. A Board-regu- visor allows banks under its jurisdic- lated institution must assign a 100 per- tion to assign a lower risk weight to cent risk weight to all its corporate ex- such exposures; and posures. (ii) The risk weight is not lower than (g) Residential mortgage exposures. (1) the risk weight that corresponds to the A Board-regulated institution must as- PSE’s home country in accordance sign a 50 percent risk weight to a first- with Table 1 to § 217.32. lien residential mortgage exposure that: TABLE 3 TO § 217.32—RISK WEIGHTS FOR NON- (i) Is secured by a property that is ei- U.S. PSE GENERAL OBLIGATIONS ther owner-occupied or rented; Risk weight (ii) Is made in accordance with pru- (in percent) dent underwriting standards, including relating to the loan amount as a per- CRC: 0–1 ...... 20 cent of the appraised value of the prop- 2 ...... 50 erty; A Board-regulated institution 3 ...... 100 must base all estimates of a property’s 4–7 ...... 150 OECD Member with No CRC ...... 20 value on an appraisal or evaluation of Non-OECD Member with No CRC ...... 100 the property that satisfies subpart E of Sovereign Default ...... 150 12 CFR part 208. (iii) Is not 90 days or more past due TABLE 4 TO § 217.32—RISK WEIGHTS FOR NON- or carried in nonaccrual status; and U.S. PSE REVENUE OBLIGATIONS (iv) Is not restructured or modified. (2) A Board-regulated institution Risk weight (in percent) must assign a 100 percent risk weight to a first-lien residential mortgage ex- CRC: 0–1 ...... 50 posure that does not meet the criteria 2–3 ...... 100 in paragraph (g)(1) of this section, and 4–7 ...... 150 to junior-lien residential mortgage ex- OECD Member with No CRC ...... 50 Non-OECD Member with No CRC ...... 100 posures. Sovereign Default ...... 150 (3) For the purpose of this paragraph (g), if a Board-regulated institution (4) Exposures to PSEs from an OECD holds the first-lien and junior-lien(s) member sovereign with no CRC. (i) A residential mortgage exposures, and no Board-regulated institution must as- other party holds an intervening lien, sign a 20 percent risk weight to a gen- the Board-regulated institution must eral obligation exposure to a PSE combine the exposures and treat them whose home country is an OECD mem- as a single first-lien residential mort- ber sovereign with no CRC. gage exposure. (ii) A Board-regulated institution (4) A loan modified or restructured must assign a 50 percent risk weight to solely pursuant to the U.S. Treasury’s a revenue obligation exposure to a PSE Home Affordable Mortgage Program is whose home country is an OECD mem- not modified or restructured for pur- ber sovereign with no CRC. poses of this section. (5) Exposures to PSEs whose home (h) Pre-sold construction loans. A country is not an OECD member sovereign Board-regulated institution must as- with no CRC. A Board-regulated insti- sign a 50 percent risk weight to a pre- tution must assign a 100 percent risk sold construction loan unless the pur- weight to an exposure to a PSE whose chase contract is cancelled, in which

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case a Board-regulated institution ing counterparty credit risk by the must assign a 100 percent risk weight. central counterparty after settlement (i) Statutory multifamily mortgages. A of the trade and associated default fund Board-regulated institution must as- contributions. sign a 50 percent risk weight to a stat- (2) A Board-regulated institution utory multifamily mortgage. must assign a 20 percent risk weight to (j) High-volatility commercial real estate cash items in the process of collection. (HVCRE) exposures. A Board-regulated (3) A Board-regulated institution institution must assign a 150 percent must assign a 100 percent risk weight risk weight to an HVCRE exposure. to DTAs arising from temporary dif- (k) Past due exposures. Except for an ferences that the Board-regulated in- exposure to a sovereign entity or a res- stitution could realize through net op- idential mortgage exposure or a policy erating loss carrybacks. loan, if an exposure is 90 days or more (4) A Board-regulated institution past due or on nonaccrual: must assign a 250 percent risk weight (1) A Board-regulated institution to the portion of each of the following must assign a 150 percent risk weight items that is not deducted from com- to the portion of the exposure that is mon equity tier 1 capital pursuant to not guaranteed or that is unsecured. § 217.22(d): (2) A Board-regulated institution (i) MSAs; and may assign a risk weight to the guar- (ii) DTAs arising from temporary dif- anteed portion of a past due exposure ferences that the Board-regulated in- based on the risk weight that applies stitution could not realize through net under § 217.36 if the guarantee or credit operating loss carrybacks. derivative meets the requirements of (5) A Board-regulated institution that section. must assign a 100 percent risk weight (3) A Board-regulated institution to all assets not specifically assigned a may assign a risk weight to the different risk weight under this sub- collateralized portion of a past due ex- part and that are not deducted from posure based on the risk weight that tier 1 or tier 2 capital pursuant to applies under § 217.37 if the collateral § 217.22. meets the requirements of that section. (6) Notwithstanding the requirements (l) Other assets. (1)(i) A bank holding of this section, a state member bank company or savings and loan holding may assign an asset that is not in- company must assign a zero percent cluded in one of the categories pro- risk weight to cash owned and held in vided in this section to the risk weight all offices of subsidiary depository in- category applicable under the capital stitutions or in transit, and to gold rules applicable to bank holding com- bullion held in a subsidiary depository panies and savings and loan holding institution’s own vaults, or held in an- companies under this part, provided other depository institution’s vaults on that all of the following conditions an allocated basis, to the extent the apply: gold bullion assets are offset by gold (i) The Board-regulated institution is bullion liabilities. not authorized to hold the asset under (ii) A state member bank must assign applicable law other than debt pre- a zero percent risk weight to cash viously contracted or similar author- owned and held in all offices of the ity; and state member bank or in transit; to (ii) The risks associated with the gold bullion held in the state member asset are substantially similar to the bank’s own vaults or held in another risks of assets that are otherwise as- depository institution’s vaults on an signed to a risk weight category of less allocated basis, to the extent the gold than 100 percent under this subpart. bullion assets are offset by gold bullion (m) Insurance assets—(1) Assets held in liabilities; and to exposures that arise a separate account. (i) A bank holding from the settlement of cash trans- company or savings and loan holding actions (such as equities, fixed income, company must risk-weight the indi- spot foreign exchange and spot com- vidual assets held in a separate ac- modities) with a central counterparty count that does not qualify as a non- where there is no assumption of ongo- guaranteed separate account as if the

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individual assets were held directly by (ii) Self-liquidating, trade-related the bank holding company or savings contingent items that arise from the and loan holding company. movement of goods, with an original (ii) A bank holding company or sav- maturity of one year or less. ings and loan holding company must (3) 50 percent CCF. A Board-regulated assign a zero percent risk weight to an institution must apply a 50 percent asset that is held in a non-guaranteed CCF to the amount of: separate account. (i) Commitments with an original (2) Policy loans. A bank holding com- maturity of more than one year that pany or savings and loan holding com- are not unconditionally cancelable by pany must assign a 20 percent risk the Board-regulated institution; and weight to a policy loan. (ii) Transaction-related contingent [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as items, including performance bonds, amended at 78 FR 62287, Oct. 11, 2013] bid bonds, warranties, and performance standby letters of credit. § 217.33 Off-balance sheet exposures. (4) 100 percent CCF. A Board-regulated (a) General. (1) A Board-regulated in- institution must apply a 100 percent stitution must calculate the exposure CCF to the amount of the following off- amount of an off-balance sheet expo- balance-sheet items and other similar sure using the credit conversion factors transactions: (CCFs) in paragraph (b) of this section. (i) Guarantees; (2) Where a Board-regulated institu- (ii) Repurchase agreements (the off- tion commits to provide a commit- balance sheet component of which ment, the Board-regulated institution equals the sum of the current fair val- may apply the lower of the two appli- ues of all positions the Board-regulated cable CCFs. institution has sold subject to repur- (3) Where a Board-regulated institu- chase); tion provides a commitment structured (iii) Credit-enhancing representa- as a syndication or participation, the tions and warranties that are not Board-regulated institution is only re- securitization exposures; quired to calculate the exposure (iv) Off-balance sheet securities lend- amount for its pro rata share of the ing transactions (the off-balance sheet commitment. component of which equals the sum of (4) Where a Board-regulated institu- the current fair values of all positions tion provides a commitment, enters the Board-regulated institution has into a repurchase agreement, or pro- lent under the transaction); vides a credit-enhancing representa- (v) Off-balance sheet securities bor- tion and warranty, and such commit- rowing transactions (the off-balance ment, repurchase agreement, or credit- sheet component of which equals the enhancing representation and warranty sum of the current fair values of all is not a securitization exposure, the ex- non-cash positions the Board-regulated posure amount shall be no greater than institution has posted as collateral the maximum contractual amount of under the transaction); the commitment, repurchase agree- (vi) Financial standby letters of cred- ment, or credit-enhancing representa- it; and tion and warranty, as applicable. (vii) Forward agreements. (b) Credit conversion factors—(1) Zero percent CCF. A Board-regulated institu- § 217.34 OTC derivative contracts. tion must apply a zero percent CCF to (a) Exposure amount—(1) Single OTC the unused portion of a commitment derivative contract. Except as modified that is unconditionally cancelable by by paragraph (b) of this section, the ex- the Board-regulated institution. posure amount for a single OTC deriva- (2) 20 percent CCF. A Board-regulated tive contract that is not subject to a institution must apply a 20 percent qualifying master netting agreement is CCF to the amount of: equal to the sum of the Board-regu- (i) Commitments with an original lated institution’s current credit expo- maturity of one year or less that are sure and potential future credit expo- not unconditionally cancelable by the sure (PFE) on the OTC derivative con- Board-regulated institution; and tract.

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(i) Current credit exposure. The cur- each party falling due on each value rent credit exposure for a single OTC date in each currency. derivative contract is the greater of (C) For an OTC derivative contract the mark-to-fair value of the OTC de- that does not fall within one of the rivative contract or zero. specified categories in Table 1 to (ii) PFE. (A) The PFE for a single § 217.34, the PFE must be calculated OTC derivative contract, including an using the appropriate ‘‘other’’ conver- OTC derivative contract with a nega- sion factor. tive mark-to-fair value, is calculated (D) A Board-regulated institution by multiplying the notional principal must use an OTC derivative contract’s amount of the OTC derivative contract effective notional principal amount by the appropriate conversion factor in (that is, the apparent or stated no- Table 1 to § 217.34. tional principal amount multiplied by (B) For purposes of calculating either any multiplier in the OTC derivative the PFE under this paragraph (a) or contract) rather than the apparent or the gross PFE under paragraph (a)(2) of stated notional principal amount in this section for exchange rate con- calculating PFE. tracts and other similar contracts in (E) The PFE of the protection pro- which the notional principal amount is vider of a credit derivative is capped at equivalent to the cash flows, notional the net present value of the amount of principal amount is the net receipts to unpaid premiums.

TABLE 1 TO § 217.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS1

Foreign ex- Credit (invest- Credit (non-invest- Precious met- 2 Interest Remaining maturity rate change rate ment grade ref- ment-grade ref- Equity als (except Other and gold erence asset) 3 erence asset) gold)

One year or less ...... 0.00 0.01 0.05 0.10 0.06 0.07 0.10 Greater than one year and less than or equal to five years ...... 0.005 0.05 0.05 0.10 0.08 0.07 0.12 Greater than five years 0.015 0.075 0.05 0.10 0.10 0.08 0.15 1 For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract. 2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum con- version factor is 0.005. 3 A Board-regulated institution must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A Board-regulated institution must use the column labeled ‘‘Credit (non-investment-grade reference asset)’’ for all other credit derivatives.

(2) Multiple OTC derivative contracts (ii) Adjusted sum of the PFE amounts. subject to a qualifying master netting The adjusted sum of the PFE amounts, agreement. Except as modified by para- Anet, is calculated as Anet = (0.4 × graph (b) of this section, the exposure Agross) + (0.6 × NGR × Agross), amount for multiple OTC derivative where: contracts subject to a qualifying mas- (A) Agross = the gross PFE (that is, ter netting agreement is equal to the the sum of the PFE amounts as deter- sum of the net current credit exposure mined under paragraph (a)(1)(ii) of this and the adjusted sum of the PFE section for each individual derivative amounts for all OTC derivative con- contract subject to the qualifying mas- tracts subject to the qualifying master ter netting agreement); and netting agreement. (B) Net-to-gross Ratio (NGR) = the (i) Net current credit exposure. The net ratio of the net current credit exposure current credit exposure is the greater to the gross current credit exposure. In of the net sum of all positive and nega- calculating the NGR, the gross current tive mark-to-fair values of the indi- credit exposure equals the sum of the vidual OTC derivative contracts sub- positive current credit exposures (as ject to the qualifying master netting determined under paragraph (a)(1)(i) of agreement or zero.

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this section) of all individual deriva- compute a counterparty credit risk tive contracts subject to the qualifying capital requirement for the OTC credit master netting agreement. derivative under § 217.32, provided that (b) Recognition of credit risk mitigation this treatment is applied consistently of collateralized OTC derivative contracts: for all such OTC credit derivatives. The (1) A Board-regulated institution may Board-regulated institution must ei- recognize the credit risk mitigation ther include all or exclude all such OTC benefits of financial collateral that se- credit derivatives that are subject to a cures an OTC derivative contract or qualifying master netting agreement multiple OTC derivative contracts sub- from any measure used to determine ject to a qualifying master netting counterparty credit risk exposure. agreement (netting set) by using the (ii) The provisions of this paragraph simple approach in § 217.37(b). (c)(2) apply to all relevant counterpar- (2) As an alternative to the simple ties for risk-based capital purposes un- approach, a Board-regulated institu- less the Board-regulated institution is tion may recognize the credit risk treating the OTC credit derivative as a mitigation benefits of financial collat- covered position under subpart F, in eral that secures such a contract or which case the Board-regulated institu- netting set if the financial collateral is tion must compute a supplemental marked-to-fair value on a daily basis counterparty credit risk capital re- and subject to a daily margin mainte- quirement under this section. nance requirement by applying a risk (d) Counterparty credit risk for OTC eq- weight to the exposure as if it were uity derivatives. (1) A Board-regulated uncollateralized and adjusting the ex- institution must treat an OTC equity posure amount calculated under para- derivative contract as an equity expo- graph (a)(1) or (2) of this section using sure and compute a risk-weighted asset the collateral haircut approach in amount for the OTC equity derivative § 217.37(c). The Board-regulated institu- contract under §§ 217.51 through 217.53 tion must substitute the exposure (unless the Board-regulated institution amount calculated under paragraph is treating the contract as a covered (a)(1) or (2) of this section for SE in the position under subpart F of this part). equation in § 217.37(c)(2). (2) In addition, the Board-regulated (c) Counterparty credit risk for OTC institution must also calculate a risk- credit derivatives. (1) Protection pur- based capital requirement for the chasers. A Board-regulated institution counterparty credit risk of an OTC eq- that purchases an OTC credit deriva- uity derivative contract under this sec- tive that is recognized under § 217.36 as tion if the Board-regulated institution a credit risk mitigant for an exposure is treating the contract as a covered that is not a covered position under position under subpart F of this part. subpart F is not required to compute a (3) If the Board-regulated institution separate counterparty credit risk cap- risk weights the contract under the ital requirement under § 217.32 provided Simple Risk-Weight Approach (SRWA) that the Board-regulated institution in § 217.52, the Board-regulated institu- does so consistently for all such credit tion may choose not to hold risk-based derivatives. The Board-regulated insti- capital against the counterparty credit tution must either include all or ex- risk of the OTC equity derivative con- clude all such credit derivatives that tract, as long as it does so for all such are subject to a qualifying master net- contracts. Where the OTC equity deriv- ting agreement from any measure used ative contracts are subject to a quali- to determine counterparty credit risk fied master netting agreement, a exposure to all relevant counterparties Board-regulated institution using the for risk-based capital purposes. SRWA must either include all or ex- (2) Protection providers. (i) A Board- clude all of the contracts from any regulated institution that is the pro- measure used to determine tection provider under an OTC credit counterparty credit risk exposure. derivative must treat the OTC credit (e) Clearing member Board-regulated in- derivative as an exposure to the under- stitution’s exposure amount. A clearing lying reference asset. The Board-regu- member Board-regulated institution’s lated institution is not required to exposure amount for an OTC derivative

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contract or netting set of OTC deriva- cording to paragraph (a)(1) or (2) of this tive contracts where the Board-regu- section multiplied by the scaling factor lated institution is either acting as a 0.71. If the Board-regulated institution financial intermediary and enters into determines that a longer period is ap- an offsetting transaction with a QCCP propriate, the Board-regulated institu- or where the Board-regulated institu- tion must use a larger scaling factor to tion provides a guarantee to the QCCP adjust for a longer holding period as on the performance of the client equals follows: the exposure amount calculated ac-

where (ii) A clearing member client Board- H = the holding period greater than five regulated institution’s total risk- days. Additionally, the Board may re- weighted assets for cleared trans- quire the Board-regulated institution to actions is the sum of the risk-weighted set a longer holding period if the Board asset amounts for all its cleared trans- determines that a longer period is appro- actions. priate due to the nature, structure, or characteristics of the transaction or is (2) Trade exposure amount. (i) For a commensurate with the risks associated cleared transaction that is either a de- with the transaction. rivative contract or a netting set of de- rivative contracts, the trade exposure § 217.35 Cleared transactions. amount equals: (a) General requirements—(1) Clearing (A) The exposure amount for the de- member clients. A Board-regulated insti- rivative contract or netting set of de- tution that is a clearing member client rivative contracts, calculated using the must use the methodologies described methodology used to calculate expo- in paragraph (b) of this section to cal- sure amount for OTC derivative con- culate risk-weighted assets for a tracts under § 217.34; plus cleared transaction. (B) The fair value of the collateral (2) Clearing members. A Board-regu- posted by the clearing member client lated institution that is a clearing Board-regulated institution and held member must use the methodologies by the CCP, clearing member, or custo- described in paragraph (c) of this sec- dian in a manner that is not bank- tion to calculate its risk-weighted as- ruptcy remote. sets for a cleared transaction and para- (ii) For a cleared transaction that is graph (d) of this section to calculate its a repo-style transaction or netting set risk-weighted assets for its default of repo-style transactions, the trade fund contribution to a CCP. exposure amount equals: (b) Clearing member client Board-regu- (A) The exposure amount for the lated institutions—(1) Risk-weighted as- repo-style transaction calculated using sets for cleared transactions. (i) To deter- the methodologies under § 217.37(c); mine the risk-weighted asset amount plus for a cleared transaction, a Board-regu- (B) The fair value of the collateral lated institution that is a clearing posted by the clearing member client member client must multiply the trade Board-regulated institution and held exposure amount for the cleared trans- by the CCP, clearing member, or custo- action, calculated in accordance with dian in a manner that is not bank- paragraph (b)(2) of this section, by the ruptcy remote. risk weight appropriate for the cleared (3) Cleared transaction risk weights. (i) transaction, determined in accordance For a cleared transaction with a QCCP, with paragraph (b)(3) of this section.

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a clearing member client Board-regu- a clearing member Board-regulated in- lated institution must apply a risk stitution must multiply the trade ex- weight of: posure amount for the cleared trans- (A) 2 percent if the collateral posted action, calculated in accordance with by the Board-regulated institution to paragraph (c)(2) of this section, by the the QCCP or clearing member is sub- risk weight appropriate for the cleared ject to an arrangement that prevents transaction, determined in accordance any losses to the clearing member cli- with paragraph (c)(3) of this section. ent Board-regulated institution due to (ii) A clearing member Board-regu- the joint default or a concurrent insol- lated institution’s total risk-weighted vency, liquidation, or receivership pro- assets for cleared transactions is the ceeding of the clearing member and sum of the risk-weighted asset any other clearing member clients of amounts for all of its cleared trans- the clearing member; and the clearing actions. member client Board-regulated institu- (2) Trade exposure amount. A clearing tion has conducted sufficient legal re- member Board-regulated institution view to conclude with a well-founded must calculate its trade exposure basis (and maintains sufficient written amount for a cleared transaction as documentation of that legal review) follows: that in the event of a legal challenge (i) For a cleared transaction that is (including one resulting from an event either a derivative contract or a net- of default or from liquidation, insol- ting set of derivative contracts, the vency, or receivership proceedings) the trade exposure amount equals: relevant court and administrative au- (A) The exposure amount for the de- thorities would find the arrangements rivative contract, calculated using the to be legal, valid, binding and enforce- methodology to calculate exposure able under the law of the relevant ju- amount for OTC derivative contracts risdictions; or under § 217.34; plus (B) 4 percent if the requirements of (B) The fair value of the collateral § 217.35(b)(3)(A) are not met. posted by the clearing member Board- (ii) For a cleared transaction with a regulated institution and held by the CCP that is not a QCCP, a clearing CCP in a manner that is not bank- member client Board-regulated institu- ruptcy remote. tion must apply the risk weight appro- (ii) For a cleared transaction that is priate for the CCP according to § 217.32. a repo-style transaction or netting set (4) Collateral. (i) Notwithstanding any of repo-style transactions, trade expo- other requirements in this section, col- sure amount equals: lateral posted by a clearing member (A) The exposure amount for repo- client Board-regulated institution that style transactions calculated using is held by a custodian (in its capacity methodologies under § 217.37(c); plus as custodian) in a manner that is bank- (B) The fair value of the collateral ruptcy remote from the CCP, the cus- posted by the clearing member Board- todian, clearing member and other regulated institution and held by the clearing member clients of the clearing CCP in a manner that is not bank- member, is not subject to a capital re- ruptcy remote. quirement under this section. (3) Cleared transaction risk weight. (i) (ii) A clearing member client Board- A clearing member Board-regulated in- regulated institution must calculate a stitution must apply a risk weight of 2 risk-weighted asset amount for any percent to the trade exposure amount collateral provided to a CCP, clearing for a cleared transaction with a QCCP. member, or custodian in connection (ii) For a cleared transaction with a with a cleared transaction in accord- CCP that is not a QCCP, a clearing ance with the requirements under member Board-regulated institution § 217.32. must apply the risk weight appropriate (c) Clearing member Board-regulated in- for the CCP according to § 217.32. stitutions—(1) Risk-weighted assets for (4) Collateral. (i) Notwithstanding any cleared transactions. other requirement in this section, col- (i) To determine the risk-weighted lateral posted by a clearing member asset amount for a cleared transaction, Board-regulated institution that is

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held by a custodian in a manner that is amount for default fund contributions bankruptcy remote from the CCP is to CCPs that are not QCCPs equals the not subject to a capital requirement sum of such default fund contributions under this section. multiplied by 1,250 percent, or an (ii) A clearing member Board-regu- amount determined by the Board, lated institution must calculate a risk- based on factors such as size, structure weighted asset amount for any collat- and membership characteristics of the eral provided to a CCP, clearing mem- CCP and riskiness of its transactions, ber, or a custodian in connection with in cases where such default fund con- a cleared transaction in accordance tributions may be unlimited. with requirements under § 217.32. (3) Risk-weighted asset amount for de- (d) Default fund contributions. (1) Gen- eral requirement. A clearing member fault fund contributions to QCCPs. A Board-regulated institution must de- clearing member Board-regulated insti- termine the risk-weighted asset tution’s risk-weighted asset amount amount for a default fund contribution for default fund contributions to to a CCP at least quarterly, or more QCCPs equals the sum of its capital re- frequently if, in the opinion of the quirement, KCM for each QCCP, as cal- Board-regulated institution or the culated under the methodology set Board, there is a material change in forth in paragraphs (d)(3)(i) through the financial condition of the CCP. (iii) of this section (Method 1), multi- (2) Risk-weighted asset amount for de- plied by 1,250 percent or in paragraphs fault fund contributions to non-qualifying (d)(3)(iv) of this section (Method 2). CCPs. A clearing member Board-regu- (i) Method 1. The hypothetical capital lated institution’s risk-weighted asset requirement of a QCCP (KCCP) equals:

Where: (3) For repo-style transactions, when

(A) EBRMi = the exposure amount for applying § 217.37(c)(2), the Board-regu- each transaction cleared through the lated institution must use the method- QCCP by clearing member i, calculated ology in § 217.37(c)(3); in accordance with § 217.34 for OTC de- (B) VMi = any collateral posted by rivative contracts and § 217.37(c)(2) for clearing member i to the QCCP that it repo-style transactions, provided that: is entitled to receive from the QCCP, (1) For purposes of this section, in but has not yet received, and any col- calculating the exposure amount the lateral that the QCCP has actually re- Board-regulated institution may re- ceived from clearing member i; place the formula provided in (C) IMi = the collateral posted as ini- § 217.34(a)(2)(ii) with the following: Anet tial margin by clearing member i to = (0.15 × Agross) + (0.85 × NGR × the QCCP; Agross); and (D) DFi = the funded portion of clear- ing member i’s default fund contribu- (2) For option derivative contracts tion that will be applied to reduce the that are cleared transactions, the PFE QCCP’s loss upon a default by clearing described in § 217.34(a)(1)(ii) must be ad- member i; justed by multiplying the notional (E) RW = 20 percent, except when the principal amount of the derivative con- Board has determined that a higher tract by the appropriate conversion risk weight is more appropriate based factor in Table 1 to § 217.34 and the ab- on the specific characteristics of the solute value of the option’s delta, that QCCP and its clearing members; and is, the ratio of the change in the value (F) Where a QCCP has provided its of the derivative contract to the cor- KCCP, a Board-regulated institution responding change in the price of the must rely on such disclosed figure in- underlying asset. stead of calculating KCCP under this 480

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paragraph (d), unless the Board-regu- (ii) For a Board-regulated institution lated institution determines that a that is a clearing member of a QCCP more conservative figure is appropriate with a default fund supported by fund- based on the nature, structure, or char- ed commitments, KCM equals: acteristics of the QCCP.

Subscripts 1 and 2 denote the clear- would be used to cover its losses before ing members with the two largest ANet clearing members’ default fund con- values. For purposes of this paragraph tributions are used to cover losses; (d), for derivatives A is defined in Net (D) DFCM = funded default fund con- § 217.34(a)(2)(ii) and for repo-style trans- tributions from all clearing members actions, ANet means the exposure and any other clearing member con- amount as defined in § 217.37(c)(2) using tributed financial resources that are the methodology in § 217.37(c)(3); available to absorb mutualized QCCP (B) N = the number of clearing mem- losses; bers in the QCCP; (E) DF = DFCCP + DFCM (that is, the (C) DFCCP = the QCCP’s own funds and other financial resources that total funded default fund contribution);

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Where: (B) For a Board-regulated institution (1) DFi = the Board-regulated institu- that is a clearing member of a QCCP tion’s unfunded commitment to the de- with a default fund supported by un- fault fund; funded commitments and is unable to (2) DF = the total of all clearing CM calculate KCM using the methodology members’ unfunded commitment to the described in paragraph (d)(3)(iii) of this default fund; and section, KCM equals: (3) K*CM as defined in paragraph (d)(3)(ii) of this section.

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Where: proportionately) by an eligible guar- (1) IMi = the Board-regulated institu- antee or eligible credit derivative. tion’s initial margin posted to the (3) Exposures on which there is a QCCP; tranching of credit risk (reflecting at (2) IMCM = the total of initial margin least two different levels of seniority) posted to the QCCP; and generally are securitization exposures (3)K*CM as defined in paragraph subject to §§ 217.41 through 217.45. (d)(3)(ii) of this section. (4) If multiple eligible guarantees or (iv) Method 2. A clearing member eligible credit derivatives cover a sin- Board-regulated institution’s risk- gle exposure described in this section, a weighted asset amount for its default Board-regulated institution may treat fund contribution to a QCCP, RWADF, the hedged exposure as multiple sepa- equals: rate exposures each covered by a single RWA = Min {12.5 * DF; 0.18 * TE} eligible guarantee or eligible credit de- DF rivative and may calculate a separate Where: risk-weighted asset amount for each (A) TE = the Board-regulated institu- separate exposure as described in para- tion’s trade exposure amount to the graph (c) of this section. QCCP, calculated according to section (5) If a single eligible guarantee or el- 35(c)(2); igible credit derivative covers multiple (B) DF = the funded portion of the hedged exposures described in para- Board-regulated institution’s default graph (a)(2) of this section, a Board- fund contribution to the QCCP. regulated institution must treat each (4) Total risk-weighted assets for default hedged exposure as covered by a sepa- fund contributions. Total risk-weighted rate eligible guarantee or eligible cred- assets for default fund contributions is it derivative and must calculate a sep- the sum of a clearing member Board- arate risk-weighted asset amount for regulated institution’s risk-weighted each exposure as described in para- assets for all of its default fund con- graph (c) of this section. tributions to all CCPs of which the (b) Rules of recognition. (1) A Board- Board-regulated institution is a clear- regulated institution may only recog- ing member. nize the credit risk mitigation benefits of eligible guarantees and eligible cred- § 217.36 Guarantees and credit deriva- it derivatives. tives: substitution treatment. (2) A Board-regulated institution (a) Scope—(1) General. A Board-regu- may only recognize the credit risk lated institution may recognize the mitigation benefits of an eligible credit credit risk mitigation benefits of an el- derivative to hedge an exposure that is igible guarantee or eligible credit de- different from the credit derivative’s rivative by substituting the risk reference exposure used for deter- weight associated with the protection mining the derivative’s cash settle- provider for the risk weight assigned to ment value, deliverable obligation, or an exposure, as provided under this sec- occurrence of a credit event if: tion. (i) The reference exposure ranks pari (2) This section applies to exposures passu with, or is subordinated to, the for which: hedged exposure; and (i) Credit risk is fully covered by an (ii) The reference exposure and the eligible guarantee or eligible credit de- hedged exposure are to the same legal rivative; or entity, and legally enforceable cross- (ii) Credit risk is covered on a pro default or cross-acceleration clauses rata basis (that is, on a basis in which are in place to ensure payments under the Board-regulated institution and the credit derivative are triggered the protection provider share losses when the obligated party of the hedged

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exposure fails to pay under the terms tive notional amount of the credit risk of the hedged exposure. mitigant to reflect any maturity mis- (c) Substitution approach—(1) Full cov- match between the hedged exposure erage. If an eligible guarantee or eligi- and the credit risk mitigant. ble credit derivative meets the condi- (2) A maturity mismatch occurs tions in paragraphs (a) and (b) of this when the residual maturity of a credit section and the protection amount (P) risk mitigant is less than that of the of the guarantee or credit derivative is hedged exposure(s). greater than or equal to the exposure (3) The residual maturity of a hedged amount of the hedged exposure, a exposure is the longest possible re- Board-regulated institution may recog- maining time before the obligated nize the guarantee or credit derivative party of the hedged exposure is sched- in determining the risk-weighted asset uled to fulfil its obligation on the amount for the hedged exposure by hedged exposure. If a credit risk substituting the risk weight applicable mitigant has embedded options that to the guarantor or credit derivative may reduce its term, the Board-regu- protection provider under § 217.32 for lated institution (protection purchaser) the risk weight assigned to the expo- must use the shortest possible residual sure. maturity for the credit risk mitigant. (2) Partial coverage. If an eligible If a call is at the discretion of the pro- guarantee or eligible credit derivative tection provider, the residual maturity meets the conditions in §§ 217.36(a) and of the credit risk mitigant is at the 217.37(b) and the protection amount (P) first call date. If the call is at the dis- of the guarantee or credit derivative is cretion of the Board-regulated institu- less than the exposure amount of the tion (protection purchaser), but the hedged exposure, the Board-regulated terms of the arrangement at origina- institution must treat the hedged expo- tion of the credit risk mitigant contain sure as two separate exposures (pro- a positive incentive for the Board-regu- tected and unprotected) in order to rec- lated institution to call the trans- ognize the credit risk mitigation ben- action before contractual maturity, efit of the guarantee or credit deriva- the remaining time to the first call tive. date is the residual maturity of the (i) The Board-regulated institution credit risk mitigant. may calculate the risk-weighted asset (4) A credit risk mitigant with a ma- amount for the protected exposure turity mismatch may be recognized under § 217.32, where the applicable risk only if its original maturity is greater weight is the risk weight applicable to than or equal to one year and its resid- the guarantor or credit derivative pro- ual maturity is greater than three tection provider. months. (ii) The Board-regulated institution must calculate the risk-weighted asset (5) When a maturity mismatch exists, amount for the unprotected exposure the Board-regulated institution must under § 217.32, where the applicable risk apply the following adjustment to re- weight is that of the unprotected por- duce the effective notional amount of the credit risk mitigant: Pm = E × tion of the hedged exposure. ¥ ¥ (iii) The treatment provided in this (t 0.25)/(T 0.25), where: section is applicable when the credit (i) Pm = effective notional amount of risk of an exposure is covered on a par- the credit risk mitigant, adjusted for tial pro rata basis and may be applica- maturity mismatch; ble when an adjustment is made to the (ii) E = effective notional amount of effective notional amount of the guar- the credit risk mitigant; antee or credit derivative under para- (iii) t = the lesser of T or the residual graphs (d), (e), or (f) of this section. maturity of the credit risk mitigant, (d) Maturity mismatch adjustment. (1) expressed in years; and A Board-regulated institution that rec- (iv) T = the lesser of five or the resid- ognizes an eligible guarantee or eligi- ual maturity of the hedged exposure, ble credit derivative in determining expressed in years. the risk-weighted asset amount for a (e) Adjustment for credit derivatives hedged exposure must adjust the effec- without restructuring as a credit event. If

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a Board-regulated institution recog- (i) Pc = effective notional amount of nizes an eligible credit derivative that the credit risk mitigant, adjusted for does not include as a credit event a re- currency mismatch (and maturity mis- structuring of the hedged exposure in- match and lack of restructuring event, volving forgiveness or postponement of if applicable); principal, interest, or fees that results (ii) Pr = effective notional amount of in a credit loss event (that is, a charge- the credit risk mitigant (adjusted for off, specific provision, or other similar maturity mismatch and lack of re- debit to the profit and loss account), structuring event, if applicable); and the Board-regulated institution must (iii) H = haircut appropriate for the apply the following adjustment to re- FX currency mismatch between the credit duce the effective notional amount of risk mitigant and the hedged exposure. the credit derivative: Pr = Pm × 0.60, where: (2) A Board-regulated institution (1) Pr = effective notional amount of must set HFX equal to eight percent un- the credit risk mitigant, adjusted for less it qualifies for the use of and uses lack of restructuring event (and matu- its own internal estimates of foreign rity mismatch, if applicable); and exchange volatility based on a ten- (2) Pm = effective notional amount of business-day holding period. A Board- the credit risk mitigant (adjusted for regulated institution qualifies for the maturity mismatch, if applicable). use of its own internal estimates of for- (f) Currency mismatch adjustment. (1) If eign exchange volatility if it qualifies a Board-regulated institution recog- for the use of its own-estimates hair- nizes an eligible guarantee or eligible cuts in § 217.37(c)(4). credit derivative that is denominated (3) A Board-regulated institution in a currency different from that in must adjust HFX calculated in para- which the hedged exposure is denomi- graph (f)(2) of this section upward if nated, the Board-regulated institution the Board-regulated institution re- must apply the following formula to values the guarantee or credit deriva- the effective notional amount of the tive less frequently than once every 10 guarantee or credit derivative: Pc = Pr business days using the following × (1¥HFX), where: square root of time formula:

§ 217.37 Collateralized transactions. ever, it must use the same approach for (a) General. (1) To recognize the risk- similar exposures or transactions. mitigating effects of financial collat- (b) The simple approach—(1) General eral, a Board-regulated institution may requirements. (i) A Board-regulated in- use: stitution may recognize the credit risk (i) The simple approach in paragraph mitigation benefits of financial collat- (b) of this section for any exposure; or eral that secures any exposure. (ii) The collateral haircut approach (ii) To qualify for the simple ap- in paragraph (c) of this section for proach, the financial collateral must repo-style transactions, eligible mar- meet the following requirements: gin loans, collateralized derivative con- (A) The collateral must be subject to tracts, and single-product netting sets a collateral agreement for at least the of such transactions. life of the exposure; (2) A Board-regulated institution (B) The collateral must be revalued may use any approach described in this at least every six months; and section that is valid for a particular type of exposure or transaction; how-

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(C) The collateral (other than gold) a zero percent risk weight under and the exposure must be denominated § 217.32, and the Board-regulated insti- in the same currency. tution has discounted the fair value of (2) Risk weight substitution. (i) A the collateral by 20 percent. Board-regulated institution may apply (c) Collateral haircut approach—(1) a risk weight to the portion of an expo- General. A Board-regulated institution sure that is secured by the fair value of may recognize the credit risk mitiga- financial collateral (that meets the re- tion benefits of financial collateral quirements of paragraph (b)(1) of this that secures an eligible margin loan, section) based on the risk weight as- repo-style transaction, collateralized signed to the collateral under § 217.32. derivative contract, or single-product For repurchase agreements, reverse re- netting set of such transactions, and of purchase agreements, and securities any collateral that secures a repo-style lending and borrowing transactions, transaction that is included in the the collateral is the instruments, gold, Board-regulated institution’s VaR- and cash the Board-regulated institu- based measure under subpart F of this tion has borrowed, purchased subject part by using the collateral haircut ap- to resale, or taken as collateral from proach in this section. A Board-regu- the counterparty under the trans- lated institution may use the standard action. Except as provided in para- supervisory haircuts in paragraph (c)(3) graph (b)(3) of this section, the risk of this section or, with prior written weight assigned to the collateralized approval of the Board, its own esti- portion of the exposure may not be less mates of haircuts according to para- than 20 percent. graph (c)(4) of this section. (ii) A Board-regulated institution (2) Exposure amount equation. A must apply a risk weight to the unse- Board-regulated institution must de- cured portion of the exposure based on termine the exposure amount for an el- the risk weight applicable to the expo- igible margin loan, repo-style trans- sure under this subpart. action, collateralized derivative con- (3) Exceptions to the 20 percent risk- tract, or a single-product netting set of weight floor and other requirements. Not- such transactions by setting the expo- withstanding paragraph (b)(2)(i) of this sure amount equal to max {0, [(SE ¥ section: SC) + S(Es × Hs) + S(Efx × Hfx)]}, where: (i) A Board-regulated institution may (i)(A) For eligible margin loans and assign a zero percent risk weight to an repo-style transactions and netting exposure to an OTC derivative contract sets thereof, SE equals the value of the that is marked-to-market on a daily exposure (the sum of the current fair basis and subject to a daily margin values of all instruments, gold, and maintenance requirement, to the ex- cash the Board-regulated institution tent the contract is collateralized by has lent, sold subject to repurchase, or cash on deposit. posted as collateral to the (ii) A Board-regulated institution counterparty under the transaction (or may assign a 10 percent risk weight to netting set)); and an exposure to an OTC derivative con- (B) For collateralized derivative con- tract that is marked-to-market daily tracts and netting sets thereof, SE and subject to a daily margin mainte- equals the exposure amount of the OTC nance requirement, to the extent that derivative contract (or netting set) cal- the contract is collateralized by an ex- culated under § 217.34 (a)(1) or (2). posure to a sovereign that qualifies for (ii) SC equals the value of the collat- a zero percent risk weight under eral (the sum of the current fair values § 217.32. of all instruments, gold and cash the (iii) A Board-regulated institution Board-regulated institution has bor- may assign a zero percent risk weight rowed, purchased subject to resale, or to the collateralized portion of an ex- taken as collateral from the posure where: counterparty under the transaction (or (A) The financial collateral is cash netting set)); on deposit; or (iii) Es equals the absolute value of (B) The financial collateral is an ex- the net position in a given instrument posure to a sovereign that qualifies for or in gold (where the net position in

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the instrument or gold equals the sum currency the Board-regulated institu- of the current fair values of the instru- tion has lent, sold subject to repur- ment or gold the Board-regulated insti- chase, or posted as collateral to the tution has lent, sold subject to repur- counterparty minus the sum of the cur- chase, or posted as collateral to the rent fair values of any instruments or counterparty minus the sum of the cur- cash in the currency the Board-regu- rent fair values of that same instru- lated institution has borrowed, pur- ment or gold the Board-regulated insti- chased subject to resale, or taken as tution has borrowed, purchased subject collateral from the counterparty); and to resale, or taken as collateral from (vi) Hfx equals the haircut appro- the counterparty); priate to the mismatch between the (iv) Hs equals the market price vola- currency referenced in Efx and the set- tility haircut appropriate to the in- tlement currency. strument or gold referenced in Es; (3) Standard supervisory haircuts. (i) A (v) Efx equals the absolute value of Board-regulated institution must use the net position of instruments and the haircuts for market price volatility cash in a currency that is different (Hs) provided in Table 1 to § 217.37, as from the settlement currency (where adjusted in certain circumstances in the net position in a given currency accordance with the requirements of equals the sum of the current fair val- paragraphs (c)(3)(iii) and (iv) of this ues of any instruments or cash in the section.

TABLE 1 TO § 217.37—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1

Haircut (in percent) assigned based on: Investment Sovereign issuers risk Non-sovereign issuers risk grade Residual maturity weight under § 217.32 weight under § 217.32 securitization (in percent) 2 (in percent) exposures (in percent) Zero 20 or 50 100 20 50 100

Less than or equal to 1 year ...... 0.5 1.0 15.0 1.0 2.0 4.0 4.0 Greater than 1 year and less than or equal to 5 years...... 2.0 3.0 15.0 4.0 6.0 8.0 12.0 Greater than 5 years ...... 4.0 6.0 15.0 8.0 12.0 16.0 24.0

Main index equities (including convertible bonds) and gold ...... 15.0

Other publicly traded equities (including convertible bonds) ...... 25.0

Mutual funds ...... Highest haircut applicable to any security in which the fund can invest.

Cash collateral held ...... Zero.

Other exposure types ...... 25.0 1 The market price volatility haircuts in Table 1 to § 217.37 are based on a 10 business-day holding period. 2 Includes a foreign PSE that receives a zero percent risk weight.

(ii) For currency mismatches, a ing a quarter, a Board-regulated insti- Board-regulated institution must use a tution must adjust the supervisory haircut for foreign exchange rate vola- haircuts provided in paragraphs tility (Hfx) of 8.0 percent, as adjusted (c)(3)(i) and (ii) of this section upward in certain circumstances under para- on the basis of a holding period of graphs (c)(3)(iii) and (iv) of this sec- twenty business days for the following tion. quarter except in the calculation of the (iii) For repo-style transactions, a exposure amount for purposes of Board-regulated institution may mul- § 217.35. If a netting set contains one or tiply the standard supervisory haircuts more trades involving illiquid collat- provided in paragraphs (c)(3)(i) and (ii) eral or an OTC derivative that cannot of this section by the square root of 1⁄2 be easily replaced, a Board-regulated (which equals 0.707107). institution must adjust the supervisory (iv) If the number of trades in a net- haircuts upward on the basis of a hold- ting set exceeds 5,000 at any time dur- ing period of twenty business days. If

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over the two previous quarters more holding period that is at least two than two margin disputes on a netting times the minimum holding period for set have occurred that lasted more that netting set. A Board-regulated in- than the holding period, then the stitution must adjust the standard su- Board-regulated institution must ad- pervisory haircuts upward using the just the supervisory haircuts upward following formula: for that netting set on the basis of a

(A) TM equals a holding period of volatilities of market prices and for- longer than 10 business days for eligi- eign exchange rates: ble margin loans and derivative con- (i) To receive Board approval to use tracts or longer than 5 business days its own internal estimates, a Board- for repo-style transactions; regulated institution must satisfy the (B) HS equals the standard super- following minimum standards: visory haircut; and (A) A Board-regulated institution (C) TS equals 10 business days for eli- must use a 99th percentile one-tailed gible margin loans and derivative con- confidence interval. tracts or 5 business days for repo-style (B) The minimum holding period for transactions. a repo-style transaction is five business (v) If the instrument a Board-regu- days and for an eligible margin loan is lated institution has lent, sold subject ten business days except for trans- to repurchase, or posted as collateral actions or netting sets for which para- does not meet the definition of finan- graph (c)(4)(i)(C) of this section applies. cial collateral, the Board-regulated in- When a Board-regulated institution stitution must use a 25.0 percent hair- calculates an own-estimates haircut on cut for market price volatility (Hs). a TN-day holding period, which is dif- (4) Own internal estimates for haircuts. ferent from the minimum holding pe- With the prior written approval of the riod for the transaction type, the appli- Board, a Board-regulated institution cable haircut (HM) is calculated using may calculate haircuts (Hs and Hfx) the following square root of time for- using its own internal estimates of the mula:

(1) TM equals 5 for repo-style trans- twenty business days for the following actions and 10 for eligible margin quarter except in the calculation of the loans; exposure amount for purposes of (2) TN equals the holding period used § 217.35. If a netting set contains one or by the Board-regulated institution to more trades involving illiquid collat- derive HN; and eral or an OTC derivative that cannot (3) HN equals the haircut based on the be easily replaced, a Board-regulated holding period TN. institution must calculate the haircut (C) If the number of trades in a net- using a minimum holding period of ting set exceeds 5,000 at any time dur- twenty business days. If over the two ing a quarter, a Board-regulated insti- tution must calculate the haircut using a minimum holding period of

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previous quarters more than two mar- Board-regulated institution must at a gin disputes on a netting set have oc- minimum take into account: curred that lasted more than the hold- (A) The type of issuer of the security; ing period, then the Board-regulated (B) The credit quality of the security; institution must calculate the haircut (C) The maturity of the security; and for transactions in that netting set on (D) The interest rate sensitivity of the basis of a holding period that is at the security. least two times the minimum holding (iii) With respect to debt securities period for that netting set. that are not investment grade and eq- (D) A Board-regulated institution is uity securities, a Board-regulated in- required to calculate its own internal stitution must calculate a separate estimates with inputs calibrated to his- haircut for each individual security. torical data from a continuous 12- (iv) Where an exposure or collateral month period that reflects a period of (whether in the form of cash or securi- significant financial stress appropriate ties) is denominated in a currency that to the security or category of securi- differs from the settlement currency, ties. the Board-regulated institution must (E) A Board-regulated institution calculate a separate currency mis- must have policies and procedures that match haircut for its net position in describe how it determines the period each mismatched currency based on es- of significant financial stress used to timated volatilities of foreign ex- calculate the Board-regulated institu- change rates between the mismatched tion’s own internal estimates for hair- currency and the settlement currency. cuts under this section and must be (v) A Board-regulated institution’s able to provide empirical support for own estimates of market price and for- the period used. The Board-regulated eign exchange rate volatilities may not institution must obtain the prior ap- take into account the correlations proval of the Board for, and notify the among securities and foreign exchange Board if the Board-regulated institu- rates on either the exposure or collat- tion makes any material changes to, eral side of a transaction (or netting these policies and procedures. set) or the correlations among securi- (F) Nothing in this section prevents ties and foreign exchange rates be- the Board from requiring a Board-regu- tween the exposure and collateral sides lated institution to use a different pe- of the transaction (or netting set). riod of significant financial stress in the calculation of own internal esti- RISK-WEIGHTED ASSETS FOR UNSETTLED mates for haircuts. TRANSACTIONS (G) A Board-regulated institution must update its data sets and calculate § 217.38 Unsettled transactions. haircuts no less frequently than quar- (a) Definitions. For purposes of this terly and must also reassess data sets section: and haircuts whenever market prices (1) Delivery-versus-payment (DvP) change materially. transaction means a securities or com- (ii) With respect to debt securities modities transaction in which the that are investment grade, a Board- buyer is obligated to make payment regulated institution may calculate only if the seller has made delivery of haircuts for categories of securities. the securities or commodities and the For a category of securities, the Board- seller is obligated to deliver the securi- regulated institution must calculate ties or commodities only if the buyer the haircut on the basis of internal vol- has made payment. atility estimates for securities in that (2) Payment-versus-payment (PvP) category that are representative of the transaction means a foreign exchange securities in that category that the transaction in which each Board-regulated institution has lent, counterparty is obligated to make a sold subject to repurchase, posted as final transfer of one or more currencies collateral, borrowed, purchased subject only if the other counterparty has to resale, or taken as collateral. In de- made a final transfer of one or more termining relevant categories, the currencies.

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(3) A transaction has a normal settle- TABLE 1 TO § 217.38—RISK WEIGHTS FOR ment period if the contractual settle- UNSETTLED DVP AND PVP TRANSACTIONS ment period for the transaction is Risk weight to equal to or less than the market stand- Number of business be applied to ard for the instrument underlying the days after positive current contractual exposure transaction and equal to or less than settlement date (in percent) five business days. (4) Positive current exposure of a From 5 to 15 ...... 100.0 Board-regulated institution for a trans- From 16 to 30 ...... 625.0 action is the difference between the From 31 to 45 ...... 937.5 transaction value at the agreed settle- 46 or more ...... 1,250.0 ment price and the current market (e) Non-DvP/non-PvP (non-delivery- price of the transaction, if the dif- versus-payment/non-payment-versus-pay- ference results in a credit exposure of the Board-regulated institution to the ment) transactions. (1) A Board-regu- counterparty. lated institution must hold risk-based (b) Scope. This section applies to all capital against any non-DvP/non-PvP transactions involving securities, for- transaction with a normal settlement eign exchange instruments, and com- period if the Board-regulated institu- modities that have a risk of delayed tion has delivered cash, securities, settlement or delivery. This section commodities, or currencies to its does not apply to: counterparty but has not received its (1) Cleared transactions that are corresponding deliverables by the end marked-to-market daily and subject to of the same business day. The Board- daily receipt and payment of variation regulated institution must continue to margin; hold risk-based capital against the (2) Repo-style transactions, including transaction until the Board-regulated unsettled repo-style transactions; institution has received its cor- (3) One-way cash payments on OTC responding deliverables. derivative contracts; or (2) From the business day after the (4) Transactions with a contractual Board-regulated institution has made settlement period that is longer than its delivery until five business days the normal settlement period (which after the counterparty delivery is due, are treated as OTC derivative contracts the Board-regulated institution must as provided in § 217.34). calculate the risk-weighted asset (c) System-wide failures. In the case of a system-wide failure of a settlement, amount for the transaction by treating clearing system or central the current fair value of the counterparty, the Board may waive deliverables owed to the Board-regu- risk-based capital requirements for un- lated institution as an exposure to the settled and failed transactions until counterparty and using the applicable the situation is rectified. counterparty risk weight under § 217.32. (d) Delivery-versus-payment (DvP) and (3) If the Board-regulated institution payment-versus-payment (PvP) trans- has not received its deliverables by the actions. A Board-regulated institution fifth business day after counterparty must hold risk-based capital against delivery was due, the Board-regulated any DvP or PvP transaction with a institution must assign a 1,250 percent normal settlement period if the Board- risk weight to the current fair value of regulated institution’s counterparty the deliverables owed to the Board-reg- has not made delivery or payment ulated institution. within five business days after the set- (f) Total risk-weighted assets for unset- tlement date. The Board-regulated in- tled transactions. Total risk-weighted stitution must determine its risk- assets for unsettled transactions is the weighted asset amount for such a sum of the risk-weighted asset transaction by multiplying the positive amounts of all DvP, PvP, and non-DvP/ current exposure of the transaction for non-PvP transactions. the Board-regulated institution by the appropriate risk weight in Table 1 to § 217.38.

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§§ 217.39–217.40 [Reserved] thetic securitization. A Board-regu- lated institution that fails to meet RISK-WEIGHTED ASSETS FOR these conditions or chooses not to rec- SECURITIZATION EXPOSURES ognize the credit risk mitigant for pur- poses of this section must instead hold § 217.41 Operational requirements for risk-based capital against the under- securitization exposures. lying exposures as if they had not been (a) Operational criteria for traditional synthetically securitized. The condi- securitizations. A Board-regulated insti- tions are: tution that transfers exposures it has (1) The credit risk mitigant is: originated or purchased to a (i) Financial collateral; securitization SPE or other third party (ii) A guarantee that meets all cri- in connection with a traditional teria as set forth in the definition of securitization may exclude the expo- ‘‘eligible guarantee’’ in § 217.2, except sures from the calculation of its risk- for the criteria in paragraph (3) of that weighted assets only if each condition definition; or in this section is satisfied. A Board- (iii) A credit derivative that meets regulated institution that meets these all criteria as set forth in the defini- conditions must hold risk-based capital tion of ‘‘eligible credit derivative’’ in against any credit risk it retains in § 217.2, except for the criteria in para- connection with the securitization. A graph (3) of the definition of ‘‘eligible Board-regulated institution that fails guarantee’’ in § 217.2. to meet these conditions must hold (2) The Board-regulated institution risk-based capital against the trans- transfers credit risk associated with ferred exposures as if they had not been the underlying exposures to one or securitized and must deduct from com- more third parties, and the terms and mon equity tier 1 capital any after-tax conditions in the credit risk mitigants gain-on-sale resulting from the trans- employed do not include provisions action. The conditions are: that: (1) The exposures are not reported on (i) Allow for the termination of the the Board-regulated institution’s con- credit protection due to deterioration solidated balance sheet under GAAP; in the credit quality of the underlying (2) The Board-regulated institution exposures; has transferred to one or more third (ii) Require the Board-regulated in- parties credit risk associated with the stitution to alter or replace the under- underlying exposures; lying exposures to improve the credit (3) Any clean-up calls relating to the quality of the underlying exposures; securitization are eligible clean-up (iii) Increase the Board-regulated in- calls; and stitution’s cost of credit protection in (4) The securitization does not: response to deterioration in the credit (i) Include one or more underlying quality of the underlying exposures; exposures in which the borrower is per- (iv) Increase the yield payable to par- mitted to vary the drawn amount with- ties other than the Board-regulated in- in an agreed limit under a line of cred- stitution in response to a deterioration it; and in the credit quality of the underlying (ii) Contain an early amortization exposures; or provision. (v) Provide for increases in a retained (b) Operational criteria for synthetic first loss position or credit enhance- securitizations. For synthetic ment provided by the Board-regulated securitizations, a Board-regulated in- institution after the inception of the stitution may recognize for risk-based securitization; capital purposes the use of a credit risk (3) The Board-regulated institution mitigant to hedge underlying expo- obtains a well-reasoned opinion from sures only if each condition in this legal counsel that confirms the en- paragraph (b) is satisfied. A Board-reg- forceability of the credit risk mitigant ulated institution that meets these in all relevant jurisdictions; and conditions must hold risk-based capital (4) Any clean-up calls relating to the against any credit risk of the exposures securitization are eligible clean-up it retains in connection with the syn- calls.

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(c) Due diligence requirements for (D) For resecuritization exposures, securitization exposures. (1) Except for performance information on the under- exposures that are deducted from com- lying securitization exposures, for ex- mon equity tier 1 capital and exposures ample, the issuer name and credit qual- subject to § 217.42(h), if a Board-regu- ity, and the characteristics and per- lated institution is unable to dem- formance of the exposures underlying onstrate to the satisfaction of the the securitization exposures; and Board a comprehensive understanding (ii) On an on-going basis (no less fre- of the features of a securitization expo- quently than quarterly), evaluating, sure that would materially affect the reviewing, and updating as appropriate performance of the exposure, the the analysis required under paragraph Board-regulated institution must as- (c)(1) of this section for each sign the securitization exposure a risk weight of 1,250 percent. The Board-reg- securitization exposure. ulated institution’s analysis must be § 217.42 Risk-weighted assets for commensurate with the complexity of securitization exposures. the securitization exposure and the materiality of the exposure in relation (a) Securitization risk weight ap- to its capital. proaches. Except as provided elsewhere (2) A Board-regulated institution in this section or in § 217.41: must demonstrate its comprehensive (1) A Board-regulated institution understanding of a securitization expo- must deduct from common equity tier sure under paragraph (c)(1) of this sec- 1 capital any after-tax gain-on-sale re- tion, for each securitization exposure sulting from a securitization and apply by: a 1,250 percent risk weight to the por- (i) Conducting an analysis of the risk tion of a CEIO that does not constitute characteristics of a securitization ex- after-tax gain-on-sale. posure prior to acquiring the exposure, (2) If a securitization exposure does and documenting such analysis within not require deduction under paragraph three business days after acquiring the (a)(1) of this section, a Board-regulated exposure, considering: institution may assign a risk weight to (A) Structural features of the the securitization exposure using the securitization that would materially simplified supervisory formula ap- impact the performance of the expo- sure, for example, the contractual cash proach (SSFA) in accordance with flow waterfall, waterfall-related trig- §§ 217.43(a) through 217.43(d) and subject gers, credit enhancements, liquidity to the limitation under paragraph (e) enhancements, fair value triggers, the of this section. Alternatively, a Board- performance of organizations that serv- regulated institution that is not sub- ice the exposure, and deal-specific defi- ject to subpart F of this part may as- nitions of default; sign a risk weight to the securitization (B) Relevant information regarding exposure using the gross-up approach the performance of the underlying in accordance with § 217.43(e), provided, credit exposure(s), for example, the however, that such Board-regulated in- percentage of loans 30, 60, and 90 days stitution must apply either the SSFA past due; default rates; prepayment or the gross-up approach consistently rates; loans in foreclosure; property across all of its securitization expo- types; occupancy; average credit score sures, except as provided in paragraphs or other measures of creditworthiness; (a)(1), (a)(3), and (a)(4) of this section. average LTV ratio; and industry and (3) If a securitization exposure does geographic diversification data on the not require deduction under paragraph underlying exposure(s); (a)(1) of this section and the Board-reg- (C) Relevant market data of the ulated institution cannot, or chooses securitization, for example, bid-ask not to apply the SSFA or the gross-up spread, most recent sales price and his- approach to the exposure, the Board- toric price volatility, trading volume, implied market rating, and size, depth regulated institution must assign a and concentration level of the market risk weight to the exposure as de- for the securitization; and scribed in § 217.44.

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(4) If a securitization exposure is a repo-style transaction, eligible margin derivative contract (other than protec- loan, cleared transaction (other than a tion provided by a Board-regulated in- credit derivative), or an OTC derivative stitution in the form of a credit deriva- contract (other than a credit deriva- tive) that has a first priority claim on tive) is the notional amount of the ex- the cash flows from the underlying ex- posure. For an off-balance sheet posures (notwithstanding amounts due securitization exposure to an ABCP under interest rate or currency deriva- program, such as an eligible ABCP li- tive contracts, fees due, or other simi- quidity facility, the notional amount lar payments), a Board-regulated insti- may be reduced to the maximum po- tution may choose to set the risk- tential amount that the Board-regu- weighted asset amount of the exposure lated institution could be required to equal to the amount of the exposure as fund given the ABCP program’s current determined in paragraph (c) of this sec- underlying assets (calculated without tion. regard to the current credit quality of (b) Total risk-weighted assets for those assets). securitization exposures. A Board-regu- lated institution’s total risk-weighted (ii) A Board-regulated institution assets for securitization exposures must determine the exposure amount equals the sum of the risk-weighted of an eligible ABCP liquidity facility asset amount for securitization expo- for which the SSFA does not apply by sures that the Board-regulated institu- multiplying the notional amount of the tion risk weights under §§ 217.41(c), exposure by a CCF of 50 percent. 217.42(a)(1), and 217.43, 217.44, or 217.45, (iii) A Board-regulated institution and paragraphs (e) through (j) of this must determine the exposure amount section, as applicable. of an eligible ABCP liquidity facility (c) Exposure amount of a securitization for which the SSFA applies by multi- exposure—(1) On-balance sheet plying the notional amount of the ex- securitization exposures. The exposure posure by a CCF of 100 percent. amount of an on-balance sheet (4) Repo-style transactions, eligible mar- securitization exposure (excluding an gin loans, and derivative contracts. The available-for-sale or held-to-maturity exposure amount of a securitization ex- security where the Board-regulated in- posure that is a repo-style transaction, stitution has made an AOCI opt-out eligible margin loan, or derivative con- election under § 217.22(b)(2), a repo-style tract (other than a credit derivative) is transaction, eligible margin loan, OTC the exposure amount of the transaction derivative contract, or cleared trans- as calculated under § 217.34 or § 217.37, action) is equal to the carrying value as applicable. of the exposure. (d) Overlapping exposures. If a Board- (2) On-balance sheet securitization ex- regulated institution has multiple posures held by a Board-regulated institu- securitization exposures that provide tion that has made an AOCI opt-out elec- duplicative coverage to the underlying tion. The exposure amount of an on-bal- ance sheet securitization exposure that exposures of a securitization (such as is an available-for-sale or held-to-ma- when a Board-regulated institution turity security held by a Board-regu- provides a program-wide credit en- lated institution that has made an hancement and multiple pool-specific AOCI opt-out election under liquidity facilities to an ABCP pro- § 217.22(b)(2) is the Board-regulated in- gram), the Board-regulated institution stitution’s carrying value (including is not required to hold duplicative risk- net accrued but unpaid interest and based capital against the overlapping fees), less any net unrealized gains on position. Instead, the Board-regulated the exposure and plus any net unreal- institution may apply to the overlap- ized losses on the exposure. ping position the applicable risk-based (3) Off-balance sheet securitization ex- capital treatment that results in the posures. (i) Except as provided in para- highest risk-based capital requirement. graph (j) of this section, the exposure (e) Implicit support. If a Board-regu- amount of an off-balance sheet lated institution provides support to a securitization exposure that is not a securitization in excess of the Board-

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regulated institution’s contractual ob- (ii) The Board-regulated institution ligation to provide credit support to establishes and maintains, pursuant to the securitization (implicit support): GAAP, a non-capital reserve sufficient (1) The Board-regulated institution to meet the Board-regulated institu- must include in risk-weighted assets tion’s reasonably estimated liability all of the underlying exposures associ- under the contractual obligation. ated with the securitization as if the (iii) The small-business obligations exposures had not been securitized and are to businesses that meet the criteria must deduct from common equity tier for a small-business concern estab- 1 capital any after-tax gain-on-sale re- lished by the Small Business Adminis- sulting from the securitization; and tration under section 3(a) of the Small (2) The Board-regulated institution Business Act (15 U.S.C. 632 et seq.). must disclose publicly: (iv)(A) In the case of a state member (i) That it has provided implicit sup- bank, the bank is well capitalized, as port to the securitization; and defined in 12 CFR 208.43. For purposes (ii) The risk-based capital impact to of determining whether a state member the Board-regulated institution of pro- bank is well capitalized for purposes of viding such implicit support. this paragraph (h), the state member (f) Undrawn portion of a servicer cash bank’s capital ratios must be cal- advance facility. (1) Notwithstanding culated without regard to the capital any other provision of this subpart, a treatment for transfers of small-busi- Board-regulated institution that is a ness obligations under this paragraph servicer under an eligible servicer cash (h). advance facility is not required to hold (B) In the case of a bank holding risk-based capital against potential fu- company or savings and loan holding ture cash advance payments that it company, the bank holding company or may be required to provide under the savings and loan holding company is contract governing the facility. well capitalized, as defined in 12 CFR (2) For a Board-regulated institution 225.2. For purposes of determining that acts as a servicer, the exposure amount for a servicer cash advance fa- whether a bank holding company or cility that is not an eligible servicer savings and loan holding company is cash advance facility is equal to the well capitalized for purposes of this amount of all potential future cash ad- paragraph (h), the bank holding com- vance payments that the Board-regu- pany or savings and loan holding com- lated institution may be contractually pany’s capital ratios must be cal- required to provide during the subse- culated without regard to the capital quent 12 month period under the con- treatment for transfers of small-busi- tract governing the facility. ness obligations with recourse specified (g) Interest-only mortgage-backed secu- in paragraph (k)(1) of this section. rities. Regardless of any other provi- (2) The total outstanding amount of sions in this subpart, the risk weight contractual exposure retained by a for a non-credit-enhancing interest- Board-regulated institution on trans- only mortgage-backed security may fers of small-business obligations re- not be less than 100 percent. ceiving the capital treatment specified (h) Small-business loans and leases on in paragraph (h)(1) of this section can- personal property transferred with re- not exceed 15 percent of the Board-reg- tained contractual exposure. (1) Regard- ulated institution’s total capital. less of any other provision of this sub- (3) If a Board-regulated institution part, a Board-regulated institution ceases to be well capitalized under 12 that has transferred small-business CFR 208.43 or exceeds the 15 percent loans and leases on personal property capital limitation provided in para- (small-business obligations) with re- graph (h)(2) of this section, the capital course must include in risk-weighted treatment under paragraph (h)(1) of assets only its contractual exposure to this section will continue to apply to the small-business obligations if all the any transfers of small-business obliga- following conditions are met: tions with retained contractual expo- (i) The transaction must be treated sure that occurred during the time as a sale under GAAP. that the Board-regulated institution

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was well capitalized and did not exceed (ii) The detachment point (parameter the capital limit. D) equals the sum of parameter A plus (4) The risk-based capital ratios of the ratio of the notional amount of the the Board-regulated institution must Board-regulated institution’s exposure be calculated without regard to the in the nth-to-default credit derivative to capital treatment for transfers of the total notional amount of all under- small-business obligations specified in lying exposures. The ratio is expressed paragraph (h)(1) of this section for pur- as a decimal value between zero and poses of: one. (i) Determining whether a Board-reg- (3) A Board-regulated institution ulated institution is adequately cap- that does not use the SSFA to deter- italized, undercapitalized, significantly mine a risk weight for its nth-to-default undercapitalized, or critically under- credit derivative must assign a risk capitalized under the Board’s prompt weight of 1,250 percent to the exposure. corrective action regulations; and (4) Protection purchaser—(i) First-to- (ii) Reclassifying a well-capitalized default credit derivatives. A Board-regu- Board-regulated institution to ade- lated institution that obtains credit quately capitalized and requiring an protection on a group of underlying ex- adequately capitalized Board-regulated posures through a first-to-default cred- it derivative that meets the rules of institution to comply with certain recognition of § 217.36(b) must deter- mandatory or discretionary super- mine its risk-based capital require- visory actions as if the Board-regulated ment for the underlying exposures as if institution were in the next lower the Board-regulated institution syn- prompt-corrective-action category. thetically securitized the underlying th (i) N -to-default credit derivatives—(1) exposure with the smallest risk- Protection provider. A Board-regulated weighted asset amount and had ob- institution may assign a risk weight tained no credit risk mitigant on the th using the SSFA in § 217.43 to an n -to- other underlying exposures. A Board- default credit derivative in accordance regulated institution must calculate a with this paragraph (i). A Board-regu- risk-based capital requirement for lated institution must determine its counterparty credit risk according to exposure in the nth-to-default credit de- § 217.34 for a first-to-default credit de- rivative as the largest notional amount rivative that does not meet the rules of of all the underlying exposures. recognition of § 217.36(b). (2) For purposes of determining the (ii) Second-or-subsequent-to-default risk weight for an nth-to-default credit credit derivatives. (A) A Board-regulated derivative using the SSFA, the Board- institution that obtains credit protec- regulated institution must calculate tion on a group of underlying exposures the attachment point and detachment through a nth-to-default credit deriva- point of its exposure as follows: tive that meets the rules of recognition (i) The attachment point (parameter of § 217.36(b) (other than a first-to-de- A) is the ratio of the sum of the no- fault credit derivative) may recognize tional amounts of all underlying expo- the credit risk mitigation benefits of sures that are subordinated to the the derivative only if: Board-regulated institution’s exposure (1) The Board-regulated institution to the total notional amount of all un- also has obtained credit protection on derlying exposures. The ratio is ex- the same underlying exposures in the pressed as a decimal value between form of first-through-(n-1)-to-default zero and one. In the case of a first-to- credit derivatives; or default credit derivative, there are no (2) If n-1 of the underlying exposures underlying exposures that are subordi- have already defaulted. nated to the Board-regulated institu- (B) If a Board-regulated institution tion’s exposure. In the case of a second- satisfies the requirements of paragraph or-subsequent-to-default credit deriva- (i)(4)(ii)(A) of this section, the Board- tive, the smallest (n-1) notional regulated institution must determine amounts of the underlying exposure(s) its risk-based capital requirement for are subordinated to the Board-regu- the underlying exposures as if the lated institution’s exposure. Board-regulated institution had only

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synthetically securitized the under- exposures of the securitization SPE lying exposure with the nth smallest (notwithstanding amounts due under risk-weighted asset amount and had interest rate or currency derivative obtained no credit risk mitigant on the contracts, fees due, or other similar other underlying exposures. payments). (C) A Board-regulated institution must calculate a risk-based capital re- [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as amended at 78 FR 62288, Oct. 11, 2013] quirement for counterparty credit risk th according to § 217.34 for a n -to-default § 217.43 Simplified supervisory for- credit derivative that does not meet mula approach (SSFA) and the the rules of recognition of § 217.36(b). gross-up approach. (j) Guarantees and credit derivatives (a) General requirements for the SSFA. other than nth-to-default credit deriva- tives—(1) Protection provider. For a guar- To use the SSFA to determine the risk antee or credit derivative (other than weight for a securitization exposure, a an nth-to-default credit derivative) pro- Board-regulated institution must have vided by a Board-regulated institution data that enables it to assign accu- that covers the full amount or a pro rately the parameters described in rata share of a securitization expo- paragraph (b) of this section. Data used sure’s principal and interest, the to assign the parameters described in Board-regulated institution must risk paragraph (b) of this section must be weight the guarantee or credit deriva- the most currently available data; if tive as if it holds the portion of the ref- the contracts governing the underlying erence exposure covered by the guar- exposures of the securitization require antee or credit derivative. payments on a monthly or quarterly (2) Protection purchaser. (i) A Board- basis, the data used to assign the pa- regulated institution that purchases a rameters described in paragraph (b) of guarantee or OTC credit derivative this section must be no more than 91 (other than an nth-to-default credit de- calendar days old. A Board-regulated rivative) that is recognized under institution that does not have the ap- § 217.45 as a credit risk mitigant (in- propriate data to assign the param- cluding via collateral recognized under eters described in paragraph (b) of this § 217.37) is not required to compute a section must assign a risk weight of separate counterparty credit risk cap- 1,250 percent to the exposure. ital requirement under § 217.31, in ac- (b) SSFA parameters. To calculate the cordance with 34(c). risk weight for a securitization expo- (ii) If a Board-regulated institution sure using the SSFA, a Board-regu- cannot, or chooses not to, recognize a lated institution must have accurate purchased credit derivative as a credit information on the following five in- risk mitigant under § 217.45, the Board- puts to the SSFA calculation: regulated institution must determine (1) KG is the weighted-average (with the exposure amount of the credit de- unpaid principal used as the weight for rivative under § 217.34. each exposure) total capital require- (A) If the Board-regulated institution ment of the underlying exposures cal- purchases credit protection from a culated using this subpart. KG is ex- counterparty that is not a pressed as a decimal value between securitization SPE, the Board-regu- zero and one (that is, an average risk lated institution must determine the weight of 100 percent represents a value risk weight for the exposure according of KG equal to 0.08). to general risk weights under § 217.32. (2) Parameter W is expressed as a (B) If the Board-regulated institution decimal value between zero and one. purchases the credit protection from a Parameter W is the ratio of the sum of counterparty that is a securitization the dollar amounts of any underlying SPE, the Board-regulated institution exposures of the securitization that must determine the risk weight for the meet any of the criteria as set forth in exposure according to section § 217.42, paragraphs (b)(2)(i) through (vi) of this including § 217.42(a)(4) for a credit de- section to the balance, measured in rivative that has a first priority claim dollars, of underlying exposures: on the cash flows from the underlying (i) Ninety days or more past due;

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(ii) Subject to a bankruptcy or insol- tives, parameter D equals parameter A vency proceeding; plus the ratio of the current dollar (iii) In the process of foreclosure; amount of the securitization exposures (iv) Held as real estate owned; that are pari passu with the exposure (v) Has contractually deferred pay- (that is, have equal seniority with re- ments for 90 days or more, other than spect to credit risk) to the current dol- principal or interest payments deferred lar amount of the underlying expo- on: sures. Parameter D is expressed as a (A) Federally-guaranteed student decimal value between zero and one. loans, in accordance with the terms of (5) A supervisory calibration param- those guarantee programs; or eter, p, is equal to 0.5 for securitization (B) Consumer loans, including non- exposures that are not resecuritization federally-guaranteed student loans, exposures and equal to 1.5 for provided that such payments are de- resecuritization exposures. ferred pursuant to provisions included (c) Mechanics of the SSFA. KG and W in the contract at the time funds are are used to calculate KA, the aug- disbursed that provide for period(s) of mented value of KG, which reflects the deferral that are not initiated based on observed credit quality of the under- changes in the creditworthiness of the lying exposures. KA is defined in para- borrower; or graph (d) of this section. The values of (vi) Is in default. parameters A and D, relative to KA de- (3) Parameter A is the attachment termine the risk weight assigned to a point for the exposure, which rep- securitization exposure as described in resents the threshold at which credit paragraph (d) of this section. The risk losses will first be allocated to the ex- weight assigned to a securitization ex- posure. Except as provided in § 217.42(i) posure, or portion of a securitization for nth-to-default credit derivatives, pa- exposure, as appropriate, is the larger rameter A equals the ratio of the cur- of the risk weight determined in ac- rent dollar amount of underlying expo- cordance with this paragraph (c) or sures that are subordinated to the ex- paragraph (d) of this section and a risk posure of the Board-regulated institu- weight of 20 percent. tion to the current dollar amount of (1) When the detachment point, pa- underlying exposures. Any reserve ac- rameter D, for a securitization expo- count funded by the accumulated cash sure is less than or equal to KA, the ex- flows from the underlying exposures posure must be assigned a risk weight that is subordinated to the Board-regu- of 1,250 percent. lated institution’s securitization expo- (2) When the attachment point, pa- sure may be included in the calculation rameter A, for a securitization expo- of parameter A to the extent that cash sure is greater than or equal to KA, the is present in the account. Parameter A Board-regulated institution must cal- is expressed as a decimal value between culate the risk weight in accordance zero and one. with paragraph (d) of this section. (4) Parameter D is the detachment (3) When A is less than KA and D is point for the exposure, which rep- greater than KA, the risk weight is a resents the threshold at which credit weighted-average of 1,250 percent and losses of principal allocated to the ex- 1,250 percent times KSSFA calculated in posure would result in a total loss of accordance with paragraph (d) of this principal. Except as provided in section section. For the purpose of this weight- 42(i) for nth-to-default credit deriva- ed-average calculation:

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(e) Gross-up approach—(1) Applica- securitization exposures in §§ 217.44 and bility. A Board-regulated institution 217.45. that is not subject to subpart F of this (2) To use the gross-up approach, a part may apply the gross-up approach Board-regulated institution must cal- set forth in this section instead of the culate the following four inputs: SSFA to determine the risk weight of (i) Pro rata share, which is the par its securitization exposures, provided value of the Board-regulated institu- that it applies the gross-up approach to tion’s securitization exposure as a per- all of its securitization exposures, ex- cent of the par value of the tranche in cept as otherwise provided for certain

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which the securitization exposure re- any of the individual underlying expo- sides; sures covered by the facility. (ii) Enhanced amount, which is the (c) A securitization exposure in a sec- par value of tranches that are more ond loss position or better to an ABCP senior to the tranche in which the program—(1) Risk weighting. A Board- Board-regulated institution’s regulated institution may determine securitization resides; the risk-weighted asset amount of a (iii) Exposure amount of the Board- securitization exposure that is in a sec- regulated institution’s securitization ond loss position or better to an ABCP exposure calculated under § 217.42(c); program that meets the requirements and of paragraph (c)(2) of this section by (iv) Risk weight, which is the weight- multiplying the exposure amount by ed-average risk weight of underlying the higher of the following risk exposures of the securitization as cal- weights: culated under this subpart. (i) 100 percent; and (3) Credit equivalent amount. The cred- (ii) The highest risk weight applica- it equivalent amount of a ble to any of the individual underlying securitization exposure under this sec- exposures of the ABCP program. tion equals the sum of: (2) Requirements. (i) The exposure is (i) The exposure amount of the not an eligible ABCP liquidity facility; Board-regulated institution’s (ii) The exposure must be economi- securitization exposure; and cally in a second loss position or bet- (ii) The pro rata share multiplied by ter, and the first loss position must the enhanced amount, each calculated provide significant credit protection to in accordance with paragraph (e)(2) of the second loss position; this section. (iii) The exposure qualifies as invest- (4) Risk-weighted assets. To calculate ment grade; and risk-weighted assets for a (iv) The Board-regulated institution securitization exposure under the holding the exposure must not retain gross-up approach, a Board-regulated or provide protection to the first loss institution must apply the risk weight position. required under paragraph (e)(2) of this section to the credit equivalent § 217.45 Recognition of credit risk amount calculated in paragraph (e)(3) mitigants for securitization expo- of this section. sures. (f) Limitations. Notwithstanding any other provision of this section, a (a) General. (1) An originating Board- Board-regulated institution must as- regulated institution that has obtained sign a risk weight of not less than 20 a credit risk mitigant to hedge its ex- percent to a securitization exposure. posure to a synthetic or traditional securitization that satisfies the oper- § 217.44 Securitization exposures to ational criteria provided in § 217.41 may which the SSFA and gross-up ap- recognize the credit risk mitigant proach do not apply. under §§ 217.36 or 217.37, but only as pro- (a) General requirement. A Board-regu- vided in this section. lated institution must assign a 1,250 (2) An investing Board-regulated in- percent risk weight to all stitution that has obtained a credit securitization exposures to which the risk mitigant to hedge a securitization Board-regulated institution does not exposure may recognize the credit risk apply the SSFA or the gross-up ap- mitigant under §§ 217.36 or 217.37, but proach under § 217.43, except as set only as provided in this section. forth in this section. (b) Mismatches. A Board-regulated in- (b) Eligible ABCP liquidity facilities. A stitution must make any applicable ad- Board-regulated institution may deter- justment to the protection amount of mine the risk-weighted asset amount an eligible guarantee or credit deriva- of an eligible ABCP liquidity facility tive as required in § 217.36(d), (e), and (f) by multiplying the exposure amount by for any hedged securitization exposure. the highest risk weight applicable to In the context of a synthetic

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securitization, when an eligible guar- must treat the exposure as an equity antee or eligible credit derivative cov- derivative with an adjusted carrying ers multiple hedged exposures that value determined as the sum of para- have different residual maturities, the graphs (b)(1) and (3) of this section. Board-regulated institution must use (b) Adjusted carrying value. For pur- the longest residual maturity of any of poses of §§ 217.51 through 217.53, the ad- the hedged exposures as the residual justed carrying value of an equity ex- maturity of all hedged exposures. posure is: §§ 217.46–217.50 [Reserved] (1) For the on-balance sheet compo- nent of an equity exposure (other than RISK-WEIGHTED ASSETS FOR EQUITY an equity exposure that is classified as EXPOSURES available-for-sale where the Board-reg- ulated institution has made an AOCI § 217.51 Introduction and exposure opt-out election under § 217.22(b)(2)), measurement. the Board-regulated institution’s car- (a) General. (1) To calculate its risk- rying value of the exposure; weighted asset amounts for equity ex- (2) For the on-balance sheet compo- posures that are not equity exposures nent of an equity exposure that is clas- to an investment fund, a Board-regu- sified as available-for-sale where the lated institution must use the Simple Board-regulated institution has made Risk-Weight Approach (SRWA) pro- an AOCI opt-out election under vided in 217.52. A Board-regulated insti- tution must use the look-through ap- § 217.22(b)(2), the Board-regulated insti- proaches provided in § 217.53 to cal- tution’s carrying value of the exposure culate its risk-weighted asset amounts less any net unrealized gains on the ex- for equity exposures to investment posure that are reflected in such car- funds. rying value but excluded from the (2) A Board-regulated institution Board-regulated institution’s regu- must treat an investment in a separate latory capital components; account (as defined in § 217.2) as if it (3) For the off-balance sheet compo- were an equity exposure to an invest- nent of an equity exposure that is not ment fund as provided in § 217.53. an equity commitment, the effective (3) Stable value protection. (i) Stable notional principal amount of the expo- value protection means a contract sure, the size of which is equivalent to where the provider of the contract is a hypothetical on-balance sheet posi- obligated to pay: tion in the underlying equity instru- (A) The policy owner of a separate ment that would evidence the same account an amount equal to the short- change in fair value (measured in dol- fall between the fair value and cost lars) given a small change in the price basis of the separate account when the of the underlying equity instrument, policy owner of the separate account minus the adjusted carrying value of surrenders the policy; or the on-balance sheet component of the (B) The beneficiary of the contract exposure as calculated in paragraph an amount equal to the shortfall be- (b)(1) of this section; and tween the fair value and book value of (4) For a commitment to acquire an a specified portfolio of assets. equity exposure (an equity commit- (ii) A Board-regulated institution ment), the effective notional principal that purchases stable value protection on its investment in a separate account amount of the exposure is multiplied must treat the portion of the carrying by the following conversion factors value of its investment in the separate (CFs): account attributable to the stable (i) Conditional equity commitments value protection as an exposure to the with an original maturity of one year provider of the protection and the re- or less receive a CF of 20 percent. maining portion of the carrying value (ii) Conditional equity commitments of its separate account as an equity ex- with an original maturity of over one posure to an investment fund. year receive a CF of 50 percent. (iii) A Board-regulated institution (iii) Unconditional equity commit- that provides stable value protection ments receive a CF of 100 percent.

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§ 217.52 Simple risk-weight approach Small Business Investment Act of 1958 (SRWA). (15 U.S.C. 682). (a) General. Under the SRWA, a (B) For savings and loan holding Board-regulated institution’s total companies, an equity exposure that is risk-weighted assets for equity expo- designed primarily to promote commu- sures equals the sum of the risk- nity welfare, including the welfare of weighted asset amounts for each of the low- and moderate-income commu- Board-regulated institution’s indi- nities or families, such as by providing vidual equity exposures (other than eq- services or employment, and excluding uity exposures to an investment fund) equity exposures to an unconsolidated as determined under this section and small business investment company the risk-weighted asset amounts for and equity exposures held through a each of the Board-regulated institu- small business investment company de- tion’s individual equity exposures to an scribed in section 302 of the Small investment fund as determined under Business Investment Act of 1958 (15 § 217.53. U.S.C. 682). (b) SRWA computation for individual (ii) Effective portion of hedge pairs. equity exposures. A Board-regulated in- The effective portion of a hedge pair. stitution must determine the risk- (iii) Non-significant equity exposures. weighted asset amount for an indi- Equity exposures, excluding significant vidual equity exposure (other than an investments in the capital of an uncon- equity exposure to an investment fund) solidated financial institution in the by multiplying the adjusted carrying form of common stock and exposures value of the equity exposure or the ef- to an investment firm that would meet fective portion and ineffective portion the definition of a traditional of a hedge pair (as defined in paragraph securitization were it not for the appli- (c) of this section) by the lowest appli- cation of paragraph (8) of that defini- cable risk weight in this paragraph (b). tion in § 217.2 and has greater than im- (1) Zero percent risk weight equity expo- material leverage, to the extent that sures. An equity exposure to a sov- the aggregate adjusted carrying value ereign, the Bank for International Set- of the exposures does not exceed 10 per- tlements, the European Central Bank, cent of the Board-regulated institu- the European Commission, the Inter- tion’s total capital. national Monetary Fund, an MDB, and (A) To compute the aggregate ad- any other entity whose credit expo- justed carrying value of a Board-regu- sures receive a zero percent risk weight lated institution’s equity exposures for under § 217.32 may be assigned a zero purposes of this section, the Board-reg- percent risk weight. ulated institution may exclude equity (2) 20 percent risk weight equity expo- exposures described in paragraphs sures. An equity exposure to a PSE, (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of Federal Home Loan Bank or the Fed- this section, the equity exposure in a eral Agricultural Mortgage Corpora- hedge pair with the smaller adjusted tion (Farmer Mac) must be assigned a carrying value, and a proportion of 20 percent risk weight. each equity exposure to an investment (3) 100 percent risk weight equity expo- fund equal to the proportion of the as- sures. The equity exposures set forth in sets of the investment fund that are this paragraph (b)(3) must be assigned not equity exposures or that meet the a 100 percent risk weight. criterion of paragraph (b)(3)(i) of this (i) Community development equity expo- section. If a Board-regulated institu- sures. (A) For state member banks and tion does not know the actual holdings bank holding companies, an equity ex- of the investment fund, the Board-reg- posure that qualifies as a community ulated institution may calculate the development investment under 12 proportion of the assets of the fund U.S.C. 24 (Eleventh), excluding equity that are not equity exposures based on exposures to an unconsolidated small the terms of the prospectus, partner- business investment company and eq- ship agreement, or similar contract uity exposures held through a consoli- that defines the fund’s permissible in- dated small business investment com- vestments. If the sum of the invest- pany described in section 302 of the ment limits for all exposure classes

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within the fund exceeds 100 percent, (i) Would meet the definition of a the Board-regulated institution must traditional securitization were it not assume for purposes of this section for the application of paragraph (8) of that the investment fund invests to the that definition; and maximum extent possible in equity ex- (ii) Has greater than immaterial le- posures. verage. (B) When determining which of a (c) Hedge transactions—(1) Hedge pair. Board-regulated institution’s equity A hedge pair is two equity exposures exposures qualify for a 100 percent risk that form an effective hedge so long as weight under this paragraph (b), a each equity exposure is publicly traded Board-regulated institution first must or has a return that is primarily based include equity exposures to unconsoli- on a publicly traded equity exposure. dated small business investment com- (2) Effective hedge. Two equity expo- panies or held through consolidated sures form an effective hedge if the ex- small business investment companies posures either have the same remain- described in section 302 of the Small ing maturity or each has a remaining Business Investment Act, then must maturity of at least three months; the include publicly traded equity expo- hedge relationship is formally docu- sures (including those held indirectly mented in a prospective manner (that through investment funds), and then is, before the Board-regulated institu- must include non-publicly traded eq- tion acquires at least one of the equity uity exposures (including those held in- exposures); the documentation speci- directly through investment funds). fies the measure of effectiveness (E) the Board-regulated institution will (4) 250 percent risk weight equity expo- use for the hedge relationship through- sures. Significant investments in the out the life of the transaction; and the capital of unconsolidated financial in- hedge relationship has an E greater stitutions in the form of common stock than or equal to 0.8. A Board-regulated that are not deducted from capital pur- institution must measure E at least suant to § 217.22(d) are assigned a 250 quarterly and must use one of three al- percent risk weight. ternative measures of E as set forth in (5) 300 percent risk weight equity expo- this paragraph (c). sures. A publicly traded equity expo- (i) Under the dollar-offset method of sure (other than an equity exposure de- measuring effectiveness, the Board-reg- scribed in paragraph (b)(7) of this sec- ulated institution must determine the tion and including the ineffective por- ratio of value change (RVC). The RVC tion of a hedge pair) must be assigned is the ratio of the cumulative sum of a 300 percent risk weight. the changes in value of one equity ex- (6) 400 percent risk weight equity expo- posure to the cumulative sum of the sures. An equity exposure (other than changes in the value of the other eq- an equity exposure described in para- uity exposure. If RVC is positive, the graph (b)(7)) of this section that is not hedge is not effective and E equals 0. If publicly traded must be assigned a 400 RVC is negative and greater than or percent risk weight. equal to ¥1 (that is, between zero and (7) 600 percent risk weight equity expo- ¥1), then E equals the absolute value sures. An equity exposure to an invest- of RVC. If RVC is negative and less ment firm must be assigned a 600 per- than ¥1, then E equals 2 plus RVC. cent risk weight, provided that the in- (ii) Under the variability-reduction vestment firm: method of measuring effectiveness:

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(iii) Under the regression method of that may be assigned to an equity ex- measuring effectiveness, E equals the posure under this section is 20 percent. coefficient of determination of a re- (2) The risk-weighted asset amount of gression in which the change in value an equity exposure to an investment of one exposure in a hedge pair is the fund that meets the requirements for a dependent variable and the change in community development equity expo- value of the other exposure in a hedge sure in § 217.52(b)(3)(i) is its adjusted pair is the independent variable. How- carrying value. ever, if the estimated regression coeffi- (3) If an equity exposure to an invest- cient is positive, then E equals zero. ment fund is part of a hedge pair and (3) The effective portion of a hedge the Board-regulated institution does pair is E multiplied by the greater of not use the full look-through approach, the adjusted carrying values of the eq- the Board-regulated institution must uity exposures forming a hedge pair. use the ineffective portion of the hedge (4) The ineffective portion of a hedge pair as determined under § 217.52(c) as pair is (1–E) multiplied by the greater the adjusted carrying value for the eq- of the adjusted carrying values of the uity exposure to the investment fund. equity exposures forming a hedge pair. The risk-weighted asset amount of the [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as effective portion of the hedge pair is amended at 78 FR 62288, Oct. 11, 2013] equal to its adjusted carrying value. (b) Full look-through approach. A § 217.53 Equity exposures to invest- Board-regulated institution that is ment funds. able to calculate a risk-weighted asset (a) Available approaches. (1) Unless amount for its proportional ownership the exposure meets the requirements share of each exposure held by the in- for a community development equity vestment fund (as calculated under this exposure under § 217.52(b)(3)(i), a Board- subpart as if the proportional owner- regulated institution must determine ship share of the adjusted carrying the risk-weighted asset amount of an value of each exposure were held di- equity exposure to an investment fund rectly by the Board-regulated institu- under the full look-through approach tion) may set the risk-weighted asset described in paragraph (b) of this sec- amount of the Board-regulated institu- tion, the simple modified look-through tion’s exposure to the fund equal to the approach described in paragraph (c) of product of: this section, or the alterative modified (1) The aggregate risk-weighted asset look-through approach described para- amounts of the exposures held by the graph (d) of this section, provided, how- fund as if they were held directly by ever, that the minimum risk weight the Board-regulated institution; and

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(2) The Board-regulated institution’s rather than for speculative purposes proportional ownership share of the and do not constitute a material por- fund. tion of the fund’s exposures. (c) Simple modified look-through ap- proach. Under the simple modified §§ 217.54–217.60 [Reserved] look-through approach, the risk- DISCLOSURES weighted asset amount for a Board-reg- ulated institution’s equity exposure to § 217.61 Purpose and scope. an investment fund equals the adjusted carrying value of the equity exposure Sections 217.61–217.63 of this subpart establish public disclosure require- multiplied by the highest risk weight ments related to the capital require- that applies to any exposure the fund is ments described in subpart B of this permitted to hold under the pro- part for a Board-regulated institution spectus, partnership agreement, or with total consolidated assets of $50 similar agreement that defines the billion or more as reported on the fund’s permissible investments (exclud- Board-regulated institution’s most re- ing derivative contracts that are used cent year-end Call Report, for a state for hedging rather than speculative member bank, or FR Y–9C, for a bank purposes and that do not constitute a holding company or savings and loan material portion of the fund’s expo- holding company, as applicable that is sures). not an advanced approaches Board-reg- (d) Alternative modified look-through ulated institution making public dis- approach. Under the alternative modi- closures pursuant to § 217.172. An ad- fied look-through approach, a Board- vanced approaches Board-regulated in- regulated institution may assign the stitution that has not received ap- adjusted carrying value of an equity proval from the Board to exit parallel exposure to an investment fund on a run pursuant to § 217.121(d) is subject to pro rata basis to different risk weight the disclosure requirements described categories under this subpart based on in §§ 217.62 and 217.63. Such a Board-reg- the investment limits in the fund’s pro- ulated institution must comply with spectus, partnership agreement, or § 217.62 unless it is a consolidated sub- similar contract that defines the fund’s sidiary of a bank holding company, permissible investments. The risk- savings and loan holding company, or weighted asset amount for the Board- depository institution that is subject regulated institution’s equity exposure to these disclosure requirements or a to the investment fund equals the sum subsidiary of a non-U.S. banking orga- of each portion of the adjusted car- nization that is subject to comparable rying value assigned to an exposure public disclosure requirements in its type multiplied by the applicable risk home jurisdiction. For purposes of this weight under this subpart. If the sum section, total consolidated assets are of the investment limits for all expo- determined based on the average of the sure types within the fund exceeds 100 Board-regulated institution’s total percent, the Board-regulated institu- consolidated assets in the four most re- tion must assume that the fund invests cent quarters as reported on the Call to the maximum extent permitted Report, for a state member bank, or under its investment limits in the ex- FR Y–9C, for a bank holding company posure type with the highest applicable or savings and loan holding company, risk weight under this subpart and con- as applicable; or the average of the tinues to make investments in order of Board-regulated institution’s total the exposure type with the next high- consolidated assets in the most recent est applicable risk weight under this consecutive quarters as reported quar- subpart until the maximum total in- terly on the Board-regulated institu- vestment level is reached. If more than tion’s Call Report, for a state member one exposure type applies to an expo- bank, or FR Y–9C, for a bank holding sure, the Board-regulated institution company or savings and loan holding must use the highest applicable risk company, as applicable if the Board- weight. A Board-regulated institution regulated institution has not filed such may exclude derivative contracts held a report for each of the most recent by the fund that are used for hedging four quarters.

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§ 217.62 Disclosure requirements. cific commercial or financial informa- (a) A Board-regulated institution de- tion that it would otherwise be re- scribed in § 217.61 must provide timely quired to disclose under this section public disclosures each calendar quar- would be exempt from disclosure by the ter of the information in the applicable Board under the Freedom of Informa- tables in § 217.63. If a significant change tion Act (5 U.S.C. 552), then the Board- occurs, such that the most recent re- regulated institution is not required to ported amounts are no longer reflective disclose that specific information pur- of the Board-regulated institution’s suant to this section, but must disclose capital adequacy and risk profile, then more general information about the a brief discussion of this change and its subject matter of the requirement, to- likely impact must be disclosed as soon gether with the fact that, and the rea- as practicable thereafter. Qualitative son why, the specific items of informa- disclosures that typically do not tion have not been disclosed. change each quarter (for example, a general summary of the Board-regu- § 217.63 Disclosures by Board-regu- lated institution’s risk management lated institutions described in objectives and policies, reporting sys- § 217.61. tem, and definitions) may be disclosed (a) Except as provided in § 217.62, a annually after the end of the fourth Board-regulated institution described calendar quarter, provided that any in § 217.61 must make the disclosures significant changes are disclosed in the described in Tables 1 through 10 of this interim. The Board-regulated institu- section. The Board-regulated institu- tion’s management may provide all of tion must make these disclosures pub- the disclosures required by §§ 217.61 licly available for each of the last through 217.63 in one place on the three years (that is, twelve quarters) or Board-regulated institution’s public such shorter period beginning on Janu- Web site or may provide the disclosures ary 1, 2015. in more than one public financial re- (b) A Board-regulated institution port or other regulatory reports, pro- must publicly disclose each quarter the vided that the Board-regulated institu- following: tion publicly provides a summary table (1) Common equity tier 1 capital, ad- specifically indicating the location(s) ditional tier 1 capital, tier 2 capital, of all such disclosures. tier 1 and total capital ratios, includ- (b) A Board-regulated institution de- ing the regulatory capital elements scribed in § 217.61 must have a formal disclosure policy approved by the board and all the regulatory adjustments and of directors that addresses its approach deductions needed to calculate the nu- for determining the disclosures it merator of such ratios; makes. The policy must address the as- (2) Total risk-weighted assets, includ- sociated internal controls and disclo- ing the different regulatory adjust- sure controls and procedures. The ments and deductions needed to cal- board of directors and senior manage- culate total risk-weighted assets; ment are responsible for establishing (3) Regulatory capital ratios during and maintaining an effective internal any transition periods, including a de- control structure over financial report- scription of all the regulatory capital ing, including the disclosures required elements and all regulatory adjust- by this subpart, and must ensure that ments and deductions needed to cal- appropriate review of the disclosures culate the numerator and denominator takes place. One or more senior officers of each capital ratio during any transi- of the Board-regulated institution tion period; and must attest that the disclosures meet (4) A reconciliation of regulatory the requirements of this subpart. capital elements as they relate to its (c) If a Board-regulated institution balance sheet in any audited consoli- described in § 217.61 concludes that spe- dated financial statements.

TABLE 1 TO § 217.63—SCOPE OF APPLICATION

Qualitative Disclosures ... (a) .... The name of the top corporate entity in the group to which subpart D of this part applies.

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TABLE 1 TO § 217.63—SCOPE OF APPLICATION—Continued (b) .... A brief description of the differences in the basis for consolidating entities 1 for accounting and regulatory purposes, with a description of those entities: (1) That are fully consolidated; (2) That are deconsolidated and deducted from total capital; (3) For which the total capital requirement is deducted; and (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). (c) .... Any restrictions, or other major impediments, on transfer of funds or total capital within the group. (d) .... The aggregate amount of surplus capital of insurance subsidiaries included in the total cap- ital of the consolidated group. (e) .... The aggregate amount by which actual total capital is less than the minimum total capital re- quirement in all subsidiaries, with total capital requirements and the name(s) of the sub- sidiaries with such deficiencies. 1 Entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and signifi- cant minority equity investments in insurance, financial and commercial entities.

TABLE 2 TO § 217.63—CAPITAL STRUCTURE

Qualitative Disclosures ... (a) .... Summary information on the terms and conditions of the main features of all regulatory cap- ital instruments. Quantitative Disclosures (b) .... The amount of common equity tier 1 capital, with separate disclosure of: (1) Common stock and related surplus; (2) Retained earnings; (3) Common equity minority interest; (4) AOCI; and (5) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) .... The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and (2) Regulatory adjustments and deductions made to tier 1 capital. (d) .... The amount of total capital, with separate disclosure of: (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority inter- est not included in tier 1 capital; and (2) Regulatory adjustments and deductions made to total capital.

TABLE 3 TO § 217.63—CAPITAL ADEQUACY

Qualitative disclosures ... (a) .... A summary discussion of the Board-regulated institution’s approach to assessing the ade- quacy of its capital to support current and future activities. Quantitative disclosures (b) .... Risk-weighted assets for: (1) Exposures to sovereign entities; (2) Exposures to certain supranational entities and MDBs; (3) Exposures to depository institutions, foreign banks, and credit unions; (4) Exposures to PSEs; (5) Corporate exposures; (6) Residential mortgage exposures; (7) Statutory multifamily mortgages and pre-sold construction loans; (8) HVCRE loans; (9) Past due loans; (10) Other assets; (11) Cleared transactions; (12) Default fund contributions; (13) Unsettled transactions; (14) Securitization exposures; and (15) Equity exposures. (c) .... Standardized market risk-weighted assets as calculated under subpart F of this part. (d) .... Common equity tier 1, tier 1 and total risk-based capital ratios: (1) For the top consolidated group; and (2) For each depository institution subsidiary. (e) .... Total standardized risk-weighted assets.

TABLE 4 TO § 217.63—CAPITAL CONSERVATION BUFFER

Quantitative Disclosures (a) .... At least quarterly, the Board-regulated institution must calculate and publicly disclose the capital conservation buffer as described under § 217.11. (b) .... At least quarterly, the Board-regulated institution must calculate and publicly disclose the eli- gible retained income of the Board-regulated institution, as described under § 217.11.

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TABLE 4 TO § 217.63—CAPITAL CONSERVATION BUFFER—Continued (c) .... At least quarterly, the Board-regulated institution must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the cap- ital conservation buffer framework described under § 217.11, including the maximum pay- out amount for the quarter.

(c) General qualitative disclosure re- tion of the relevant risk management quirement. For each separate risk area function; the scope and nature of risk described in Tables 5 through 10, the reporting and/or measurement systems; Board-regulated institution must de- policies for hedging and/or mitigating scribe its risk management objectives risk and strategies and processes for and policies, including: Strategies and monitoring the continuing effective- processes; the structure and organiza- ness of hedges/mitigants.

TABLE 5 TO § 217.63 1—CREDIT RISK: GENERAL DISCLOSURES

Qualitative Disclosures... (a) .... The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6), including the: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes); (5) Description of the methodology that the Board-regulated institution uses to estimate its allowance for loan and lease losses, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the Board-regulated institution’s credit risk management policy. Quantitative Disclosures (b) .... Total credit risk exposures and average credit risk exposures, after accounting offsets in ac- cordance with GAAP, without taking into account the effects of credit risk mitigation tech- niques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, Board-regulated institutions could use categories similar to that used for financial statement purposes. Such cat- egories might include, for instance (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet expo- sures; (2) Debt securities; and (3) OTC derivatives.2 (c) .... Geographic distribution of exposures, categorized in significant areas by major types of credit exposure.3 (d) .... Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) .... By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses at the end of each period, disaggregated on the basis of the Board-regulated institution’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. (f) ..... Amount of impaired loans and, if available, the amount of past due loans categorized by sig- nificant geographic areas including, if practical, the amounts of allowances related to each geographical area,5 further categorized as required by GAAP. (g) .... Reconciliation of changes in ALLL.6 (h) .... Remaining contractual maturity delineation (for example, one year or less) of the whole port- folio, categorized by credit exposure.

1 Table 5 does not cover equity exposures, which should be reported in Table 9. 2 See, for example, ASC Topic 815–10 and 210, as they may be amended from time to time. 3 Geographical areas may consist of individual countries, groups of countries, or regions within countries. A Board-regulated in- stitution might choose to define the geographical areas based on the way the Board-regulated institution’s portfolio is geographi- cally managed. The criteria used to allocate the loans to geographical areas must be specified. 4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans. 5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately. 6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge- offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.

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TABLE 6 TO § 217.63—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK-RELATED EXPOSURES

Qualitative Disclosures ... (a) .... The general qualitative disclosure requirement with respect to OTC derivatives, eligible mar- gin loans, and repo-style transactions, including a discussion of: (1) The methodology used to assign credit limits for counterparty credit exposures; (2) Policies for securing collateral, valuing and managing collateral, and establishing credit reserves; (3) The primary types of collateral taken; and (4) The impact of the amount of collateral the Board-regulated institution would have to pro- vide given a deterioration in the Board-regulated institution’s own creditworthiness. Quantitative Disclosures (b) .... Gross positive fair value of contracts, collateral held (including type, for example, cash, gov- ernment securities), and net unsecured credit exposure.1 A Board-regulated institution also must disclose the notional value of credit derivative hedges purchased for counterparty credit risk protection and the distribution of current credit exposure by expo- sure type.2 (c) .... Notional amount of purchased and sold credit derivatives, segregated between use for the Board-regulated institution’s own credit portfolio and in its intermediation activities, includ- ing the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. 1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc. 2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.

TABLE 7 TO § 217.63—CREDIT RISK MITIGATION 12

Qualitative Disclosures ... (a) .... The general qualitative disclosure requirement with respect to credit risk mitigation, includ- ing: (1) Policies and processes for collateral valuation and management; (2) A description of the main types of collateral taken by the Board-regulated institution; (3) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (4) Information about (market or credit) risk concentrations with respect to credit risk mitiga- tion. Quantitative Disclosures (b) .... For each separately disclosed credit risk portfolio, the total exposure that is covered by eligi- ble financial collateral, and after the application of haircuts. (c) .... For each separately disclosed portfolio, the total exposure that is covered by guarantees/ credit derivatives and the risk-weighted asset amount associated with that exposure. 1 At a minimum, a Board-regulated institution must provide the disclosures in Table 7 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, Board-regulated insti- tutions are encouraged to give further information about mitigants that have not been recognized for that purpose. 2 Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures and included within those relating to securitization (Table 8).

TABLE 8 TO § 217.63—SECURITIZATION

Qualitative Disclosures ... (a) .... The general qualitative disclosure requirement with respect to a securitization (including syn- thetic securitizations), including a discussion of: (1) The Board-regulated institution’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the Board-regulated institution to other entities and including the type of risks assumed and retained with resecuritization activity; 1 (2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets; (3) The roles played by the Board-regulated institution in the securitization process 2 and an indication of the extent of the Board-regulated institution’s involvement in each of them; (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The Board-regulated institution’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the Board-regulated institution follows for its securitization exposures including the type of securitization exposure to which each ap- proach applies. (b) .... A list of: (1) The type of securitization SPEs that the Board-regulated institution, as sponsor, uses to securitize third-party exposures. The Board-regulated institution must indicate whether it has exposure to these SPEs, either on- or off-balance sheet; and (2) Affiliated entities: (i) That the Board-regulated institution manages or advises; and (ii) That invest either in the securitization exposures that the Board-regulated institution has securitized or in securitization SPEs that the Board-regulated institution sponsors.3 (c) .... Summary of the Board-regulated institution’s accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings;

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TABLE 8 TO § 217.63—SECURITIZATION—Continued (2) Recognition of gain-on-sale; (3) Methods and key assumptions applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could re- quire the Board-regulated institution to provide financial support for securitized assets. (d) .... An explanation of significant changes to any quantitative information since the last reporting period. Quantitative Disclosures (e) .... The total outstanding exposures securitized by the Board-regulated institution in securitizations that meet the operational criteria provided in § 217.41 (categorized into tra- ditional and synthetic securitizations), by exposure type, separately for securitizations of third-party exposures for which the bank acts only as sponsor.4 (f) ..... For exposures securitized by the Board-regulated institution in securitizations that meet the operational criteria in § 217.41: (1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 and (2) Losses recognized by the Board-regulated institution during the current period cat- egorized by exposure type.6 (g) .... The total amount of outstanding exposures intended to be securitized categorized by expo- sure type. (h) .... Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by expo- sure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i) ..... (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g., SSFA); and (2) Exposures that have been deducted entirely from tier 1 capital, CEIOs deducted from total capital (as described in § 217.42(a)(1), and other exposures deducted from total cap- ital should be disclosed separately by exposure type. (j) ..... Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. (k) .... Aggregate amount of resecuritization exposures retained or purchased categorized accord- ing to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 The Board-regulated institution should describe the structure of resecuritizations in which it participates; this description should be provided for the main categories of resecuritization products in which the Board-regulated institution is active. 2 For example, these roles may include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity pro- vider, or swap provider. 3 Such affiliated entities may include, for example, money market funds, to be listed individually, and personal and private trusts, to be noted collectively. 4 ‘‘Exposures securitized’’ include underlying exposures originated by the bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the bank’s balance sheet and underlying exposures acquired by the bank from third-party entities) in which the originating bank does not retain any securitization exposure should be shown sepa- rately but need only be reported for the year of inception. Banks are required to disclose exposures regardless of whether there is a capital charge under this part. 5 Include credit-related other than temporary impairment (OTTI). 6 For example, charge-offs/allowances (if the assets remain on the bank’s balance sheet) or credit-related OTTI of interest-only strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the bank with respect to securitized assets.

TABLE 9 TO § 217.63—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART

Qualitative Disclosures ... (a) .... The general qualitative disclosure requirement with respect to equity risk for equities not subject to subpart F of this part, including: (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity hold- ings not subject to subpart F of this part. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative Disclosures (b) .... Value disclosed on the balance sheet of investments, as well as the fair value of those in- vestments; for securities that are publicly traded, a comparison to publicly-quoted share values where the share price is materially different from fair value. (c) .... The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non publicly traded. (d) .... The cumulative realized gains (losses) arising from sales and liquidations in the reporting period.

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TABLE 9 TO § 217.63—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART—Continued (e) .... (1) Total unrealized gains (losses).1 (2) Total latent revaluation gains (losses).2 (3) Any amounts of the above included in tier 1 or tier 2 capital. (f) ..... Capital requirements categorized by appropriate equity groupings, consistent with the Board- regulated institution’s methodology, as well as the aggregate amounts and the type of eq- uity investments subject to any supervisory transition regarding regulatory capital require- ments. 1 Unrealized gains (losses) recognized on the balance sheet but not through earnings. 2 Unrealized gains (losses) not recognized either on the balance sheet or through earnings.

TABLE 10 TO § 217.63—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepay- ments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. Quantitative disclosures (b) .... The increase (decline) in earnings or economic value (or relevant measure used by man- agement) for upward and downward rate shocks according to management’s method for measuring interest rate risk for non-trading activities, categorized by currency (as appro- priate).

§§ 217.64–217.99 [Reserved] (2) Has consolidated total on-balance sheet foreign exposure on its most re- Subpart E—Risk-Weighted Assets— cent year-end Federal Financial Insti- tutions Examination Council (FFIEC) Internal Ratings-Based and 009 Report equal to $10 billion or more Advanced Measurement Ap- (where total on-balance sheet foreign proaches exposure equals total foreign countries cross-border claims on an ultimate- § 217.100 Purpose, applicability, and risk basis, plus total foreign countries principle of conservatism. claims on local residents on an ulti- (a) Purpose. This subpart E estab- mate-risk basis, plus total foreign lishes: countries fair value of foreign ex- (1) Minimum qualifying criteria for change and derivative products), cal- Board-regulated institutions using in- culated in accordance with the FFIEC stitution-specific internal risk meas- 009 Country Exposure Report; urement and management processes for (3) Has a subsidiary depository insti- calculating risk-based capital require- tution that is required, or has elected, ments; and to use 12 CFR part 3, subpart E (OCC), (2) Methodologies for such Board-reg- 12 CFR part 217, subpart E (Board), or ulated institutions to calculate their 12 CFR part 325, subpart E (FDIC) to total risk-weighted assets. calculate its risk-based capital require- ments; (b) Applicability. (1) This subpart ap- (ii) A state member bank that: plies to: (A) Has total consolidated assets, as (i) A top-tier bank holding company reported on the most recent year-end or savings and loan holding company Consolidated Report of Condition and domiciled in the United States that: Income (Call Report), equal to $250 bil- (A) Is not a consolidated subsidiary lion or more; of another bank holding company or (B) Has consolidated total on-balance savings and loan holding company that sheet foreign exposure on its most re- uses 12 CFR part 217, subpart E, to cal- cent year-end Federal Financial Insti- culate its risk-based capital require- tutions Examination Council (FFIEC) ments; and 009 Report equal to $10 billion or more (B) That: (where total on-balance sheet foreign (1) Has total consolidated assets (ex- exposure equals total foreign countries cluding assets held by an insurance un- cross-border claims on an ultimate- derwriting subsidiary), as defined on risk basis, plus total foreign countries schedule HC–K of the FR Y–9C, equal to claims on local residents on an ulti- $250 billion or more; mate-risk basis, plus total foreign

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countries fair value of foreign ex- the satisfaction of the Board that not change and derivative products), cal- applying the provision would, in all cir- culated in accordance with the FFIEC cumstances, unambiguously generate a 009 Country Exposure Report; risk-based capital requirement for each (C) Is a subsidiary of a depository in- such exposure greater than that which stitution that uses 12 CFR part 3, sub- would otherwise be required under this part E (OCC), 12 CFR part 217, subpart subpart; E (Board), or 12 CFR part 325, subpart (2) The Board-regulated institution E (FDIC) to calculate its risk-based appropriately manages the risk of each capital requirements; or such exposure; (D) Is a subsidiary of a bank holding (3) The Board-regulated institution company or savings and loan holding notifies the Board in writing prior to company that uses 12 CFR part 217, applying this principle to each such ex- subpart E, to calculate its risk-based posure; and capital requirements; and (4) The exposures to which the Board- (iii) Any Board-regulated institution regulated institution applies this prin- that elects to use this subpart to cal- ciple are not, in the aggregate, mate- culate its risk-based capital require- rial to the Board-regulated institution. ments. (iv) Is a subsidiary of a bank holding [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as company or savings and loan holding amended at 78 FR 62288, Oct. 11, 2013; 80 FR 41419, July 15, 2015] company that uses the advanced ap- proaches pursuant to 12 CFR part 217 to § 217.101 Definitions. calculate its total risk-weighted assets; or (a) Terms that are set forth in § 217.2 (v) Elects to use this subpart to cal- and used in this subpart have the defi- culate its total risk-weighted assets. nitions assigned thereto in § 217.2. (2) A bank that is subject to this sub- (b) For the purposes of this subpart, part shall remain subject to this sub- the following terms are defined as fol- part unless the Board determines in lows: writing that application of this subpart Advanced internal ratings-based (IRB) is not appropriate in light of the systems means an advanced approaches Board-regulated institution’s asset Board-regulated institution’s internal size, level of complexity, risk profile, risk rating and segmentation system; or scope of operations. In making a de- risk parameter quantification system; termination under this paragraph (b), data management and maintenance the Board will apply notice and re- system; and control, oversight, and sponse procedures in the same manner validation system for credit risk of and to the same extent as the notice wholesale and retail exposures. and response procedures in 12 CFR Advanced systems means an advanced 263.202. approaches Board-regulated institu- (3) A market risk Board-regulated in- tion’s advanced IRB systems, oper- stitution must exclude from its cal- ational risk management processes, culation of risk-weighted assets under operational risk data and assessment this subpart the risk-weighted asset systems, operational risk quantifica- amounts of all covered positions, as de- tion systems, and, to the extent used fined in subpart F of this part (except by the Board-regulated institution, the foreign exchange positions that are not internal models methodology, ad- trading positions, over-the-counter de- vanced CVA approach, double default rivative positions, cleared trans- excessive correlation detection process, actions, and unsettled transactions). and internal models approach (IMA) for (c) Principle of conservatism. Notwith- equity exposures. standing the requirements of this sub- Backtesting means the comparison of part, a Board-regulated institution a Board-regulated institution’s inter- may choose not to apply a provision of nal estimates with actual outcomes this subpart to one or more exposures during a sample period not used in provided that: model development. In this context, (1) The Board-regulated institution backtesting is one form of out-of-sam- can demonstrate on an ongoing basis to ple testing.

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Benchmarking means the comparison in a non-U.S. jurisdiction, the Board- of a Board-regulated institution’s in- regulated institution may elect to use ternal estimates with relevant internal the definition of default that is used in and external data or with estimates that jurisdiction, provided that the based on other estimation techniques. Board-regulated institution has ob- Bond option contract means a bond op- tained prior approval from the Board tion, bond future, or any other instru- to use the definition of default in that ment linked to a bond that gives rise jurisdiction. to similar counterparty credit risk. (iii) A retail exposure in default re- Business environment and internal con- mains in default until the Board-regu- trol factors means the indicators of a lated institution has reasonable assur- Board-regulated institution’s oper- ance of repayment and performance for ational risk profile that reflect a cur- all contractual principal and interest rent and forward-looking assessment of payments on the exposure. the Board-regulated institution’s un- (2) Wholesale. (i) A Board-regulated derlying business risk factors and in- institution’s wholesale obligor is in de- ternal control environment. fault if: Credit default swap (CDS) means a fi- (A) The Board-regulated institution nancial contract executed under stand- determines that the obligor is unlikely ard industry documentation that al- to pay its credit obligations to the lows one party (the protection pur- Board-regulated institution in full, chaser) to transfer the credit risk of without recourse by the Board-regu- one or more exposures (reference expo- lated institution to actions such as re- sure(s)) to another party (the protec- alizing collateral (if held); or tion provider) for a certain period of (B) The obligor is past due more than time. 90 days on any material credit obliga- Credit valuation adjustment (CVA) tion(s) to the Board-regulated institu- 29 means the fair value adjustment to re- tion. flect counterparty credit risk in valu- (ii) An obligor in default remains in ation of OTC derivative contracts. default until the Board-regulated insti- Default—For the purposes of calcu- tution has reasonable assurance of re- lating capital requirements under this payment and performance for all con- subpart: tractual principal and interest pay- (1) Retail. (i) A retail exposure of a ments on all exposures of the Board- Board-regulated institution is in de- regulated institution to the obligor (other than exposures that have been fault if: fully written-down or charged-off). (A) The exposure is 180 days past due, Dependence means a measure of the in the case of a residential mortgage association among operational losses exposure or revolving exposure; across and within units of measure. (B) The exposure is 120 days past due, Economic downturn conditions means, in the case of retail exposures that are with respect to an exposure held by the not residential mortgage exposures or Board-regulated institution, those con- revolving exposures; or ditions in which the aggregate default (C) The Board-regulated institution rates for that exposure’s wholesale or has taken a full or partial charge-off, retail exposure subcategory (or sub- write-down of principal, or material division of such subcategory selected negative fair value adjustment of prin- by the Board-regulated institution) in cipal on the exposure for credit-related the exposure’s national jurisdiction (or reasons. subdivision of such jurisdiction se- (ii) Notwithstanding paragraph (1)(i) lected by the Board-regulated institu- of this definition, for a retail exposure tion) are significantly higher than av- held by a non-U.S. subsidiary of the erage. Board-regulated institution that is Effective maturity (M) of a wholesale subject to an internal ratings-based ap- exposure means: proach to capital adequacy consistent with the Basel Committee on Banking 29 Overdrafts are past due once the obligor Supervision’s ‘‘International Conver- has breached an advised limit or been ad- gence of Capital Measurement and Cap- vised of a limit smaller than the current out- ital Standards: A Revised Framework’’ standing balance.

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(1) For wholesale exposures other credit enhancement that is investment than repo-style transactions, eligible grade. margin loans, and OTC derivative con- Eligible operational risk offsets means tracts described in paragraph (2) or (3) amounts, not to exceed expected oper- of this definition: ational loss, that: (i) The weighted-average remaining (1) Are generated by internal busi- maturity (measured in years, whole or ness practices to absorb highly predict- fractional) of the expected contractual able and reasonably stable operational cash flows from the exposure, using the losses, including reserves calculated undiscounted amounts of the cash consistent with GAAP; and flows as weights; or (2) Are available to cover expected (ii) The nominal remaining maturity operational losses with a high degree of (measured in years, whole or frac- certainty over a one-year horizon. tional) of the exposure. Eligible purchased wholesale exposure (2) For repo-style transactions, eligi- means a purchased wholesale exposure ble margin loans, and OTC derivative that: contracts subject to a qualifying mas- (1) The Board-regulated institution ter netting agreement for which the or securitization SPE purchased from Board-regulated institution does not an unaffiliated seller and did not di- apply the internal models approach in rectly or indirectly originate; section 132(d), the weighted-average re- (2) Was generated on an arm’s-length maining maturity (measured in years, basis between the seller and the obligor whole or fractional) of the individual (intercompany accounts receivable and transactions subject to the qualifying receivables subject to contra-accounts master netting agreement, with the between firms that buy and sell to each weight of each individual transaction other do not satisfy this criterion); set equal to the notional amount of the (3) Provides the Board-regulated in- transaction. stitution or securitization SPE with a (3) For repo-style transactions, eligi- claim on all proceeds from the expo- ble margin loans, and OTC derivative sure or a pro rata interest in the pro- contracts for which the Board-regu- ceeds from the exposure; lated institution applies the internal (4) Has an M of less than one year; models approach in § 217.132(d), the and value determined in § 217.132(d)(4). (5) When consolidated by obligor, Eligible double default guarantor, with does not represent a concentrated ex- respect to a guarantee or credit deriva- posure relative to the portfolio of pur- tive obtained by a Board-regulated in- chased wholesale exposures. stitution, means: Expected exposure (EE) means the ex- (1) U.S.-based entities. A depository in- pected value of the probability dis- stitution, a bank holding company, a tribution of non-negative credit risk savings and loan holding company, or a exposures to a counterparty at any securities broker or dealer registered specified future date before the matu- with the SEC under the Securities Ex- rity date of the longest term trans- change Act, if at the time the guar- action in the netting set. Any negative antee is issued or anytime thereafter, fair values in the probability distribu- has issued and outstanding an unse- tion of fair values to a counterparty at cured debt security without credit en- a specified future date are set to zero hancement that is investment grade. to convert the probability distribution (2) Non-U.S.-based entities. A foreign of fair values to the probability dis- bank, or a non-U.S.-based securities tribution of credit risk exposures. firm if the Board-regulated institution Expected operational loss (EOL) means demonstrates that the guarantor is the expected value of the distribution subject to consolidated supervision and of potential aggregate operational regulation comparable to that imposed losses, as generated by the Board-regu- on U.S. depository institutions, or se- lated institution’s operational risk curities broker-dealers) if at the time quantification system using a one-year the guarantee is issued or anytime horizon. thereafter, has issued and outstanding Expected positive exposure (EPE) an unsecured debt security without means the weighted average over time

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of expected (non-negative) exposures to (3) For the off-balance sheet compo- a counterparty where the weights are nent of a wholesale exposure or seg- the proportion of the time interval ment of retail exposures (other than an that an individual expected exposure OTC derivative contract, a repo-style represents. When calculating risk- transaction, or eligible margin loan for based capital requirements, the aver- which the Board-regulated institution age is taken over a one-year horizon. determines EAD under § 217.132, cleared Exposure at default (EAD) means: transaction, or default fund contribu- (1) For the on-balance sheet compo- tion) in the form of anything other nent of a wholesale exposure or seg- than a loan commitment, line of credit, ment of retail exposures (other than an trade-related letter of credit, or trans- OTC derivative contract, a repo-style action-related contingency, EAD transaction or eligible margin loan for means the notional amount of the ex- which the Board-regulated institution posure or segment. determines EAD under § 217.132, a (4) EAD for OTC derivative contracts cleared transaction, or default fund is calculated as described in § 217.132. A contribution), EAD means the Board- Board-regulated institution also may regulated institution’s carrying value determine EAD for repo-style trans- (including net accrued but unpaid in- actions and eligible margin loans as de- terest and fees) for the exposure or seg- scribed in § 217.132. ment less any allocated transfer risk Exposure category means any of the reserve for the exposure or segment. wholesale, retail, securitization, or eq- (2) For the off-balance sheet compo- uity exposure categories. nent of a wholesale exposure or seg- External operational loss event data ment of retail exposures (other than an means, with respect to a Board-regu- OTC derivative contract, a repo-style lated institution, gross operational loss transaction or eligible margin loan for amounts, dates, recoveries, and rel- which the Board-regulated institution evant causal information for oper- determines EAD under § 217.132, cleared ational loss events occurring at organi- transaction, or default fund contribu- zations other than the Board-regulated tion) in the form of a loan commit- institution. ment, line of credit, trade-related let- IMM exposure means a repo-style ter of credit, or transaction-related transaction, eligible margin loan, or contingency, EAD means the Board- OTC derivative for which a Board-regu- regulated institution’s best estimate of lated institution calculates its EAD net additions to the outstanding using the internal models methodology amount owed the Board-regulated in- of § 217.132(d). stitution, including estimated future Internal operational loss event data additional draws of principal and ac- means, with respect to a Board-regu- crued but unpaid interest and fees, that lated institution, gross operational loss are likely to occur over a one-year ho- amounts, dates, recoveries, and rel- rizon assuming the wholesale exposure evant causal information for oper- or the retail exposures in the segment ational loss events occurring at the were to go into default. This estimate Board-regulated institution. of net additions must reflect what Loss given default (LGD) means: would be expected during economic (1) For a wholesale exposure, the downturn conditions. For the purposes greatest of: of this definition: (i) Zero; (i) Trade-related letters of credit are (ii) The Board-regulated institution’s short-term, self-liquidating instru- empirically based best estimate of the ments that are used to finance the long-run default-weighted average eco- movement of goods and are nomic loss, per dollar of EAD, the collateralized by the underlying goods. Board-regulated institution would ex- (ii) Transaction-related contin- pect to incur if the obligor (or a typical gencies relate to a particular trans- obligor in the loss severity grade as- action and include, among other signed by the Board-regulated institu- things, performance bonds and per- tion to the exposure) were to default formance-based letters of credit. within a one-year horizon over a mix of

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economic conditions, including eco- (1) Exposures to the same legal enti- nomic downturn conditions; or ty or natural person denominated in (iii) The Board-regulated institu- different currencies; tion’s empirically based best estimate (2)(i) An income-producing real es- of the economic loss, per dollar of EAD, tate exposure for which all or substan- the Board-regulated institution would tially all of the repayment of the expo- expect to incur if the obligor (or a typ- sure is reliant on the cash flows of the ical obligor in the loss severity grade real estate serving as collateral for the assigned by the Board-regulated insti- exposure; the Board-regulated institu- tution to the exposure) were to default tion, in economic substance, does not within a one-year horizon during eco- have recourse to the borrower beyond nomic downturn conditions. the real estate collateral; and no cross- (2) For a segment of retail exposures, default or cross-acceleration clauses the greatest of: are in place other than clauses ob- (i) Zero; tained solely out of an abundance of (ii) The Board-regulated institution’s caution; and empirically based best estimate of the (ii) Other credit exposures to the long-run default-weighted average eco- same legal entity or natural person; nomic loss, per dollar of EAD, the and Board-regulated institution would ex- (3)(i) A wholesale exposure author- pect to incur if the exposures in the ized under section 364 of the U.S. Bank- segment were to default within a one- ruptcy Code (11 U.S.C. 364) to a legal year horizon over a mix of economic entity or natural person who is a debt- conditions, including economic down- or-in-possession for purposes of Chap- turn conditions; or ter 11 of the Bankruptcy Code; and (iii) The Board-regulated institu- (ii) Other credit exposures to the tion’s empirically based best estimate same legal entity or natural person. of the economic loss, per dollar of EAD, Operational loss means a loss (exclud- the Board-regulated institution would ing insurance or tax effects) resulting expect to incur if the exposures in the from an operational loss event. Oper- segment were to default within a one- ational loss includes all expenses asso- year horizon during economic down- ciated with an operational loss event turn conditions. except for opportunity costs, forgone (3) The economic loss on an exposure revenue, and costs related to risk man- in the event of default is all material agement and control enhancements im- credit-related losses on the exposure plemented to prevent future oper- (including accrued but unpaid interest ational losses. or fees, losses on the sale of collateral, Operational loss event means an event direct workout costs, and an appro- that results in loss and is associated priate allocation of indirect workout with any of the following seven oper- costs). Where positive or negative cash ational loss event type categories: flows on a wholesale exposure to a de- (1) Internal fraud, which means the faulted obligor or a defaulted retail ex- operational loss event type category posure (including proceeds from the that comprises operational losses re- sale of collateral, workout costs, addi- sulting from an act involving at least tional extensions of credit to facilitate one internal party of a type intended repayment of the exposure, and draw- to defraud, misappropriate property, or downs of unused credit lines) occur circumvent regulations, the law, or after the date of default, the economic company policy excluding diversity- loss must reflect the net present value and discrimination-type events. of cash flows as of the default date (2) External fraud, which means the using a discount rate appropriate to operational loss event type category the risk of the defaulted exposure. that comprises operational losses re- Obligor means the legal entity or nat- sulting from an act by a third party of ural person contractually obligated on a type intended to defraud, misappro- a wholesale exposure, except that a priate property, or circumvent the law. Board-regulated institution may treat Retail credit card losses arising from the following exposures as having sepa- non-contractual, third-party-initiated rate obligors: fraud (for example, identity theft) are

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external fraud operational losses. All Other retail exposure means an expo- other third-party-initiated credit sure (other than a securitization expo- losses are to be treated as credit risk sure, an equity exposure, a residential losses. mortgage exposure, a pre-sold con- (3) Employment practices and work- struction loan, a qualifying revolving place safety, which means the oper- exposure, or the residual value portion ational loss event type category that of a lease exposure) that is managed as comprises operational losses resulting part of a segment of exposures with ho- from an act inconsistent with employ- mogeneous risk characteristics, not on ment, health, or safety laws or agree- an individual-exposure basis, and is ei- ments, payment of personal injury ther: claims, or payment arising from (1) An exposure to an individual for diversity- and discrimination-type non-business purposes; or events. (2) An exposure to an individual or (4) Clients, products, and business company for business purposes if the practices, which means the operational Board-regulated institution’s consoli- loss event type category that com- dated business credit exposure to the prises operational losses resulting from individual or company is $1 million or the nature or design of a product or less. from an unintentional or negligent Probability of default (PD) means: failure to meet a professional obliga- (1) For a wholesale exposure to a non- tion to specific clients (including fidu- defaulted obligor, the Board-regulated ciary and suitability requirements). institution’s empirically based best es- timate of the long-run average one- (5) Damage to physical assets, which year default rate for the rating grade means the operational loss event type assigned by the Board-regulated insti- category that comprises operational tution to the obligor, capturing the av- losses resulting from the loss of or erage default experience for obligors in damage to physical assets from natural the rating grade over a mix of eco- disaster or other events. nomic conditions (including economic (6) Business disruption and system downturn conditions) sufficient to pro- failures, which means the operational vide a reasonable estimate of the aver- loss event type category that com- age one-year default rate over the eco- prises operational losses resulting from nomic cycle for the rating grade. disruption of business or system fail- (2) For a segment of non-defaulted re- ures. tail exposures, the Board-regulated in- (7) Execution, delivery, and process stitution’s empirically based best esti- management, which means the oper- mate of the long-run average one-year ational loss event type category that default rate for the exposures in the comprises operational losses resulting segment, capturing the average default from failed transaction processing or experience for exposures in the seg- process management or losses arising ment over a mix of economic condi- from relations with trade counterpar- tions (including economic downturn ties and vendors. conditions) sufficient to provide a rea- Operational risk means the risk of loss sonable estimate of the average one- resulting from inadequate or failed in- year default rate over the economic ternal processes, people, and systems cycle for the segment. or from external events (including (3) For a wholesale exposure to a de- but excluding strategic and faulted obligor or segment of defaulted reputational risk). retail exposures, 100 percent. Operational risk exposure means the Qualifying cross-product master netting 99.9th percentile of the distribution of agreement means a qualifying master potential aggregate operational losses, netting agreement that provides for as generated by the Board-regulated in- termination and close-out netting stitution’s operational risk quantifica- across multiple types of financial tion system over a one-year horizon transactions or qualifying master net- (and not incorporating eligible oper- ting agreements in the event of a ational risk offsets or qualifying oper- counterparty’s default, provided that ational risk mitigants). the underlying financial transactions

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are OTC derivative contracts, eligible Scenario analysis means a systematic margin loans, or repo-style trans- process of obtaining expert opinions actions. In order to treat an agreement from business managers and risk man- as a qualifying cross-product master agement experts to derive reasoned as- netting agreement for purposes of this sessments of the likelihood and loss subpart, a Board-regulated institution impact of plausible high-severity oper- must comply with the requirements of ational losses. Scenario analysis may § 217.3(c) of this part with respect to include the well-reasoned evaluation that agreement. and use of external operational loss Qualifying revolving exposure (QRE) event data, adjusted as appropriate to means an exposure (other than a ensure relevance to a Board-regulated securitization exposure or equity expo- institution’s operational risk profile sure) to an individual that is managed and control structure. as part of a segment of exposures with Total wholesale and retail risk-weighted homogeneous risk characteristics, not assets means the sum of: on an individual-exposure basis, and: (1) Risk-weighted assets for whole- (1) Is revolving (that is, the amount sale exposures that are not IMM expo- outstanding fluctuates, determined sures, cleared transactions, or default largely by a borrower’s decision to bor- fund contributions to non-defaulted ob- row and repay up to a pre-established maximum amount, except for an out- ligors and segments of non-defaulted standing amount that the borrower is retail exposures; required to pay in full every month); (2) Risk-weighted assets for whole- (2) Is unsecured and unconditionally sale exposures to defaulted obligors cancelable by the Board-regulated in- and segments of defaulted retail expo- stitution to the fullest extent per- sures; mitted by Federal law; and (3) Risk-weighted assets for assets (3)(i) Has a maximum contractual ex- not defined by an exposure category; posure amount (drawn plus undrawn) of (4) Risk-weighted assets for non-ma- up to $100,000; or terial portfolios of exposures; (ii) With respect to a product with an (5) Risk-weighted assets for IMM ex- outstanding amount that the borrower posures (as determined in § 217.132(d)); is required to pay in full every month, (6) Risk-weighted assets for cleared the total outstanding amount does not transactions and risk-weighted assets in practice exceed $100,000. for default fund contributions (as de- (4) A segment of exposures that con- termined in § 217.133); and tains one or more exposures that fails (7) Risk-weighted assets for unsettled to meet paragraph (3)(ii) of this defini- transactions (as determined in tion must be treated as a segment of § 217.136). other retail exposures for the 24 month Unexpected operational loss (UOL) period following the month in which means the difference between the the total outstanding amount of one or Board-regulated institution’s oper- more exposures individually exceeds ational risk exposure and the Board- $100,000. regulated institution’s expected oper- Retail exposure means a residential mortgage exposure, a qualifying re- ational loss. volving exposure, or an other retail ex- Unit of measure means the level (for posure. example, organizational unit or oper- Retail exposure subcategory means the ational loss event type) at which the residential mortgage exposure, quali- Board-regulated institution’s oper- fying revolving exposure, or other re- ational risk quantification system gen- tail exposure subcategory. erates a separate distribution of poten- Risk parameter means a variable used tial operational losses. in determining risk-based capital re- Wholesale exposure means a credit ex- quirements for wholesale and retail ex- posure to a company, natural person, posures, specifically probability of de- sovereign, or governmental entity fault (PD), loss given default (LGD), (other than a securitization exposure, exposure at default (EAD), or effective retail exposure, pre-sold construction maturity (M). loan, or equity exposure).

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Wholesale exposure subcategory means (A) The Board-regulated institution’s the HVCRE or non-HVCRE wholesale current status in meeting the quali- exposure subcategory. fication requirements in § 217.122; and (B) The consistency of the Board-reg- [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as amended at 79 FR 78295, Dec. 30, 2014] ulated institution’s current practices with the Board’s supervisory guidance §§ 217.102–217.120 [Reserved] on the qualification requirements; (iv) Based on the Board-regulated in- QUALIFICATION stitution’s self-assessment, identify and describe the areas in which the § 217.121 Qualification process. Board-regulated institution proposes to (a) Timing. (1) A Board-regulated in- undertake additional work to comply stitution that is described in with the qualification requirements in § 217.100(b)(1)(i) and (ii) must adopt a § 217.122 or to improve the consistency written implementation plan no later of the Board-regulated institution’s than six months after the date the current practices with the Board’s su- Board-regulated institution meets a pervisory guidance on the qualification criterion in that section. The imple- requirements (gap analysis); mentation plan must incorporate an (v) Describe what specific actions the explicit start date no later than 36 Board-regulated institution will take months after the date the Board-regu- to address the areas identified in the lated institution meets at least one cri- gap analysis required by paragraph terion under § 217.100(b)(1)(i) and (ii). (b)(1)(iv) of this section; The Board may extend the start date. (vi) Identify objective, measurable (2) A Board-regulated institution milestones, including delivery dates that elects to be subject to this subpart and a date when the Board-regulated under § 217.101(b)(1)(iii) must adopt a institution’s implementation of the written implementation plan. methodologies described in this sub- (b) Implementation plan. (1) The part will be fully operational; Board-regulated institution’s imple- (vii) Describe resources that have mentation plan must address in detail been budgeted and are available to im- how the Board-regulated institution plement the plan; and complies, or plans to comply, with the (viii) Receive approval of the Board- qualification requirements in § 217.122. regulated institution’s board of direc- The Board-regulated institution also tors. must maintain a comprehensive and (2) The Board-regulated institution sound planning and governance process must submit the implementation plan, to oversee the implementation efforts together with a copy of the minutes of described in the plan. At a minimum, the board of directors’ approval, to the the plan must: Board at least 60 days before the (i) Comprehensively address the qual- Board-regulated institution proposes to ification requirements in § 217.122 for begin its parallel run, unless the Board the Board-regulated institution and waives prior notice. each consolidated subsidiary (U.S. and (c) Parallel run. Before determining foreign-based) of the Board-regulated its risk-weighted assets under this sub- institution with respect to all port- part and following adoption of the im- folios and exposures of the Board-regu- plementation plan, the Board-regu- lated institution and each of its con- lated institution must conduct a satis- solidated subsidiaries; factory parallel run. A satisfactory (ii) Justify and support any proposed parallel run is a period of no less than temporary or permanent exclusion of four consecutive calendar quarters dur- business lines, portfolios, or exposures ing which the Board-regulated institu- from the application of the advanced tion complies with the qualification re- approaches in this subpart (which busi- quirements in § 217.122 to the satisfac- ness lines, portfolios, and exposures tion of the Board. During the parallel must be, in the aggregate, immaterial run, the Board-regulated institution to the Board-regulated institution); must report to the Board on a calendar (iii) Include the Board-regulated in- quarterly basis its risk-based capital stitution’s self-assessment of: ratios determined in accordance with

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§ 217.10(b)(1) through (3) and § 217.10(c)(1) used to determine its risk-based cap- through (3). During this period, the ital requirements are representative of Board-regulated institution’s min- long run experience with respect to its imum risk-based capital ratios are de- own credit risk and operational risk termined as set forth in subpart D of exposures. this part. (b) Risk rating and segmentation sys- (d) Approval to calculate risk-based tems for wholesale and retail exposures. capital requirements under this subpart. (1)(i) A Board-regulated institution The Board will notify the Board-regu- must have an internal risk rating and lated institution of the date that the segmentation system that accurately, Board-regulated institution must begin reliably, and meaningfully differen- to use this subpart for purposes of tiates among degrees of credit risk for § 217.10 if the Board determines that: the Board-regulated institution’s (1) The Board-regulated institution wholesale and retail exposures. When fully complies with all the qualifica- assigning an internal risk rating, a tion requirements in § 217.122; Board-regulated institution may con- (2) The Board-regulated institution sider a third-party assessment of credit has conducted a satisfactory parallel risk, provided that the Board-regulated run under paragraph (c) of this section; institution’s internal risk rating as- and signment does not rely solely on the (3) The Board-regulated institution has an adequate process to ensure on- external assessment. going compliance with the qualifica- (ii) If a Board-regulated institution tion requirements in § 217.122. uses multiple rating or segmentation systems, the Board-regulated institu- [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as tion’s rationale for assigning an obli- amended at 78 FR 62288, Oct. 11, 2013] gor or exposure to a particular system § 217.122 Qualification requirements. must be documented and applied in a manner that best reflects the obligor (a) Process and systems requirements. or exposure’s level of risk. A Board-reg- (1) A Board-regulated institution must ulated institution must not inappropri- have a rigorous process for assessing ately allocate obligors or exposures its overall capital adequacy in relation across systems to minimize regulatory to its risk profile and a comprehensive capital requirements. strategy for maintaining an appro- priate level of capital. (iii) In assigning ratings to wholesale (2) The systems and processes used by obligors and exposures, including loss a Board-regulated institution for risk- severity ratings grades to wholesale ex- based capital purposes under this sub- posures, and assigning retail exposures part must be consistent with the to retail segments, a Board-regulated Board-regulated institution’s internal institution must use all relevant and risk management processes and man- material information and ensure that agement information reporting sys- the information is current. tems. (iv) When assigning an obligor to a (3) Each Board-regulated institution PD rating or retail exposure to a PD must have an appropriate infrastruc- segment, a Board-regulated institution ture with risk measurement and man- must assess the obligor or retail bor- agement processes that meet the quali- rower’s ability and willingness to con- fication requirements of this section tractually perform, taking a conserv- and are appropriate given the Board- ative view of projected information. regulated institution’s size and level of (2) For wholesale exposures: complexity. Regardless of whether the (i) A Board-regulated institution systems and models that generate the must have an internal risk rating sys- risk parameters necessary for calcu- tem that accurately and reliably as- lating a Board-regulated institution’s signs each obligor to a single rating risk-based capital requirements are lo- grade (reflecting the obligor’s likeli- cated at any affiliate of the Board-reg- hood of default). A Board-regulated in- ulated institution, the Board-regulated stitution may elect, however, not to institution itself must ensure that the assign to a rating grade an obligor to risk parameters and reference data whom the Board-regulated institution

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extends credit based solely on the fi- must consider cross-collateral provi- nancial strength of a guarantor, pro- sions, where present. vided that all of the Board-regulated (iii) The Board-regulated institution institution’s exposures to the obligor must review and, if appropriate, update are fully covered by eligible guaran- assignments of individual retail expo- tees, the Board-regulated institution sures to segments and the loss charac- applies the PD substitution approach teristics and delinquency status of in § 217.134(c)(1) to all exposures to that each identified risk segment. These re- obligor, and the Board-regulated insti- views must occur whenever the Board- tution immediately assigns the obligor regulated institution receives new ma- to a rating grade if a guarantee can no terial information, but generally no longer be recognized under this part. less frequently than quarterly, and, in The Board-regulated institution’s all cases, at least annually. wholesale obligor rating system must (4) The Board-regulated institution’s have at least seven discrete rating internal risk rating policy for whole- grades for non-defaulted obligors and sale exposures must describe the at least one rating grade for defaulted Board-regulated institution’s rating obligors. philosophy (that is, must describe how (ii) Unless the Board-regulated insti- wholesale obligor rating assignments tution has chosen to directly assign are affected by the Board-regulated in- LGD estimates to each wholesale expo- stitution’s choice of the range of eco- sure, the Board-regulated institution nomic, business, and industry condi- must have an internal risk rating sys- tions that are considered in the obligor tem that accurately and reliably as- rating process). signs each wholesale exposure to a loss (5) The Board-regulated institution’s severity rating grade (reflecting the internal risk rating system for whole- Board-regulated institution’s estimate sale exposures must provide for the re- of the LGD of the exposure). A Board- view and update (as appropriate) of regulated institution employing loss each obligor rating and (if applicable) severity rating grades must have a suf- ficiently granular loss severity grading each loss severity rating whenever the system to avoid grouping together ex- Board-regulated institution obtains posures with widely ranging LGDs. relevant and material information on (iii) A Board-regulated institution the obligor or exposure that affects PD, must have an effective process to ob- LGD and EAD, but no less frequently tain and update in a timely manner than annually. relevant and material information on (c) Quantification of risk parameters for obligor and exposure characteristics wholesale and retail exposures. (1) The that affect PD, LGD and EAD. Board-regulated institution must have (3) For retail exposures: a comprehensive risk parameter quan- (i) A Board-regulated institution tification process that produces accu- must have an internal system that rate, timely, and reliable estimates of groups retail exposures into the appro- the risk parameters on a consistent priate retail exposure subcategory and basis for the Board-regulated institu- groups the retail exposures in each re- tion’s wholesale and retail exposures. tail exposure subcategory into separate (2) A Board-regulated institution’s segments with homogeneous risk char- estimates of PD, LGD, and EAD must acteristics that provide a meaningful incorporate all relevant, material, and differentiation of risk. The Board-regu- available data that is reflective of the lated institution’s system must iden- Board-regulated institution’s actual tify and group in separate segments by wholesale and retail exposures and of subcategories exposures identified in sufficient quality to support the deter- § 217.131(c)(2)(ii) and (iii). mination of risk-based capital require- (ii) A Board-regulated institution ments for the exposures. In particular, must have an internal system that cap- the population of exposures in the data tures all relevant exposure risk charac- used for estimation purposes, the lend- teristics, including borrower credit ing standards in use when the data score, product and collateral types, as were generated, and other relevant well as exposure delinquencies, and characteristics, should closely match

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or be comparable to the Board-regu- Board-regulated institution must be lated institution’s exposures and stand- able to monitor outstanding amounts ards. In addition, a Board-regulated in- on a daily basis. stitution must: (6) At a minimum, PD estimates for (i) Demonstrate that its estimates wholesale obligors and retail segments are representative of long run experi- must be based on at least five years of ence, including periods of economic default data. LGD estimates for whole- downturn conditions, whether internal sale exposures must be based on at or external data are used; least seven years of loss severity data, (ii) Take into account any changes in and LGD estimates for retail segments lending practice or the process for pur- must be based on at least five years of suing recoveries over the observation loss severity data. EAD estimates for period; wholesale exposures must be based on (iii) Promptly reflect technical ad- at least seven years of exposure vances, new data, and other informa- amount data, and EAD estimates for tion as they become available; retail segments must be based on at (iv) Demonstrate that the data used least five years of exposure amount to estimate risk parameters support data. If the Board-regulated institution the accuracy and robustness of those has relevant and material reference estimates; and data that span a longer period of time (v) Demonstrate that its estimation than the minimum time periods speci- technique performs well in out-of-sam- fied above, the Board-regulated institu- ple tests whenever possible. tion must incorporate such data in its (3) The Board-regulated institution’s estimates, provided that it does not risk parameter quantification process place undue weight on periods of favor- must produce appropriately conserv- able or benign economic conditions rel- ative risk parameter estimates where ative to periods of economic downturn the Board-regulated institution has conditions. limited relevant data, and any adjust- (7) Default, loss severity, and expo- ments that are part of the quantifica- sure amount data must include periods tion process must not result in a pat- of economic downturn conditions, or tern of bias toward lower risk param- the Board-regulated institution must eter estimates. adjust its estimates of risk parameters (4) The Board-regulated institution’s to compensate for the lack of data risk parameter estimation process from periods of economic downturn should not rely on the possibility of conditions. U.S. government financial assistance, except for the financial assistance that (8) The Board-regulated institution’s the U.S. government has a legally bind- PD, LGD, and EAD estimates must be ing commitment to provide. based on the definition of default in (5) The Board-regulated institution § 217.101. must be able to demonstrate which (9) If a Board-regulated institution variables have been found to be statis- uses internal data obtained prior to be- tically significant with regard to EAD. coming subject to this subpart E or ex- The Board-regulated institution’s EAD ternal data to arrive at PD, LGD, or estimates must reflect its specific poli- EAD estimates, the Board-regulated in- cies and strategies with regard to ac- stitution must demonstrate to the count management, including account Board that the Board-regulated insti- monitoring and payment processing, tution has made appropriate adjust- and its ability and willingness to pre- ments if necessary to be consistent vent further drawdowns in cir- with the definition of default in cumstances short of payment default. § 217.101. Internal data obtained after The Board-regulated institution must the Board-regulated institution be- have adequate systems and procedures comes subject to this subpart E must in place to monitor current out- be consistent with the definition of de- standing amounts against committed fault in § 217.101. lines, and changes in outstanding (10) The Board-regulated institution amounts per obligor and obligor rating must review and update (as appro- grade and per retail segment. The priate) its risk parameters and its risk

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parameter quantification process at (2) Operational risk data and assess- least annually. ment systems. A Board-regulated insti- (11) The Board-regulated institution tution must have operational risk data must, at least annually, conduct a and assessment systems that capture comprehensive review and analysis of operational risks to which the Board- reference data to determine relevance regulated institution is exposed. The of the reference data to the Board-reg- Board-regulated institution’s oper- ulated institution’s exposures, quality ational risk data and assessment sys- of reference data to support PD, LGD, tems must: and EAD estimates, and consistency of (i) Be structured in a manner con- reference data to the definition of de- sistent with the Board-regulated insti- fault in § 217.101. tution’s current business activities, (d) Counterparty credit risk model. A risk profile, technological processes, Board-regulated institution must ob- and risk management processes; and tain the prior written approval of the (ii) Include credible, transparent, sys- Board under § 217.132 to use the internal tematic, and verifiable processes that models methodology for counterparty incorporate the following elements on credit risk and the advanced CVA ap- an ongoing basis: proach for the CVA capital require- (A) Internal operational loss event data. ment. The Board-regulated institution must (e) Double default treatment. A Board- have a systematic process for cap- regulated institution must obtain the turing and using internal operational prior written approval of the Board loss event data in its operational risk under § 217.135 to use the double default data and assessment systems. treatment. (f) Equity exposures model. A Board- (1) The Board-regulated institution’s regulated institution must obtain the operational risk data and assessment prior written approval of the Board systems must include a historical ob- under § 217.153 to use the internal mod- servation period of at least five years els approach for equity exposures. for internal operational loss event data (g) Operational risk. (1) Operational (or such shorter period approved by the risk management processes. A Board- Board to address transitional situa- regulated institution must: tions, such as integrating a new busi- (i) Have an operational risk manage- ness line). ment function that: (2) The Board-regulated institution (A) Is independent of business line must be able to map its internal oper- management; and ational loss event data into the seven (B) Is responsible for designing, im- operational loss event type categories. plementing, and overseeing the Board- (3) The Board-regulated institution regulated institution’s operational risk may refrain from collecting internal data and assessment systems, oper- operational loss event data for indi- ational risk quantification systems, vidual operational losses below estab- and related processes; lished dollar threshold amounts if the (ii) Have and document a process Board-regulated institution can dem- (which must capture business environ- onstrate to the satisfaction of the ment and internal control factors af- Board that the thresholds are reason- fecting the Board-regulated institu- able, do not exclude important internal tion’s operational risk profile) to iden- operational loss event data, and permit tify, measure, monitor, and control the Board-regulated institution to cap- operational risk in the Board-regulated ture substantially all the dollar value institution’s products, activities, proc- of the Board-regulated institution’s esses, and systems; and operational losses. (iii) Report operational risk expo- (B) External operational loss event sures, operational loss events, and data. The Board-regulated institution other relevant operational risk infor- must have a systematic process for de- mation to business unit management, termining its methodologies for incor- senior management, and the board of porating external operational loss directors (or a designated committee of event data into its operational risk the board). data and assessment systems.

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(C) Scenario analysis. The Board-regu- culate its total operational risk expo- lated institution must have a system- sure; and atic process for determining its meth- (E) Must be reviewed and updated (as odologies for incorporating scenario appropriate) whenever the Board-regu- analysis into its operational risk data lated institution becomes aware of in- and assessment systems. formation that may have a material ef- (D) Business environment and internal fect on the Board-regulated institu- control factors. The Board-regulated in- tion’s estimate of operational risk ex- stitution must incorporate business en- posure, but the review and update must vironment and internal control factors occur no less frequently than annually. into its operational risk data and as- (ii) With the prior written approval sessment systems. The Board-regulated of the Board, a state member bank may institution must also periodically com- generate an estimate of its operational pare the results of its prior business risk exposure using an alternative ap- environment and internal control fac- proach to that specified in paragraph tor assessments against its actual (g)(3)(i) of this section. A state member operational losses incurred in the in- bank proposing to use such an alter- tervening period. native operational risk quantification (3) Operational risk quantification sys- system must submit a proposal to the tems. (i) The Board-regulated institu- Board. In determining whether to ap- tion’s operational risk quantification prove a state member bank’s proposal systems: to use an alternative operational risk (A) Must generate estimates of the quantification system, the Board will Board-regulated institution’s oper- consider the following principles: ational risk exposure using its oper- (A) Use of the alternative operational ational risk data and assessment sys- risk quantification system will be al- tems; lowed only on an exception basis, con- (B) Must employ a unit of measure sidering the size, complexity, and risk that is appropriate for the Board-regu- profile of the state member bank; lated institution’s range of business ac- (B) The state member bank must tivities and the variety of operational demonstrate that its estimate of its loss events to which it is exposed, and operational risk exposure generated that does not combine business activi- under the alternative operational risk ties or operational loss events with de- quantification system is appropriate monstrably different risk profiles with- and can be supported empirically; and in the same loss distribution; (C) A state member bank must not (C) Must include a credible, trans- use an allocation of operational risk parent, systematic, and verifiable ap- capital requirements that includes en- proach for weighting each of the four tities other than depository institu- elements, described in paragraph tions or the benefits of diversification (g)(2)(ii) of this section, that a Board- across entities. regulated institution is required to in- (h) Data management and maintenance. corporate into its operational risk data (1) A Board-regulated institution must and assessment systems; have data management and mainte- (D) May use internal estimates of de- nance systems that adequately support pendence among operational losses all aspects of its advanced systems and across and within units of measure if the timely and accurate reporting of the Board-regulated institution can risk-based capital requirements. demonstrate to the satisfaction of the (2) A Board-regulated institution Board that its process for estimating must retain data using an electronic dependence is sound, robust to a vari- format that allows timely retrieval of ety of scenarios, and implemented with data for analysis, validation, reporting, integrity, and allows for uncertainty and disclosure purposes. surrounding the estimates. If the (3) A Board-regulated institution Board-regulated institution has not must retain sufficient data elements made such a demonstration, it must related to key risk drivers to permit sum operational risk exposure esti- adequate monitoring, validation, and mates across units of measure to cal- refinement of its advanced systems.

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(i) Control, oversight, and validation (iii) Documents and reports its find- mechanisms. (1) The Board-regulated in- ings to the Board-regulated institu- stitution’s senior management must tion’s board of directors (or a com- ensure that all components of the mittee thereof). Board-regulated institution’s advanced (6) The Board-regulated institution systems function effectively and com- must periodically stress test its ad- ply with the qualification requirements vanced systems. The stress testing in this section. must include a consideration of how (2) The Board-regulated institution’s economic cycles, especially downturns, board of directors (or a designated affect risk-based capital requirements committee of the board) must at least (including migration across rating annually review the effectiveness of, grades and segments and the credit and approve, the Board-regulated insti- risk mitigation benefits of double de- tution’s advanced systems. fault treatment). (3) A Board-regulated institution (j) Documentation. The Board-regu- must have an effective system of con- lated institution must adequately doc- trols and oversight that: ument all material aspects of its ad- (i) Ensures ongoing compliance with vanced systems. the qualification requirements in this [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as section; amended at 78 FR 62289, Oct. 11, 2013; 80 FR (ii) Maintains the integrity, reli- 41419, July 15, 2015] ability, and accuracy of the Board-reg- ulated institution’s advanced systems; § 217.123 Ongoing qualification. and (a) Changes to advanced systems. A (iii) Includes adequate governance Board-regulated institution must meet and project management processes. all the qualification requirements in (4) The Board-regulated institution § 217.122 on an ongoing basis. A Board- must validate, on an ongoing basis, its regulated institution must notify the advanced systems. The Board-regulated Board when the Board-regulated insti- institution’s validation process must tution makes any change to an ad- be independent of the advanced sys- vanced system that would result in a tems’ development, implementation, material change in the Board-regulated and operation, or the validation proc- institution’s advanced approaches total ess must be subjected to an inde- risk-weighted asset amount for an ex- pendent review of its adequacy and ef- posure type or when the Board-regu- fectiveness. Validation must include: lated institution makes any significant (i) An evaluation of the conceptual change to its modeling assumptions. soundness of (including developmental (b) Failure to comply with qualification evidence supporting) the advanced sys- requirements. (1) If the Board deter- tems; mines that a Board-regulated institu- (ii) An ongoing monitoring process tion that uses this subpart and that that includes verification of processes has conducted a satisfactory parallel and benchmarking; and run fails to comply with the qualifica- (iii) An outcomes analysis process tion requirements in § 217.122, the that includes backtesting. Board will notify the Board-regulated (5) The Board-regulated institution institution in writing of the Board-reg- must have an internal audit function ulated institution’s failure to comply. or equivalent function that is inde- (2) The Board-regulated institution pendent of business-line management must establish and submit a plan satis- that at least annually: factory to the Board to return to com- (i) Reviews the Board-regulated insti- pliance with the qualification require- tution’s advanced systems and associ- ments. ated operations, including the oper- (3) In addition, if the Board deter- ations of its credit function and esti- mines that the Board-regulated insti- mations of PD, LGD, and EAD; tution’s advanced approaches total (ii) Assesses the effectiveness of the risk-weighted assets are not commen- controls supporting the Board-regu- surate with the Board-regulated insti- lated institution’s advanced systems; tution’s credit, market, operational, or and other risks, the Board may require

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such a Board-regulated institution to with or acquires a company that cal- calculate its advanced approaches total culates its risk-based capital require- risk-weighted assets with any modi- ments using advanced systems, the fications provided by the Board. Board-regulated institution may use the acquired company’s advanced sys- § 217.124 Merger and acquisition tran- tems to determine total risk-weighted sitional arrangements. assets for the merged or acquired com- (a) Mergers and acquisitions of compa- pany’s exposures for up to 24 months nies without advanced systems. If a after the calendar quarter during Board-regulated institution merges which the acquisition or merger con- with or acquires a company that does summates. The Board may extend this not calculate its risk-based capital re- transition period for up to an addi- quirements using advanced systems, tional 12 months. Within 90 days of the Board-regulated institution may consummating the merger or acquisi- use subpart D of this part to determine tion, the Board-regulated institution the risk-weighted asset amounts for must submit to the Board an imple- the merged or acquired company’s ex- mentation plan for using its advanced posures for up to 24 months after the systems for the merged or acquired calendar quarter during which the company. merger or acquisition consummates. (2) If the acquiring Board-regulated The Board may extend this transition institution is not subject to the ad- period for up to an additional 12 vanced approaches in this subpart at months. Within 90 days of consum- the time of acquisition or merger, dur- mating the merger or acquisition, the ing the period when subpart D of this Board-regulated institution must sub- part applies to the acquiring Board- mit to the Board an implementation regulated institution, the ALLL associ- plan for using its advanced systems for ated with the exposures of the merged the acquired company. During the pe- or acquired company may not be di- riod in which subpart D of this part ap- rectly included in tier 2 capital. Rath- plies to the merged or acquired com- er, any excess eligible credit reserves pany, any ALLL, net of allocated associated with the merged or acquired transfer risk reserves established pur- company’s exposures may be included suant to 12 U.S.C. 3904, associated with in the Board-regulated institution’s the merged or acquired company’s ex- tier 2 capital up to 0.6 percent of the posures may be included in the acquir- credit-risk-weighted assets associated ing Board-regulated institution’s tier 2 with those exposures. capital up to 1.25 percent of the ac- quired company’s risk-weighted assets. §§ 217.125–217.130 [Reserved] All general allowances of the merged or acquired company must be excluded RISK-WEIGHTED ASSETS FOR GENERAL from the Board-regulated institution’s CREDIT RISK eligible credit reserves. In addition, the risk-weighted assets of the merged or § 217.131 Mechanics for calculating total wholesale and retail risk- acquired company are not included in weighted assets. the Board-regulated institution’s cred- it-risk-weighted assets but are included (a) Overview. A Board-regulated insti- in total risk-weighted assets. If a tution must calculate its total whole- Board-regulated institution relies on sale and retail risk-weighted asset this paragraph (a), the Board-regulated amount in four distinct phases: institution must disclose publicly the (1) Phase 1—categorization of expo- amounts of risk-weighted assets and sures; qualifying capital calculated under (2) Phase 2—assignment of wholesale this subpart for the acquiring Board- obligors and exposures to rating grades regulated institution and under sub- and segmentation of retail exposures; part D of this part for the acquired (3) Phase 3—assignment of risk pa- company. rameters to wholesale exposures and (b) Mergers and acquisitions of compa- segments of retail exposures; and nies with advanced systems. (1) If a (4) Phase 4—calculation of risk- Board-regulated institution merges weighted asset amounts.

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(b) Phase 1—Categorization. The margin loans using the approach in Board-regulated institution must de- § 217.132(b), the Board-regulated institu- termine which of its exposures are tion must identify which of its retail wholesale exposures, retail exposures, exposures are eligible margin loans for securitization exposures, or equity ex- which the Board-regulated institution posures. The Board-regulated institu- uses this EAD approach and must seg- tion must categorize each retail expo- ment such eligible margin loans sepa- sure as a residential mortgage expo- rately from other retail exposures. sure, a QRE, or another retail expo- (3) Eligible purchased wholesale expo- sure. The Board-regulated institution sures. A Board-regulated institution must identify which wholesale expo- may group its eligible purchased sures are HVCRE exposures, sovereign wholesale exposures into segments that exposures, OTC derivative contracts, have homogeneous risk characteristics. repo-style transactions, eligible mar- A Board-regulated institution must use gin loans, eligible purchased wholesale the wholesale exposure formula in exposures, cleared transactions, default Table 1 of this section to determine the fund contributions, and unsettled risk-based capital requirement for each transactions to which § 217.136 applies, segment of eligible purchased whole- and eligible guarantees or eligible cred- sale exposures. it derivatives that are used as credit (d) Phase 3—Assignment of risk param- risk mitigants. The Board-regulated in- eters to wholesale exposures and segments stitution must identify any on-balance of retail exposures. (1) Quantification sheet asset that does not meet the defi- process. Subject to the limitations in nition of a wholesale, retail, equity, or this paragraph (d), the Board-regulated securitization exposure, any non-mate- institution must: rial portfolio of exposures described in (i) Associate a PD with each whole- paragraph (e)(4) of this section, and for sale obligor rating grade; bank holding companies and savings (ii) Associate an LGD with each and loan holding companies, any on- wholesale loss severity rating grade or balance sheet asset that is held in a assign an LGD to each wholesale expo- non-guaranteed separate account. sure; (c) Phase 2—Assignment of wholesale (iii) Assign an EAD and M to each obligors and exposures to rating grades wholesale exposure; and and retail exposures to segments—(1) As- (iv) Assign a PD, LGD, and EAD to signment of wholesale obligors and expo- each segment of retail exposures. sures to rating grades. (2) Floor on PD assignment. The PD for (i) The Board-regulated institution each wholesale obligor or retail seg- must assign each obligor of a wholesale ment may not be less than 0.03 percent, exposure to a single obligor rating except for exposures to or directly and grade and must assign each wholesale unconditionally guaranteed by a sov- exposure to which it does not directly ereign entity, the Bank for Inter- assign an LGD estimate to a loss sever- national Settlements, the Inter- ity rating grade. national Monetary Fund, the European (ii) The Board-regulated institution Commission, the European Central must identify which of its wholesale Bank, or a multilateral development obligors are in default. bank, to which the Board-regulated in- (2) Segmentation of retail exposures. (i) stitution assigns a rating grade associ- The Board-regulated institution must ated with a PD of less than 0.03 per- group the retail exposures in each re- cent. tail subcategory into segments that (3) Floor on LGD estimation. The LGD have homogeneous risk characteristics. for each segment of residential mort- (ii) The Board-regulated institution gage exposures may not be less than 10 must identify which of its retail expo- percent, except for segments of resi- sures are in default. The Board-regu- dential mortgage exposures for which lated institution must segment de- all or substantially all of the principal faulted retail exposures separately of each exposure is either: from non-defaulted retail exposures. (i) Directly and unconditionally (iii) If the Board-regulated institu- guaranteed by the full faith and credit tion determines the EAD for eligible of a sovereign entity; or

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(ii) Guaranteed by a contingent obli- quantifying the LGD of the exposure, gation of the U.S. government or its and may take into account the risk re- agencies, the enforceability of which is ducing effects of collateral in support dependent upon some affirmative ac- of retail exposures when quantifying tion on the part of the beneficiary of the PD and LGD of the segment. In the guarantee or a third party (for ex- order to do so, a Board-regulated insti- ample, meeting servicing require- tution must have established internal ments). requirements for collateral manage- (4) Eligible purchased wholesale expo- ment, legal certainty, and risk man- sures. A Board-regulated institution agement processes. must assign a PD, LGD, EAD, and M to (6) EAD for OTC derivative contracts, each segment of eligible purchased repo-style transactions, and eligible mar- wholesale exposures. If the Board-regu- gin loans. A Board-regulated institu- lated institution can estimate ECL tion must calculate its EAD for an OTC (but not PD or LGD) for a segment of derivative contract as provided in eligible purchased wholesale exposures, the Board-regulated institution must § 217.132 (c) and (d). A Board-regulated assume that the LGD of the segment institution may take into account the equals 100 percent and that the PD of risk-reducing effects of financial col- the segment equals ECL divided by lateral in support of a repo-style trans- EAD. The estimated ECL must be cal- action or eligible margin loan and of culated for the exposures without re- any collateral in support of a repo- gard to any assumption of recourse or style transaction that is included in guarantees from the seller or other the Board-regulated institution’s VaR- parties. based measure under subpart F of this (5) Credit risk mitigation: credit deriva- part through an adjustment to EAD as tives, guarantees, and collateral. (i) A provided in § 217.132(b) and (d). A Board- Board-regulated institution may take regulated institution that takes collat- into account the risk reducing effects eral into account through such an ad- of eligible guarantees and eligible cred- justment to EAD under § 217.132 may it derivatives in support of a wholesale not reflect such collateral in LGD. exposure by applying the PD substi- (7) Effective maturity. An exposure’s M tution or LGD adjustment treatment must be no greater than five years and to the exposure as provided in § 217.134 no less than one year, except that an or, if applicable, applying double de- exposure’s M must be no less than one fault treatment to the exposure as pro- day if the exposure is a trade related vided in § 217.135. A Board-regulated in- letter of credit, or if the exposure has stitution may decide separately for an original maturity of less than one each wholesale exposure that qualifies year and is not part of a Board-regu- for the double default treatment under lated institution’s ongoing financing of § 217.135 whether to apply the double the obligor. An exposure is not part of default treatment or to use the PD sub- a Board-regulated institution’s ongoing stitution or LGD adjustment treat- financing of the obligor if the Board- ment without recognizing double de- regulated institution: fault effects. (i) Has a legal and practical ability (ii) A Board-regulated institution not to renew or roll over the exposure may take into account the risk reduc- ing effects of guarantees and credit de- in the event of credit deterioration of rivatives in support of retail exposures the obligor; in a segment when quantifying the PD (ii) Makes an independent credit de- and LGD of the segment. In doing so, a cision at the inception of the exposure Board-regulated institution must con- and at every renewal or roll over; and sider all relevant available informa- (iii) Has no substantial commercial tion. incentive to continue its credit rela- (iii) Except as provided in paragraph tionship with the obligor in the event (d)(6) of this section, a Board-regulated of credit deterioration of the obligor. institution may take into account the (8) EAD for exposures to certain central risk reducing effects of collateral in counterparties. A Board-regulated insti- support of a wholesale exposure when tution may attribute an EAD of zero to

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exposures that arise from the settle- fund contributions, unsettled trans- ment of cash transactions (such as eq- actions, and exposures to which the uities, fixed income, spot foreign ex- Board-regulated institution applies the change, and spot commodities) with a double default treatment in § 217.135) central counterparty where there is no and segments of non-defaulted retail assumption of ongoing counterparty exposures by inserting the assigned credit risk by the central counterparty risk parameters for the wholesale obli- after settlement of the trade and asso- gor and exposure or retail segment into ciated default fund contributions. the appropriate risk-based capital for- (e) Phase 4—Calculation of risk-weight- mula specified in Table 1 and multi- ed assets—(1) Non-defaulted exposures. (i) plying the output of the formula (K) by A Board-regulated institution must the EAD of the exposure or segment. calculate the dollar risk-based capital Alternatively, a Board-regulated insti- requirement for each of its wholesale tution may apply a 300 percent risk exposures to a non-defaulted obligor weight to the EAD of an eligible mar- (except for eligible guarantees and eli- gin loan if the Board-regulated institu- gible credit derivatives that hedge an- tion is not able to meet the Board’s re- other wholesale exposure, IMM expo- quirements for estimation of PD and sures, cleared transactions, default LGD for the margin loan.

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(ii) The sum of all the dollar risk- U.S. government guarantee: The dollar based capital requirements for each risk-based capital requirement for each wholesale exposure to a non-defaulted wholesale exposure not covered by an obligor and segment of non-defaulted eligible guarantee from the U.S. gov- retail exposures calculated in para- ernment to a defaulted obligor and graph (e)(1)(i) of this section and in each segment of defaulted retail expo- § 217.135(e) equals the total dollar risk- sures not covered by an eligible guar- based capital requirement for those ex- antee from the U.S. government equals posures and segments. 0.08 multiplied by the EAD of the expo- (iii) The aggregate risk-weighted sure or segment. asset amount for wholesale exposures (ii) Covered by an eligible U.S. govern- to non-defaulted obligors and segments ment guarantee: The dollar risk-based of non-defaulted retail exposures capital requirement for each wholesale equals the total dollar risk-based cap- exposure to a defaulted obligor covered ital requirement in paragraph (e)(1)(ii) by an eligible guarantee from the U.S. of this section multiplied by 12.5. government and each segment of de- (2) Wholesale exposures to defaulted ob- faulted retail exposures covered by an ligors and segments of defaulted retail ex- eligible guarantee from the U.S. gov- posures—(i) Not covered by an eligible ernment equals the sum of:

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(A) The sum of the EAD of the por- other depository institution’s vaults on tion of each wholesale exposure to a de- an allocated basis, to the extent the faulted obligor covered by an eligible gold bullion assets are offset by gold guarantee from the U.S. government bullion liabilities. plus the EAD of the portion of each (iii) A Board-regulated institution segment of defaulted retail exposures must assign a risk-weighted asset that is covered by an eligible guarantee amount equal to 50 percent of the car- from the U.S. government and the re- rying value to a pre-sold construction sulting sum is multiplied by 0.016, and loan unless the purchase contract is (B) The sum of the EAD of the por- cancelled, in which case a Board-regu- tion of each wholesale exposure to a de- lated institution must assign a risk- faulted obligor not covered by an eligi- weighted asset amount equal to a 100 ble guarantee from the U.S. govern- percent of the carrying value of the ment plus the EAD of the portion of pre-sold construction loan. each segment of defaulted retail expo- (iv) The risk-weighted asset amount sures that is not covered by an eligible for the residual value of a retail lease guarantee from the U.S. government exposure equals such residual value. and the resulting sum is multiplied by (v) The risk-weighted asset amount 0.08. for DTAs arising from temporary dif- (iii) The sum of all the dollar risk- ferences that the Board-regulated in- based capital requirements for each stitution could realize through net op- wholesale exposure to a defaulted obli- erating loss carrybacks equals the car- gor and each segment of defaulted re- rying value, netted in accordance with tail exposures calculated in paragraph § 217.22. (e)(2)(i) of this section plus the dollar (vi) The risk-weighted asset amount risk-based capital requirements each for MSAs, DTAs arising from tem- wholesale exposure to a defaulted obli- porary timing differences that the gor and for each segment of defaulted Board-regulated institution could not retail exposures calculated in para- realize through net operating loss graph (e)(2)(ii) of this section equals carrybacks, and significant invest- the total dollar risk-based capital re- ments in the capital of unconsolidated quirement for those exposures and seg- financial institutions in the form of ments. common stock that are not deducted (iv) The aggregate risk-weighted pursuant to § 217.22(d) equals the asset amount for wholesale exposures amount not subject to deduction multi- to defaulted obligors and segments of plied by 250 percent. defaulted retail exposures equals the (vii) The risk-weighted asset amount total dollar risk-based capital require- for any other on-balance-sheet asset ment calculated in paragraph (e)(2)(iii) that does not meet the definition of a of this section multiplied by 12.5. wholesale, retail, securitization, IMM, (3) Assets not included in a defined ex- or equity exposure, cleared trans- posure category. (i) A bank holding com- action, or default fund contribution pany or savings and loan holding com- and is not subject to deduction under pany may assign a risk-weighted asset § 217.22(a), (c), or (d) equals the carrying amount of zero to cash owned and held value of the asset. in all offices of subsidiary depository (4) Non-material portfolios of exposures. institutions or in transit; and for gold The risk-weighted asset amount of a bullion held in a subsidiary depository portfolio of exposures for which the institution’s own vaults, or held in an- Board-regulated institution has dem- other depository institution’s vaults on onstrated to the Board’s satisfaction an allocated basis, to the extent the that the portfolio (when combined with gold bullion assets are offset by gold all other portfolios of exposures that bullion liabilities. the Board-regulated institution seeks (ii) A state member bank may assign to treat under this paragraph (e)) is not a risk-weighted asset amount to cash material to the Board-regulated insti- owned and held in all offices of the tution is the sum of the carrying val- state member bank or in transit and ues of on-balance sheet exposures plus for gold bullion held in the state mem- the notional amounts of off-balance ber bank’s own vaults, or held in an- sheet exposures in the portfolio. For

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purposes of this paragraph (e)(4), the EAD for an OTC derivative contract or notional amount of an OTC derivative a set of OTC derivative contracts sub- contract that is not a credit derivative ject to a qualifying master netting is the EAD of the derivative as cal- agreement. To estimate EAD for quali- culated in § 217.132. fying cross-product master netting (5) Assets held in non-guaranteed sepa- agreements, a Board-regulated institu- rate accounts. The risk-weighted asset tion may only use the internal models amount for an on-balance sheet asset methodology in paragraph (d) of this that is held in a non-guaranteed sepa- section. rate account is zero percent of the car- (4) A Board-regulated institution rying value of the asset. must also use the methodology in para- graph (e) of this section to calculate [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as amended at 78 FR 62289, Oct. 11, 2013; 80 FR the risk-weighted asset amounts for 41420, July 15, 2015] CVA for OTC derivatives. (b) EAD for eligible margin loans and § 217.132 Counterparty credit risk of repo-style transactions—(1) General. A repo-style transactions, eligible Board-regulated institution may recog- margin loans, and OTC derivative nize the credit risk mitigation benefits contracts. of financial collateral that secures an (a) Methodologies for collateral recogni- eligible margin loan, repo-style trans- tion. (1) Instead of an LGD estimation action, or single-product netting set of methodology, a Board-regulated insti- such transactions by factoring the col- tution may use the following meth- lateral into its LGD estimates for the odologies to recognize the benefits of exposure. Alternatively, a Board-regu- financial collateral in mitigating the lated institution may estimate an un- counterparty credit risk of repo-style secured LGD for the exposure, as well transactions, eligible margin loans, as for any repo-style transaction that collateralized OTC derivative contracts is included in the Board-regulated in- and single product netting sets of such stitution’s VaR-based measure under transactions, and to recognize the ben- subpart F of this part, and determine efits of any collateral in mitigating the the EAD of the exposure using: counterparty credit risk of repo-style (i) The collateral haircut approach transactions that are included in a described in paragraph (b)(2) of this Board-regulated institution’s VaR- section; based measure under subpart F of this (ii) For netting sets only, the simple part: VaR methodology described in para- (i) The collateral haircut approach graph (b)(3) of this section; or set forth in paragraph (b)(2) of this sec- (iii) The internal models method- tion; ology described in paragraph (d) of this (ii) The internal models methodology section. set forth in paragraph (d) of this sec- (2) Collateral haircut approach—(i) tion; and EAD equation. A Board-regulated insti- (iii) For single product netting sets tution may determine EAD for an eligi- of repo-style transactions and eligible ble margin loan, repo-style trans- margin loans, the simple VaR method- action, or netting set by setting EAD ology set forth in paragraph (b)(3) of equal to max this section. {0, [(SE ¥ SC) + S(Es × Hs) + S(Efx × (2) A Board-regulated institution H )]}, may use any combination of the three fx methodologies for collateral recogni- where: tion; however, it must use the same (A) SE equals the value of the expo- methodology for transactions in the sure (the sum of the current fair values same category. of all instruments, gold, and cash the (3) A Board-regulated institution Board-regulated institution has lent, must use the methodology in para- sold subject to repurchase, or posted as graph (c) of this section, or with prior collateral to the counterparty under written approval of the Board, the in- the transaction (or netting set)); ternal model methodology in para- (B) SC equals the value of the collat- graph (d) of this section, to calculate eral (the sum of the current fair values

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of all instruments, gold, and cash the from the settlement currency (where Board-regulated institution has bor- the net position in a given currency rowed, purchased subject to resale, or equals the sum of the current fair val- taken as collateral from the ues of any instruments or cash in the counterparty under the transaction (or currency the Board-regulated institu- netting set)); tion has lent, sold subject to repur- (C) Es equals the absolute value of chase, or posted as collateral to the the net position in a given instrument counterparty minus the sum of the cur- or in gold (where the net position in a rent fair values of any instruments or given instrument or in gold equals the cash in the currency the Board-regu- sum of the current fair values of the in- lated institution has borrowed, pur- strument or gold the Board-regulated chased subject to resale, or taken as institution has lent, sold subject to re- collateral from the counterparty); and purchase, or posted as collateral to the (F) Hfx equals the haircut appropriate counterparty minus the sum of the cur- to the mismatch between the currency rent fair values of that same instru- referenced in Efx and the settlement ment or gold the Board-regulated insti- currency. tution has borrowed, purchased subject (ii) Standard supervisory haircuts. (A) to resale, or taken as collateral from Under the standard supervisory hair- the counterparty); cuts approach: (D) Hs equals the market price vola- (1) A Board-regulated institution tility haircut appropriate to the in- must use the haircuts for market price strument or gold referenced in Es; volatility (Hs) in Table 1 to § 217.132, as (E) Efx equals the absolute value of adjusted in certain circumstances as the net position of instruments and provided in paragraphs (b)(2)(ii)(A)(3) cash in a currency that is different and (4) of § 217.132;

TABLE 1 TO § 217.132—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1

Haircut (in percent) assigned based on: Investment Sovereign issuers risk Non-sovereign issuers risk grade Residual maturity weight under § 217.132 2 weight under § 217.132 securitization (in percent) (in percent) exposures (in percent) Zero 20 or 50 100 20 50 100

Less than or equal to 1 year ...... 0.5 1.0 15.0 1.0 2.0 4.0 4.0 Greater than 1 year and less than or equal to 5 years ...... 2.0 3.0 15.0 4.0 6.0 8.0 12.0 Greater than 5 years .... 4.0 6.0 15.0 8.0 12.0 16.0 24.0

Main index equities (including convertible bonds) and gold ...... 15.0

Other publicly traded equities (including convertible bonds) ...... 25.0

Mutual funds ...... Highest haircut applicable to any security in which the fund can invest.

Cash collateral held ...... Zero

Other exposure types ...... 25.0 1 The market price volatility haircuts in Table 1 to § 217.132 are based on a 10 business-day holding period. 2 Includes a foreign PSE that receives a zero percent risk weight.

(2) For currency mismatches, a (3) For repo-style transactions, a Board-regulated institution must use a Board-regulated institution may mul- haircut for foreign exchange rate vola- tiply the supervisory haircuts provided tility (Hfx) of 8 percent, as adjusted in in paragraphs (b)(2)(ii)(A)(1) and (2) of certain circumstances as provided in this section by the square root of 1⁄2 paragraphs (b)(2)(ii)(A)(3) and (4) of this (which equals 0.707107). section. (4) A Board-regulated institution must adjust the supervisory haircuts

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upward on the basis of a holding period placed, a Board-regulated institution longer than ten business days (for eligi- must adjust the supervisory haircuts ble margin loans) or five business days upward on the basis of a holding period (for repo-style transactions) where the of twenty business days. If over the two following conditions apply. If the num- previous quarters more than two mar- ber of trades in a netting set exceeds gin disputes on a netting set have oc- 5,000 at any time during a quarter, a curred that lasted more than the hold- Board-regulated institution must ad- ing period, then the Board-regulated just the supervisory haircuts upward institution must adjust the supervisory on the basis of a holding period of haircuts upward for that netting set on twenty business days for the following the basis of a holding period that is at quarter (except when a Board-regulated institution is calculating EAD for a least two times the minimum holding cleared transaction under § 217.133). If a period for that netting set. A Board- netting set contains one or more trades regulated institution must adjust the involving illiquid collateral or an OTC standard supervisory haircuts upward derivative that cannot be easily re- using the following formula:

(i) TM equals a holding period of the volatilities of market prices and longer than 10 business days for eligi- foreign exchange rates. ble margin loans and derivative con- (A) To receive Board approval to use tracts or longer than 5 business days its own internal estimates, a Board- for repo-style transactions; regulated institution must satisfy the following minimum quantitative (ii) Hs equals the standard super- visory haircut; and standards: (1) A Board-regulated institution (iii) Ts equals 10 business days for eli- gible margin loans and derivative con- must use a 99th percentile one-tailed confidence interval. tracts or 5 business days for repo-style (2) The minimum holding period for a transactions. repo-style transaction is five business (5) If the instrument a Board-regu- days and for an eligible margin loan is lated institution has lent, sold subject ten business days except for trans- to repurchase, or posted as collateral actions or netting sets for which para- does not meet the definition of finan- graph (b)(2)(iii)(A)(3) of this section ap- cial collateral, the Board-regulated in- plies. When a Board-regulated institu- stitution must use a 25.0 percent hair- tion calculates an own-estimates hair- cut for market price volatility (Hs). cut on a TN-day holding period, which (iii) Own internal estimates for hair- is different from the minimum holding cuts. With the prior written approval of period for the transaction type, the ap- the Board, a Board-regulated institu- plicable haircut (HM) is calculated tion may calculate haircuts (Hs and using the following square root of time Hfx) using its own internal estimates of formula:

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(i) TM equals 5 for repo-style trans- the calculation of own internal esti- actions and 10 for eligible margin mates for haircuts. loans; (7) A Board-regulated institution (ii) TN equals the holding period used must update its data sets and calculate by the Board-regulated institution to haircuts no less frequently than quar- derive HN; and terly and must also reassess data sets (iii) HN equals the haircut based on and haircuts whenever market prices the holding period TN change materially. (3) If the number of trades in a net- (B) With respect to debt securities ting set exceeds 5,000 at any time dur- that are investment grade, a Board- ing a quarter, a Board-regulated insti- regulated institution may calculate tution must calculate the haircut haircuts for categories of securities. using a minimum holding period of For a category of securities, the Board- twenty business days for the following regulated institution must calculate quarter (except when a Board-regulated the haircut on the basis of internal vol- institution is calculating EAD for a atility estimates for securities in that cleared transaction under § 217.133). If a category that are representative of the netting set contains one or more trades securities in that category that the involving illiquid collateral or an OTC Board-regulated institution has lent, derivative that cannot be easily re- sold subject to repurchase, posted as placed, a Board-regulated institution collateral, borrowed, purchased subject must calculate the haircut using a to resale, or taken as collateral. In de- minimum holding period of twenty termining relevant categories, the business days. If over the two previous Board-regulated institution must at a quarters more than two margin dis- minimum take into account: putes on a netting set have occurred (1) The type of issuer of the security; that lasted more than the holding pe- (2) The credit quality of the security; riod, then the Board-regulated institu- (3) The maturity of the security; and tion must calculate the haircut for (4) The interest rate sensitivity of transactions in that netting set on the the security. basis of a holding period that is at (C) With respect to debt securities least two times the minimum holding that are not investment grade and eq- period for that netting set. uity securities, a Board-regulated in- (4) A Board-regulated institution is stitution must calculate a separate required to calculate its own internal haircut for each individual security. estimates with inputs calibrated to his- (D) Where an exposure or collateral torical data from a continuous 12- (whether in the form of cash or securi- month period that reflects a period of ties) is denominated in a currency that significant financial stress appropriate differs from the settlement currency, to the security or category of securi- the Board-regulated institution must ties. calculate a separate currency mis- (5) A Board-regulated institution match haircut for its net position in must have policies and procedures that each mismatched currency based on es- describe how it determines the period timated volatilities of foreign ex- of significant financial stress used to change rates between the mismatched calculate the Board-regulated institu- currency and the settlement currency. tion’s own internal estimates for hair- (E) A Board-regulated institution’s cuts under this section and must be own estimates of market price and for- able to provide empirical support for eign exchange rate volatilities may not the period used. The Board-regulated take into account the correlations institution must obtain the prior ap- among securities and foreign exchange proval of the Board for, and notify the rates on either the exposure or collat- Board if the Board-regulated institu- eral side of a transaction (or netting tion makes any material changes to, set) or the correlations among securi- these policies and procedures. ties and foreign exchange rates be- (6) Nothing in this section prevents tween the exposure and collateral sides the Board from requiring a Board-regu- of the transaction (or netting set). lated institution to use a different pe- (3) Simple VaR methodology. With the riod of significant financial stress in prior written approval of the Board, a

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Board-regulated institution may esti- the holding period, then the Board-reg- mate EAD for a netting set using a ulated institution must set its PFE for VaR model that meets the require- that netting set equal to an estimate ments in paragraph (b)(3)(iii) of this over a holding period that is at least section. In such event, the Board-regu- two times the minimum holding period lated institution must set EAD equal for that netting set. to max {0, [(SE ¥ SC) + PFE]}, where: (c) EAD for OTC derivative contracts— (i) SE equals the value of the expo- (1) OTC derivative contracts not subject to sure (the sum of the current fair values a qualifying master netting agreement. A of all instruments, gold, and cash the Board-regulated institution must de- Board-regulated institution has lent, termine the EAD for an OTC derivative sold subject to repurchase, or posted as contract that is not subject to a quali- collateral to the counterparty under fying master netting agreement using the netting set); the current exposure methodology in (ii) SC equals the value of the collat- paragraph (c)(5) of this section or using eral (the sum of the current fair values the internal models methodology de- of all instruments, gold, and cash the scribed in paragraph (d) of this section. Board-regulated institution has bor- A Board-regulated institution may re- rowed, purchased subject to resale, or duce the EAD calculated according to taken as collateral from the paragraph (c)(5) of this section by the counterparty under the netting set); credit valuation adjustment that the and Board-regulated institution has recog- (iii) PFE (potential future exposure) nized in its balance sheet valuation of equals the Board-regulated institu- any OTC derivative contracts in the tion’s empirically based best estimate netting set. For purposes of this para- of the 99th percentile, one-tailed con- graph (c)(1), the credit valuation ad- fidence interval for an increase in the justment does not include any adjust- value of (SE ¥ SC) over a five-business- ments to common equity tier 1 capital day holding period for repo-style trans- attributable to changes in the fair actions, or over a ten-business-day value of the Board-regulated institu- holding period for eligible margin loans tion’s liabilities that are due to except for netting sets for which para- changes in its own credit risk since the graph (b)(3)(iv) of this section applies inception of the transaction with the using a minimum one-year historical counterparty. observation period of price data rep- (2) OTC derivative contracts subject to a resenting the instruments that the qualifying master netting agreement. A Board-regulated institution has lent, Board-regulated institution must de- sold subject to repurchase, posted as termine the EAD for multiple OTC de- collateral, borrowed, purchased subject rivative contracts that are subject to a to resale, or taken as collateral. The qualifying master netting agreement Board-regulated institution must vali- using the current exposure method- date its VaR model by establishing and ology in paragraph (c)(6) of this section maintaining a rigorous and regular or using the internal models method- backtesting regime. ology described in paragraph (d) of this (iv) If the number of trades in a net- section. A Board-regulated institution ting set exceeds 5,000 at any time dur- may reduce the EAD calculated accord- ing a quarter, a Board-regulated insti- ing to paragraph (c)(6) of this section tution must use a twenty-business-day by the credit valuation adjustment holding period for the following quar- that the Board-regulated institution ter (except when a Board-regulated in- has recognized in its balance sheet stitution is calculating EAD for a valuation of any OTC derivative con- cleared transaction under § 217.133). If a tracts in the netting set. For purposes netting set contains one or more trades of this paragraph (c)(2), the credit valu- involving illiquid collateral, a Board- ation adjustment does not include any regulated institution must use a twen- adjustments to common equity tier 1 ty-business-day holding period. If over capital attributable to changes in the the two previous quarters more than fair value of the Board-regulated insti- two margin disputes on a netting set tution’s liabilities that are due to have occurred that lasted more than changes in its own credit risk since the

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inception of the transaction with the position under subpart F of this part, counterparty. and under certain other circumstances (3) Credit derivatives. Notwithstanding described in § 217.155, the Board-regu- paragraphs (c)(1) and (c)(2) of this sec- lated institution must also calculate a tion: risk-based capital requirement for the (i) A Board-regulated institution that counterparty credit risk of an equity purchases a credit derivative that is derivative contract under this section. recognized under § 217.134 or § 217.135 as (5) Single OTC derivative contract. Ex- a credit risk mitigant for an exposure cept as modified by paragraph (c)(7) of that is not a covered position under this section, the EAD for a single OTC subpart F of this part is not required to derivative contract that is not subject calculate a separate counterparty cred- to a qualifying master netting agree- it risk capital requirement under this ment is equal to the sum of the Board- section so long as the Board-regulated regulated institution’s current credit institution does so consistently for all exposure and potential future credit such credit derivatives and either in- exposure (PFE) on the derivative con- cludes or excludes all such credit de- tract. rivatives that are subject to a master netting agreement from any measure (i) Current credit exposure. The cur- used to determine counterparty credit rent credit exposure for a single OTC risk exposure to all relevant counter- derivative contract is the greater of parties for risk-based capital purposes. the mark-to-fair value of the deriva- (ii) A Board-regulated institution tive contract or zero; and that is the protection provider in a (ii) PFE. The PFE for a single OTC credit derivative must treat the credit derivative contract, including an OTC derivative as a wholesale exposure to derivative contract with a negative the reference obligor and is not re- mark-to-fair value, is calculated by quired to calculate a counterparty multiplying the notional principal credit risk capital requirement for the amount of the derivative contract by credit derivative under this section, so the appropriate conversion factor in long as it does so consistently for all Table 2 to § 217.132. For purposes of cal- such credit derivatives and either in- culating either the PFE under para- cludes all or excludes all such credit graph (c)(5) of this section or the gross derivatives that are subject to a mas- PFE under paragraph (c)(6) of this sec- ter netting agreement from any meas- tion for exchange rate contracts and ure used to determine counterparty other similar contracts in which the credit risk exposure to all relevant notional principal amount is equiva- counterparties for risk-based capital lent to the cash flows, the notional purposes (unless the Board-regulated principal amount is the net receipts to institution is treating the credit deriv- each party falling due on each value ative as a covered position under sub- date in each currency. For any OTC de- part F of this part, in which case the rivative contract that does not fall Board-regulated institution must cal- within one of the specified categories culate a supplemental counterparty in Table 2 to § 217.132, the PFE must be credit risk capital requirement under calculated using the ‘‘other’’ conver- this section). sion factors. A Board-regulated institu- (4) Equity derivatives. A Board-regu- tion must use an OTC derivative con- lated institution must treat an equity tract’s effective notional principal derivative contract as an equity expo- amount (that is, its apparent or stated sure and compute a risk-weighted asset notional principal amount multiplied amount for the equity derivative con- by any multiplier in the OTC deriva- tract under §§ 217.151–217.155 (unless the tive contract) rather than its apparent Board-regulated institution is treating or stated notional principal amount in the contract as a covered position calculating PFE. PFE of the protection under subpart F of this part). In addi- provider of a credit derivative is tion, if the Board-regulated institution capped at the net present value of the is treating the contract as a covered amount of unpaid premiums.

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TABLE 2 TO § 217.132—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 1

Foreign Credit (invest- Credit (non- Precious 2 Interest Remaining maturity rate exchange rate ment-grade ref- investment-grade Equity metals Other and gold erence asset) 3 reference asset) (except gold)

One year or less ...... 0.00 0.01 0.05 0.10 0.06 0.07 0.10 Over one to five years .. 0.005 0.05 0.05 0.10 0.08 0.07 0.12 Over five years ...... 0.015 0.075 0.05 0.10 0.10 0.08 0.15 1 For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of re- maining payments in the derivative contract. 2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum con- version factor is 0.005. 3 A Board-regulated institution must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A Board-regulated institution must use the column labeled ‘‘Credit (non-investment-grade reference asset)’’ for all other credit derivatives.

(6) Multiple OTC derivative contracts (7) Collateralized OTC derivative con- subject to a qualifying master netting tracts. A Board-regulated institution agreement. Except as modified by para- may recognize the credit risk mitiga- graph (c)(7) of this section, the EAD for tion benefits of financial collateral multiple OTC derivative contracts sub- that secures an OTC derivative con- ject to a qualifying master netting tract or single-product netting set of agreement is equal to the sum of the OTC derivatives by factoring the col- net current credit exposure and the ad- lateral into its LGD estimates for the justed sum of the PFE exposure for all contract or netting set. Alternatively, OTC derivative contracts subject to the a Board-regulated institution may rec- qualifying master netting agreement. ognize the credit risk mitigation bene- (i) Net current credit exposure. The net fits of financial collateral that secures current credit exposure is the greater such a contract or netting set that is of: marked-to-market on a daily basis and (A) The net sum of all positive and subject to a daily margin maintenance negative fair values of the individual requirement by estimating an unse- OTC derivative contracts subject to the cured LGD for the contract or netting qualifying master netting agreement; set and adjusting the EAD calculated or under paragraph (c)(5) or (c)(6) of this (B) Zero; and section using the collateral haircut ap- (ii) Adjusted sum of the PFE. The ad- proach in paragraph (b)(2) of this sec- justed sum of the PFE, Anet, is cal- culated as tion. The Board-regulated institution must substitute the EAD calculated Anet = (0.4 × Agross) + (0.6 × NGR × Agross), under paragraph (c)(5) or (c)(6) of this where: section for èE in the equation in para- graph (b)(2)(i) of this section and must (A) Agross = the gross PFE (that is, the sum of the PFE amounts (as deter- use a ten-business day minimum hold- mined under paragraph (c)(5)(ii) of this ing period (TM = 10) unless a longer section) for each individual derivative holding period is required by paragraph contract subject to the qualifying mas- (b)(2)(iii)(A)(3) of this section. ter netting agreement); and (8) Clearing member Board-regulated in- (B) NGR = the net to gross ratio (that stitution’s EAD. A clearing member is, the ratio of the net current credit Board-regulated institution’s EAD for exposure to the gross current credit ex- an OTC derivative contract or netting posure). In calculating the NGR, the set of OTC derivative contracts where gross current credit exposure equals the Board-regulated institution is ei- the sum of the positive current credit ther acting as a financial intermediary exposures (as determined under para- and enters into an offsetting trans- graph (c)(6)(i) of this section) of all in- action with a QCCP or where the dividual derivative contracts subject to Board-regulated institution provides a the qualifying master netting agree- guarantee to the QCCP on the perform- ment. ance of the client equals the exposure

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amount calculated according to para- that a longer period is appropriate, it graph (c)(5) or (6) of this section multi- must use a larger scaling factor to ad- plied by the scaling factor 0.71. If the just for a longer holding period as fol- Board-regulated institution determines lows:

where (B) The Board-regulated institution H = the holding period greater than five obtains the prior written approval of days. Additionally, the Board may re- the Board. quire the Board-regulated institution to (iv) A Board-regulated institution set a longer holding period if the Board that uses the internal models method- determines that a longer period is appro- ology for a transaction type must re- priate due to the nature, structure, or characteristics of the transaction or is ceive approval from the Board to cease commensurate with the risks associated using the methodology for that trans- with the transaction. action type or to make a material change to its internal model. (d) Internal models methodology. (1)(i) (2) Risk-weighted assets using IMM. With prior written approval from the Under the IMM, a Board-regulated in- Board, a Board-regulated institution stitution uses an internal model to es- may use the internal models method- ology in this paragraph (d) to deter- timate the expected exposure (EE) for mine EAD for counterparty credit risk a netting set and then calculates EAD for derivative contracts (collateralized based on that EE. A Board-regulated or uncollateralized) and single-product institution must calculate two EEs and netting sets thereof, for eligible mar- two EADs (one stressed and one gin loans and single-product netting unstressed) for each netting set as fol- sets thereof, and for repo-style trans- lows: actions and single-product netting sets (i) EADunstressed is calculated using an thereof. EE estimate based on the most recent (ii) A Board-regulated institution data meeting the requirements of para- that uses the internal models method- graph (d)(3)(vii) of this section; ology for a particular transaction type (ii) EADstressed is calculated using an (derivative contracts, eligible margin EE estimate based on a historical pe- loans, or repo-style transactions) must riod that includes a period of stress to use the internal models methodology the credit default spreads of the Board- for all transactions of that transaction regulated institution’s counterparties type. A Board-regulated institution according to paragraph (d)(3)(viii) of may choose to use the internal models this section; methodology for one or two of these (iii) The Board-regulated institution three types of exposures and not the must use its internal model’s prob- other types. ability distribution for changes in the (iii) A Board-regulated institution fair value of a netting set that are at- may also use the internal models meth- tributable to changes in market vari- odology for derivative contracts, eligi- ables to determine EE; and ble margin loans, and repo-style trans- (iv) Under the internal models meth- actions subject to a qualifying cross- odology, EAD = Max (0, a × effective product netting agreement if: EPE ¥ CVA), or, subject to the prior (A) The Board-regulated institution written approval of Board as provided effectively integrates the risk miti- in paragraph (d)(10) of this section, a gating effects of cross-product netting more conservative measure of EAD. into its risk management and other in- (A) CVA equals the credit valuation formation technology systems; and adjustment that the Board-regulated

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institution has recognized in its bal- utable to changes in the fair value of ance sheet valuation of any OTC deriv- the Board-regulated institution’s li- ative contracts in the netting set. For abilities that are due to changes in its purposes of this paragraph (d), CVA own credit risk since the inception of does not include any adjustments to the transaction with the counterparty. common equity tier 1 capital attrib-

(C) a = 1.4 except as provided in para- (3) Prior approval relating to EAD cal- graph (d)(6) of this section, or when the culation. To obtain Board approval to Board has determined that the Board- calculate the distributions of exposures regulated institution must set a higher upon which the EAD calculation is based on the Board-regulated institu- based, the Board-regulated institution tion’s specific characteristics of must demonstrate to the satisfaction counterparty credit risk or model per- of the Board that it has been using for formance. at least one year an internal model (v) A Board-regulated institution that broadly meets the following min- may include financial collateral cur- imum standards, with which the Board- rently posted by the counterparty as regulated institution must maintain collateral (but may not include other compliance: forms of collateral) when calculating (i) The model must have the systems EE. capability to estimate the expected ex- (vi) If a Board-regulated institution posure to the counterparty on a daily hedges some or all of the counterparty basis (but is not expected to estimate credit risk associated with a netting or report expected exposure on a daily set using an eligible credit derivative, basis); the Board-regulated institution may (ii) The model must estimate ex- take the reduction in exposure to the pected exposure at enough future dates counterparty into account when esti- to reflect accurately all the future cash mating EE. If the Board-regulated in- flows of contracts in the netting set; stitution recognizes this reduction in (iii) The model must account for the exposure to the counterparty in its es- possible non-normality of the exposure timate of EE, it must also use its inter- distribution, where appropriate; nal model to estimate a separate EAD (iv) The Board-regulated institution for the Board-regulated institution’s must measure, monitor, and control exposure to the protection provider of current counterparty exposure and the the credit derivative. exposure to the counterparty over the

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whole life of all contracts in the net- tution’s counterparties. The Board-reg- ting set; ulated institution must have proce- (v) The Board-regulated institution dures to evaluate the effectiveness of must be able to measure and manage its stress calibration that include a current exposures gross and net of col- process for using benchmark portfolios lateral held, where appropriate. The that are vulnerable to the same risk Board-regulated institution must esti- factors as the Board-regulated institu- mate expected exposures for OTC deriv- tion’s portfolio. The Board may require ative contracts both with and without the Board-regulated institution to the effect of collateral agreements; modify its stress calibration to better (vi) The Board-regulated institution reflect actual historic losses of the must have procedures to identify, mon- portfolio; itor, and control wrong-way risk (ix) A Board-regulated institution throughout the life of an exposure. The must subject its internal model to an procedures must include stress testing initial validation and annual model re- and scenario analysis; view process. The model review should (vii) The model must use current consider whether the inputs and risk market data to compute current expo- factors, as well as the model outputs, sures. The Board-regulated institution are appropriate. As part of the model must estimate model parameters using review process, the Board-regulated in- historical data from the most recent stitution must have a backtesting pro- three-year period and update the data gram for its model that includes a quarterly or more frequently if market process by which unacceptable model conditions warrant. The Board-regu- performance will be determined and lated institution should consider using remedied; model parameters based on forward- (x) A Board-regulated institution looking measures, where appropriate; must have policies for the measure- (viii) When estimating model param- ment, management and control of col- eters based on a stress period, the lateral and margin amounts; and Board-regulated institution must use (xi) A Board-regulated institution at least three years of historical data must have a comprehensive stress test- that include a period of stress to the ing program that captures all credit credit default spreads of the Board-reg- exposures to counterparties, and incor- ulated institution’s counterparties. porates stress testing of principal mar- The Board-regulated institution must ket risk factors and creditworthiness review the data set and update the data of counterparties. as necessary, particularly for any ma- (4) Calculating the maturity of expo- terial changes in its counterparties. sures. (i) If the remaining maturity of The Board-regulated institution must the exposure or the longest-dated con- demonstrate, at least quarterly, and tract in the netting set is greater than maintain documentation of such dem- one year, the Board-regulated institu- onstration, that the stress period coin- tion must set M for the exposure or cides with increased CDS or other cred- netting set equal to the lower of five it spreads of the Board-regulated insti- years or M(EPE), where:

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(ii) If the remaining maturity of the liquid collateral that can be delivered exposure or the longest-dated contract under the terms of the collateral agree- in the netting set is one year or less, ment and, where applicable, the period the Board-regulated institution must of time required to re-hedge the result- set M for the exposure or netting set ing market risk upon the default of the equal to one year, except as provided in counterparty. The minimum margin § 217.131(d)(7). period of risk is set according to para- (iii) Alternatively, a Board-regulated graph (d)(5)(iii) of this section; or institution that uses an internal model (ii) As an alternative to paragraph to calculate a one-sided credit valu- (d)(5)(i) of this section, a Board-regu- ation adjustment may use the effective lated institution that can model EPE credit duration estimated by the model without collateral agreements but can- as M(EPE) in place of the formula in not achieve the higher level of mod- paragraph (d)(4)(i) of this section. eling sophistication to model EPE with (5) Effects of collateral agreements on collateral agreements can set effective EAD. A Board-regulated institution EPE for a collateralized netting set may capture the effect on EAD of a col- equal to the lesser of: lateral agreement that requires receipt (A) An add-on that reflects the poten- of collateral when exposure to the tial increase in exposure of the netting counterparty increases, but may not set over the margin period of risk, plus capture the effect on EAD of a collat- the larger of: eral agreement that requires receipt of (1) The current exposure of the net- collateral when counterparty credit ting set reflecting all collateral held or quality deteriorates. Two methods are posted by the Board-regulated institu- available to capture the effect of a col- tion excluding any collateral called or lateral agreement, as set forth in para- in dispute; or graphs (d)(5)(i) and (ii) of this section: (2) The largest net exposure including (i) With prior written approval from all collateral held or posted under the the Board, a Board-regulated institu- margin agreement that would not trig- tion may include the effect of a collat- ger a collateral call. For purposes of eral agreement within its internal this section, the add-on is computed as model used to calculate EAD. The the expected increase in the netting Board-regulated institution may set set’s exposure over the margin period EAD equal to the expected exposure at of risk (set in accordance with para- the end of the margin period of risk. graph (d)(5)(iii) of this section); or The margin period of risk means, with (B) Effective EPE without a collat- respect to a netting set subject to a eral agreement plus any collateral the collateral agreement, the time period Board-regulated institution posts to from the most recent exchange of col- the counterparty that exceeds the re- lateral with a counterparty until the quired margin amount. next required exchange of collateral, (iii) For purposes of this part, includ- plus the period of time required to sell ing paragraphs (d)(5)(i) and (ii) of this and realize the proceeds of the least section, the margin period of risk for a

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netting set subject to a collateral from a full simulation of counterparty agreement is: exposure across counterparties that in- (A) Five business days for repo-style corporates a joint simulation of mar- transactions subject to daily remar- ket and credit risk factors (numerator) gining and daily marking-to-market, and economic capital based on EPE and ten business days for other trans- (denominator), subject to a floor of 1.2. actions when liquid financial collateral For purposes of this calculation, eco- is posted under a daily margin mainte- nomic capital is the unexpected losses nance requirement, or for all counterparty credit risks meas- (B) Twenty business days if the num- ured at a 99.9 percent confidence level ber of trades in a netting set exceeds over a one-year horizon. To receive ap- 5,000 at any time during the previous proval, the Board-regulated institution quarter (except if the Board-regulated must meet the following minimum institution is calculating EAD for a standards to the satisfaction of the cleared transaction under § 217.133) or Board: contains one or more trades involving (i) The Board-regulated institution’s illiquid collateral or any derivative own estimate of alpha must capture in contract that cannot be easily re- the numerator the effects of: placed. If over the two previous quar- (A) The material sources of ters more than two margin disputes on stochastic dependency of distributions a netting set have occurred that lasted of fair values of transactions or port- more than the margin period of risk, folios of transactions across counter- then the Board-regulated institution parties; must use a margin period of risk for (B) Volatilities and correlations of that netting set that is at least two market risk factors used in the joint times the minimum margin period of simulation, which must be related to risk for that netting set. If the perio- the credit risk factor used in the sim- dicity of the receipt of collateral is N- ulation to reflect potential increases in days, the minimum margin period of volatility or correlation in an eco- risk is the minimum margin period of nomic downturn, where appropriate; risk under this paragraph (d) plus N and minus 1. This period should be ex- (C) The granularity of exposures tended to cover any impediments to (that is, the effect of a concentration prompt re-hedging of any market risk. in the proportion of each counter- (C) Five business days for an OTC de- party’s exposure that is driven by a rivative contract or netting set of OTC particular risk factor). derivative contracts where the Board- (ii) The Board-regulated institution regulated institution is either acting must assess the potential model uncer- as a financial intermediary and enters tainty in its estimates of alpha. into an offsetting transaction with a (iii) The Board-regulated institution CCP or where the Board-regulated in- must calculate the numerator and de- stitution provides a guarantee to the nominator of alpha in a consistent CCP on the performance of the client. fashion with respect to modeling meth- A Board-regulated institution must use odology, parameter specifications, and a longer holding period if the Board- portfolio composition. regulated institution determines that a (iv) The Board-regulated institution longer period is appropriate. Addition- must review and adjust as appropriate ally, the Board may require the Board- its estimates of the numerator and de- regulated institution to set a longer nominator of alpha on at least a quar- holding period if the Board determines terly basis and more frequently when that a longer period is appropriate due the composition of the portfolio varies to the nature, structure, or character- over time. istics of the transaction or is commen- (7) Risk-based capital requirements for surate with the risks associated with transactions with specific wrong-way risk. the transaction. A Board-regulated institution must de- (6) Own estimate of alpha. With prior termine if a repo-style transaction, eli- written approval of the Board, a Board- gible margin loan, bond option, or eq- regulated institution may calculate uity derivative contract or purchased alpha as the ratio of economic capital credit derivative to which the Board-

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regulated institution applies the inter- cific wrong-way risk is the sum of a nal models methodology under this Board-regulated institution’s risk- paragraph (d) has specific wrong-way based capital requirement for pur- risk. If a transaction has specific chased credit derivatives that are not wrong-way risk, the Board-regulated bond options with specific wrong-way institution must treat the transaction risk as calculated under paragraph as its own netting set and exclude it (d)(7)(ii) of this section, a Board-regu- from the model described in lated institution’s risk-based capital § 217.132(d)(2) and instead calculate the requirement for equity derivatives risk-based capital requirement for the with specific wrong-way risk as cal- transaction as follows: culated under paragraph (d)(7)(i) of this (i) For an equity derivative contract, section, a Board-regulated institution’s by multiplying: risk-based capital requirement for (A) K, calculated using the appro- bond options with specific wrong-way priate risk-based capital formula speci- risk as calculated under paragraph fied in Table 1 of § 217.131 using the PD (d)(7)(iii) of this section, and a Board- of the counterparty and LGD equal to regulated institution’s risk-based cap- 100 percent, by ital requirement for repo-style trans- (B) The maximum amount the Board- actions and eligible margin loans with regulated institution could lose on the specific wrong-way risk as calculated equity derivative. under paragraph (d)(7)(iv) of this sec- (ii) For a purchased credit derivative tion, multiplied by 12.5. by multiplying: (9) Risk-weighted assets for IMM expo- (A) K, calculated using the appro- sures. (i) The Board-regulated institu- priate risk-based capital formula speci- tion must insert the assigned risk pa- fied in Table 1 of § 217.131 using the PD of the counterparty and LGD equal to rameters for each counterparty and 100 percent, by netting set into the appropriate for- (B) The fair value of the reference mula specified in Table 1 of § 217.131 and asset of the credit derivative. multiply the output of the formula by (iii) For a bond option, by multi- the EADunstressed of the netting set to ob- plying: tain the unstressed capital require- (A) K, calculated using the appro- ment for each netting set. A Board-reg- priate risk-based capital formula speci- ulated institution that uses an ad- fied in Table 1 of § 217.131 using the PD vanced CVA approach that captures of the counterparty and LGD equal to migrations in credit spreads under 100 percent, by paragraph (e)(3) of this section must (B) The smaller of the notional set the maturity adjustment (b) in the amount of the underlying reference formula equal to zero. The sum of the asset and the maximum potential loss unstressed capital requirement cal- under the bond option contract. culated for each netting set equals (iv) For a repo-style transaction or Kunstressed. eligible margin loan by multiplying: (ii) The Board-regulated institution (A) K, calculated using the appro- must insert the assigned risk param- priate risk-based capital formula speci- eters for each wholesale obligor and fied in Table 1 of § 217.131 using the PD netting set into the appropriate for- of the counterparty and LGD equal to mula specified in Table 1 of § 217.131 and 100 percent, by multiply the output of the formula by (B) The EAD of the transaction de- the EADstressed of the netting set to ob- termined according to the EAD equa- tain the stressed capital requirement tion in § 217.132(b)(2), substituting the for each netting set. A Board-regulated estimated value of the collateral as- institution that uses an advanced CVA suming a default of the counterparty approach that captures migrations in for the value of the collateral in Sc of credit spreads under paragraph (e)(6) of the equation. this section must set the maturity ad- (8) Risk-weighted asset amount for IMM justment (b) in the formula equal to exposures with specific wrong-way risk. zero. The sum of the stressed capital The aggregate risk-weighted asset requirement calculated for each net- amount for IMM exposures with spe- ting set equals Kstressed. 544

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(iii) The Board-regulated institu- a Board-regulated institution must cal- tion’s dollar risk-based capital require- culate a CVA risk-weighted asset ment under the internal models meth- amount for its portfolio of OTC deriva- odology equals the larger of Kunstressed tive transactions that are subject to and Kstressed. A Board-regulated institu- the CVA capital requirement using the tion’s risk-weighted assets amount for simple CVA approach described in IMM exposures is equal to the capital paragraph (e)(5) of this section or, with requirement multiplied by 12.5, plus prior written approval of the Board, risk-weighted assets for IMM exposures the advanced CVA approach described with specific wrong-way risk in para- in paragraph (e)(6) of this section. A graph (d)(8) of this section and those in Board-regulated institution that re- paragraph (d)(10) of this section. ceives prior Board approval to cal- (10) Other measures of counterparty ex- culate its CVA risk-weighted asset posure. (i) With prior written approval amounts for a class of counterparties of the Board, a Board-regulated insti- using the advanced CVA approach must tution may set EAD equal to a measure continue to use that approach for that of counterparty credit risk exposure, class of counterparties until it notifies such as peak EAD, that is more con- the Board in writing that the Board- servative than an alpha of 1.4 (or high- regulated institution expects to begin er under the terms of paragraph calculating its CVA risk-weighted (d)(7)(iv)(C) of this section) times the asset amount using the simple CVA ap- larger of EPEunstressed and EPEstressed for proach. Such notice must include an every counterparty whose EAD will be explanation of the Board-regulated in- measured under the alternative meas- stitution’s rationale and the date upon ure of counterparty exposure. The which the Board-regulated institution Board-regulated institution must dem- will begin to calculate its CVA risk- onstrate the conservatism of the meas- weighted asset amount using the sim- ure of counterparty credit risk expo- ple CVA approach. sure used for EAD. With respect to (2) Market risk Board-regulated institu- paragraph (d)(10)(i) of this section: tions. Notwithstanding the prior ap- (A) For material portfolios of new proval requirement in paragraph (e)(1) OTC derivative products, the Board- of this section, a market risk Board- regulated institution may assume that regulated institution may calculate its the current exposure methodology in CVA risk-weighted asset amount using paragraphs (c)(5) and (c)(6) of this sec- the advanced CVA approach if the tion meets the conservatism require- Board-regulated institution has Board ment of this section for a period not to approval to: exceed 180 days. (B) For immaterial portfolios of OTC (i) Determine EAD for OTC deriva- derivative contracts, the Board-regu- tive contracts using the internal mod- lated institution generally may assume els methodology described in para- that the current exposure methodology graph (d) of this section; and in paragraphs (c)(5) and (c)(6) of this (ii) Determine its specific risk add-on section meets the conservatism re- for debt positions issued by the quirement of this section. counterparty using a specific risk (ii) To calculate risk-weighted assets model described in § 217.207(b). for purposes of the approach in para- (3) Recognition of hedges. (i) A Board- graph (d)(10)(i) of this section, the regulated institution may recognize a Board-regulated institution must in- single name CDS, single name contin- sert the assigned risk parameters for gent CDS, any other equivalent hedg- each counterparty and netting set into ing instrument that references the the appropriate formula specified in counterparty directly, and index credit Table 1 of § 217.131, multiply the output default swaps (CDSind) as a CVA hedge of the formula by the EAD for the ex- under paragraph (e)(5)(ii) of this sec- posure as specified above, and multiply tion or paragraph (e)(6) of this section, by 12.5. provided that the position is managed (e) Credit valuation adjustment (CVA) as a CVA hedge in accordance with the risk-weighted assets—(1) In general. With Board-regulated institution’s hedging respect to its OTC derivative contracts, policies.

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(ii) A Board-regulated institution tion’s entire portfolio of OTC deriva- shall not recognize as a CVA hedge any tive counterparties that are subject to tranched or nth-to-default credit deriva- the CVA capital requirement, multi- tive. plied by 12.5. (4) Total CVA risk-weighted assets. (5) Simple CVA approach. (i) Under the Total CVA risk-weighted assets is the simple CVA approach, the CVA capital CVA capital requirement, KCVA, cal- requirement, KCVA, is calculated ac- culated for a Board-regulated institu- cording to the following formula:

(A) wi = the weight applicable to (G) Bind = the notional amount of one counterparty i under Table 3 to or more CDSind purchased to hedge CVA § 217.132; risk for counterparty i multiplied by (B) Mi = the EAD-weighted average of (1-exp(¥0.05 × Mind))/(0.05 × Mind) the effective maturity of each netting (H) wind = the weight applicable to the set with counterparty i (where each CDSind based on the average weight of netting set’s effective maturity can be the underlying reference names that no less than one year.) comprise the index under Table 3 to total (C) EADi = the sum of the EAD for § 217.132. all netting sets of OTC derivative con- (ii) The Board-regulated institution tracts with counterparty i calculated may treat the notional amount of the using the current exposure method- index attributable to a counterparty as ology described in paragraph (c) of this section or the internal models method- a single name hedge of counterparty i ology described in paragraph (d) of this (Bi,) when calculating KCVA, and sub- section. When the Board-regulated in- tract the notional amount of Bi from stitution calculates EAD under para- the notional amount of the CDSind. A graph (c) of this section, such EAD Board-regulated institution must treat may be adjusted for purposes of calcu- the CDSind hedge with the notional total amount reduced by Bi as a CVA hedge. lating EADi by multiplying EAD by (1-exp(¥0.05 × Mi))/(0.05 × Mi), where ‘‘exp’’ is the exponential function. TABLE 3 TO § 217.132—ASSIGNMENT OF When the Board-regulated institution COUNTERPARTY WEIGHT calculates EAD under paragraph (d) of Internal PD Weight wi total this section, EADi equals EADunstressed. (in percent) (in percent) hedge (D) Mi = the notional weighted av- erage maturity of the hedge instru- 0.00–0.07 ...... 0.70 >0.070–0.15 ...... 0.80 ment. >0.15–0.40 ...... 1.00 (E) Bi = the sum of the notional >0.40–2.00 ...... 2.00 amounts of any purchased single name >2.00–6.00 ...... 3.00 CDS referencing counterparty i that is >6.00 ...... 10.00 used to hedge CVA risk to counterparty i multiplied by (1- (6) Advanced CVA approach. (i) A hedge hedge exp(¥0.05 × Mi ))/(0.05 × Mi ). Board-regulated institution may use (F) Mind = the maturity of the CDSind the VaR model that it uses to deter- or the notional weighted average matu- mine specific risk under § 217.207(b) or rity of any CDSind purchased to hedge another VaR model that meets the CVA risk of counterparty i. quantitative requirements of

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§ 217.205(b) and § 217.207(b)(1) to cal- proach any immaterial OTC derivative culate its CVA capital requirement for portfolios for which it uses the current a counterparty by modeling the impact exposure methodology in paragraph (c) of changes in the counterparties’ credit of this section according to paragraph spreads, together with any recognized (e)(6)(viii) of this section; and CVA hedges, on the CVA for the (C) A Board-regulated institution counterparties, subject to the following must have the systems capability to requirements: calculate the CVA capital requirement (A) The VaR model must incorporate for a counterparty on a daily basis (but only changes in the counterparties’ is not required to calculate the CVA credit spreads, not changes in other risk factors. The VaR model does not capital requirement on a daily basis). need to capture jump-to-default risk; (ii) Under the advanced CVA ap- (B) A Board-regulated institution proach, the CVA capital requirement, that qualifies to use the advanced CVA KCVA, is calculated according to the fol- approach must include in that ap- lowing formulas:

Where on the credit quality, industry, and re- (A) ti = the time of the i-th revalu- gion of the counterparty are available ation time bucket starting from t0 = 0. to determine LGDMKT, a Board-regu- (B) tT = the longest contractual ma- lated institution may use a conserv- turity across the OTC derivative con- ative estimate when determining tracts with the counterparty. LGDMKT, subject to approval by the (C) si = the CDS spread for the Board. counterparty at tenor ti used to cal- (E) EEi = the sum of the expected ex- culate the CVA for the counterparty. If posures for all netting sets with the a CDS spread is not available, the counterparty at revaluation time ti, Board-regulated institution must use a calculated according to paragraphs proxy spread based on the credit qual- (e)(6)(iv)(A) and (e)(6)(v)(A) of this sec- ity, industry and region of the tion. counterparty. (F) Di = the risk-free discount factor (D) LGDMKT = the loss given default of at time ti, where D0 = 1. the counterparty based on the spread (G) Exp is the exponential function. of a publicly traded debt instrument of (H) The subscript j refers either to a the counterparty, or, where a publicly stressed or an unstressed calibration as traded debt instrument spread is not described in paragraphs (e)(6)(iv) and available, a proxy spread based on the (v) of this section. credit quality, industry, and region of (iii) Notwithstanding paragraphs the counterparty. Where no market in- (e)(6)(i) and (e)(6)(ii) of this section, a formation and no reliable proxy based Board-regulated institution must use

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the formulas in paragraphs (e)(6)(iii)(A) (A) If the VaR model is based on or (e)(6)(iii)(B) of this section to cal- credit spread sensitivities for specific culate credit spread sensitivities if its tenors, the Board-regulated institution VaR model is not based on full repric- must calculate each credit spread sen- ing. sitivity according to the following for- mula:

(iv) To calculate the CVAUnstressed financial stress in the calculation of measure for purposes of paragraph the CVAStressed measure. (e)(6)(ii) of this section, the Board-reg- (vi) If a Board-regulated institution ulated institution must: captures the effect of a collateral (A) Use the EEi calculated using the agreement on EAD using the method calibration of paragraph (d)(3)(vii) of described in paragraph (d)(5)(ii) of this this section, except as provided in section, for purposes of paragraph § 217.132(e)(6)(vi), and (e)(6)(ii) of this section, the Board-reg- (B) Use the historical observation pe- ulated institution must calculate EEi riod required under § 217.205(b)(2). using the method in paragraph (d)(5)(ii) (v) To calculate the CVAStressed meas- of this section and keep that EE con- ure for purposes of paragraph (e)(6)(ii) stant with the maturity equal to the of this section, the Board-regulated in- maximum of: stitution must: (A) Half of the longest maturity of a (A) Use the EEi calculated using the transaction in the netting set, and stress calibration in paragraph (B) The notional weighted average (d)(3)(viii) of this section except as pro- maturity of all transactions in the net- vided in paragraph (e)(6)(vi) of this sec- ting set. tion. (vii) For purposes of paragraph (e)(6) (B) Calibrate VaR model inputs to of this section, the Board-regulated in- historical data from the most severe stitution’s VaR model must capture twelve-month stress period contained the basis between the spreads of any within the three-year stress period CDS that is used as the hedging in- used to calculate EE . The Board may ind i strument and the hedged counterparty require a Board-regulated institution to use a different period of significant

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exposure over various time periods, in- asset amounts for all of its cleared cluding benign and stressed environ- transactions. ments. If the VaR model does not cap- (2) Trade exposure amount. (i) For a ture that basis, the Board-regulated in- cleared transaction that is a derivative stitution must reflect only 50 percent contract or a netting set of derivative of the notional amount of the CDSind contracts, trade exposure amount hedge in the VaR model. equals the EAD for the derivative con- (viii) If a Board-regulated institution tract or netting set of derivative con- uses the current exposure methodology tracts calculated using the method- described in paragraphs (c)(5) and (c)(6) ology used to calculate EAD for OTC of this section to calculate the EAD for derivative contracts set forth in any immaterial portfolios of OTC de- § 217.132(c) or (d), plus the fair value of rivative contracts, the Board-regulated the collateral posted by the clearing institution must use that EAD as a member client Board-regulated institu- constant EE in the formula for the cal- tion and held by the CCP or a clearing culation of CVA with the maturity member in a manner that is not bank- equal to the maximum of: ruptcy remote. When the Board-regu- (A) Half of the longest maturity of a lated institution calculates EAD for transaction in the netting set, and the cleared transaction using the (B) The notional weighted average methodology in § 217.132(d), EAD equals maturity of all transactions in the net- EADunstressed. ting set. (ii) For a cleared transaction that is a repo-style transaction or netting set [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as of repo-style transactions, trade expo- amended at 80 FR 41421, July 15, 2015] sure amount equals the EAD for the repo-style transaction calculated using § 217.133 Cleared transactions. the methodology set forth in (a) General requirements. (1) A Board- § 217.132(b)(2), (b)(3), or (d), plus the fair regulated institution that is a clearing value of the collateral posted by the member client must use the meth- clearing member client Board-regu- odologies described in paragraph (b) of lated institution and held by the CCP this section to calculate risk-weighted or a clearing member in a manner that assets for a cleared transaction. is not bankruptcy remote. When the (2) A Board-regulated institution Board-regulated institution calculates that is a clearing member must use the EAD for the cleared transaction under methodologies described in paragraph § 217.132(d), EAD equals EADunstressed. (c) of this section to calculate its risk- (3) Cleared transaction risk weights. (i) weighted assets for cleared trans- For a cleared transaction with a QCCP, actions and paragraph (d) of this sec- a clearing member client Board-regu- tion to calculate its risk-weighted as- lated institution must apply a risk sets for its default fund contribution to weight of: a CCP. (A) 2 percent if the collateral posted (b) Clearing member client Board-regu- by the Board-regulated institution to lated institutions—(1) Risk-weighted as- the QCCP or clearing member is sub- sets for cleared transactions. (i) To deter- ject to an arrangement that prevents mine the risk-weighted asset amount any loss to the clearing member client for a cleared transaction, a Board-regu- Board-regulated institution due to the lated institution that is a clearing joint default or a concurrent insol- member client must multiply the trade vency, liquidation, or receivership pro- exposure amount for the cleared trans- ceeding of the clearing member and action, calculated in accordance with any other clearing member clients of paragraph (b)(2) of this section, by the the clearing member; and the clearing risk weight appropriate for the cleared member client Board-regulated institu- transaction, determined in accordance tion has conducted sufficient legal re- with paragraph (b)(3) of this section. view to conclude with a well-founded (ii) A clearing member client Board- basis (and maintains sufficient written regulated institution’s total risk- documentation of that legal review) weighted assets for cleared trans- that in the event of a legal challenge actions is the sum of the risk-weighted (including one resulting from an event

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of default or from liquidation, insol- (i) For a cleared transaction that is a vency or receivership proceedings) the derivative contract or a netting set of relevant court and administrative au- derivative contracts, trade exposure thorities would find the arrangements amount equals the EAD calculated to be legal, valid, binding and enforce- using the methodology used to cal- able under the law of the relevant ju- culate EAD for OTC derivative con- risdictions. tracts set forth in § 217.132(c) or (B) 4 percent, if the requirements of § 217.132(d), plus the fair value of the paragraph (b)(3)(i)(A) of this section collateral posted by the clearing mem- are not met. ber Board-regulated institution and (ii) For a cleared transaction with a held by the CCP in a manner that is CCP that is not a QCCP, a clearing not bankruptcy remote. When the member client Board-regulated institu- clearing member Board-regulated insti- tion must apply the risk weight appli- tution calculates EAD for the cleared cable to the CCP under § 217.32. transaction using the methodology in (4) Collateral. (i) Notwithstanding any § 217.132(d), EAD equals EADunstressed. other requirement of this section, col- (ii) For a cleared transaction that is lateral posted by a clearing member a repo-style transaction or netting set client Board-regulated institution that of repo-style transactions, trade expo- sure amount equals the EAD calculated is held by a custodian (in its capacity under §§ 217.132(b)(2), (b)(3), or (d), plus as custodian) in a manner that is bank- the fair value of the collateral posted ruptcy remote from the CCP, the cus- by the clearing member Board-regu- todian, clearing member, and other lated institution and held by the CCP clearing member clients of the clearing in a manner that is not bankruptcy re- member, is not subject to a capital re- mote. When the clearing member quirement under this section. Board-regulated institution calculates (ii) A clearing member client Board- EAD for the cleared transaction under regulated institution must calculate a § 217.132(d), EAD equals EADunstressed. risk-weighted asset amount for any (3) Cleared transaction risk weights. (i) collateral provided to a CCP, clearing A clearing member Board-regulated in- member or a custodian in connection stitution must apply a risk weight of 2 with a cleared transaction in accord- percent to the trade exposure amount ance with requirements under subparts for a cleared transaction with a QCCP. E or F of this part, as applicable. (ii) For a cleared transaction with a (c) Clearing member Board-regulated in- CCP that is not a QCCP, a clearing stitution—(1) Risk-weighted assets for member Board-regulated institution cleared transactions. (i) To determine must apply the risk weight applicable the risk-weighted asset amount for a to the CCP according to § 217.32. cleared transaction, a clearing member (iii) Notwithstanding paragraphs Board-regulated institution must mul- (c)(3)(i) and (ii) of this section, a clear- tiply the trade exposure amount for ing member Board-regulated institu- the cleared transaction, calculated in tion may apply a risk weight of 0 per- accordance with paragraph (c)(2) of this cent to the trade exposure amount for section by the risk weight appropriate a cleared transaction with a CCP where for the cleared transaction, determined the clearing member Board-regulated in accordance with paragraph (c)(3) of institution is acting as a financial this section. intermediary on behalf of a clearing (ii) A clearing member Board-regu- member client, the transaction offsets lated institution’s total risk-weighted another transaction that satisfies the assets for cleared transactions is the requirements set forth in § 217.3(a), and sum of the risk-weighted asset the clearing member Board-regulated amounts for all of its cleared trans- institution is not obligated to reim- actions. burse the clearing member client in (2) Trade exposure amount. A clearing the event of the CCP default. member Board-regulated institution (4) Collateral. (i) Notwithstanding any must calculate its trade exposure other requirement of this section, col- amount for a cleared transaction as lateral posted by a clearing member follows: Board-regulated institution that is

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held by a custodian in a manner that is lated institution’s risk-weighted asset bankruptcy remote from the CCP is amount for default fund contributions not subject to a capital requirement to CCPs that are not QCCPs equals the under this section. sum of such default fund contributions (ii) A clearing member Board-regu- multiplied by 1,250 percent or an lated institution must calculate a risk- amount determined by the Board, weighted asset amount for any collat- based on factors such as size, structure eral provided to a CCP, clearing mem- and membership characteristics of the ber or a custodian in connection with a CCP and riskiness of its transactions, cleared transaction in accordance with in cases where such default fund con- requirements under subparts E or F of tributions may be unlimited. this part, as applicable. (3) Risk-weighted asset amount for de- (d) Default fund contributions—(1) Gen- fault fund contributions to QCCPs. A eral requirement. A clearing member clearing member Board-regulated insti- Board-regulated institution must de- tution’s risk-weighted asset amount termine the risk-weighted asset for default fund contributions to amount for a default fund contribution QCCPs equals the sum of its capital re- to a CCP at least quarterly, or more quirement, KCM for each QCCP, as cal- frequently if, in the opinion of the culated under the methodology set Board-regulated institution or the forth in paragraph (d)(3)(i) of this sec- Board, there is a material change in tion (Method 1), multiplied by 1,250 per- the financial condition of the CCP. cent or paragraph (d)(3)(iv) of this sec- (2) Risk-weighted asset amount for de- tion (Method 2). fault fund contributions to non-qualifying (i) Method 1. The hypothetical capital CCPs. A clearing member Board-regu- requirement of a QCCP (KCCP) equals:

Where responding change in the price of the (A) EBRMi = the EAD for each trans- underlying asset. action cleared through the QCCP by (3) For repo-style transactions, when clearing member i, calculated using applying § 217.132(b)(2), the Board-regu- the methodology used to calculate lated institution must use the method- EAD for OTC derivative contracts set ology in § 217.132(b)(2)(ii). forth in § 217.132(c)(5) and § 217.132.(c)(6) (B) VMi = any collateral posted by or the methodology used to calculate clearing member i to the QCCP that it EAD for repo-style transactions set is entitled to receive from the QCCP forth in § 217.132(b)(2) for repo-style but has not yet received, and any col- transactions, provided that: lateral that the QCCP has actually re- (1) For purposes of this section, when ceived from clearing member i; calculating the EAD, the Board-regu- (C) IMi = the collateral posted as ini- lated institution may replace the for- tial margin by clearing member i to mula provided in § 217.132(c)(6)(ii) with the QCCP; the following formula: Anet = (0.15 × (D) DFi = the funded portion of clear- Agross) + (0.85 × NGR × Agross); and ing member i’s default fund contribu- (2) For option derivative contracts tion that will be applied to reduce the that are cleared transactions, the PFE QCCP’s loss upon a default by clearing described in § 217.132(c)(5) must be ad- member i; and justed by multiplying the notional (E) RW = 20 percent, except when the principal amount of the derivative con- Board has determined that a higher tract by the appropriate conversion risk weight is more appropriate based factor in Table 2 to § 217.132 and the ab- on the specific characteristics of the solute value of the option’s delta, that QCCP and its clearing members; and is, the ratio of the change in the value (F) Where a QCCP has provided its of the derivative contract to the cor- KCCP, a Board-regulated institution 551

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must rely on such disclosed figure in- based on the nature, structure, or char- stead of calculating KCCP under this acteristics of the QCCP. paragraph (d), unless the Board-regu- (ii) For a Board-regulated institution lated institution determines that a that is a clearing member of a QCCP more conservative figure is appropriate with a default fund supported by fund- ed commitments, KCM equals:

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Where: (D) For a Board-regulated institution (A) DFi = the Board-regulated insti- that is a clearing member of a QCCP tution’s unfunded commitment to the with a default fund supported by un- default fund; funded commitments and that is un- (B) DF = the total of all clearing CM able to calculate KCM using the meth- members’ unfunded commitments to odology described above in this para- the default fund; and graph (d)(3)(iii), KCM equals: (C) K*CM as defined in paragraph (d)(3)(ii) of this section.

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Where: graph (a)(1) of this section by using the (1) IMi = the Board-regulated institu- PD substitution approach or the LGD tion’s initial margin posted to the adjustment approach in paragraph (c) QCCP; of this section or, if the transaction (2) IMCM = the total of initial margin qualifies, using the double default posted to the QCCP; and treatment in § 217.135. A Board-regu- (3) K*CM as defined above in this para- lated institution’s PD and LGD for the graph (d)(3)(iii). hedged exposure may not be lower than (iv) Method 2. A clearing member the PD and LGD floors described in Board-regulated institution’s risk- § 217.131(d)(2) and (d)(3). weighted asset amount for its default (4) If multiple eligible guarantees or fund contribution to a QCCP, RWADF, eligible credit derivatives cover a sin- equals: gle exposure described in paragraph RWA = Min {12.5 * DF; 0.18 * TE} (a)(1) of this section, a Board-regulated DF institution may treat the hedged expo- Where: sure as multiple separate exposures (A) TE = the Board-regulated institu- each covered by a single eligible guar- tion’s trade exposure amount to the antee or eligible credit derivative and QCCP calculated according to section may calculate a separate risk-based 133(c)(2); capital requirement for each separate (B) DF = the funded portion of the exposure as described in paragraph Board-regulated institution’s default (a)(3) of this section. fund contribution to the QCCP. (5) If a single eligible guarantee or el- (v) Total risk-weighted assets for de- igible credit derivative covers multiple fault fund contributions. Total risk- hedged wholesale exposures described weighted assets for default fund con- in paragraph (a)(1) of this section, a tributions is the sum of a clearing Board-regulated institution must treat member Board-regulated institution’s each hedged exposure as covered by a risk-weighted assets for all of its de- separate eligible guarantee or eligible fault fund contributions to all CCPs of credit derivative and must calculate a which the Board-regulated institution separate risk-based capital require- is a clearing member. ment for each exposure as described in [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as paragraph (a)(3) of this section. amended at 80 FR 41421, July 15, 2015] (6) A Board-regulated institution must use the same risk parameters for § 217.134 Guarantees and credit de- calculating ECL as it uses for calcu- rivatives: PD substitution and LGD lating the risk-based capital require- adjustment approaches. ment for the exposure. (a) Scope. (1) This section applies to (b) Rules of recognition. (1) A Board- wholesale exposures for which: regulated institution may only recog- (i) Credit risk is fully covered by an nize the credit risk mitigation benefits eligible guarantee or eligible credit de- of eligible guarantees and eligible cred- rivative; or it derivatives. (ii) Credit risk is covered on a pro (2) A Board-regulated institution rata basis (that is, on a basis in which may only recognize the credit risk the Board-regulated institution and mitigation benefits of an eligible credit the protection provider share losses derivative to hedge an exposure that is proportionately) by an eligible guar- different from the credit derivative’s antee or eligible credit derivative. reference exposure used for deter- (2) Wholesale exposures on which mining the derivative’s cash settle- there is a tranching of credit risk (re- ment value, deliverable obligation, or flecting at least two different levels of occurrence of a credit event if: seniority) are securitization exposures (i) The reference exposure ranks pari subject to § 217.141 through § 217.145. passu (that is, equally) with or is junior (3) A Board-regulated institution to the hedged exposure; and may elect to recognize the credit risk (ii) The reference exposure and the mitigation benefits of an eligible guar- hedged exposure are exposures to the antee or eligible credit derivative cov- same legal entity, and legally enforce- ering an exposure described in para- able cross-default or cross-acceleration

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clauses are in place to assure payments (B) The Board-regulated institution under the credit derivative are trig- must calculate its risk-based capital gered when the obligor fails to pay requirement for the unprotected expo- under the terms of the hedged expo- sure under § 217.131, where PD is the ob- sure. ligor’s PD, LGD is the hedged expo- (c) Risk parameters for hedged expo- sure’s LGD (not adjusted to reflect the sures—(1) PD substitution approach—(i) guarantee or credit derivative), and Full coverage. If an eligible guarantee EAD is the EAD of the original hedged or eligible credit derivative meets the exposure minus P. conditions in paragraphs (a) and (b) of (C) The treatment in paragraph this section and the protection amount (c)(1)(ii) of this section is applicable (P) of the guarantee or credit deriva- when the credit risk of a wholesale ex- tive is greater than or equal to the posure is covered on a partial pro rata EAD of the hedged exposure, a Board- basis or when an adjustment is made to regulated institution may recognize the effective notional amount of the the guarantee or credit derivative in guarantee or credit derivative under determining the Board-regulated insti- paragraphs (d), (e), or (f) of this sec- tution’s risk-based capital requirement tion. for the hedged exposure by substituting (iii) LGD of hedged exposures. The the PD associated with the rating LGD of a hedged exposure under the grade of the protection provider for the PD substitution approach is equal to: PD associated with the rating grade of (A) The lower of the LGD of the the obligor in the risk-based capital hedged exposure (not adjusted to re- formula applicable to the guarantee or flect the guarantee or credit deriva- credit derivative in Table 1 of § 217.131 tive) and the LGD of the guarantee or and using the appropriate LGD as de- credit derivative, if the guarantee or scribed in paragraph (c)(1)(iii) of this credit derivative provides the Board- section. If the Board-regulated institu- regulated institution with the option tion determines that full substitution to receive immediate payout upon trig- of the protection provider’s PD leads to an inappropriate degree of risk mitiga- gering the protection; or tion, the Board-regulated institution (B) The LGD of the guarantee or may substitute a higher PD than that credit derivative, if the guarantee or of the protection provider. credit derivative does not provide the (ii) Partial coverage. If an eligible Board-regulated institution with the guarantee or eligible credit derivative option to receive immediate payout meets the conditions in paragraphs (a) upon triggering the protection. and (b) of this section and P of the (2) LGD adjustment approach. (i) Full guarantee or credit derivative is less coverage. If an eligible guarantee or eli- than the EAD of the hedged exposure, gible credit derivative meets the condi- the Board-regulated institution must tions in paragraphs (a) and (b) of this treat the hedged exposure as two sepa- section and the protection amount (P) rate exposures (protected and unpro- of the guarantee or credit derivative is tected) in order to recognize the credit greater than or equal to the EAD of the risk mitigation benefit of the guar- hedged exposure, the Board-regulated antee or credit derivative. institution’s risk-based capital require- (A) The Board-regulated institution ment for the hedged exposure is the must calculate its risk-based capital greater of: requirement for the protected exposure (A) The risk-based capital require- under § 217.131, where PD is the protec- ment for the exposure as calculated tion provider’s PD, LGD is determined under § 217.131, with the LGD of the ex- under paragraph (c)(1)(iii) of this sec- posure adjusted to reflect the guar- tion, and EAD is P. If the Board-regu- antee or credit derivative; or lated institution determines that full (B) The risk-based capital require- substitution leads to an inappropriate ment for a direct exposure to the pro- degree of risk mitigation, the Board- tection provider as calculated under regulated institution may use a higher § 217.131, using the PD for the protec- PD than that of the protection pro- tion provider, the LGD for the guar- vider. antee or credit derivative, and an EAD

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equal to the EAD of the hedged expo- (3) The residual maturity of a hedged sure. exposure is the longest possible re- (ii) Partial coverage. If an eligible maining time before the obligor is guarantee or eligible credit derivative scheduled to fulfil its obligation on the meets the conditions in paragraphs (a) exposure. If a credit risk mitigant has and (b) of this section and the protec- embedded options that may reduce its tion amount (P) of the guarantee or term, the Board-regulated institution credit derivative is less than the EAD (protection purchaser) must use the of the hedged exposure, the Board-regu- shortest possible residual maturity for lated institution must treat the hedged the credit risk mitigant. If a call is at exposure as two separate exposures the discretion of the protection pro- (protected and unprotected) in order to vider, the residual maturity of the recognize the credit risk mitigation credit risk mitigant is at the first call benefit of the guarantee or credit de- date. If the call is at the discretion of rivative. the Board-regulated institution (pro- (A) The Board-regulated institution’s tection purchaser), but the terms of risk-based capital requirement for the the arrangement at origination of the protected exposure would be the great- credit risk mitigant contain a positive er of: incentive for the Board-regulated insti- (1) The risk-based capital require- tution to call the transaction before ment for the protected exposure as cal- contractual maturity, the remaining culated under § 217.131, with the LGD of time to the first call date is the resid- the exposure adjusted to reflect the ual maturity of the credit risk guarantee or credit derivative and EAD mitigant.30 set equal to P; or (4) A credit risk mitigant with a ma- (2) The risk-based capital require- turity mismatch may be recognized ment for a direct exposure to the guar- only if its original maturity is greater antor as calculated under § 217.131, than or equal to one year and its resid- using the PD for the protection pro- ual maturity is greater than three vider, the LGD for the guarantee or months. credit derivative, and an EAD set equal (5) When a maturity mismatch exists, to P. the Board-regulated institution must (B) The Board-regulated institution apply the following adjustment to the must calculate its risk-based capital effective notional amount of the credit requirement for the unprotected expo- risk mitigant:

sure under § 217.131, where PD is the ob- Pm = E × (t ¥ 0.25)/(T ¥ 0.25), ligor’s PD, LGD is the hedged expo- where: sure’s LGD (not adjusted to reflect the guarantee or credit derivative), and (i) Pm = effective notional amount of EAD is the EAD of the original hedged the credit risk mitigant, adjusted for exposure minus P. maturity mismatch; (3) M of hedged exposures. For pur- (ii) E = effective notional amount of poses of this paragraph (c), the M of the credit risk mitigant; (iii) t = the lesser of T or the residual the hedged exposure is the same as the maturity of the credit risk mitigant, M of the exposure if it were unhedged. expressed in years; and (d) Maturity mismatch. (1) A Board- (iv) T = the lesser of five or the resid- regulated institution that recognizes ual maturity of the hedged exposure, an eligible guarantee or eligible credit expressed in years. derivative in determining its risk- (e) Credit derivatives without restruc- based capital requirement for a hedged turing as a credit event. If a Board-regu- exposure must adjust the effective no- lated institution recognizes an eligible tional amount of the credit risk mitigant to reflect any maturity mis- match between the hedged exposure 30 For example, where there is a step-up in and the credit risk mitigant. cost in conjunction with a call feature or where the effective cost of protection in- (2) A maturity mismatch occurs creases over time even if credit quality re- when the residual maturity of a credit mains the same or improves, the residual risk mitigant is less than that of the maturity of the credit risk mitigant will be hedged exposure(s). the remaining time to the first call.

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credit derivative that does not include (ii) The simple VaR methodology in as a credit event a restructuring of the § 217.132(b)(3); or hedged exposure involving forgiveness (iii) The internal models method- or postponement of principal, interest, ology in § 217.132(d). or fees that results in a credit loss (3) A Board-regulated institution event (that is, a charge-off, specific must adjust HFX calculated in para- provision, or other similar debit to the graph (f)(2) of this section upward if profit and loss account), the Board-reg- the Board-regulated institution re- ulated institution must apply the fol- values the guarantee or credit deriva- lowing adjustment to the effective no- tive less frequently than once every tional amount of the credit derivative: ten business days using the square root of time formula provided in P = P × 0.60, r m § 217.132(b)(2)(iii)(A)(2). where: [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as (1) Pr = effective notional amount of amended at 79 FR 78295, Dec. 30, 2014] the credit risk mitigant, adjusted for lack of restructuring event (and matu- § 217.135 Guarantees and credit de- rity mismatch, if applicable); and rivatives: double default treatment. (2) Pm = effective notional amount of (a) Eligibility and operational criteria the credit risk mitigant adjusted for for double default treatment. A Board- maturity mismatch (if applicable). regulated institution may recognize (f) Currency mismatch. (1) If a Board- the credit risk mitigation benefits of a regulated institution recognizes an eli- guarantee or credit derivative covering gible guarantee or eligible credit deriv- an exposure described in § 217.134(a)(1) ative that is denominated in a cur- by applying the double default treat- rency different from that in which the ment in this section if all the following hedged exposure is denominated, the criteria are satisfied: Board-regulated institution must apply (1) The hedged exposure is fully cov- the following formula to the effective ered or covered on a pro rata basis by: notional amount of the guarantee or (i) An eligible guarantee issued by an credit derivative: eligible double default guarantor; or (ii) An eligible credit derivative that Pc = Prx(1 ¥ HFX), meets the requirements of § 217.134(b)(2) where: and that is issued by an eligible double (i) Pc = effective notional amount of default guarantor. the credit risk mitigant, adjusted for (2) The guarantee or credit derivative currency mismatch (and maturity mis- is: match and lack of restructuring event, (i) An uncollateralized guarantee or if applicable); uncollateralized credit derivative (for (ii) Pr = effective notional amount of example, a credit default swap) that the credit risk mitigant (adjusted for provides protection with respect to a maturity mismatch and lack of re- single reference obligor; or structuring event, if applicable); and (ii) An nth-to-default credit derivative (iii) HFX = haircut appropriate for the (subject to the requirements of currency mismatch between the credit § 217.142(m). risk mitigant and the hedged exposure. (3) The hedged exposure is a whole- (2) A Board-regulated institution sale exposure (other than a sovereign must set HFX equal to 8 percent unless exposure). it qualifies for the use of and uses its (4) The obligor of the hedged expo- own internal estimates of foreign ex- sure is not: change volatility based on a ten-busi- (i) An eligible double default guar- ness-day holding period and daily antor or an affiliate of an eligible dou- marking-to-market and remargining. A ble default guarantor; or Board-regulated institution qualifies (ii) An affiliate of the guarantor. for the use of its own internal esti- (5) The Board-regulated institution mates of foreign exchange volatility if does not recognize any credit risk miti- it qualifies for: gation benefits of the guarantee or (i) The own-estimates haircuts in credit derivative for the hedged expo- § 217.132(b)(2)(iii); sure other than through application of

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the double default treatment as pro- ble default treatment on the protected vided in this section. portion of the exposure: (6) The Board-regulated institution (1) For the protected exposure, the has implemented a process (which has Board-regulated institution must set received the prior, written approval of EAD equal to P and calculate its risk- the Board) to detect excessive correla- weighted asset amount as provided in tion between the creditworthiness of paragraph (e) of this section; and the obligor of the hedged exposure and (2) For the unprotected exposure, the the protection provider. If excessive Board-regulated institution must set correlation is present, the Board-regu- EAD equal to the EAD of the original lated institution may not use the dou- exposure minus P and then calculate ble default treatment for the hedged its risk-weighted asset amount as pro- exposure. vided in § 217.131. (b) Full coverage. If a transaction (d) Mismatches. For any hedged expo- meets the criteria in paragraph (a) of sure to which a Board-regulated insti- this section and the protection amount tution applies double default treat- (P) of the guarantee or credit deriva- ment under this part, the Board-regu- tive is at least equal to the EAD of the lated institution must make applicable hedged exposure, the Board-regulated adjustments to the protection amount institution may determine its risk- as required in § 217.134(d), (e), and (f). weighted asset amount for the hedged (e) The double default dollar risk-based exposure under paragraph (e) of this capital requirement. The dollar risk- section. based capital requirement for a hedged (c) Partial coverage. If a transaction exposure to which a Board-regulated meets the criteria in paragraph (a) of institution has applied double default this section and the protection amount treatment is KDD multiplied by the (P) of the guarantee or credit deriva- EAD of the exposure. KDD is calculated tive is less than the EAD of the hedged according to the following formula: exposure, the Board-regulated institu- K = K × (0.15 + 160 × PD ), tion must treat the hedged exposure as DD o g two separate exposures (protected and Where: unprotected) in order to recognize dou- (1)

(2) PDg = PD of the protection pro- option to receive immediate payout on vider. triggering the protection; and

(3) PDo = PD of the obligor of the (5) ros (asset value correlation of the hedged exposure. obligor) is calculated according to the

(4) LGDg = appropriate formula for (R) provided in (i) The lower of the LGD of the Table 1 in § 217.131, with PD equal to hedged exposure (not adjusted to re- PDo. flect the guarantee or credit deriva- (6) b (maturity adjustment coeffi- tive) and the LGD of the guarantee or cient) is calculated according to the credit derivative, if the guarantee or formula for b provided in Table 1 in credit derivative provides the Board- § 217.131, with PD equal to the lesser of regulated institution with the option PDo and PDg; and to receive immediate payout on trig- (7) M (maturity) is the effective ma- gering the protection; or turity of the guarantee or credit deriv- (ii) The LGD of the guarantee or ative, which may not be less than one credit derivative, if the guarantee or year or greater than five years. credit derivative does not provide the Board-regulated institution with the

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§ 217.136 Unsettled transactions. (c) System-wide failures. In the case of a system-wide failure of a settlement (a) Definitions. For purposes of this or clearing system, or a central section: counterparty, the Board may waive (1) Delivery-versus-payment (DvP) risk-based capital requirements for un- transaction means a securities or com- settled and failed transactions until modities transaction in which the the situation is rectified. buyer is obligated to make payment (d) Delivery-versus-payment (DvP) and only if the seller has made delivery of payment-versus-payment (PvP) trans- the securities or commodities and the actions. A Board-regulated institution seller is obligated to deliver the securi- must hold risk-based capital against ties or commodities only if the buyer any DvP or PvP transaction with a has made payment. normal settlement period if the Board- (2) Payment-versus-payment (PvP) regulated institution’s counterparty transaction means a foreign exchange has not made delivery or payment transaction in which each within five business days after the set- counterparty is obligated to make a tlement date. The Board-regulated in- final transfer of one or more currencies stitution must determine its risk- only if the other counterparty has weighted asset amount for such a made a final transfer of one or more transaction by multiplying the positive currencies. current exposure of the transaction for (3) A transaction has a normal settle- the Board-regulated institution by the ment period if the contractual settle- appropriate risk weight in Table 1 to ment period for the transaction is § 217.136. equal to or less than the market stand- ard for the instrument underlying the TABLE 1 TO § 217.136—RISK WEIGHTS FOR transaction and equal to or less than UNSETTLED DVP AND PVP TRANSACTIONS five business days. (4) The positive current exposure of a Risk weight to be applied to Board-regulated institution for a trans- Number of business days after contractual positive action is the difference between the settlement date current exposure transaction value at the agreed settle- (in percent) ment price and the current market price of the transaction, if the dif- From 5 to 15 ...... 100 ference results in a credit exposure of From 16 to 30 ...... 625 From 31 to 45 ...... 937.5 the Board-regulated institution to the 46 or more ...... 1,250 counterparty. (b) Scope. This section applies to all (e) Non-DvP/non-PvP (non-delivery- transactions involving securities, for- versus-payment/non-payment-versus-pay- eign exchange instruments, and com- ment) transactions. (1) A Board-regu- modities that have a risk of delayed lated institution must hold risk-based settlement or delivery. This section capital against any non-DvP/non-PvP does not apply to: transaction with a normal settlement (1) Cleared transactions that are sub- period if the Board-regulated institu- ject to daily marking-to-market and tion has delivered cash, securities, daily receipt and payment of variation commodities, or currencies to its margin; counterparty but has not received its (2) Repo-style transactions, including corresponding deliverables by the end unsettled repo-style transactions of the same business day. The Board- (which are addressed in §§ 217.131 and regulated institution must continue to 132); hold risk-based capital against the (3) One-way cash payments on OTC transaction until the Board-regulated derivative contracts (which are ad- institution has received its cor- dressed in §§ 217. 131 and 132); or responding deliverables. (4) Transactions with a contractual (2) From the business day after the settlement period that is longer than Board-regulated institution has made the normal settlement period (which its delivery until five business days are treated as OTC derivative contracts after the counterparty delivery is due, and addressed in §§ 217.131 and 132). the Board-regulated institution must

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calculate its risk-based capital require- Board-regulated institution that fails ment for the transaction by treating to meet these conditions must hold the current fair value of the risk-based capital against the trans- deliverables owed to the Board-regu- ferred exposures as if they had not been lated institution as a wholesale expo- securitized and must deduct from com- sure. mon equity tier 1 capital any after-tax (i) A Board-regulated institution may gain-on-sale resulting from the trans- use a 45 percent LGD for the trans- action. The conditions are: action rather than estimating LGD for (1) The exposures are not reported on the transaction provided the Board- the Board-regulated institution’s con- regulated institution uses the 45 per- solidated balance sheet under GAAP; cent LGD for all transactions described (2) The Board-regulated institution in paragraphs (e)(1) and (2) of this sec- has transferred to one or more third tion. parties credit risk associated with the (ii) A Board-regulated institution underlying exposures; may use a 100 percent risk weight for (3) Any clean-up calls relating to the the transaction provided the Board- securitization are eligible clean-up regulated institution uses this risk calls; and weight for all transactions described in (4) The securitization does not: paragraphs (e)(1) and (2) of this section. (i) Include one or more underlying (3) If the Board-regulated institution exposures in which the borrower is per- has not received its deliverables by the mitted to vary the drawn amount with- fifth business day after the in an agreed limit under a line of cred- counterparty delivery was due, the it; and Board-regulated institution must apply (ii) Contain an early amortization a 1,250 percent risk weight to the cur- provision. rent fair value of the deliverables owed (b) Operational criteria for synthetic to the Board-regulated institution. securitizations. For synthetic (f) Total risk-weighted assets for unset- securitizations, a Board-regulated in- tled transactions. Total risk-weighted stitution may recognize for risk-based assets for unsettled transactions is the capital purposes under this subpart the sum of the risk-weighted asset use of a credit risk mitigant to hedge amounts of all DvP, PvP, and non-DvP/ underlying exposures only if each of non-PvP transactions. the conditions in this paragraph (b) is satisfied. A Board-regulated institution [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as amended at 80 FR 41421, July 15, 2015] that meets these conditions must hold risk-based capital against any credit §§ 217.137–217.140 [Reserved] risk of the exposures it retains in con- nection with the synthetic RISK-WEIGHTED ASSETS FOR securitization. A Board-regulated insti- SECURITIZATION EXPOSURES tution that fails to meet these condi- tions or chooses not to recognize the § 217.141 Operational criteria for rec- credit risk mitigant for purposes of ognizing the transfer of risk. this section must hold risk-based cap- (a) Operational criteria for traditional ital under this subpart against the un- securitizations. A Board-regulated insti- derlying exposures as if they had not tution that transfers exposures it has been synthetically securitized. The originated or purchased to a conditions are: securitization SPE or other third party (1) The credit risk mitigant is: in connection with a traditional (i) Financial collateral; or securitization may exclude the expo- (ii) A guarantee that meets all of the sures from the calculation of its risk- requirements of an eligible guarantee weighted assets only if each of the con- in § 217.2 except for paragraph (3) of the ditions in this paragraph (a) is satis- definition; or fied. A Board-regulated institution (iii) A credit derivative that meets that meets these conditions must hold all of the requirements of an eligible risk-based capital against any credit derivative except for paragraph securitization exposures it retains in (3) of the definition of eligible guar- connection with the securitization. A antee in § 217.2.

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(2) The Board-regulated institution sure under paragraph (c)(1) of this sec- transfers credit risk associated with tion, for each securitization exposure the underlying exposures to third par- by: ties, and the terms and conditions in (i) Conducting an analysis of the risk the credit risk mitigants employed do characteristics of a securitization ex- not include provisions that: posure prior to acquiring the exposure (i) Allow for the termination of the and document such analysis within credit protection due to deterioration three business days after acquiring the in the credit quality of the underlying exposure, considering: exposures; (A) Structural features of the (ii) Require the Board-regulated in- securitization that would materially stitution to alter or replace the under- impact the performance of the expo- lying exposures to improve the credit sure, for example, the contractual cash quality of the underlying exposures; flow waterfall, waterfall-related trig- (iii) Increase the Board-regulated in- gers, credit enhancements, liquidity stitution’s cost of credit protection in enhancements, fair value triggers, the response to deterioration in the credit performance of organizations that serv- quality of the underlying exposures; ice the position, and deal-specific defi- (iv) Increase the yield payable to par- nitions of default; ties other than the Board-regulated in- (B) Relevant information regarding stitution in response to a deterioration the performance of the underlying in the credit quality of the underlying credit exposure(s), for example, the exposures; or percentage of loans 30, 60, and 90 days (v) Provide for increases in a retained past due; default rates; prepayment first loss position or credit enhance- rates; loans in foreclosure; property ment provided by the Board-regulated types; occupancy; average credit score institution after the inception of the or other measures of creditworthiness; securitization; average loan-to-value ratio; and indus- (3) The Board-regulated institution try and geographic diversification data obtains a well-reasoned opinion from on the underlying exposure(s); legal counsel that confirms the en- (C) Relevant market data of the forceability of the credit risk mitigant securitization, for example, bid-ask in all relevant jurisdictions; and spreads, most recent sales price and (4) Any clean-up calls relating to the historical price volatility, trading vol- securitization are eligible clean-up ume, implied market rating, and size, calls. depth and concentration level of the (c) Due diligence requirements for market for the securitization; and securitization exposures. (1) Except for (D) For resecuritization exposures, exposures that are deducted from com- performance information on the under- mon equity tier 1 capital and exposures lying securitization exposures, for ex- subject to § 217.142(k), if a Board-regu- ample, the issuer name and credit qual- lated institution is unable to dem- ity, and the characteristics and per- onstrate to the satisfaction of the formance of the exposures underlying Board a comprehensive understanding the securitization exposures; and of the features of a securitization expo- (ii) On an on-going basis (no less fre- sure that would materially affect the quently than quarterly), evaluating, performance of the exposure, the reviewing, and updating as appropriate Board-regulated institution must as- the analysis required under this sec- sign a 1,250 percent risk weight to the tion for each securitization exposure. securitization exposure. The Board-reg- ulated institution’s analysis must be § 217.142 Risk-based capital require- commensurate with the complexity of ment for securitization exposures. the securitization exposure and the (a) Hierarchy of approaches. Except as materiality of the position in relation provided elsewhere in this section and to regulatory capital according to this in § 217.141: part. (1) A Board-regulated institution (2) A Board-regulated institution must deduct from common equity tier must demonstrate its comprehensive 1 capital any after-tax gain-on-sale re- understanding of a securitization expo- sulting from a securitization and must

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apply a 1,250 percent risk weight to the a securitization exposure net of any portion of any CEIO that does not con- DTLs associated with the stitute after tax gain-on-sale; securitization exposure. (2) If a securitization exposure does (d) Maximum risk-based capital require- not require deduction or a 1,250 percent ment. Except as provided in § 217.141(c), risk weight under paragraph (a)(1) of unless one or more underlying expo- this section, the Board-regulated insti- sures does not meet the definition of a tution must apply the supervisory for- wholesale, retail, securitization, or eq- mula approach in § 217.143 to the expo- uity exposure, the total risk-based cap- sure if the Board-regulated institution ital requirement for all securitization and the exposure qualify for the super- exposures held by a single Board-regu- visory formula approach according to lated institution associated with a sin- § 217.143(a); gle securitization (excluding any risk- (3) If a securitization exposure does based capital requirements that relate not require deduction or a 1,250 percent to the Board-regulated institution’s risk weight under paragraph (a)(1) of gain-on-sale or CEIOs associated with this section and does not qualify for the securitization) may not exceed the the supervisory formula approach, the sum of: Board-regulated institution may apply (1) The Board-regulated institution’s the simplified supervisory formula ap- total risk-based capital requirement proach under § 217.144; for the underlying exposures calculated (4) If a securitization exposure does under this subpart as if the Board-regu- not require deduction or a 1,250 percent lated institution directly held the un- risk weight under paragraph (a)(1) of derlying exposures; and this section, does not qualify for the (2) The total ECL of the underlying supervisory formula approach in exposures calculated under this sub- § 217.143, and the Board-regulated insti- part. tution does not apply the simplified su- (e) Exposure amount of a securitization pervisory formula approach in § 217.144, exposure. (1) The exposure amount of an the Board-regulated institution must on-balance sheet securitization expo- apply a 1,250 percent risk weight to the sure that is not a repo-style trans- exposure; and action, eligible margin loan, OTC de- (5) If a securitization exposure is a rivative contract, or cleared trans- derivative contract (other than protec- action is the Board-regulated institu- tion provided by a Board-regulated in- tion’s carrying value. stitution in the form of a credit deriva- (2) Except as provided in paragraph tive) that has a first priority claim on (m) of this section, the exposure the cash flows from the underlying ex- amount of an off-balance sheet posures (notwithstanding amounts due securitization exposure that is not an under interest rate or currency deriva- OTC derivative contract (other than a tive contracts, fees due, or other simi- credit derivative), repo-style trans- lar payments), a Board-regulated insti- action, eligible margin loan, or cleared tution may choose to set the risk- transaction (other than a credit deriva- weighted asset amount of the exposure tive) is the notional amount of the ex- equal to the amount of the exposure as posure. For an off-balance-sheet determined in paragraph (e) of this sec- securitization exposure to an ABCP tion rather than apply the hierarchy of program, such as an eligible ABCP li- approaches described in paragraphs quidity facility, the notional amount (a)(1) through (4) of this section. may be reduced to the maximum po- (b) Total risk-weighted assets for tential amount that the Board-regu- securitization exposures. A Board-regu- lated institution could be required to lated institution’s total risk-weighted fund given the ABCP program’s current assets for securitization exposures is underlying assets (calculated without equal to the sum of its risk-weighted regard to the current credit quality of assets calculated using §§ 217.141 those assets). through 146. (3) The exposure amount of a (c) Deductions. A Board-regulated in- securitization exposure that is a repo- stitution may calculate any deduction style transaction, eligible margin loan, from common equity tier 1 capital for or OTC derivative contract (other than

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a credit derivative) or cleared trans- ligation to provide credit support to action (other than a credit derivative) the securitization (implicit support): is the EAD of the exposure as cal- (1) The Board-regulated institution culated in § 217.132 or § 217.133. must calculate a risk-weighted asset (f) Overlapping exposures. If a Board- amount for underlying exposures asso- regulated institution has multiple ciated with the securitization as if the securitization exposures that provide exposures had not been securitized and duplicative coverage of the underlying must deduct from common equity tier exposures of a securitization (such as 1 capital any after-tax gain-on-sale re- when a Board-regulated institution sulting from the securitization; and provides a program-wide credit en- (2) The Board-regulated institution hancement and multiple pool-specific must disclose publicly: liquidity facilities to an ABCP pro- (i) That it has provided implicit sup- gram), the Board-regulated institution port to the securitization; and is not required to hold duplicative risk- (ii) The regulatory capital impact to based capital against the overlapping the Board-regulated institution of pro- position. Instead, the Board-regulated viding such implicit support. institution may assign to the overlap- ping securitization exposure the appli- (i) Undrawn portion of a servicer cash cable risk-based capital treatment advance facility. (1) Notwithstanding under this subpart that results in the any other provision of this subpart, a highest risk-based capital requirement. Board-regulated institution that is a (g) Securitizations of non-IRB expo- servicer under an eligible servicer cash sures. Except as provided in § 217.141(c), advance facility is not required to hold if a Board-regulated institution has a risk-based capital against potential fu- securitization exposure where any un- ture cash advance payments that it derlying exposure is not a wholesale may be required to provide under the exposure, retail exposure, contract governing the facility. securitization exposure, or equity expo- (2) For a Board-regulated institution sure, the Board-regulated institution: that acts as a servicer, the exposure (1) Must deduct from common equity amount for a servicer cash advance fa- tier 1 capital any after-tax gain-on-sale cility that is not an eligible servicer resulting from the securitization and cash advance facility is equal to the apply a 1,250 percent risk weight to the amount of all potential future cash ad- portion of any CEIO that does not con- vance payments that the Board-regu- stitute gain-on-sale, if the Board-regu- lated institution may be contractually lated institution is an originating required to provide during the subse- Board-regulated institution; quent 12 month period under the con- (2) May apply the simplified super- tract governing the facility. visory formula approach in § 217.144 to (j) Interest-only mortgage-backed secu- the exposure, if the securitization ex- rities. Regardless of any other provi- posure does not require deduction or a sions in this part, the risk weight for a 1,250 percent risk weight under para- non-credit-enhancing interest-only graph (g)(1) of this section; mortgage-backed security may not be (3) Must assign a 1,250 percent risk less than 100 percent. weight to the exposure if the (k) Small-business loans and leases on securitization exposure does not re- personal property transferred with re- quire deduction or a 1,250 percent risk course. (1) Notwithstanding any other weight under paragraph (g)(1) of this provisions of this subpart E, a Board- section, does not qualify for the super- regulated institution that has trans- visory formula approach in § 217.143, ferred small-business loans and leases and the Board-regulated institution on personal property (small-business does not apply the simplified super- obligations) with recourse must in- visory formula approach in § 217.144 to clude in risk-weighted assets only the the exposure. contractual amount of retained re- (h) Implicit support. If a Board-regu- course if all the following conditions lated institution provides support to a are met: securitization in excess of the Board- (i) The transaction is a sale under regulated institution’s contractual ob- GAAP.

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(ii) The Board-regulated institution (4) The risk-based capital ratios of a establishes and maintains, pursuant to Board-regulated institution must be GAAP, a non-capital reserve sufficient calculated without regard to the cap- to meet the Board-regulated institu- ital treatment for transfers of small- tion’s reasonably estimated liability business obligations with recourse under the recourse arrangement. specified in paragraph (k)(1) of this sec- (iii) The loans and leases are to busi- tion. nesses that meet the criteria for a (l) Nth-to-default credit derivatives— small-business concern established by (1) Protection provider. A Board-regu- the Small Business Administration lated institution must determine a risk under section 3(a) of the Small Busi- weight using the supervisory formula ness Act (15 U.S.C. 632 et seq.); and approach (SFA) pursuant to § 217.143 or (iv)(A) In the case of a state member the simplified supervisory formula ap- bank, the bank is well capitalized, as proach (SSFA) pursuant to § 217.144 for defined in section 208.43 of this chapter. an nth-to-default credit derivative in For purposes of determining whether a accordance with this paragraph (l). In state member bank is well capitalized the case of credit protection sold, a for purposes of this paragraph, the Board-regulated institution must de- state member bank’s capital ratios termine its exposure in the nth-to-de- must be calculated without regard to fault credit derivative as the largest the capital treatment for transfers of notional amount of all the underlying small-business obligations with re- exposures. course specified in this paragraph (2) For purposes of determining the (k)(1). risk weight for an nth-to-default credit (B) In the case of a bank holding derivative using the SFA or the SSFA, company or savings and loan holding the Board-regulated institution must company, the bank holding company or calculate the attachment point and de- savings and loan holding company is tachment point of its exposure as fol- well capitalized, as defined in 12 CFR lows: 225.2. For purposes of determining whether a bank holding company or (i) The attachment point (parameter savings and loan holding company is A) is the ratio of the sum of the no- well capitalized for purposes of this tional amounts of all underlying expo- paragraph, the bank holding company sures that are subordinated to the or savings and loan holding company’s Board-regulated institution’s exposure capital ratios must be calculated with- to the total notional amount of all un- out regard to the capital treatment for derlying exposures. For purposes of the transfers of small-business obligations SSFA, parameter A is expressed as a with recourse specified in this para- decimal value between zero and one. graph (k)(1). For purposes of using the SFA to cal- (2) The total outstanding amount of culate the risk weight for its exposure recourse retained by a Board-regulated in an nth-to-default credit derivative, institution on transfers of small-busi- parameter A must be set equal to the ness obligations subject to paragraph credit enhancement level (L) input to (k)(1) of this section cannot exceed 15 the SFA formula. In the case of a first- percent of the Board-regulated institu- to-default credit derivative, there are tion’s total capital. no underlying exposures that are sub- (3) If a Board-regulated institution ordinated to the Board-regulated insti- ceases to be well capitalized or exceeds tution’s exposure. In the case of a sec- the 15 percent capital limitation in ond-or-subsequent-to-default credit de- paragraph (k)(2) of this section, the rivative, the smallest (n-1) risk-weight- preferential capital treatment specified ed asset amounts of the underlying ex- in paragraph (k)(1) of this section will posure(s) are subordinated to the continue to apply to any transfers of Board-regulated institution’s exposure. small-business obligations with re- (ii) The detachment point (parameter course that occurred during the time D) equals the sum of parameter A plus that the Board-regulated institution the ratio of the notional amount of the was well capitalized and did not exceed Board-regulated institution’s exposure the capital limit. in the nth-to-default credit derivative to

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the total notional amount of all under- had only synthetically securitized the lying exposures. For purposes of the underlying exposure with the nth small- SSFA, parameter W is expressed as a est risk-based capital requirement and decimal value between zero and one. had obtained no credit risk mitigant on For purposes of the SFA, parameter D the other underlying exposures. must be set to equal L plus the thick- (C) A Board-regulated institution ness of tranche T input to the SFA for- must calculate a risk-based capital re- mula. quirement for counterparty credit risk (3) A Board-regulated institution according to § 217.132 for a nth-to-default that does not use the SFA or the SSFA credit derivative that does not meet to determine a risk weight for its expo- the rules of recognition of § 217.134(b). sure in an nth-to-default credit deriva- (m) Guarantees and credit derivatives tive must assign a risk weight of 1,250 other than nth-to-default credit deriva- percent to the exposure. tives—(1) Protection provider. For a guar- (4) Protection purchaser—(i) First-to- antee or credit derivative (other than default credit derivatives. A Board-regu- an nth-to-default credit derivative) pro- lated institution that obtains credit vided by a Board-regulated institution protection on a group of underlying ex- that covers the full amount or a pro posures through a first-to-default cred- rata share of a securitization expo- it derivative that meets the rules of sure’s principal and interest, the recognition of § 217.134(b) must deter- Board-regulated institution must risk mine its risk-based capital require- weight the guarantee or credit deriva- ment under this subpart for the under- tive as if it holds the portion of the ref- lying exposures as if the Board-regu- erence exposure covered by the guar- lated institution synthetically antee or credit derivative. securitized the underlying exposure (2) Protection purchaser. (i) A Board- with the lowest risk-based capital re- regulated institution that purchases an quirement and had obtained no credit OTC credit derivative (other than an risk mitigant on the other underlying nth-to-default credit derivative) that is exposures. A Board-regulated institu- recognized under § 217.145 as a credit tion must calculate a risk-based cap- risk mitigant (including via recognized ital requirement for counterparty cred- collateral) is not required to compute a it risk according to § 217.132 for a first- separate counterparty credit risk cap- to-default credit derivative that does ital requirement under § 217.131 in ac- not meet the rules of recognition of cordance with § 217.132(c)(3). § 217.134(b). (ii) If a Board-regulated institution (ii) Second-or-subsequent-to-default cannot, or chooses not to, recognize a credit derivatives. (A) A Board-regulated purchased credit derivative as a credit institution that obtains credit protec- risk mitigant under § 217.145, the tion on a group of underlying exposures Board-regulated institution must de- through a nth-to-default credit deriva- termine the exposure amount of the tive that meets the rules of recognition credit derivative under § 217.132(c). of § 217.134(b) (other than a first-to-de- (A) If the Board-regulated institution fault credit derivative) may recognize purchases credit protection from a the credit risk mitigation benefits of counterparty that is not a the derivative only if: securitization SPE, the Board-regu- (1) The Board-regulated institution lated institution must determine the also has obtained credit protection on risk weight for the exposure according the same underlying exposures in the § 217.131. form of first-through-(n-1)-to-default (B) If the Board-regulated institution credit derivatives; or purchases the credit protection from a (2) If n-1 of the underlying exposures counterparty that is a securitization have already defaulted. SPE, the Board-regulated institution (B) If a Board-regulated institution must determine the risk weight for the satisfies the requirements of paragraph exposure according to this section, in- (l)(3)(ii)(A) of this section, the Board- cluding paragraph (a)(5) of this section regulated institution must determine for a credit derivative that has a first its risk-based capital requirement for priority claim on the cash flows from the underlying exposures as if the bank the underlying exposures of the

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securitization SPE (notwithstanding to L + T, an exposure’s SFA risk-based amounts due under interest rate or capital requirement equals the expo- currency derivative contracts, fees due, sure amount. or other similar payments. (2) If KIRB is less than or equal to L, [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as an exposure’s SFA risk-based capital amended at 78 FR 62289, Oct. 11, 2013] requirement is UE multiplied by TP multiplied by the greater of: § 217.143 Supervisory formula ap- (i) F · T (where F is 0.016 for all proach (SFA). securitization exposures); or (a) Eligibility requirements. A Board- (ii) S[L + T]¥S[L]. regulated institution must use the SFA (3) If K is greater than L and less to determine its risk-weighted asset IRB than L + T, the Board-regulated insti- amount for a securitization exposure if tution must apply a 1,250 percent risk the Board-regulated institution can calculate on an ongoing basis each of weight to an amount equal to UE · TP ¥ the SFA parameters in paragraph (e) of (KIRB L), and the exposure’s SFA risk- this section. based capital requirement is UE multi- (b) Mechanics. The risk-weighted plied by TP multiplied by the greater asset amount for a securitization expo- of: sure equals its SFA risk-based capital (i) F · (T¥(KIRB¥L)) (where F is 0.016 requirement as calculated under para- for all other securitization exposures); graph (c) and (d) of this section, multi- or

plied by 12.5. (ii) S[L + T]¥S[KIRB]. (c) The SFA risk-based capital require- (d) The supervisory formula: ment. (1) If KIRB is greater than or equal

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(e) SFA parameters. For purposes of are equity exposures (as defined in the calculations in paragraphs (c) and § 217.151(b)). (d) of this section: (2) Tranche percentage (TP). TP is the (1) Amount of the underlying exposures ratio of the amount of the Board-regu- (UE). UE is the EAD of any underlying lated institution’s securitization expo- exposures that are wholesale and retail sure to the amount of the tranche that exposures (including the amount of any contains the securitization exposure. funded spread accounts, cash collateral (3) Capital requirement on underlying accounts, and other similar funded exposures (KIRB). (i) KIRB is the ratio of: credit enhancements) plus the amount (A) The sum of the risk-based capital of any underlying exposures that are requirements for the underlying expo- securitization exposures (as defined in sures plus the expected credit losses of § 217.142(e)) plus the adjusted carrying the underlying exposures (as deter- value of any underlying exposures that mined under this subpart E as if the

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underlying exposures were directly derlying exposures that is subordinated held by the Board-regulated institu- to the tranche that contains the Board- tion); to regulated institution’s securitization (B) UE. exposure may be included in the nu- (ii) The calculation of KIRB must re- merator and denominator of L to the flect the effects of any credit risk extent cash has accumulated in the ac- mitigant applied to the underlying ex- count. Unfunded reserve accounts (that posures (either to an individual under- is, reserve accounts that are to be lying exposure, to a group of under- funded from future cash flows from the lying exposures, or to all of the under- underlying exposures) may not be in- lying exposures). (iii) All assets related to the cluded in the calculation of L. securitization are treated as under- (v) In some cases, the purchase price lying exposures, including assets in a of receivables will reflect a discount reserve account (such as a cash collat- that provides credit enhancement (for eral account). example, first loss protection) for all or (4) Credit enhancement level (L). (i) L certain tranches of the securitization. is the ratio of: When this arises, L should be cal- (A) The amount of all securitization culated inclusive of this discount if the exposures subordinated to the tranche discount provides credit enhancement that contains the Board-regulated in- for the securitization exposure. stitution’s securitization exposure; to (5) Thickness of tranche (T). T is the (B) UE. ratio of: (ii) A Board-regulated institution (i) The amount of the tranche that must determine L before considering contains the Board-regulated institu- the effects of any tranche-specific cred- it enhancements. tion’s securitization exposure; to (iii) Any gain-on-sale or CEIO associ- (ii) UE. ated with the securitization may not (6) Effective number of exposures (N). be included in L. (i) Unless the Board-regulated institu- (iv) Any reserve account funded by tion elects to use the formula provided accumulated cash flows from the un- in paragraph (f) of this section,

where EADi represents the EAD associated treat each underlying exposure as a with the ith instrument in the underlying single underlying exposure and must exposures. not look through to the originally (ii) Multiple exposures to one obligor securitized underlying exposures. /must be treated as a single underlying (7) Exposure-weighted average loss exposure. given default (EWALGD). EWALGD is (iii) In the case of a resecuritization, calculated as: the Board-regulated institution must

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where LGDi represents the average LGD as- (2) Under the conditions in sociated with all exposures to the ith obli- §§ 217.143(f)(3) and (f)(4), a Board-regu- gor. In the case of a resecuritization, an LGD lated institution may employ a sim- of 100 percent must be assumed for the un- derlying exposures that are themselves plified method for calculating N and securitization exposures. EWALGD. (f) Simplified method for computing N (3) If C1 is no more than 0.03, a Board- and EWALGD. (1) If all underlying ex- regulated institution may set posures of a securitization are retail EWALGD = 0.50 if none of the under- exposures, a Board-regulated institu- lying exposures is a securitization ex- tion may apply the SFA using the fol- posure, or may set EWALGD = 1 if one lowing simplifications: or more of the underlying exposures is (i) h = 0; and a securitization exposure, and may set (ii) v = 0. N equal to the following amount:

where: propriate data to assign the param- (i) Cm is the ratio of the sum of the eters described in paragraph (b) of this amounts of the ‘m’ largest underlying section must assign a risk weight of exposures to UE; and 1,250 percent to the exposure. (ii) The level of m is to be selected by (b) SSFA parameters. To calculate the the Board-regulated institution. risk weight for a securitization expo- (4) Alternatively, if only C1 is avail- sure using the SSFA, a Board-regu- able and C1 is no more than 0.03, the lated institution must have accurate Board-regulated institution may set information on the following five in- EWALGD = 0.50 if none of the under- puts to the SSFA calculation: lying exposures is a securitization ex- (1) KG is the weighted-average (with posure, or may set EWALGD = 1 if one unpaid principal used as the weight for or more of the underlying exposures is each exposure) total capital require- a securitization exposure and may set ment of the underlying exposures cal- N = 1/C1. culated using subpart D of this part. KG § 217.144 Simplified supervisory for- is expressed as a decimal value between mula approach (SSFA). zero and one (that is, an average risk weight of 100 percent represents a value (a) General requirements for the SSFA. of K equal to 0.08). To use the SSFA to determine the risk G (2) Parameter W is expressed as a weight for a securitization exposure, a decimal value between zero and one. Board-regulated institution must have Parameter W is the ratio of the sum of data that enables it to assign accu- the dollar amounts of any underlying rately the parameters described in exposures of the securitization that paragraph (b) of this section. Data used meet any of the criteria as set forth in to assign the parameters described in paragraphs (b)(2)(i) through (vi) of this paragraph (b) of this section must be section to the balance, measured in the most currently available data; if dollars, of underlying exposures: the contracts governing the underlying exposures of the securitization require (i) Ninety days or more past due; payments on a monthly or quarterly (ii) Subject to a bankruptcy or insol- basis, the data used to assign the pa- vency proceeding; rameters described in paragraph (b) of (iii) In the process of foreclosure; this section must be no more than 91 (iv) Held as real estate owned; calendar days old. A Board-regulated (v) Has contractually deferred pay- institution that does not have the ap- ments for 90 days or more, other than

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principal or interest payments deferred that are pari passu with the exposure on: (that is, have equal seniority with re- (A) Federally-guaranteed student spect to credit risk) to the current dol- loans, in accordance with the terms of lar amount of the underlying expo- those guarantee programs; or sures. Parameter D is expressed as a (B) Consumer loans, including non- decimal value between zero and one. federally-guaranteed student loans, (5) A supervisory calibration param- provided that such payments are de- eter, p, is equal to 0.5 for securitization ferred pursuant to provisions included exposures that are not resecuritization in the contract at the time funds are exposures and equal to 1.5 for disbursed that provide for period(s) of resecuritization exposures. deferral that are not initiated based on (c) Mechanics of the SSFA. KG and W changes in the creditworthiness of the are used to calculate K , the aug- borrower; or A mented value of KG, which reflects the (vi) Is in default. observed credit quality of the under- (3) Parameter A is the attachment lying exposures. K is defined in para- point for the exposure, which rep- A graph (d) of this section. The values of resents the threshold at which credit parameters A and D, relative to K de- losses will first be allocated to the ex- A termine the risk weight assigned to a posure. Except as provided in section securitization exposure as described in 142(l) for nth-to-default credit deriva- paragraph (d) of this section. The risk tives, parameter A equals the ratio of weight assigned to a securitization ex- the current dollar amount of under- posure, or portion of a securitization lying exposures that are subordinated exposure, as appropriate, is the larger to the exposure of the Board-regulated institution to the current dollar of the risk weight determined in ac- amount of underlying exposures. Any cordance with this paragraph (c), para- reserve account funded by the accumu- graph (d) of this section, and a risk lated cash flows from the underlying weight of 20 percent. exposures that is subordinated to the (1) When the detachment point, pa- Board-regulated institution’s rameter D, for a securitization expo- securitization exposure may be in- sure is less than or equal to KA, the ex- cluded in the calculation of parameter posure must be assigned a risk weight A to the extent that cash is present in of 1,250 percent; the account. Parameter A is expressed (2) When the attachment point, pa- as a decimal value between zero and rameter A, for a securitization expo- one. sure is greater than or equal to KA, the (4) Parameter D is the detachment Board-regulated institution must cal- point for the exposure, which rep- culate the risk weight in accordance resents the threshold at which credit with paragraph (d) of this section; losses of principal allocated to the ex- (3) When A is less than KA and D is posure would result in a total loss of greater than KA, the risk weight is a principal. Except as provided in section weighted-average of 1,250 percent and th 142(l) for n -to-default credit deriva- 1,250 percent times KSSFA calculated in tives, parameter D equals parameter A accordance with paragraph (d) of this plus the ratio of the current dollar section. For the purpose of this weight- amount of the securitization exposures ed-average calculation:

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§ 217.145 Recognition of credit risk mitigant, but only as provided in this mitigants for securitization expo- section. sures. (b) Collateral. (1) Rules of recognition. (a) General. An originating Board-reg- A Board-regulated institution may rec- ulated institution that has obtained a ognize financial collateral in deter- credit risk mitigant to hedge its mining the Board-regulated institu- securitization exposure to a synthetic tion’s risk-weighted asset amount for a or traditional securitization that satis- securitization exposure (other than a fies the operational criteria in § 217.141 repo-style transaction, an eligible mar- may recognize the credit risk mitigant, gin loan, or an OTC derivative contract but only as provided in this section. An for which the Board-regulated institu- investing Board-regulated institution tion has reflected collateral in its de- that has obtained a credit risk termination of exposure amount under mitigant to hedge a securitization ex- § 217.132) as follows. The Board-regu- posure may recognize the credit risk lated institution’s risk-weighted asset

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amount for the collateralized (ii) SE = the amount of the securitization exposure is equal to the securitization exposure calculated risk-weighted asset amount for the under § 217.142(e); securitization exposure as calculated (iii) C = the current fair value of the under the SSFA in § 217.144 or under the collateral; SFA in § 217.143 multiplied by the ratio (iv) Hs = the haircut appropriate to of adjusted exposure amount (SE*) to the collateral type; and original exposure amount (SE), (v) Hfx = the haircut appropriate for Where: any currency mismatch between the { ¥ × (i) SE* = max 0, [SE C collateral and the exposure. (1¥Hs¥Hfx)]};

(3) Standard supervisory haircuts. Un- securitization exposures is 65 business less a Board-regulated institution days. qualifies for use of and uses own-esti- (c) Guarantees and credit derivatives— mates haircuts in paragraph (b)(4) of (1) Limitations on recognition. A Board- this section: regulated institution may only recog- (i) A Board-regulated institution nize an eligible guarantee or eligible must use the collateral type haircuts credit derivative provided by an eligi- (Hs) in Table 1 to § 217.132 of this sub- ble guarantor in determining the part; Board-regulated institution’s risk- (ii) A Board-regulated institution weighted asset amount for a must use a currency mismatch haircut securitization exposure. (Hfx) of 8 percent if the exposure and (2) ECL for securitization exposures. the collateral are denominated in dif- When a Board-regulated institution ferent currencies; recognizes an eligible guarantee or eli- (iii) A Board-regulated institution gible credit derivative provided by an must multiply the supervisory haircuts eligible guarantor in determining the obtained in paragraphs (b)(3)(i) and (ii) Board-regulated institution’s risk- of this section by the square root of 6.5 weighted asset amount for a (which equals 2.549510); and securitization exposure, the Board-reg- (iv) A Board-regulated institution ulated institution must also: must adjust the supervisory haircuts (i) Calculate ECL for the protected upward on the basis of a holding period portion of the exposure using the same longer than 65 business days where and risk parameters that it uses for calcu- as appropriate to take into account the lating the risk-weighted asset amount illiquidity of the collateral. of the exposure as described in para- (4) Own estimates for haircuts. With graph (c)(3) of this section; and the prior written approval of the (ii) Add the exposure’s ECL to the Board, a Board-regulated institution Board-regulated institution’s total may calculate haircuts using its own ECL. internal estimates of market price vol- (3) Rules of recognition. A Board-regu- atility and foreign exchange volatility, lated institution may recognize an eli- subject to § 217.132(b)(2)(iii). The min- gible guarantee or eligible credit deriv- imum holding period (TM) for ative provided by an eligible guarantor 573

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in determining the Board-regulated in- antee or eligible credit derivative cov- stitution’s risk-weighted asset amount ers multiple hedged exposures that for the securitization exposure as fol- have different residual maturities, the lows: Board-regulated institution must use (i) Full coverage. If the protection the longest residual maturity of any of amount of the eligible guarantee or eli- the hedged exposures as the residual gible credit derivative equals or ex- maturity of all the hedged exposures. ceeds the amount of the securitization exposure, the Board-regulated institu- §§ 217.146–217.150 [Reserved] tion may set the risk-weighted asset RISK-WEIGHTED ASSETS FOR EQUITY amount for the securitization exposure EXPOSURES equal to the risk-weighted asset amount for a direct exposure to the eli- § 217.151 Introduction and exposure gible guarantor (as determined in the measurement. wholesale risk weight function de- (a) General. (1) To calculate its risk- scribed in § 217.131), using the Board- weighted asset amounts for equity ex- regulated institution’s PD for the guar- posures that are not equity exposures antor, the Board-regulated institu- to investment funds, a Board-regulated tion’s LGD for the guarantee or credit institution may apply either the Sim- derivative, and an EAD equal to the ple Risk Weight Approach (SRWA) in amount of the securitization exposure § 217.152 or, if it qualifies to do so, the (as determined in § 217.142(e)). Internal Models Approach (IMA) in (ii) Partial coverage. If the protection § 217.153. A Board-regulated institution amount of the eligible guarantee or eli- must use the look-through approaches gible credit derivative is less than the provided in § 217.154 to calculate its amount of the securitization exposure, risk-weighted asset amounts for equity the Board-regulated institution may exposures to investment funds. set the risk-weighted asset amount for (2) A Board-regulated institution the securitization exposure equal to must treat an investment in a separate the sum of: account (as defined in § 217.2), as if it (A) Covered portion. The risk-weight- were an equity exposure to an invest- ed asset amount for a direct exposure ment fund as provided in § 217.154. to the eligible guarantor (as deter- (3) Stable value protection. (i) Stable mined in the wholesale risk weight value protection means a contract function described in § 217.131), using where the provider of the contract is the Board-regulated institution’s PD obligated to pay: for the guarantor, the Board-regulated (A) The policy owner of a separate institution’s LGD for the guarantee or account an amount equal to the short- credit derivative, and an EAD equal to fall between the fair value and cost the protection amount of the credit basis of the separate account when the risk mitigant; and policy owner of the separate account (B) Uncovered portion. (1) 1.0 minus surrenders the policy, or the ratio of the protection amount of (B) The beneficiary of the contract the eligible guarantee or eligible credit an amount equal to the shortfall be- derivative to the amount of the tween the fair value and book value of securitization exposure); multiplied by a specified portfolio of assets. (2) The risk-weighted asset amount (ii) A Board-regulated institution for the securitization exposure without that purchases stable value protection the credit risk mitigant (as determined on its investment in a separate account in §§ 217.142 through 146). must treat the portion of the carrying (4) Mismatches. The Board-regulated value of its investment in the separate institution must make applicable ad- account attributable to the stable justments to the protection amount as value protection as an exposure to the required in § 217.134(d), (e), and (f) for provider of the protection and the re- any hedged securitization exposure and maining portion of the carrying value any more senior securitization expo- of its separate account as an equity ex- sure that benefits from the hedge. In posure to an investment fund. the context of a synthetic (iii) A Board-regulated institution securitization, when an eligible guar- that provides stable value protection

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must treat the exposure as an equity by multiplying the adjusted carrying derivative with an adjusted carrying value of the equity exposure or the ef- value determined as the sum of fective portion and ineffective portion § 217.151(b)(1) and (2). of a hedge pair (as defined in paragraph (b) Adjusted carrying value. For pur- (c) of this section) by the lowest appli- poses of this subpart, the adjusted car- cable risk weight in this section. rying value of an equity exposure is: (1) Zero percent risk weight equity expo- (1) For the on-balance sheet compo- sures. An equity exposure to an entity nent of an equity exposure, the Board- whose credit exposures are exempt regulated institution’s carrying value from the 0.03 percent PD floor in of the exposure; § 217.131(d)(2) is assigned a zero percent (2) For the off-balance sheet compo- risk weight. nent of an equity exposure, the effec- (2) 20 percent risk weight equity expo- tive notional principal amount of the sures. An equity exposure to a Federal exposure, the size of which is equiva- Home Loan Bank or the Federal Agri- lent to a hypothetical on-balance sheet cultural Mortgage Corporation (Farm- position in the underlying equity in- er Mac) is assigned a 20 percent risk strument that would evidence the same weight. change in fair value (measured in dol- (3) 100 percent risk weight equity expo- lars) for a given small change in the sures. The following equity exposures price of the underlying equity instru- are assigned a 100 percent risk weight: ment, minus the adjusted carrying (i) Community development equity expo- value of the on-balance sheet compo- sures. (A) For state member banks and nent of the exposure as calculated in bank holding companies, an equity ex- paragraph (b)(1) of this section. posure that qualifies as a community (3) For unfunded equity commit- development investment under 12 ments that are unconditional, the ef- U.S.C. 24 (Eleventh), excluding equity fective notional principal amount is exposures to an unconsolidated small the notional amount of the commit- business investment company and eq- ment. For unfunded equity commit- uity exposures held through a consoli- ments that are conditional, the effec- dated small business investment com- tive notional principal amount is the pany described in section 302 of the Board-regulated institution’s best esti- Small Business Investment Act of 1958 mate of the amount that would be (15 U.S.C. 682). funded under economic downturn con- (B) For savings and loan holding ditions. companies, an equity exposure that is designed primarily to promote commu- § 217.152 Simple risk weight approach nity welfare, including the welfare of (SRWA). low- and moderate-income commu- (a) General. Under the SRWA, a nities or families, such as by providing Board-regulated institution’s aggre- services or employment, and excluding gate risk-weighted asset amount for its equity exposures to an unconsolidated equity exposures is equal to the sum of small business investment company the risk-weighted asset amounts for and equity exposures held through a each of the Board-regulated institu- small business investment company de- tion’s individual equity exposures scribed in section 302 of the Small (other than equity exposures to an in- Business Investment Act of 1958 (15 vestment fund) as determined in this U.S.C. 682). section and the risk-weighted asset (ii) Effective portion of hedge pairs. amounts for each of the Board-regu- The effective portion of a hedge pair. lated institution’s individual equity ex- (iii) Non-significant equity exposures. posures to an investment fund as deter- Equity exposures, excluding significant mined in § 217.154. investments in the capital of an uncon- (b) SRWA computation for individual solidated institution in the form of equity exposures. A Board-regulated in- common stock and exposures to an in- stitution must determine the risk- vestment firm that would meet the def- weighted asset amount for an indi- inition of a traditional securitization vidual equity exposure (other than an were it not for the Board’s application equity exposure to an investment fund) of paragraph (8) of that definition in

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§ 217.2 and has greater than immaterial that are not deducted from capital pur- leverage, to the extent that the aggre- suant to § 217.22(b)(4) are assigned a 250 gate adjusted carrying value of the ex- percent risk weight. posures does not exceed 10 percent of (5) 300 percent risk weight equity expo- the Board-regulated institution’s total sures. A publicly traded equity expo- capital. sure (other than an equity exposure de- (A) To compute the aggregate ad- scribed in paragraph (b)(6) of this sec- justed carrying value of a Board-regu- tion and including the ineffective por- lated institution’s equity exposures for tion of a hedge pair) is assigned a 300 purposes of this section, the Board-reg- percent risk weight. ulated institution may exclude equity (6) 400 percent risk weight equity expo- exposures described in paragraphs sures. An equity exposure (other than (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of an equity exposure described in para- this section, the equity exposure in a graph (b)(6) of this section) that is not hedge pair with the smaller adjusted publicly traded is assigned a 400 per- carrying value, and a proportion of cent risk weight. each equity exposure to an investment (7) 600 percent risk weight equity expo- fund equal to the proportion of the as- sures. An equity exposure to an invest- sets of the investment fund that are ment firm that: not equity exposures or that meet the (i) Would meet the definition of a criterion of paragraph (b)(3)(i) of this traditional securitization were it not section. If a Board-regulated institu- for the Board’s application of para- tion does not know the actual holdings graph (8) of that definition in § 217.2; of the investment fund, the Board-reg- and ulated institution may calculate the (ii) Has greater than immaterial le- proportion of the assets of the fund verage is assigned a 600 percent risk that are not equity exposures based on weight. the terms of the prospectus, partner- (c) Hedge transactions—(1) Hedge pair. ship agreement, or similar contract A hedge pair is two equity exposures that defines the fund’s permissible in- that form an effective hedge so long as vestments. If the sum of the invest- each equity exposure is publicly traded ment limits for all exposure classes or has a return that is primarily based within the fund exceeds 100 percent, on a publicly traded equity exposure. the Board-regulated institution must (2) Effective hedge. Two equity expo- assume for purposes of this section sures form an effective hedge if the ex- that the investment fund invests to the posures either have the same remain- maximum extent possible in equity ex- ing maturity or each has a remaining posures. maturity of at least three months; the (B) When determining which of a hedge relationship is formally docu- Board-regulated institution’s equity mented in a prospective manner (that exposures qualifies for a 100 percent is, before the Board-regulated institu- risk weight under this section, a tion acquires at least one of the equity Board-regulated institution first must exposures); the documentation speci- include equity exposures to unconsoli- fies the measure of effectiveness (E) dated small business investment com- the Board-regulated institution will panies or held through consolidated use for the hedge relationship through- small business investment companies out the life of the transaction; and the described in section 302 of the Small hedge relationship has an E greater Business Investment Act, then must than or equal to 0.8. A Board-regulated include publicly traded equity expo- institution must measure E at least sures (including those held indirectly quarterly and must use one of three al- through investment funds), and then ternative measures of E: must include non-publicly traded eq- (i) Under the dollar-offset method of uity exposures (including those held in- measuring effectiveness, the Board-reg- directly through investment funds). ulated institution must determine the (4) 250 percent risk weight equity expo- ratio of value change (RVC). The RVC sures. Significant investments in the is the ratio of the cumulative sum of capital of unconsolidated financial in- the periodic changes in value of one eq- stitutions in the form of common stock uity exposure to the cumulative sum of

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the periodic changes in the value of the the absolute value of RVC. If RVC is other equity exposure. If RVC is posi- negative and less than ¥1, then E tive, the hedge is not effective and E equals 2 plus RVC. equals zero. If RVC is negative and (ii) Under the variability-reduction greater than or equal to ¥1 (that is, method of measuring effectiveness: between zero and ¥1), then E equals

(iii) Under the regression method of eling only publicly traded equity expo- measuring effectiveness, E equals the sures (in accordance with paragraphs coefficient of determination of a re- (c) and (d) of this section). gression in which the change in value (b) Qualifying criteria. To qualify to of one exposure in a hedge pair is the use the IMA to calculate risk-weighted dependent variable and the change in assets for equity exposures, a Board- value of the other exposure in a hedge regulated institution must receive pair is the independent variable. How- prior written approval from the Board. ever, if the estimated regression coeffi- To receive such approval, the Board- cient is positive, then the value of E is zero. regulated institution must dem- (3) The effective portion of a hedge onstrate to the Board’s satisfaction pair is E multiplied by the greater of that the Board-regulated institution the adjusted carrying values of the eq- meets the following criteria: uity exposures forming a hedge pair. (1) The Board-regulated institution (4) The ineffective portion of a hedge must have one or more models that: pair is (1–E) multiplied by the greater (i) Assess the potential decline in of the adjusted carrying values of the value of its modeled equity exposures; equity exposures forming a hedge pair. (ii) Are commensurate with the size, [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as complexity, and composition of the amended at 78 FR 62289, Oct. 11, 2013] Board-regulated institution’s modeled equity exposures; and § 217.153 Internal models approach (iii) Adequately capture both general (IMA). market risk and idiosyncratic risk. (a) General. A Board-regulated insti- (2) The Board-regulated institution’s tution may calculate its risk-weighted model must produce an estimate of po- asset amount for equity exposures tential losses for its modeled equity ex- using the IMA by modeling publicly posures that is no less than the esti- traded and non-publicly traded equity mate of potential losses produced by a exposures (in accordance with para- VaR methodology employing a 99th graph (c) of this section) or by mod-

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percentile one-tailed confidence inter- where not, must use appropriately ad- val of the distribution of quarterly re- justed data), and such proxies must be turns for a benchmark portfolio of eq- robust estimates of the risk of the uity exposures comparable to the Board-regulated institution’s modeled Board-regulated institution’s modeled equity exposures. equity exposures using a long-term (c) Risk-weighted assets calculation for sample period. a Board-regulated institution using the (3) The number of risk factors and ex- IMA for publicly traded and non-publicly posures in the sample and the data pe- traded equity exposures. If a Board-regu- riod used for quantification in the lated institution models publicly trad- Board-regulated institution’s model ed and non-publicly traded equity expo- and benchmarking exercise must be sures, the Board-regulated institution’s sufficient to provide confidence in the aggregate risk-weighted asset amount accuracy and robustness of the Board- for its equity exposures is equal to the regulated institution’s estimates. sum of: (4) The Board-regulated institution’s model and benchmarking process must (1) The risk-weighted asset amount of incorporate data that are relevant in each equity exposure that qualifies for representing the risk profile of the a 0 percent, 20 percent, or 100 percent Board-regulated institution’s modeled risk weight under § 217.152(b)(1) through equity exposures, and must include (b)(3)(i) (as determined under § 217.152) data from at least one equity market and each equity exposure to an invest- cycle containing adverse market move- ment fund (as determined under ments relevant to the risk profile of § 217.154); and the Board-regulated institution’s mod- (2) The greater of: eled equity exposures. In addition, the (i) The estimate of potential losses Board-regulated institution’s on the Board-regulated institution’s benchmarking exercise must be based equity exposures (other than equity ex- on daily market prices for the bench- posures referenced in paragraph (c)(1) mark portfolio. If the Board-regulated of this section) generated by the Board- institution’s model uses a scenario regulated institution’s internal equity methodology, the Board-regulated in- exposure model multiplied by 12.5; or stitution must demonstrate that the (ii) The sum of: model produces a conservative esti- (A) 200 percent multiplied by the ag- mate of potential losses on the Board- gregate adjusted carrying value of the regulated institution’s modeled equity Board-regulated institution’s publicly exposures over a relevant long-term traded equity exposures that do not be- market cycle. If the Board-regulated long to a hedge pair, do not qualify for institution employs risk factor models, a 0 percent, 20 percent, or 100 percent the Board-regulated institution must risk weight under § 217.152(b)(1) through demonstrate through empirical anal- (b)(3)(i), and are not equity exposures ysis the appropriateness of the risk fac- to an investment fund; tors used. (B) 200 percent multiplied by the ag- (5) The Board-regulated institution must be able to demonstrate, using gregate ineffective portion of all hedge theoretical arguments and empirical pairs; and evidence, that any proxies used in the (C) 300 percent multiplied by the ag- modeling process are comparable to gregate adjusted carrying value of the the Board-regulated institution’s mod- Board-regulated institution’s equity eled equity exposures and that the exposures that are not publicly traded, Board-regulated institution has made do not qualify for a 0 percent, 20 per- appropriate adjustments for dif- cent, or 100 percent risk weight under ferences. The Board-regulated institu- § 217.152(b)(1) through (b)(3)(i), and are tion must derive any proxies for its not equity exposures to an investment modeled equity exposures and bench- fund. mark portfolio using historical market (d) Risk-weighted assets calculation for data that are relevant to the Board- a Board-regulated institution using the regulated institution’s modeled equity IMA only for publicly traded equity expo- exposures and benchmark portfolio (or, sures. If a Board-regulated institution

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models only publicly traded equity ex- sure in § 217.152(b)(3)(i) is its adjusted posures, the Board-regulated institu- carrying value. tion’s aggregate risk-weighted asset (3) If an equity exposure to an invest- amount for its equity exposures is ment fund is part of a hedge pair and equal to the sum of: the Board-regulated institution does (1) The risk-weighted asset amount of not use the full look-through approach, each equity exposure that qualifies for the Board-regulated institution may a 0 percent, 20 percent, or 100 percent use the ineffective portion of the hedge risk weight under §§ 217.152(b)(1) pair as determined under § 217.152(c) as through (b)(3)(i) (as determined under the adjusted carrying value for the eq- § 217.152), each equity exposure that uity exposure to the investment fund. qualifies for a 400 percent risk weight The risk-weighted asset amount of the under § 217.152(b)(5) or a 600 percent risk effective portion of the hedge pair is weight under § 217.152(b)(6) (as deter- equal to its adjusted carrying value. mined under § 217.152), and each equity (b) Full look-through approach. A exposure to an investment fund (as de- Board-regulated institution that is termined under § 217.154); and able to calculate a risk-weighted asset (2) The greater of: amount for its proportional ownership (i) The estimate of potential losses share of each exposure held by the in- on the Board-regulated institution’s vestment fund (as calculated under this subpart E of this part as if the propor- equity exposures (other than equity ex- tional ownership share of each expo- posures referenced in paragraph (d)(1) sure were held directly by the Board- of this section) generated by the Board- regulated institution) may either: regulated institution’s internal equity (1) Set the risk-weighted asset exposure model multiplied by 12.5; or amount of the Board-regulated institu- (ii) The sum of: tion’s exposure to the fund equal to the (A) 200 percent multiplied by the ag- product of: gregate adjusted carrying value of the (i) The aggregate risk-weighted asset Board-regulated institution’s publicly amounts of the exposures held by the traded equity exposures that do not be- fund as if they were held directly by long to a hedge pair, do not qualify for the Board-regulated institution; and a 0 percent, 20 percent, or 100 percent (ii) The Board-regulated institution’s risk weight under § 217.152(b)(1) through proportional ownership share of the (b)(3)(i), and are not equity exposures fund; or to an investment fund; and (2) Include the Board-regulated insti- (B) 200 percent multiplied by the ag- tution’s proportional ownership share gregate ineffective portion of all hedge of each exposure held by the fund in pairs. the Board-regulated institution’s IMA. (c) Simple modified look-through ap- § 217.154 Equity exposures to invest- proach. Under this approach, the risk- ment funds. weighted asset amount for a Board-reg- (a) Available approaches. (1) Unless ulated institution’s equity exposure to the exposure meets the requirements an investment fund equals the adjusted for a community development equity carrying value of the equity exposure exposure in § 217.152(b)(3)(i), a Board- multiplied by the highest risk weight regulated institution must determine assigned according to subpart D of this the risk-weighted asset amount of an part that applies to any exposure the equity exposure to an investment fund fund is permitted to hold under its pro- under the full look-through approach spectus, partnership agreement, or in paragraph (b) of this section, the similar contract that defines the fund’s simple modified look-through approach permissible investments (excluding de- in paragraph (c) of this section, or the rivative contracts that are used for alternative modified look-through ap- hedging rather than speculative pur- proach in paragraph (d) of this section. poses and that do not constitute a ma- (2) The risk-weighted asset amount of terial portion of the fund’s exposures). an equity exposure to an investment (d) Alternative modified look-through fund that meets the requirements for a approach. Under this approach, a community development equity expo- Board-regulated institution may assign

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the adjusted carrying value of an eq- SRWA must either include all or ex- uity exposure to an investment fund on clude all of the contracts from any a pro rata basis to different risk weight measure used to determine categories assigned according to sub- counterparty credit risk exposure. part D of this part based on the invest- ment limits in the fund’s prospectus, §§ 217.156–217.160 [Reserved] partnership agreement, or similar con- tract that defines the fund’s permis- RISK-WEIGHTED ASSETS FOR sible investments. The risk-weighted OPERATIONAL RISK asset amount for the Board-regulated institution’s equity exposure to the in- § 217.161 Qualification requirements for incorporation of operational vestment fund equals the sum of each risk mitigants. portion of the adjusted carrying value assigned to an exposure class multi- (a) Qualification to use operational risk plied by the applicable risk weight. If mitigants. A Board-regulated institu- the sum of the investment limits for tion may adjust its estimate of oper- all exposure types within the fund ex- ational risk exposure to reflect quali- ceeds 100 percent, the Board-regulated fying operational risk mitigants if: institution must assume that the fund (1) The Board-regulated institution’s invests to the maximum extent per- operational risk quantification system mitted under its investment limits in is able to generate an estimate of the the exposure type with the highest risk Board-regulated institution’s oper- weight under subpart D of this part, ational risk exposure (which does not and continues to make investments in incorporate qualifying operational risk order of the exposure type with the mitigants) and an estimate of the next highest risk weight under subpart Board-regulated institution’s oper- D of this part until the maximum total ational risk exposure adjusted to incor- investment level is reached. If more porate qualifying operational risk than one exposure type applies to an mitigants; and exposure, the Board-regulated institu- (2) The Board-regulated institution’s tion must use the highest applicable methodology for incorporating the ef- risk weight. A Board-regulated institu- fects of insurance, if the Board-regu- tion may exclude derivative contracts lated institution uses insurance as an held by the fund that are used for hedg- operational risk mitigant, captures ing rather than for speculative pur- through appropriate discounts to the poses and do not constitute a material amount of risk mitigation: portion of the fund’s exposures. (i) The residual term of the policy, where less than one year; § 217.155 Equity derivative contracts. (ii) The cancellation terms of the pol- (a) Under the IMA, in addition to icy, where less than one year; holding risk-based capital against an (iii) The policy’s timeliness of pay- equity derivative contract under this ment; part, a Board-regulated institution (iv) The uncertainty of payment by must hold risk-based capital against the provider of the policy; and the counterparty credit risk in the eq- (v) Mismatches in coverage between uity derivative contract by also treat- the policy and the hedged operational ing the equity derivative contract as a loss event. wholesale exposure and computing a (b) Qualifying operational risk supplemental risk-weighted asset mitigants. Qualifying operational risk amount for the contract under § 217.132. mitigants are: (b) Under the SRWA, a Board-regu- (1) Insurance that: lated institution may choose not to (i) Is provided by an unaffiliated hold risk-based capital against the company that the Board-regulated in- counterparty credit risk of equity de- stitution deems to have strong capac- rivative contracts, as long as it does so ity to meet its claims payment obliga- for all such contracts. Where the eq- tions and the obligor rating category uity derivative contracts are subject to to which the Board-regulated institu- a qualified master netting agreement, tion assigns the company is assigned a a Board-regulated institution using the PD equal to or less than 10 basis points;

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(ii) Has an initial term of at least one §§ 217.163–217.170 [Reserved] year and a residual term of more than 90 days; DISCLOSURES (iii) Has a minimum notice period for cancellation by the provider of 90 days; § 217.171 Purpose and scope. (iv) Has no exclusions or limitations §§ 217.171 through 217.173 establish based upon regulatory action or for the public disclosure requirements related receiver or liquidator of a failed deposi- to the capital requirements of a Board- tory institution; and regulated institution that is an ad- (v) Is explicitly mapped to a poten- vanced approaches Board-regulated in- tial operational loss event; stitution. (2) Operational risk mitigants other § 217.172 Disclosure requirements. than insurance for which the Board has given prior written approval. In evalu- (a) A Board-regulated institution ating an operational risk mitigant that is an advanced approaches Board- other than insurance, the Board will regulated institution that has com- consider whether the operational risk pleted the parallel run process and that mitigant covers potential operational has received notification from the losses in a manner equivalent to hold- Board pursuant to section 121(d) of sub- ing total capital. part E of this part must publicly dis- close each quarter its total and tier 1 § 217.162 Mechanics of risk-weighted risk-based capital ratios and their asset calculation. components as calculated under this subpart (that is, common equity tier 1 (a) If a Board-regulated institution capital, additional tier 1 capital, tier 2 does not qualify to use or does not have capital, total qualifying capital, and qualifying operational risk mitigants, total risk-weighted assets). the Board-regulated institution’s dol- (b) A Board-regulated institution lar risk-based capital requirement for that is an advanced approaches Board- operational risk is its operational risk regulated institution that has com- exposure minus eligible operational pleted the parallel run process and that risk offsets (if any). has received notification from the (b) If a Board-regulated institution Board pursuant to section 121(d) of sub- qualifies to use operational risk part E of this part must comply with mitigants and has qualifying oper- paragraph (c) of this section unless it is ational risk mitigants, the Board-regu- a consolidated subsidiary of a bank lated institution’s dollar risk-based holding company, savings and loan capital requirement for operational holding company, or depository insti- risk is the greater of: tution that is subject to these disclo- (1) The Board-regulated institution’s sure requirements or a subsidiary of a operational risk exposure adjusted for non-U.S. banking organization that is qualifying operational risk mitigants subject to comparable public disclosure minus eligible operational risk offsets requirements in its home jurisdiction. (if any); or (c)(1) A Board-regulated institution (2) 0.8 multiplied by the difference be- described in paragraph (b) of this sec- tween: tion must provide timely public disclo- (i) The Board-regulated institution’s sures each calendar quarter of the in- operational risk exposure; and formation in the applicable tables in § 217.173. If a significant change occurs, (ii) Eligible operational risk offsets such that the most recent reported (if any). amounts are no longer reflective of the (c) The Board-regulated institution’s Board-regulated institution’s capital risk-weighted asset amount for oper- adequacy and risk profile, then a brief ational risk equals the Board-regulated discussion of this change and its likely institution’s dollar risk-based capital impact must be disclosed as soon as requirement for operational risk deter- practicable thereafter. Qualitative dis- mined under sections 162(a) or (b) mul- closures that typically do not change tiplied by 12.5. each quarter (for example, a general

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summary of the Board-regulated insti- ital and total leverage exposure) as cal- tution’s risk management objectives culated under subpart B of this part, and policies, reporting system, and beginning with the first quarter in 2015. definitions) may be disclosed annually This disclosure requirement applies after the end of the fourth calendar without regard to whether the Board- quarter, provided that any significant regulated institution has completed changes to these are disclosed in the the parallel run process and received interim. Management may provide all notification from the Board pursuant of the disclosures required by this sub- to § 217.121(d). part in one place on the Board-regu- (2) A Board-regulated institution lated institution’s public Web site or that meets any of the criteria in may provide the disclosures in more § 217.100(b)(1) on or after January 1, than one public financial report or 2015, must publicly disclose each quar- other regulatory reports, provided that ter its supplementary leverage ratio the Board-regulated institution pub- and the components thereof (that is, licly provides a summary table specifi- cally indicating the location(s) of all tier 1 capital and total leverage expo- such disclosures. sure) as calculated under subpart B of (2) A Board-regulated institution de- this part beginning with the calendar scribed in paragraph (b) of this section quarter immediately following the must have a formal disclosure policy quarter in which the Board-regulated approved by the board of directors that institution becomes an advanced ap- addresses its approach for determining proaches Board-regulated institution. the disclosures it makes. The policy This disclosure requirement applies must address the associated internal without regard to whether the Board- controls and disclosure controls and regulated institution has completed procedures. The board of directors and the parallel run process and has re- senior management are responsible for ceived notification from the Board pur- establishing and maintaining an effec- suant to § 217.121(d). tive internal control structure over fi- [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as nancial reporting, including the disclo- amended at 79 FR 57746, Sept. 26, 2014; 80 FR sures required by this subpart, and 41421, July 15, 2015] must ensure that appropriate review of the disclosures takes place. One or § 217.173 Disclosures by certain ad- more senior officers of the Board-regu- vanced approaches Board-regulated lated institution must attest that the institutions. disclosures meet the requirements of (a)(1) An advanced approaches Board- this subpart. regulated institution described in (3) If a Board-regulated institution § 217.172(b) must make the disclosures described in paragraph (b) of this sec- described in Tables 1 through 12 to tion believes that disclosure of specific § 217.173. commercial or financial information would prejudice seriously its position (2) An advanced approaches Board- by making public information that is regulated institution that is required either proprietary or confidential in to publicly disclose its supplementary nature, the Board-regulated institution leverage ratio pursuant to § 217.172(d) is not required to disclose those spe- must make the disclosures required cific items, but must disclose more under Table 13 to § 217.173, unless the general information about the subject Board-regulated institution is a con- matter of the requirement, together solidated subsidiary of a bank holding with the fact that, and the reason why, company, savings and loan holding the specific items of information have company, or depository institution not been disclosed. that is subject to these disclosures re- (d)(1) A Board-regulated institution quirements or a subsidiary of a non- that meets any of the criteria in U.S. banking organization that is sub- § 217.100(b)(1) before January 1, 2015, ject to comparable public disclosure re- must publicly disclose each quarter its quirements in its home jurisdiction. supplementary leverage ratio and the (3) The disclosures described in Ta- components thereof (that is, tier 1 cap- bles 1 through 12 to § 217.173 must be

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made publicly available for twelve con- publicly available for twelve consecu- secutive quarters beginning on Janu- tive quarters beginning on January 1, ary 1, 2014, or a shorter period, as appli- 2015, or a shorter period, as applicable, cable, for the quarters after the Board- for the quarters after the Board-regu- regulated institution has completed lated institution becomes subject to the parallel run process and received the disclosure of the supplementary le- notification from the Board pursuant verage ratio pursuant to § 217.172(d) and to § 217.121(d). The disclosures described § 217.173(a)(2). in Table 13 to § 217.173 must be made

TABLE 1 TO § 217.173—SCOPE OF APPLICATION

Qualitative disclosures ... (a) .... The name of the top corporate entity in the group to which subpart E of this part applies. (b) .... A brief description of the differences in the basis for consolidating entities1 for accounting and regulatory purposes, with a description of those entities: (1) That are fully consolidated; (2) That are deconsolidated and deducted from total capital; (3) For which the total capital requirement is deducted; and (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). (c) .... Any restrictions, or other major impediments, on transfer of funds or total capital within the group. Quantitative disclosures (d) .... The aggregate amount of surplus capital of insurance subsidiaries included in the total cap- ital of the consolidated group. (e) .... The aggregate amount by which actual total capital is less than the minimum total capital re- quirement in all subsidiaries, with total capital requirements and the name(s) of the sub- sidiaries with such deficiencies. 1 Such entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority equity investments in insurance, financial and commercial entities.

TABLE 2 TO § 217.173—CAPITAL STRUCTURE

Qualitative disclosures ... (a) .... Summary information on the terms and conditions of the main features of all regulatory cap- ital instruments. Quantitative disclosures (b) .... The amount of common equity tier 1 capital, with separate disclosure of: (1) Common stock and related surplus; (2) Retained earnings; (3) Common equity minority interest; (4) AOCI (net of tax) and other reserves; and (5) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) .... The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and (2) Regulatory adjustments and deductions made to tier 1 capital. (d) .... The amount of total capital, with separate disclosure of: (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority inter- est not included in tier 1 capital; and (2) Regulatory adjustments and deductions made to total capital.

TABLE 3 TO § 217.173—CAPITAL ADEQUACY

Qualitative disclosures ... (a) .... A summary discussion of the Board-regulated institution’s approach to assessing the ade- quacy of its capital to support current and future activities. Quantitative disclosures (b) .... Risk-weighted assets for credit risk from: (1) Wholesale exposures; (2) Residential mortgage exposures; (3) Qualifying revolving exposures; (4) Other retail exposures; (5) Securitization exposures; (6) Equity exposures: (7) Equity exposures subject to the simple risk weight approach; and (8) Equity exposures subject to the internal models approach. (c) .... Standardized market risk-weighted assets and advanced market risk-weighted assets as cal- culated under subpart F of this part: (1) Standardized approach for specific risk; and (2) Internal models approach for specific risk. (d) .... Risk-weighted assets for operational risk. (e) .... Common equity tier 1, tier 1 and total risk-based capital ratios: (1) For the top consolidated group; and (2) For each depository institution subsidiary. (f) ..... Total risk-weighted assets.

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TABLE 4 TO § 217.173—CAPITAL CONSERVATION AND COUNTERCYCLICAL CAPITAL BUFFERS

Qualitative disclosures ... (a) .... The Board-regulated institution must publicly disclose the geographic breakdown of its pri- vate sector credit exposures used in the calculation of the countercyclical capital buffer. Quantitative disclosures (b) .... At least quarterly, the Board-regulated institution must calculate and publicly disclose the capital conservation buffer and the countercyclical capital buffer as described under § 217.11 of subpart B. (c) .... At least quarterly, the Board-regulated institution must calculate and publicly disclose the buffer retained income of the Board-regulated institution, as described under § 217.11 of subpart B. (d) .... At least quarterly, the Board-regulated institution must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the cap- ital conservation buffer and the countercyclical capital buffer framework described under § 217.11 of subpart B, including the maximum payout amount for the quarter.

(b) General qualitative disclosure re- (3) The scope and nature of risk re- quirement. For each separate risk area porting and/or measurement systems; described in Tables 5 through 12 to and § 217.173, the Board-regulated institu- (4) Policies for hedging and/or miti- tion must describe its risk manage- gating risk and strategies and proc- ment objectives and policies, including: esses for monitoring the continuing ef- (1) Strategies and processes; fectiveness of hedges/mitigants. (2) The structure and organization of the relevant risk management func- tion;

TABLE 5 1 TO § 217.173—CREDIT RISK: GENERAL DISCLOSURES

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 7 to § 217.173), including: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes). (5) Description of the methodology that the entity uses to estimate its allowance for loan and lease losses, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the Board-regulated institution’s credit risk management policy Quantitative disclosures (b) .... Total credit risk exposures and average credit risk exposures, after accounting offsets in ac- cordance with GAAP,2 without taking into account the effects of credit risk mitigation tech- niques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, Board-regulated institutions could use categories similar to that used for financial statement purposes. Such cat- egories might include, for instance: (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet expo- sures; (2) Debt securities; and (3) OTC derivatives. (c) .... Geographic 3 distribution of exposures, categorized in significant areas by major types of credit exposure. (d) .... Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) .... By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses at the end of each period, disaggregated on the basis of the entity’s impairment method. To disaggregate the infor- mation required on the basis of impairment methodology, an entity shall separately dis- close the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. (f) ..... Amount of impaired loans and, if available, the amount of past due loans categorized by sig- nificant geographic areas including, if practical, the amounts of allowances related to each geographical area,5 further categorized as required by GAAP. (g) .... Reconciliation of changes in ALLL.6 (h) .... Remaining contractual maturity breakdown (for example, one year or less) of the whole port- folio, categorized by credit exposure. 1 Table 5 to § 217.173 does not cover equity exposures, which should be reported in Table 9. 2 See, for example, ASC Topic 815–10 and 210–20 as they may be amended from time to time.

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3 Geographical areas may comprise individual countries, groups of countries, or regions within countries. A Board-regulated in- stitution might choose to define the geographical areas based on the way the company’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified. 4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans. 5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately. 6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge- offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.

TABLE 6 TO § 217.173—CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB RISK-BASED CAPITAL FORMULAS

Qualitative disclosures ... (a) .... Explanation and review of the: (1) Structure of internal rating systems and if the Board-regulated institution considers exter- nal ratings, the relation between internal and external ratings; (2) Use of risk parameter estimates other than for regulatory capital purposes; (3) Process for managing and recognizing credit risk mitigation (see Table 8 to § 217.173); and (4) Control mechanisms for the rating system, including discussion of independence, ac- countability, and rating systems review. (b) .... Description of the internal ratings process, provided separately for the following: (1) Wholesale category; (2) Retail subcategories; (i) Residential mortgage exposures; (ii) Qualifying revolving exposures; and (iii) Other retail exposures. For each category and subcategory above the description should include: (A) The types of exposure included in the category/subcategories; and (B) The definitions, methods and data for estimation and validation of PD, LGD, and EAD, including assumptions employed in the derivation of these variables.1 Quantitative disclosures: (c) .... (1) For wholesale exposures, present the following information across a sufficient number of risk assessment. PD grades (including default) to allow for a meaningful differentiation of credit risk: 2 (i) Total EAD; 3 (ii) Exposure-weighted average LGD (percentage); (iii) Exposure-weighted average risk weight; and (iv) Amount of undrawn commitments and exposure-weighted average EAD including aver- age drawdowns prior to default for wholesale exposures. (2) For each retail subcategory, present the disclosures outlined above across a sufficient number of segments to allow for a meaningful differentiation of credit risk. Quantitative disclosures: (d) .... Actual losses in the preceding period for each category and subcategory and how this dif- historical results. fers from past experience. A discussion of the factors that impacted the loss experience in the preceding period—for example, has the Board-regulated institution experienced higher than average default rates, loss rates or EADs. (e) .... The Board-regulated institution’s estimates compared against actual outcomes over a longer period.4 At a minimum, this should include information on estimates of losses against ac- tual losses in the wholesale category and each retail subcategory over a period sufficient to allow for a meaningful assessment of the performance of the internal rating processes for each category/subcategory.5 Where appropriate, the Board-regulated institution should further decompose this to provide analysis of PD, LGD, and EAD outcomes against esti- mates provided in the quantitative risk assessment disclosures above.6

1 This disclosure item does not require a detailed description of the model in full—it should provide the reader with a broad overview of the model approach, describing definitions of the variables and methods for estimating and validating those variables set out in the quantitative risk disclosures below. This should be done for each of the four category/subcategories. The Board- regulated institution must disclose any significant differences in approach to estimating these variables within each category/sub- categories. 2 The PD, LGD and EAD disclosures in Table 6 (c) to § 217.173 should reflect the effects of collateral, qualifying master netting agreements, eligible guarantees and eligible credit derivatives as defined under this part. Disclosure of each PD grade should in- clude the exposure-weighted average PD for each grade. Where a Board-regulated institution aggregates PD grades for the pur- poses of disclosure, this should be a representative breakdown of the distribution of PD grades used for regulatory capital pur- poses. 3 Outstanding loans and EAD on undrawn commitments can be presented on a combined basis for these disclosures. 4 These disclosures are a way of further informing the reader about the reliability of the information provided in the ‘‘quan- titative disclosures: Risk assessment’’ over the long run. The disclosures are requirements from year-end 2010; in the meantime, early adoption is encouraged. The phased implementation is to allow a Board-regulated institution sufficient time to build up a longer run of data that will make these disclosures meaningful. 5 This disclosure item is not intended to be prescriptive about the period used for this assessment. Upon implementation, it is expected that a Board-regulated institution would provide these disclosures for as long a set of data as possible—for example, if a Board-regulated institution has 10 years of data, it might choose to disclose the average default rates for each PD grade over that 10-year period. Annual amounts need not be disclosed. 6 A Board-regulated institution must provide this further decomposition where it will allow users greater insight into the reliability of the estimates provided in the ‘‘quantitative disclosures: Risk assessment.’’ In particular, it must provide this information where there are material differences between its estimates of PD, LGD or EAD compared to actual outcomes over the long run. The Board-regulated institution must also provide explanations for such differences.

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TABLE 7 TO § 217.173—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK OF OTC DERIVATIVE CONTRACTS, REPO-STYLE TRANSACTIONS, AND ELIGIBLE MARGIN LOANS

Qualitative Disclosures ... (a) .... The general qualitative disclosure requirement with respect to OTC derivatives, eligible mar- gin loans, and repo-style transactions, including: (1) Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures; (2) Discussion of policies for securing collateral, valuing and managing collateral, and estab- lishing credit reserves; (3) Discussion of the primary types of collateral taken; (4) Discussion of policies with respect to wrong-way risk exposures; and (5) Discussion of the impact of the amount of collateral the Board-regulated institution would have to provide if the Board-regulated institution were to receive a credit rating down- grade. Quantitative Disclosures (b) .... Gross positive fair value of contracts, netting benefits, netted current credit exposure, collat- eral held (including type, for example, cash, government securities), and net unsecured credit exposure.1 Also report measures for EAD used for regulatory capital for these transactions, the notional value of credit derivative hedges purchased for counterparty credit risk protection, and, for Board-regulated institutions not using the internal models methodology in § 217.132(d) , the distribution of current credit exposure by types of credit exposure.2 (c) .... Notional amount of purchased and sold credit derivatives, segregated between use for the Board-regulated institution’s own credit portfolio and for its intermediation activities, includ- ing the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. (d) .... The estimate of alpha if the Board-regulated institution has received supervisory approval to estimate alpha. 1 Net unsecured credit exposure is the credit exposure after considering the benefits from legally enforceable netting agree- ments and collateral arrangements, without taking into account haircuts for price volatility, liquidity, etc. 2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.

TABLE 8 TO § 217.173—CREDIT RISK MITIGATION 12

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement with respect to credit risk mitigation, includ- ing: (1) Policies and processes for, and an indication of the extent to which the Board-regulated institution uses, on- or off-balance sheet netting; (2) Policies and processes for collateral valuation and management; (3) A description of the main types of collateral taken by the Board-regulated institution; (4) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (5) Information about (market or credit) risk concentrations within the mitigation taken. Quantitative disclosures (b) .... For each separately disclosed portfolio, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit derivatives. 1 At a minimum, a Board-regulated institution must provide the disclosures in Table 8 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, Board-regulated insti- tutions are encouraged to give further information about mitigants that have not been recognized for that purpose. 2 Credit derivatives and other credit mitigation that are treated for the purposes of this subpart as synthetic securitization expo- sures should be excluded from the credit risk mitigation disclosures (in Table 8 to § 217.173) and included within those relating to securitization (in Table 9 to § 217.173).

TABLE 9 TO § 217.173—SECURITIZATION

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement with respect to securitization (including syn- thetic securitizations), including a discussion of: (1) The Board-regulated institution’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the Board-regulated institution to other entities and including the type of risks assumed and retained with resecuritization activity; 1 (2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets; (3) The roles played by the Board-regulated institution in the securitization process 2 and an indication of the extent of the Board-regulated institution’s involvement in each of them; (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The Board-regulated institution’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the Board-regulated institution follows for its securitization exposures including the type of securitization exposure to which each ap- proach applies. (b) .... A list of: (1) The type of securitization SPEs that the Board-regulated institution, as sponsor, uses to securitize third-party exposures. The Board-regulated institution must indicate whether it has exposure to these SPEs, either on- or off- balance sheet; and (2) Affiliated entities:

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TABLE 9 TO § 217.173—SECURITIZATION—Continued (i) That the Board-regulated institution manages or advises; and (ii) That invest either in the securitization exposures that the Board-regulated institution has securitized or in securitization SPEs that the Board-regulated institution sponsors.3 (c) .... Summary of the Board-regulated institution’s accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings; (2) Recognition of gain-on-sale; (3) Methods and key assumptions and inputs applied in valuing retained or purchased inter- ests; (4) Changes in methods and key assumptions and inputs from the previous period for val- uing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart E of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could re- quire the Board-regulated institution to provide financial support for securitized assets. (d) .... An explanation of significant changes to any of the quantitative information set forth below since the last reporting period. Quantitative disclosures (e) .... The total outstanding exposures securitized 4 by the Board-regulated institution in securitizations that meet the operational criteria in § 217.141 (categorized into traditional/ synthetic), by underlying exposure type 5 separately for securitizations of third-party expo- sures for which the bank acts only as sponsor. (f) ..... For exposures securitized by the Board-regulated institution in securitizations that meet the operational criteria in § 217.141: (1) Amount of securitized assets that are impaired 6/past due categorized by exposure type; and (2) Losses recognized by the Board-regulated institution during the current period cat- egorized by exposure type.7 (g) .... The total amount of outstanding exposures intended to be securitized categorized by expo- sure type. (h) .... Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by expo- sure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i) ..... (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g. SA, SFA, or SSFA). (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital; and (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. (j) ..... Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by asset type. (k) .... Aggregate amount of resecuritization exposures retained or purchased categorized accord- ing to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 The Board-regulated institution must describe the structure of resecuritizations in which it participates; this description must be provided for the main categories of resecuritization products in which the Board-regulated institution is active. 2 For example, these roles would include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity pro- vider, or swap provider. 3 For example, money market mutual funds should be listed individually, and personal and private trusts, should be noted col- lectively. 4 ‘‘Exposures securitized’’ include underlying exposures originated by the bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the bank’s balance sheet and underlying exposures acquired by the bank from third-party entities) in which the originating bank does not retain any securitization exposure should be shown sepa- rately but need only be reported for the year of inception. 5 A Board-regulated institution is required to disclose exposures regardless of whether there is a capital charge under this part. 6 A Board-regulated institution must include credit-related other than temporary impairment (OTTI). 7 For example, charge-offs/allowances (if the assets remain on the bank’s balance sheet) or credit-related OTTI of I/O strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the bank with respect to securitized assets.

TABLE 10 TO § 217.173—OPERATIONAL RISK

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement for operational risk. (b) .... Description of the AMA, including a discussion of relevant internal and external factors con- sidered in the Board-regulated institution’s measurement approach. (c) .... A description of the use of insurance for the purpose of mitigating operational risk.

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TABLE 11 TO § 217.173—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement with respect to the equity risk of equity hold- ings not subject to subpart F of this part, including: (1) Differentiation between holdings on which capital gains are expected and those held for other objectives, including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity hold- ings not subject to subpart F of this part. This includes the accounting methodology and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative disclosures (b) .... Carrying value on the balance sheet of equity investments, as well as the fair value of those investments. (c) .... The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non-publicly traded. (d) .... The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. (e) .... (1) Total unrealized gains (losses) 1 (2) Total latent revaluation gains (losses) 2 (3) Any amounts of the above included in tier 1 and/or tier 2 capital. (f) ..... Capital requirements categorized by appropriate equity groupings, consistent with the Board- regulated institution’s methodology, as well as the aggregate amounts and the type of eq- uity investments subject to any supervisory transition regarding total capital requirements.3 1 Unrealized gains (losses) recognized in the balance sheet but not through earnings. 2 Unrealized gains (losses) not recognized either in the balance sheet or through earnings. 3 This disclosure must include a breakdown of equities that are subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400 percent, and 600 percent risk weights, as applicable.

TABLE 12 TO § 217.173—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES

Qualitative disclosures ... (a) .... The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepay- ments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. Quantitative disclosures (b) .... The increase (decline) in earnings or economic value (or relevant measure used by man- agement) for upward and downward rate shocks according to management’s method for measuring interest rate risk for non-trading activities, categorized by currency (as appro- priate).

(c) Except as provided in § 217.172(b), a Board-regulated institution has com- Board-regulated institution described pleted the parallel run process and has in § 217.172(d) must make the disclo- received notification from the Board sures described in Table 13 to § 217.173; pursuant to § 217.121(d). The Board-reg- provided, however, the disclosures re- ulated institution must make these quired under this paragraph are re- disclosures publicly available begin- quired without regard to whether the ning on January 1, 2015.

TABLE 13 TO § 217.173—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 enti- ties that are consolidated for accounting purposes but outside the scope of regu- latory 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.

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TABLE 13 TO § 217.173—SUPPLEMENTARY LEVERAGE RATIO—Continued

Dollar amounts in thousands Tril Bil Mil Thou

Part 2: Supplementary leverage ratio

On-balance sheet exposures 1 On-balance sheet assets (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative 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-up for cash collateral posted if deducted from the on-balance sheet as- sets, except for cash variation margin. 7 LESS: Deductions of receivable assets for cash variation margin posted in deriv- ative 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 re- ceived. Include in this item the value of securities that qualified for sales treat- ment that must be reversed. 13 LESS: Reduction of the gross value of receivables in reverse repurchase trans- actions by cash payables in repurchase transactions under netting agreements. 14 Counterparty credit risk for all repo-style transactions. 15 Exposure for repo-style transactions where a banking organization acts as an agent. 16 Total exposures for repo-style transactions (sum of lines 12 to 15). Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amounts. 18 LESS: Adjustments for conversion to credit equivalent amounts. 19 Off-balance sheet exposures (sum of lines 17 and 18). Capital and total leverage exposure 20 Tier 1 capital. 21 Total leverage exposure (sum of lines 3, 11, 16 and 19). Supplementary leverage ratio

22 Supplementary leverage ratio ...... (in percent)

[Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as amended at 79 FR 57746, Sept. 26, 2014; 80 FR 41421, July 15, 2015]

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§§ 217.174–217.200 [Reserved] part is not commensurate with the market risk of the Board-regulated in- Subpart F—Risk-Weighted Assets— stitution’s covered positions. In mak- Market Risk ing determinations under paragraphs (c)(1) through (c)(3) of this section, the § 217.201 Purpose, applicability, and Board will apply notice and response reservation of authority. procedures generally in the same man- (a) Purpose. This subpart F estab- ner as the notice and response proce- lishes risk-based capital requirements dures set forth in 12 CFR 263.202. for Board-regulated institutions with (2) If the Board determines that the significant exposure to market risk, risk-based capital requirement cal- provides methods for these Board-regu- culated under this subpart by the lated institutions to calculate their Board-regulated institution for one or standardized measure for market risk more covered positions or portfolios of and, if applicable, advanced measure covered positions is not commensurate for market risk, and establishes public with the risks associated with those disclosure requirements. positions or portfolios, the Board may (b) Applicability. (1) This subpart ap- require the Board-regulated institution plies to any Board-regulated institu- to assign a different risk-based capital tion with aggregate trading assets and requirement to the positions or port- trading liabilities (as reported in the folios that more accurately reflects the Board-regulated institution’s most re- risk of the positions or portfolios. cent quarterly Call Report, for a state (3) The Board may also require a member bank, or FR Y–9C, for a bank Board-regulated institution to cal- holding company or savings and loan culate risk-based capital requirements holding company, as applicable, any for specific positions or portfolios savings and loan holding company that does not file the FR Y–9C should follow under this subpart, or under subpart D the instructions to the FR Y–9C) equal or subpart E of this part, as appro- to: priate, to more accurately reflect the (i) 10 percent or more of quarter-end risks of the positions. total assets as reported on the most re- (4) Nothing in this subpart limits the cent quarterly [Call Report or FR Y– authority of the Board under any other 9C]; or provision of law or regulation to take (ii) $1 billion or more. supervisory or enforcement action, in- (2) The Board may apply this subpart cluding action to address unsafe or un- to any Board-regulated institution if sound practices or conditions, deficient the Board deems it necessary or appro- capital levels, or violations of law. priate because of the level of market [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as risk of the Board-regulated institution amended at 78 FR 62289, Oct. 11, 2013] or to ensure safe and sound banking practices. § 217.202 Definitions. (3) The Board may exclude a Board- regulated institution that meets the (a) Terms set forth in § 217.2 and used criteria of paragraph (b)(1) of this sec- in this subpart have the definitions as- tion from application of this subpart if signed thereto in § 217.2. the Board determines that the exclu- (b) For the purposes of this subpart, sion is appropriate based on the level of the following terms are defined as fol- market risk of the Board-regulated in- lows: stitution and is consistent with safe Backtesting means the comparison of and sound banking practices. a Board-regulated institution’s inter- (c) Reservation of authority (1) The nal estimates with actual outcomes Board may require a Board-regulated during a sample period not used in institution to hold an amount of cap- model development. For purposes of ital greater than otherwise required this subpart, backtesting is one form of under this subpart if the Board deter- out-of-sample testing. mines that the Board-regulated insti- Commodity position means a position tution’s capital requirement for mar- for which price risk arises from ket risk as calculated under this sub- changes in the price of a commodity.

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Corporate debt position means a debt (ii) The position is free of any restric- position that is an exposure to a com- tive covenants on its tradability or the pany that is not a sovereign entity, the Board-regulated institution is able to Bank for International Settlements, hedge the material risk elements of the the European Central Bank, the Euro- position in a two-way market; pean Commission, the International (2) A foreign exchange or commodity Monetary Fund, a multilateral devel- position, regardless of whether the po- opment bank, a depository institution, sition is a trading asset or trading li- a foreign bank, a credit union, a public ability (excluding any structural for- sector entity, a GSE, or a eign currency positions that the Board- securitization. regulated institution chooses to ex- Correlation trading position means: clude with prior supervisory approval); (1) A securitization position for and which all or substantially all of the (3) Notwithstanding paragraphs (1) value of the underlying exposures is and (2) of this definition, a covered po- based on the credit quality of a single sition does not include: company for which a two-way market (i) An intangible asset, including any exists, or on commonly traded indices servicing asset; based on such exposures for which a (ii) Any hedge of a trading position two-way market exists on the indices; that the Board determines to be out- or side the scope of the Board-regulated (2) A position that is not a institution’s hedging strategy required securitization position and that hedges in paragraph (a)(2) of § 217.203; a position described in paragraph (1) of (iii) Any position that, in form or this definition; and substance, acts as a liquidity facility (3) A correlation trading position that provides support to asset-backed does not include: commercial paper; (i) A resecuritization position; (iv) A credit derivative the Board- (ii) A derivative of a securitization regulated institution recognizes as a position that does not provide a pro guarantee for risk-weighted asset rata share in the proceeds of a amount calculation purposes under securitization tranche; or subpart D or subpart E of this part; (iii) A securitization position for (v) Any position that is recognized as which the underlying assets or ref- a credit valuation adjustment hedge erence exposures are retail exposures, under § 217.132(e)(5) or § 217.132(e)(6), ex- residential mortgage exposures, or cept as provided in § 217.132(e)(6)(vii); commercial mortgage exposures. (vi) Any equity position that is not Covered position means the following publicly traded, other than a derivative positions: that references a publicly traded eq- (1) A trading asset or trading liabil- uity and other than a position in an in- ity (whether on- or off-balance sheet),31 vestment company as defined in and as reported on Schedule RC–D of the registered with the SEC under the In- Call Report or Schedule HC–D of the vestment Company Act of 1940 (15 FR Y–9C (any savings and loan holding U.S.C. 80a–1 et seq.), provided that all companies that does not file the FR Y– the underlying equities held by the in- 9C should follow the instructions to the vestment company are publicly traded; FR Y–9C), that meets the following (vii) Any equity position that is not conditions: publicly traded, other than a derivative (i) The position is a trading position that references a publicly traded eq- or hedges another covered position; 32 uity and other than a position in an en- and tity not domiciled in the United States (or a political subdivision thereof) that is supervised and regulated in a man- 31 Securities subject to repurchase and ner similar to entities described in lending agreements are included as if they paragraph (3)(vi) of this definition; are still owned by the lender. 32 A position that hedges a trading position (viii) Any position a Board-regulated must be within the scope of the bank’s hedg- institution holds with the intent to ing strategy as described in paragraph (a)(2) securitize; or of section 203 of this subpart. (ix) Any direct real estate holding.

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Debt position means a covered posi- posure in paragraph (1) of this defini- tion that is not a securitization posi- tion. tion or a correlation trading position Securitization means a transaction in and that has a value that reacts pri- which: marily to changes in interest rates or (1) All or a portion of the credit risk credit spreads. of one or more underlying exposures is Default by a sovereign entity has the transferred to one or more third par- same meaning as the term sovereign ties; default under § 217.2. (2) The credit risk associated with Equity position means a covered posi- the underlying exposures has been sep- tion that is not a securitization posi- arated into at least two tranches that tion or a correlation trading position reflect different levels of seniority; and that has a value that reacts pri- (3) Performance of the securitization marily to changes in equity prices. exposures depends upon the perform- Event risk means the risk of loss on ance of the underlying exposures; equity or hybrid equity positions as a (4) All or substantially all of the un- result of a financial event, such as the derlying exposures are financial expo- announcement or occurrence of a com- sures (such as loans, commitments, pany merger, acquisition, spin-off, or credit derivatives, guarantees, receiv- dissolution. ables, asset-backed securities, mort- Foreign exchange position means a po- gage-backed securities, other debt se- sition for which price risk arises from curities, or equity securities); changes in foreign exchange rates. (5) For non-synthetic securitizations, General market risk means the risk of the underlying exposures are not loss that could result from broad mar- owned by an operating company; ket movements, such as changes in the (6) The underlying exposures are not general level of interest rates, credit owned by a small business investment spreads, equity prices, foreign ex- company described in section 302 of the change rates, or commodity prices. Small Business Investment Act; Hedge means a position or positions (7) The underlying exposures are not that offset all, or substantially all, of owned by a firm an investment in one or more material risk factors of which qualifies as a community devel- another position. opment investment under section Idiosyncratic risk means the risk of 24(Eleventh) of the National Bank Act; loss in the value of a position that (8) The Board may determine that a arises from changes in risk factors transaction in which the underlying unique to that position. exposures are owned by an investment Incremental risk means the default firm that exercises substantially unfet- risk and credit migration risk of a po- tered control over the size and com- sition. Default risk means the risk of position of its assets, liabilities, and loss on a position that could result off-balance sheet exposures is not a from the failure of an obligor to make securitization based on the trans- timely payments of principal or inter- action’s leverage, risk profile, or eco- est on its debt obligation, and the risk nomic substance; of loss that could result from bank- (9) The Board may deem an exposure ruptcy, insolvency, or similar pro- to a transaction that meets the defini- ceeding. Credit migration risk means tion of a securitization, notwith- the price risk that arises from signifi- standing paragraph (5), (6), or (7) of this cant changes in the underlying credit definition, to be a securitization based quality of the position. on the transaction’s leverage, risk pro- Market risk means the risk of loss on file, or economic substance; and a position that could result from move- (10) The transaction is not: ments in market prices. (i) An investment fund; Resecuritization position means a cov- (ii) A collective investment fund (as ered position that is: defined in 12 CFR 208.34. (1) An on- or off-balance sheet expo- (iii) An employee benefit plan as de- sure to a resecuritization; or fined in paragraphs (3) and (32) of sec- (2) An exposure that directly or indi- tion 3 of ERISA, a ‘‘governmental rectly references a resecuritization ex- plan’’ (as defined in 29 U.S.C. 1002(32))

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that complies with the tax deferral price movements, or to lock in arbi- qualification requirements provided in trage profits. the Internal Revenue Code, or any Two-way market means a market similar employee benefit plan estab- where there are independent bona fide lished under the laws of a foreign juris- offers to buy and sell so that a price diction; or reasonably related to the last sales (iv) Registered with the SEC under price or current bona fide competitive the Investment Company Act of 1940 (15 bid and offer quotations can be deter- U.S.C. 80a–1 et seq.) or foreign equiva- mined within one day and settled at lents thereof. that price within a relatively short Securitization position means a cov- time frame conforming to trade cus- ered position that is: tom. (1) An on-balance sheet or off-balance Value-at-Risk (VaR) means the esti- sheet credit exposure (including credit- mate of the maximum amount that the enhancing representations and warran- value of one or more positions could ties) that arises from a securitization decline due to market price or rate (including a resecuritization); or movements during a fixed holding pe- (2) An exposure that directly or indi- riod within a stated confidence inter- rectly references a securitization expo- val. sure described in paragraph (1) of this [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as definition. amended at 78 FR 62290, Oct. 11, 2013; 79 FR Sovereign debt position means a direct 78295, Dec. 30, 2014; 80 FR 70672, Nov. 16, 2015] exposure to a sovereign entity. Specific risk means the risk of loss on § 217.203 Requirements for application a position that could result from fac- of this subpart F. tors other than broad market move- (a) Trading positions—(1) Identification ments and includes event risk, default of trading positions. A Board-regulated risk, and idiosyncratic risk. institution must have clearly defined Structural position in a foreign cur- policies and procedures for determining rency means a position that is not a which of its trading assets and trading trading position and that is: liabilities are trading positions and (1) Subordinated debt, equity, or mi- which of its trading positions are cor- nority interest in a consolidated sub- relation trading positions. These poli- sidiary that is denominated in a for- cies and procedures must take into ac- eign currency; count: (2) Capital assigned to foreign (i) The extent to which a position, or branches that is denominated in a for- a hedge of its material risks, can be eign currency; marked-to-market daily by reference (3) A position related to an uncon- to a two-way market; and solidated subsidiary or another item (ii) Possible impairments to the li- that is denominated in a foreign cur- quidity of a position or its hedge. rency and that is deducted from the (2) Trading and hedging strategies. A Board-regulated institution’s tier 1 or Board-regulated institution must have tier 2 capital; or clearly defined trading and hedging (4) A position designed to hedge a strategies for its trading positions that Board-regulated institution’s capital are approved by senior management of ratios or earnings against the effect on the Board-regulated institution. paragraphs (1), (2), or (3) of this defini- (i) The trading strategy must articu- tion of adverse exchange rate move- late the expected holding period of, and ments. the market risk associated with, each Term repo-style transaction means a portfolio of trading positions. repo-style transaction that has an (ii) The hedging strategy must ar- original maturity in excess of one busi- ticulate for each portfolio of trading ness day. positions the level of market risk the Trading position means a position Board-regulated institution is willing that is held by the Board-regulated in- to accept and must detail the instru- stitution for the purpose of short-term ments, techniques, and strategies the resale or with the intent of benefiting Board-regulated institution will use to from actual or expected short-term hedge the risk of the portfolio.

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(b) Management of covered positions— the Board has approved under this sub- (1) Active management. A Board-regu- part to an additional business line or lated institution must have clearly de- product type; fined policies and procedures for ac- (ii) The Board-regulated institution tively managing all covered positions. makes any change to an internal model At a minimum, these policies and pro- approved by the Board under this sub- cedures must require: part that would result in a material (i) Marking positions to market or to change in the Board-regulated institu- model on a daily basis; tion’s risk-weighted asset amount for a (ii) Daily assessment of the Board- portfolio of covered positions; or regulated institution’s ability to hedge (iii) The Board-regulated institution position and portfolio risks, and of the makes any material change to its mod- extent of market liquidity; eling assumptions. (iii) Establishment and daily moni- (3) The Board may rescind its ap- toring of limits on positions by a risk proval of the use of any internal model control unit independent of the trading (in whole or in part) or of the deter- business unit; mination of the approach under (iv) Daily monitoring by senior man- § 217.209(a)(2)(ii) for a Board-regulated agement of information described in institution’s modeled correlation trad- paragraphs (b)(1)(i) through (b)(1)(iii) of ing positions and determine an appro- this section; priate capital requirement for the cov- (v) At least annual reassessment of ered positions to which the model established limits on positions by sen- would apply, if the Board determines ior management; and that the model no longer complies with (vi) At least annual assessments by this subpart or fails to reflect accu- qualified personnel of the quality of rately the risks of the Board-regulated market inputs to the valuation proc- institution’s covered positions. ess, the soundness of key assumptions, the reliability of parameter estimation (4) The Board-regulated institution in pricing models, and the stability and must periodically, but no less fre- accuracy of model calibration under al- quently than annually, review its in- ternative market scenarios. ternal models in light of developments (2) Valuation of covered positions. The in financial markets and modeling Board-regulated institution must have technologies, and enhance those mod- a process for prudent valuation of its els as appropriate to ensure that they covered positions that includes policies continue to meet the Board’s standards and procedures on the valuation of po- for model approval and employ risk sitions, marking positions to market measurement methodologies that are or to model, independent price most appropriate for the Board-regu- verification, and valuation adjust- lated institution’s covered positions. ments or reserves. The valuation proc- (5) The Board-regulated institution ess must consider, as appropriate, un- must incorporate its internal models earned credit spreads, close-out costs, into its risk management process and early termination costs, investing and integrate the internal models used for funding costs, liquidity, and model calculating its VaR-based measure into risk. its daily risk management process. (c) Requirements for internal models. (1) (6) The level of sophistication of a A Board-regulated institution must ob- Board-regulated institution’s internal tain the prior written approval of the models must be commensurate with Board before using any internal model the complexity and amount of its cov- to calculate its risk-based capital re- ered positions. A Board-regulated insti- quirement under this subpart. tution’s internal models may use any (2) A Board-regulated institution of the generally accepted approaches, must meet all of the requirements of including but not limited to variance- this section on an ongoing basis. The covariance models, historical simula- Board-regulated institution must tions, or Monte Carlo simulations, to promptly notify the Board when: measure market risk. (i) The Board-regulated institution (7) The Board-regulated institution’s plans to extend the use of a model that internal models must properly measure

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all the material risks in the covered (3) The Board-regulated institution positions to which they are applied. must stress test the market risk of its (8) The Board-regulated institution’s covered positions at a frequency appro- internal models must conservatively priate to each portfolio, and in no case assess the risks arising from less liquid less frequently than quarterly. The positions and positions with limited stress tests must take into account price transparency under realistic mar- concentration risk (including but not ket scenarios. limited to concentrations in single (9) The Board-regulated institution issuers, industries, sectors, or mar- must have a rigorous and well-defined kets), illiquidity under stressed market process for re-estimating, re-evalu- conditions, and risks arising from the ating, and updating its internal models Board-regulated institution’s trading to ensure continued applicability and activities that may not be adequately relevance. (10) If a Board-regulated institution captured in its internal models. uses internal models to measure spe- (4) The Board-regulated institution cific risk, the internal models must must have an internal audit function also satisfy the requirements in para- independent of business-line manage- graph (b)(1) of § 217.207. ment that at least annually assesses (d) Control, oversight, and validation the effectiveness of the controls sup- mechanisms. (1) The Board-regulated in- porting the Board-regulated institu- stitution must have a risk control unit tion’s market risk measurement sys- that reports directly to senior manage- tems, including the activities of the ment and is independent from the busi- business trading units and independent ness trading units. risk control unit, compliance with (2) The Board-regulated institution policies and procedures, and calcula- must validate its internal models ini- tion of the Board-regulated institu- tially and on an ongoing basis. The tion’s measures for market risk under Board-regulated institution’s valida- this subpart. At least annually, the in- tion process must be independent of ternal audit function must report its the internal models’ development, im- findings to the Board-regulated institu- plementation, and operation, or the tion’s board of directors (or a com- validation process must be subjected to mittee thereof). an independent review of its adequacy (e) Internal assessment of capital ade- and effectiveness. Validation must in- The Board-regulated institution clude: quacy. (i) An evaluation of the conceptual must have a rigorous process for as- soundness of (including developmental sessing its overall capital adequacy in evidence supporting) the internal mod- relation to its market risk. The assess- els; ment must take into account risks (ii) An ongoing monitoring process that may not be captured fully in the that includes verification of processes VaR-based measure, including con- and the comparison of the Board-regu- centration and liquidity risk under lated institution’s model outputs with stressed market conditions. relevant internal and external data (f) Documentation. The Board-regu- sources or estimation techniques; and lated institution must adequately doc- (iii) An outcomes analysis process ument all material aspects of its inter- that includes backtesting. For internal nal models, management and valuation models used to calculate the VaR-based of covered positions, control, oversight, measure, this process must include a validation and review processes and re- comparison of the changes in the sults, and internal assessment of cap- Board-regulated institution’s portfolio ital adequacy. value that would have occurred were end-of-day positions to remain un- § 217.204 Measure for market risk. changed (therefore, excluding fees, commissions, reserves, net interest in- (a) General requirement. (1) A Board- come, and intraday trading) with VaR- regulated institution must calculate based measures during a sample period its standardized measure for market not used in model development. risk by following the steps described in

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paragraph (a)(2) of this section. An ad- (B) The average of the stressed VaR- vanced approaches Board-regulated in- based measures as calculated under stitution also must calculate an ad- § 217.206 for each of the preceding 12 vanced measure for market risk by fol- weeks multiplied by three, except as lowing the steps in paragraph (a)(2) of provided in paragraph (b) of this sec- this section. tion. (2) Measure for market risk. A Board- (iii) Specific risk add-ons. A Board-reg- regulated institution must calculate ulated institution’s specific risk add- the standardized measure for market ons equal any specific risk add-ons that risk, which equals the sum of the VaR- are required under § 217.207 and are cal- based capital requirement, stressed culated in accordance with § 217.210. VaR-based capital requirement, spe- (iv) Incremental risk capital require- cific risk add-ons, incremental risk ment. A Board-regulated institution’s capital requirement, comprehensive incremental risk capital requirement risk capital requirement, and capital equals any incremental risk capital re- requirement for de minimis exposures quirement as calculated under section all as defined under this paragraph 208 of this subpart. (a)(2), (except, that the Board-regu- (v) Comprehensive risk capital require- lated institution may not use the SFA ment. A Board-regulated institution’s in section 210(b)(2)(vii)(B) of this sub- comprehensive risk capital require- part for purposes of this calculation)[, ment equals any comprehensive risk plus any additional capital require- capital requirement as calculated ment established by the Board]. An ad- under section 209 of this subpart. vanced approaches Board-regulated in- (vi) Capital requirement for de minimis stitution that has completed the par- exposures. A Board-regulated institu- allel run process and that has received tion’s capital requirement for de mini- notifications from the Board pursuant mis exposures equals: to § 217.121(d) also must calculate the (A) The absolute value of the fair advanced measure for market risk, value of those de minimis exposures which equals the sum of the VaR-based that are not captured in the Board-reg- capital requirement, stressed VaR- ulated institution’s VaR-based measure based capital requirement, specific risk or under paragraph (a)(2)(vi)(B) of this add-ons, incremental risk capital re- section; and quirement, comprehensive risk capital (B) With the prior written approval requirement, and capital requirement of the Board, the capital requirement for de minimis exposures as defined for any de minimis exposures using al- under this paragraph (a)(2) [, plus any ternative techniques that appro- additional capital requirement estab- priately measure the market risk asso- lished by the Board]. ciated with those exposures. (i) VaR-based capital requirement. A (b) Backtesting. A Board-regulated in- Board-regulated institution’s VaR- stitution must compare each of its based capital requirement equals the most recent 250 business days’ trading greater of: losses (excluding fees, commissions, re- (A) The previous day’s VaR-based serves, net interest income, and measure as calculated under § 217.205; intraday trading) with the cor- or responding daily VaR-based measures (B) The average of the daily VaR- calibrated to a one-day holding period based measures as calculated under and at a one-tail, 99.0 percent con- § 217.205 for each of the preceding 60 fidence level. A Board-regulated insti- business days multiplied by three, ex- tution must begin backtesting as re- cept as provided in paragraph (b) of quired by this paragraph (b) no later this section. than one year after the later of Janu- (ii) Stressed VaR-based capital require- ary 1, 2014 and the date on which the ment. A Board-regulated institution’s Board-regulated institution becomes stressed VaR-based capital require- subject to this subpart. In the interim, ment equals the greater of: consistent with safety and soundness (A) The most recent stressed VaR- principles, a Board-regulated institu- based measure as calculated under tion subject to this subpart as of Janu- § 217.206; or ary 1, 2014 should continue to follow

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backtesting procedures in accordance based measure, provided that the with the Board’s supervisory expecta- Board-regulated institution includes tions. all such term repo-style transactions (1) Once each quarter, the Board-reg- consistently over time. ulated institution must identify the (1) The Board-regulated institution’s number of exceptions (that is, the num- internal models for calculating its ber of business days for which the ac- VaR-based measure must use risk fac- tual daily net trading loss, if any, ex- tors sufficient to measure the market ceeds the corresponding daily VaR- risk inherent in all covered positions. based measure) that have occurred over The market risk categories must in- the preceding 250 business days. clude, as appropriate, interest rate (2) A Board-regulated institution risk, credit spread risk, equity price must use the multiplication factor in risk, foreign exchange risk, and com- Table 1 to § 217.204 that corresponds to modity price risk. For material posi- the number of exceptions identified in tions in the major currencies and mar- paragraph (b)(1) of this section to de- kets, modeling techniques must incor- termine its VaR-based capital require- porate enough segments of the yield ment for market risk under paragraph (a)(2)(i) of this section and to deter- curve—in no case less than six—to cap- mine its stressed VaR-based capital re- ture differences in volatility and less quirement for market risk under para- than perfect correlation of rates along graph (a)(2)(ii) of this section until it the yield curve. obtains the next quarter’s backtesting (2) The VaR-based measure may in- results, unless the Board notifies the corporate empirical correlations with- Board-regulated institution in writing in and across risk categories, provided that a different adjustment or other the Board-regulated institution vali- action is appropriate. dates and demonstrates the reasonable- ness of its process for measuring cor- TABLE 1 TO § 217.204—MULTIPLICATION relations. If the VaR-based measure FACTORS BASED ON RESULTS OF BACKTESTING does not incorporate empirical correla- tions across risk categories, the Board- Multiplication Number of exceptions factor regulated institution must add the sep- arate measures from its internal mod- 4 or fewer ...... 3.00 5 ...... 3.40 els used to calculate the VaR-based 6 ...... 3.50 measure for the appropriate market 7 ...... 3.65 risk categories (interest rate risk, 8 ...... 3.75 9 ...... 3.85 credit spread risk, equity price risk, 10 or more ...... 4.00 foreign exchange rate risk, and/or com- modity price risk) to determine its ag- § 217.205 VaR-based measure. gregate VaR-based measure. (3) The VaR-based measure must in- (a) General requirement. A Board-regu- clude the risks arising from the non- lated institution must use one or more internal models to calculate daily a linear price characteristics of options VaR-based measure of the general mar- positions or positions with embedded ket risk of all covered positions. The optionality and the sensitivity of the daily VaR-based measure also may re- fair value of the positions to changes in flect the Board-regulated institution’s the volatility of the underlying rates, specific risk for one or more portfolios prices, or other material risk factors. A of debt and equity positions, if the in- Board-regulated institution with a ternal models meet the requirements large or complex options portfolio of paragraph (b)(1) of § 217.207. The must measure the volatility of options daily VaR-based measure must also re- positions or positions with embedded flect the Board-regulated institution’s optionality by different maturities and/ specific risk for any portfolio of cor- or strike prices, where material. relation trading positions that is mod- (4) The Board-regulated institution eled under § 217.209. A Board-regulated must be able to justify to the satisfac- institution may elect to include term tion of the Board the omission of any repo-style transactions in its VaR- risk factors from the calculation of its

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VaR-based measure that the Board-reg- option must update its data more fre- ulated institution uses in its pricing quently than monthly and in a manner models. appropriate for the type of weighting (5) The Board-regulated institution scheme. must demonstrate to the satisfaction (c) A Board-regulated institution of the Board the appropriateness of any must divide its portfolio into a number proxies used to capture the risks of the of significant subportfolios approved Board-regulated institution’s actual by the Board for subportfolio positions for which such proxies are backtesting purposes. These subport- used. folios must be sufficient to allow the (b) Quantitative requirements for VaR- Board-regulated institution and the based measure. (1) The VaR-based meas- Board to assess the adequacy of the ure must be calculated on a daily basis VaR model at the risk factor level; the using a one-tail, 99.0 percent confidence Board will evaluate the appropriate- level, and a holding period equivalent ness of these subportfolios relative to to a 10-business-day movement in un- the value and composition of the derlying risk factors, such as rates, Board-regulated institution’s covered spreads, and prices. To calculate VaR- positions. The Board-regulated institu- based measures using a 10-business-day tion must retain and make available to holding period, the Board-regulated in- the Board the following information stitution may calculate 10-business-day for each subportfolio for each business measures directly or may convert VaR- day over the previous two years (500 based measures using holding periods business days), with no more than a 60- other than 10 business days to the day lag: equivalent of a 10-business-day holding (1) A daily VaR-based measure for period. A Board-regulated institution the subportfolio calibrated to a one- that converts its VaR-based measure in tail, 99.0 percent confidence level; such a manner must be able to justify (2) The daily profit or loss for the the reasonableness of its approach to subportfolio (that is, the net change in the satisfaction of the Board. price of the positions held in the port- (2) The VaR-based measure must be folio at the end of the previous busi- based on a historical observation pe- ness day); and riod of at least one year. Data used to (3) The p-value of the profit or loss on determine the VaR-based measure each day (that is, the probability of ob- must be relevant to the Board-regu- serving a profit that is less than, or a lated institution’s actual exposures loss that is greater than, the amount and of sufficient quality to support the reported for purposes of paragraph calculation of risk-based capital re- (c)(2) of this section based on the model quirements. The Board-regulated insti- used to calculate the VaR-based meas- tution must update data sets at least ure described in paragraph (c)(1) of this monthly or more frequently as changes section). in market conditions or portfolio com- position warrant. For a Board-regu- § 217.206 Stressed VaR-based measure. lated institution that uses a weighting (a) General requirement. At least scheme or other method for the histor- weekly, a Board-regulated institution ical observation period, the Board-reg- must use the same internal model(s) ulated institution must either: used to calculate its VaR-based meas- (i) Use an effective observation pe- ure to calculate a stressed VaR-based riod of at least one year in which the measure. average time lag of the observations is (b) Quantitative requirements for at least six months; or stressed VaR-based measure. (1) A Board- (ii) Demonstrate to the Board that regulated institution must calculate a its weighting scheme is more effective stressed VaR-based measure for its cov- than a weighting scheme with an aver- ered positions using the same model(s) age time lag of at least six months rep- used to calculate the VaR-based meas- resenting the volatility of the Board- ure, subject to the same confidence regulated institution’s trading port- level and holding period applicable to folio over a full business cycle. A the VaR-based measure under § 217.205, Board-regulated institution using this but with model inputs calibrated to

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historical data from a continuous 12- this subpart). A Board-regulated insti- month period that reflects a period of tution must use models to measure the significant financial stress appropriate specific risk of correlation trading po- to the Board-regulated institution’s sitions that are modeled under § 217.209. current portfolio. (1) Requirements for specific risk mod- (2) The stressed VaR-based measure eling. (i) If a Board-regulated institu- must be calculated at least weekly and tion uses internal models to measure be no less than the Board-regulated in- the specific risk of a portfolio, the in- stitution’s VaR-based measure. ternal models must: (3) A Board-regulated institution (A) Explain the historical price vari- must have policies and procedures that ation in the portfolio; describe how it determines the period (B) Be responsive to changes in mar- of significant financial stress used to ket conditions; calculate the Board-regulated institu- (C) Be robust to an adverse environ- tion’s stressed VaR-based measure ment, including signaling rising risk in under this section and must be able to an adverse environment; and provide empirical support for the pe- (D) Capture all material components riod used. The Board-regulated institu- of specific risk for the debt and equity tion must obtain the prior approval of positions in the portfolio. Specifically, the Board for, and notify the Board if the internal models must: the Board-regulated institution makes (1) Capture event risk and idiosyn- any material changes to, these policies cratic risk; and and procedures. The policies and proce- (2) Capture and demonstrate sensi- dures must address: tivity to material differences between (i) How the Board-regulated institu- positions that are similar but not iden- tion links the period of significant fi- tical and to changes in portfolio com- nancial stress used to calculate the position and concentrations. stressed VaR-based measure to the (ii) If a Board-regulated institution composition and directional bias of its calculates an incremental risk measure current portfolio; and for a portfolio of debt or equity posi- (ii) The Board-regulated institution’s tions under section 208 of this subpart, process for selecting, reviewing, and the Board-regulated institution is not updating the period of significant fi- required to capture default and credit nancial stress used to calculate the migration risks in its internal models stressed VaR-based measure and for used to measure the specific risk of monitoring the appropriateness of the those portfolios. period to the Board-regulated institu- (2) Specific risk fully modeled for one or tion’s current portfolio. more portfolios. If the Board-regulated (4) Nothing in this section prevents institution’s VaR-based measure cap- the Board from requiring a Board-regu- tures all material aspects of specific lated institution to use a different pe- risk for one or more of its portfolios of riod of significant financial stress in debt, equity, or correlation trading po- the calculation of the stressed VaR- sitions, the Board-regulated institution based measure. has no specific risk add-on for those portfolios for purposes of paragraph § 217.207 Specific risk. (a)(2)(iii) of § 217.204. (a) General requirement. A Board-regu- (c) Specific risk not modeled. (1) If the lated institution must use one of the Board-regulated institution’s VaR- methods in this section to measure the based measure does not capture all ma- specific risk for each of its debt, eq- terial aspects of specific risk for a uity, and securitization positions with portfolio of debt, equity, or correlation specific risk. trading positions, the Board-regulated (b) Modeled specific risk. A Board-reg- institution must calculate a specific- ulated institution may use models to risk add-on for the portfolio under the measure the specific risk of covered po- standardized measurement method as sitions as provided in paragraph (a) of described in § 217.210. section 205 of this subpart (therefore, (2) A Board-regulated institution excluding securitization positions that must calculate a specific risk add-on are not modeled under section 209 of under the standardized measurement

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method as described in § 217.210 for all sistent with the liquidity horizons of of its securitization positions that are the positions in the portfolio. The li- not modeled under § 217.209. quidity horizon of a position or set of positions is the time required for a § 217.208 Incremental risk. Board-regulated institution to reduce (a) General requirement. A Board-regu- its exposure to, or hedge all of its ma- lated institution that measures the terial risks of, the position(s) in a specific risk of a portfolio of debt posi- stressed market. The liquidity horizon tions under § 217.207(b) using internal for a position or set of positions may models must calculate at least weekly not be less than the shorter of three an incremental risk measure for that months or the contractual maturity of portfolio according to the require- the position. ments in this section. The incremental (ii) A constant position assumption risk measure is the Board-regulated in- means that the Board-regulated insti- stitution’s measure of potential losses tution maintains the same set of posi- due to incremental risk over a one-year tions throughout the one-year horizon. time horizon at a one-tail, 99.9 percent If a Board-regulated institution uses confidence level, either under the as- this assumption, it must do so consist- sumption of a constant level of risk, or ently across all portfolios. under the assumption of constant posi- tions. With the prior approval of the (iii) A Board-regulated institution’s Board, a Board-regulated institution selection of a constant position or a may choose to include portfolios of eq- constant risk assumption must be con- uity positions in its incremental risk sistent between the Board-regulated in- model, provided that it consistently in- stitution’s incremental risk model and cludes such equity positions in a man- its comprehensive risk model described ner that is consistent with how the in section 209 of this subpart, if appli- Board-regulated institution internally cable. measures and manages the incremental (iv) A Board-regulated institution’s risk of such positions at the portfolio treatment of liquidity horizons must level. If equity positions are included be consistent between the Board-regu- in the model, for modeling purposes de- lated institution’s incremental risk fault is considered to have occurred model and its comprehensive risk upon the default of any debt of the model described in section 209, if appli- issuer of the equity position. A Board- cable. regulated institution may not include (2) Recognize the impact of correla- correlation trading positions or tions between default and migration securitization positions in its incre- events among obligors. mental risk measure. (3) Reflect the effect of issuer and (b) Requirements for incremental risk market concentrations, as well as con- modeling. For purposes of calculating centrations that can arise within and the incremental risk measure, the in- across product classes during stressed cremental risk model must: conditions. (1) Measure incremental risk over a (4) Reflect netting only of long and one-year time horizon and at a one- short positions that reference the same tail, 99.9 percent confidence level, ei- financial instrument. ther under the assumption of a con- (5) Reflect any material mismatch stant level of risk, or under the as- between a position and its hedge. sumption of constant positions. (i) A constant level of risk assump- (6) Recognize the effect that liquidity tion means that the Board-regulated horizons have on dynamic hedging institution rebalances, or rolls over, its strategies. In such cases, a Board-regu- trading positions at the beginning of lated institution must: each liquidity horizon over the one- (i) Choose to model the rebalancing year horizon in a manner that main- of the hedge consistently over the rel- tains the Board-regulated institution’s evant set of trading positions; initial risk level. The Board-regulated (ii) Demonstrate that the inclusion of institution must determine the fre- rebalancing results in a more appro- quency of rebalancing in a manner con- priate risk measurement;

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(iii) Demonstrate that the market for of the model through the results of on- the hedge is sufficiently liquid to per- going model validation efforts includ- mit rebalancing during periods of ing robust benchmarking, the greater stress; and of: (iv) Capture in the incremental risk (A) The Board-regulated institution’s model any residual risks arising from modeled measure of all price risk de- such hedging strategies. termined according to the require- (7) Reflect the nonlinear impact of ments in paragraph (b) of this section; options and other positions with mate- or rial nonlinear behavior with respect to (B) The total specific risk add-on default and migration changes. that would apply to the bank’s modeled (8) Maintain consistency with the correlation trading positions as cal- Board-regulated institution’s internal culated under section 210 of this sub- risk management methodologies for part multiplied by 8.0 percent. identifying, measuring, and managing (b) Requirements for modeling all price risk. risk. If a Board-regulated institution (c) Calculation of incremental risk cap- uses an internal model to measure the ital requirement. The incremental risk price risk of a portfolio of correlation capital requirement is the greater of: trading positions: (1) The average of the incremental (1) The internal model must measure risk measures over the previous 12 comprehensive risk over a one-year weeks; or time horizon at a one-tail, 99.9 percent (2) The most recent incremental risk confidence level, either under the as- measure. sumption of a constant level of risk, or under the assumption of constant posi- § 217.209 Comprehensive risk. tions. (a) General requirement. (1) Subject to (2) The model must capture all mate- the prior approval of the Board, a rial price risk, including but not lim- Board-regulated institution may use ited to the following: the method in this section to measure (i) The risks associated with the con- comprehensive risk, that is, all price tractual structure of cash flows of the risk, for one or more portfolios of cor- position, its issuer, and its underlying relation trading positions. exposures; (2) A Board-regulated institution (ii) Credit spread risk, including non- that measures the price risk of a port- linear price risks; folio of correlation trading positions (iii) The volatility of implied correla- using internal models must calculate tions, including nonlinear price risks at least weekly a comprehensive risk such as the cross-effect between measure that captures all price risk ac- spreads and correlations; cording to the requirements of this sec- (iv) Basis risk; tion. The comprehensive risk measure (v) Recovery rate volatility as it re- is either: lates to the propensity for recovery (i) The sum of: rates to affect tranche prices; and (A) The Board-regulated institution’s (vi) To the extent the comprehensive modeled measure of all price risk de- risk measure incorporates the benefits termined according to the require- of dynamic hedging, the static nature ments in paragraph (b) of this section; of the hedge over the liquidity horizon and must be recognized. In such cases, a (B) A surcharge for the Board-regu- Board-regulated institution must: lated institution’s modeled correlation (A) Choose to model the rebalancing trading positions equal to the total of the hedge consistently over the rel- specific risk add-on for such positions evant set of trading positions; as calculated under section 210 of this (B) Demonstrate that the inclusion of subpart multiplied by 8.0 percent; or rebalancing results in a more appro- (ii) With approval of the Board and priate risk measurement; provided the Board-regulated institu- (C) Demonstrate that the market for tion has met the requirements of this the hedge is sufficiently liquid to per- section for a period of at least one year mit rebalancing during periods of and can demonstrate the effectiveness stress; and

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(D) Capture in the comprehensive specific risk add-on for each portfolio risk model any residual risks arising of debt and equity positions for which from such hedging strategies; the Board-regulated institution’s VaR- (3) The Board-regulated institution based measure does not capture all ma- must use market data that are rel- terial aspects of specific risk and for evant in representing the risk profile of all securitization positions that are not the Board-regulated institution’s cor- modeled under § 217.209. A Board-regu- relation trading positions in order to lated institution must calculate each ensure that the Board-regulated insti- specific risk add-on in accordance with tution fully captures the material risks the requirements of this section. Not- of the correlation trading positions in withstanding any other definition or its comprehensive risk measure in ac- requirement in this subpart, a position cordance with this section; and that would have qualified as a debt po- (4) The Board-regulated institution sition or an equity position but for the must be able to demonstrate that its fact that it qualifies as a correlation model is an appropriate representation trading position under paragraph (2) of of comprehensive risk in light of the the definition of correlation trading historical price variation of its correla- position in § 217.2, shall be considered a tion trading positions. debt position or an equity position, re- (c) Requirements for stress testing. (1) A spectively, for purposes of this section Board-regulated institution must at 210 of this subpart. least weekly apply specific, super- (1) The specific risk add-on for an in- visory stress scenarios to its portfolio dividual debt or securitization position of correlation trading positions that that represents sold credit protection capture changes in: is capped at the notional amount of the (i) Default rates; (ii) Recovery rates; credit derivative contract. The specific (iii) Credit spreads; risk add-on for an individual debt or (iv) Correlations of underlying expo- securitization position that represents sures; and purchased credit protection is capped (v) Correlations of a correlation trad- at the current fair value of the trans- ing position and its hedge. action plus the absolute value of the (2) Other requirements. (i) A Board- present value of all remaining pay- regulated institution must retain and ments to the protection seller under make available to the Board the re- the transaction. This sum is equal to sults of the supervisory stress testing, the value of the protection leg of the including comparisons with the capital transaction. requirements generated by the Board- (2) For debt, equity, or securitization regulated institution’s comprehensive positions that are derivatives with lin- risk model. ear payoffs, a Board-regulated institu- (ii) A Board-regulated institution tion must assign a specific risk- must report to the Board promptly any weighting factor to the fair value of instances where the stress tests indi- the effective notional amount of the cate any material deficiencies in the underlying instrument or index port- comprehensive risk model. folio, except for a securitization posi- (d) Calculation of comprehensive risk tion for which the Board-regulated in- capital requirement. The comprehensive stitution directly calculates a specific risk capital requirement is the greater risk add-on using the SFA in paragraph of: (b)(2)(vii)(B) of this section. A swap (1) The average of the comprehensive must be included as an effective no- risk measures over the previous 12 tional position in the underlying in- weeks; or strument or portfolio, with the receiv- (2) The most recent comprehensive ing side treated as a long position and risk measure. the paying side treated as a short posi- tion. For debt, equity, or securitization § 217.210 Standardized measurement positions that are derivatives with method for specific risk. nonlinear payoffs, a Board-regulated (a) General requirement. A Board-regu- institution must risk weight the fair lated institution must calculate a total value of the effective notional amount

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of the underlying instrument or port- (iii) There is an exact match between folio multiplied by the derivative’s the currency of the credit derivative delta. hedge and the debt or securitization (3) For debt, equity, or securitization position; and positions, a Board-regulated institu- (iv) There is either an exact match tion may net long and short positions between the maturity date of the cred- (including derivatives) in identical it derivative hedge and the maturity issues or identical indices. A Board- date of the debt or securitization posi- regulated institution may also net po- tion; or, in the case where the credit sitions in depositary receipts against derivative hedge has a standard matu- an opposite position in an identical eq- rity date: uity in different markets, provided (A) The maturity date of the credit that the Board-regulated institution derivative hedge is within 30 business includes the costs of conversion. days of the maturity date of the debt (4) A set of transactions consisting of or securitization position; or either a debt position and its credit de- (B) For purchased credit protection, rivative hedge or a securitization posi- the maturity date of the credit deriva- tion and its credit derivative hedge has tive hedge is later than the maturity a specific risk add-on of zero if: date of the debt or securitization posi- (i) The debt or securitization position tion, but is no later than the standard is fully hedged by a total return swap maturity date for that instrument that (or similar instrument where there is a immediately follows the maturity date matching of swap payments and of the debt or securitization position. changes in fair value of the debt or The maturity date of the credit deriva- securitization position); tive hedge may not exceed the matu- (ii) There is an exact match between rity date of the debt or securitization the reference obligation of the swap position by more than 90 calendar days. and the debt or securitization position; (6) The specific risk add-on for a set (iii) There is an exact match between of transactions consisting of either a the currency of the swap and the debt debt position and its credit derivative or securitization position; and hedge or a securitization position and (iv) There is either an exact match its credit derivative hedge that does between the maturity date of the swap not meet the criteria of either para- and the maturity date of the debt or graph (a)(4) or (a)(5) of this section, but securitization position; or, in cases in which all or substantially all of the where a total return swap references a price risk has been hedged, is equal to portfolio of positions with different the specific risk add-on for the side of maturity dates, the total return swap the transaction with the higher spe- maturity date must match the matu- cific risk add-on. rity date of the underlying asset in (b) Debt and securitization positions. (1) that portfolio that has the latest matu- The total specific risk add-on for a rity date. portfolio of debt or securitization posi- (5) The specific risk add-on for a set tions is the sum of the specific risk of transactions consisting of either a add-ons for individual debt or debt position and its credit derivative securitization positions, as computed hedge or a securitization position and under this section. To determine the its credit derivative hedge that does specific risk add-on for individual debt not meet the criteria of paragraph or securitization positions, a Board- (a)(4) of this section is equal to 20.0 per- regulated institution must multiply cent of the capital requirement for the the absolute value of the current fair side of the transaction with the higher value of each net long or net short debt specific risk add-on when: or securitization position in the port- (i) The credit risk of the position is folio by the appropriate specific risk- fully hedged by a credit default swap or weighting factor as set forth in para- similar instrument; graphs (b)(2)(i) through (b)(2)(vii) of (ii) There is an exact match between this section. the reference obligation of the credit (2) For the purpose of this section, derivative hedge and the debt or the appropriate specific risk-weighting securitization position; factors include:

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(i) Sovereign debt positions. (A) In ac- there is no CRC applicable to the sov- cordance with Table 1 to § 217.210, a ereign, based on whether the sovereign Board-regulated institution must as- entity is a member of the OECD. Not- sign a specific risk-weighting factor to withstanding any other provision in a sovereign debt position based on the this subpart, sovereign debt positions CRC applicable to the sovereign, and, that are backed by the full faith and as applicable, the remaining contrac- credit of the United States are treated tual maturity of the position, or if as having a CRC of 0.

TABLE 1 TO § 217.210—SPECIFIC RISK-WEIGHTING FACTORS FOR SOVEREIGN DEBT POSITIONS

Specific risk-weighting factor (in percent)

CRC: 0–1 ...... 0.0

2–3 ...... Remaining contractual maturity of 6 months or less .. 0.25 Remaining contractual maturity of greater than 6 and 1.0 up to and including 24 months. Remaining contractual maturity exceeds 24 months 1.6

4–6 ...... 8.0

7 ...... 12.0

OECD Member with No CRC ...... 0.0

Non-OECD Member with No CRC ...... 8.0

Sovereign Default ...... 12.0

(B) Notwithstanding paragraph vided in paragraph (b)(2)(i)(C) of this (b)(2)(i)(A) of this section, a Board-reg- section. ulated institution may assign to a sov- (E) A Board-regulated institution ereign debt position a specific risk- must assign an 8.0 percent specific weighting factor that is lower than the risk-weighting factor to a sovereign applicable specific risk-weighting fac- debt position if the sovereign is not a tor in Table 1 to § 217.210 if: member of the OECD and does not have (1) The position is denominated in a CRC assigned to it, except as pro- the sovereign entity’s currency; vided in paragraph (b)(2)(i)(C) of this (2) The Board-regulated institution section. has at least an equivalent amount of li- (ii) Certain supranational entity and abilities in that currency; and multilateral development bank debt posi- tions. A Board-regulated institution (3) The sovereign entity allows banks may assign a 0.0 percent specific risk- under its jurisdiction to assign the weighting factor to a debt position lower specific risk-weighting factor to that is an exposure to the Bank for the same exposures to the sovereign International Settlements, the Euro- entity. pean Central Bank, the European Com- (C) A Board-regulated institution mission, the International Monetary must assign a 12.0 percent specific risk- Fund, or an MDB. weighting factor to a sovereign debt (iii) GSE debt positions. A Board-regu- position immediately upon determina- lated institution must assign a 1.6 per- tion a default has occurred; or if a de- cent specific risk-weighting factor to a fault has occurred within the previous debt position that is an exposure to a five years. GSE. Notwithstanding the foregoing, a (D) A Board-regulated institution Board-regulated institution must as- must assign a 0.0 percent specific risk- sign an 8.0 percent specific risk- weighting factor to a sovereign debt weighting factor to preferred stock position if the sovereign entity is a issued by a GSE. member of the OECD and does not have (iv) Depository institution, foreign a CRC assigned to it, except as pro- bank, and credit union debt positions. (A)

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Except as provided in paragraph corresponds to that entity’s home (b)(2)(iv)(B) of this section, a Board- country or the OECD membership sta- regulated institution must assign a tus of that entity’s home country if specific risk-weighting factor to a debt there is no CRC applicable to the enti- position that is an exposure to a depos- ty’s home country, and, as applicable, itory institution, a foreign bank, or a the remaining contractual maturity of credit union, in accordance with Table the position. 2 to § 217.210, based on the CRC that

TABLE 2 TO § 217.210—SPECIFIC RISK-WEIGHTING FACTORS FOR DEPOSITORY INSTITUTION, FOREIGN BANK, AND CREDIT UNION DEBT POSITIONS

Specific risk-weighting factor (in percent)

CRC 0–2 or OECD Member with No CRC ...... Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and 1.0 up to and including 24 months. Remaining contractual maturity exceeds 24 months 1.6

CRC 3 ...... 8.0

CRC 4–7 ...... 12.0

Non-OECD Member with No CRC ...... 8.0

Sovereign Default ...... 12.0

(B) A Board-regulated institution the OECD membership status of the must assign a specific risk-weighting PSE’s home country if there is no CRC factor of 8.0 percent to a debt position applicable to the PSE’s home country, that is an exposure to a depository in- and, as applicable, the remaining con- stitution or a foreign bank that is in- tractual maturity of the position, as cludable in the depository institution’s set forth in Tables 3 and 4 of this sec- or foreign bank’s regulatory capital tion. and that is not subject to deduction as (B) A Board-regulated institution a reciprocal holding under § 217.22. may assign a lower specific risk- (C) A Board-regulated institution weighting factor than would otherwise must assign a 12.0 percent specific risk- apply under Tables 3 and 4 of this sec- weighting factor to a debt position tion to a debt position that is an expo- that is an exposure to a foreign bank sure to a foreign PSE if: immediately upon determination that (1) The PSE’s home country allows a default by the foreign bank’s home banks under its jurisdiction to assign a country has occurred or if a default by lower specific risk-weighting factor to the foreign bank’s home country has such position; and occurred within the previous five (2) The specific risk-weighting factor years. is not lower than the risk weight that (v) PSE debt positions. (A) Except as corresponds to the PSE’s home country provided in paragraph (b)(2)(v)(B) of in accordance with Tables 3 and 4 of this section, a Board-regulated institu- this section. tion must assign a specific risk- (C) A Board-regulated institution weighting factor to a debt position must assign a 12.0 percent specific risk- that is an exposure to a PSE in accord- weighting factor to a PSE debt posi- ance with Tables 3 and 4 to § 217.210 de- tion immediately upon determination pending on the position’s categoriza- that a default by the PSE’s home coun- tion as a general obligation or revenue try has occurred or if a default by the obligation based on the CRC that cor- PSE’s home country has occurred with- responds to the PSE’s home country or in the previous five years.

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TABLE 3 TO § 217.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE GENERAL OBLIGATION DEBT POSITIONS

General obligation specific risk-weighting factor (in percent)

CRC 0–2 or OECD Member with No CRC ...... Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and 1.0 up to and including 24 months. Remaining contractual maturity exceeds 24 months 1.6

CRC 3 ...... 8.0

CRC 4–7 ...... 12.0

Non-OECD Member with No CRC ...... 8.0

Sovereign Default ...... 12.0

TABLE 4 TO § 217.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE REVENUE OBLIGATION DEBT POSITIONS

Revenue obligation specific risk-weighting factor (in percent)

CRC 0–1 or OECD Member with No CRC ...... Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and 1.0 up to and including 24 months. Remaining contractual maturity exceeds 24 months 1.6

CRC 2–3 ...... 8.0

CRC 4–7 ...... 12.0

Non-OECD Member with No CRC ...... 8.0

Sovereign Default ...... 12.0

(vi) Corporate debt positions. Except as and outstanding publicly traded instru- otherwise provided in paragraph ments, a Board-regulated institution (b)(2)(vi)(B) of this section, a Board- must assign a specific risk-weighting regulated institution must assign a factor based on the category and re- specific risk-weighting factor to a cor- maining contractual maturity of the porate debt position in accordance with position, in accordance with Table 5 to the investment grade methodology in § 217.210. For purposes of this paragraph paragraph (b)(2)(vi)(A) of this section. (b)(2)(vi)(A)(1), the Board-regulated in- (A) Investment grade methodology. (1) stitution must determine whether the For corporate debt positions that are position is in the investment grade or exposures to entities that have issued not investment grade category.

TABLE 5 TO § 217.210—SPECIFIC RISK-WEIGHTING FACTORS FOR CORPORATE DEBT POSITIONS UNDER THE INVESTMENT GRADE METHODOLOGY

Specific risk- Category Remaining contractual maturity weighting factor (in percent)

Investment Grade ...... 6 months or less ...... 0.50 Greater than 6 and up to and including 24 months ... 2.00 Greater than 24 months ...... 4.00

Non-investment Grade ...... 12.00

(2) A Board-regulated institution debt positions that are exposures to en- must assign an 8.0 percent specific tities that do not have publicly traded risk-weighting factor for corporate instruments outstanding.

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(B) Limitations. (1) A Board-regulated the position equal to the risk-based institution must assign a specific risk- capital requirement as calculated weighting factor of at least 8.0 percent under § 217.143. to an interest-only mortgage-backed (C) SSFA. To use the SSFA to deter- security that is not a securitization po- mine the specific risk-weighting factor sition. for a securitization position, a Board- (2) A Board-regulated institution regulated institution must calculate shall not assign a corporate debt posi- the specific risk-weighting factor in ac- tion a specific risk-weighting factor cordance with § 217.211. that is lower than the specific risk- (D) Nth-to-default credit derivatives. A weighting factor that corresponds to Board-regulated institution must de- the CRC of the issuer’s home country, termine a specific risk add-on using if applicable, in table 1 of this section. the SFA in paragraph (b)(2)(vii)(B) of (vii) Securitization positions. (A) Gen- this section, or assign a specific risk- eral requirements. (1) A Board-regu- weighting factor using the SSFA in lated institution that is not an ad- paragraph (b)(2)(vii)(C) of this section vanced approaches Board-regulated in- to an nth-to-default credit derivative in stitution must assign a specific risk- accordance with this paragraph weighting factor to a securitization po- (b)(2)(vii)(D), regardless of whether the sition using either the simplified su- Board-regulated institution is a net pervisory formula approach (SSFA) in protection buyer or net protection sell- paragraph (b)(2)(vii)(C) of this section er. A Board-regulated institution must (and § 217.211) or assign a specific risk- determine its position in the nth-to-de- weighting factor of 100 percent to the fault credit derivative as the largest position. notional amount of all the underlying (2) A Board-regulated institution exposures. that is an advanced approaches Board- (1) For purposes of determining the regulated institution must calculate a specific risk add-on using the SFA in specific risk add-on for a securitization paragraph (b)(2)(vii)(B) of this section position in accordance with paragraph or the specific risk-weighting factor for (b)(2)(vii)(B) of this section if the an nth-to-default credit derivative using Board-regulated institution and the the SSFA in paragraph (b)(2)(vii)(C) of securitization position each qualifies this section the Board-regulated insti- to use the SFA in § 217.143. A Board-reg- tution must calculate the attachment ulated institution that is an advanced point and detachment point of its posi- approaches Board-regulated institution tion as follows: with a securitization position that does (i) The attachment point (parameter not qualify for the SFA under para- A) is the ratio of the sum of the no- graph (b)(2)(vii)(B) of this section may tional amounts of all underlying expo- assign a specific risk-weighting factor sures that are subordinated to the to the securitization position using the Board-regulated institution’s position SSFA in accordance with paragraph to the total notional amount of all un- (b)(2)(vii)(C) of this section or assign a derlying exposures. For purposes of the specific risk-weighting factor of 100 SSFA, parameter A is expressed as a percent to the position. decimal value between zero and one. (3) A Board-regulated institution For purposes of using the SFA in para- must treat a short securitization posi- graph (b)(2)(vii)(B) of this section to tion as if it is a long securitization po- calculate the specific add-on for its po- sition solely for calculation purposes sition in an nth-to-default credit deriva- when using the SFA in paragraph tive, parameter A must be set equal to (b)(2)(vii)(B) of this section or the the credit enhancement level (L) input SSFA in paragraph (b)(2)(vii)(C) of this to the SFA formula in section 143 of section. this subpart. In the case of a first-to- (B) SFA. To calculate the specific default credit derivative, there are no risk add-on for a securitization posi- underlying exposures that are subordi- tion using the SFA, a Board-regulated nated to the Board-regulated institu- institution that is an advanced ap- tion’s position. In the case of a second- proaches Board-regulated institution or-subsequent-to-default credit deriva- must set the specific risk add-on for tive, the smallest (n-1) notional

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amounts of the underlying exposure(s) each net short securitization position are subordinated to the Board-regu- calculated under this section. lated institution’s position. (e) Equity positions. The total specific (ii) The detachment point (parameter risk add-on for a portfolio of equity po- D) equals the sum of parameter A plus sitions is the sum of the specific risk the ratio of the notional amount of the add-ons of the individual equity posi- Board-regulated institution’s position tions, as computed under this section. in the nth-to-default credit derivative to To determine the specific risk add-on the total notional amount of all under- of individual equity positions, a Board- lying exposures. For purposes of the regulated institution must multiply SSFA, parameter A is expressed as a the absolute value of the current fair decimal value between zero and one. value of each net long or net short eq- For purposes of using the SFA in para- uity position by the appropriate spe- graph (b)(2)(vii)(B) of this section to cific risk-weighting factor as deter- calculate the specific risk add-on for mined under this paragraph (e): (1) The Board-regulated institution its position in an nth-to-default credit must multiply the absolute value of derivative, parameter D must be set to the current fair value of each net long equal the L input plus the thickness of or net short equity position by a spe- tranche T input to the SFA formula in cific risk-weighting factor of 8.0 per- § 217.143 of this subpart. cent. For equity positions that are (2) A Board-regulated institution index contracts comprising a well-di- that does not use the SFA in paragraph versified portfolio of equity instru- (b)(2)(vii)(B) of this section to deter- ments, the absolute value of the cur- mine a specific risk-add on, or the rent fair value of each net long or net SSFA in paragraph (b)(2)(vii)(C) of this short position is multiplied by a spe- section to determine a specific risk- cific risk-weighting factor of 2.0 per- weighting factor for its position in an cent.33 nth-to-default credit derivative must as- (2) For equity positions arising from sign a specific risk-weighting factor of the following futures-related arbitrage 100 percent to the position. strategies, a Board-regulated institu- (c) Modeled correlation trading posi- tion may apply a 2.0 percent specific tions. For purposes of calculating the risk-weighting factor to one side (long comprehensive risk measure for mod- or short) of each position with the op- eled correlation trading positions posite side exempt from an additional under either paragraph (a)(2)(i) or capital requirement: (a)(2)(ii) of § 217.209, the total specific (i) Long and short positions in ex- risk add-on is the greater of: actly the same index at different dates (1) The sum of the Board-regulated or in different market centers; or institution’s specific risk add-ons for (ii) Long and short positions in index each net long correlation trading posi- contracts at the same date in different, tion calculated under this section; or but similar indices. (2) The sum of the Board-regulated (3) For futures contracts on main in- institution’s specific risk add-ons for dices that are matched by offsetting each net short correlation trading posi- positions in a basket of stocks com- tion calculated under this section. prising the index, a Board-regulated in- (d) Non-modeled securitization posi- stitution may apply a 2.0 percent spe- tions. For securitization positions that cific risk-weighting factor to the fu- are not correlation trading positions tures and stock basket positions (long and for securitizations that are cor- and short), provided that such trades are deliberately entered into and sepa- relation trading positions not modeled rately controlled, and that the basket under § 217.209, the total specific risk of stocks is comprised of stocks rep- add-on is the greater of: resenting at least 90.0 percent of the (1) The sum of the Board-regulated institution’s specific risk add-ons for 33 each net long securitization position A portfolio is well-diversified if it con- tains a large number of individual equity po- calculated under this section; or sitions, with no single position representing (2) The sum of the Board-regulated a substantial portion of the portfolio’s total institution’s specific risk add-ons for fair value.

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capitalization of the index. A main (C) Relevant market data of the index refers to the Standard & Poor’s securitization, for example, bid-ask 500 Index, the FTSE All-World Index, spreads, most recent sales price and and any other index for which the historical price volatility, trading vol- Board-regulated institution can dem- ume, implied market rating, and size, onstrate to the satisfaction of the depth and concentration level of the Board that the equities represented in market for the securitization; and the index have liquidity, depth of mar- (D) For resecuritization positions, ket, and size of bid-ask spreads com- performance information on the under- parable to equities in the Standard & lying securitization exposures, for ex- Poor’s 500 Index and FTSE All-World ample, the issuer name and credit qual- Index. ity, and the characteristics and per- (f) Due diligence requirements for formance of the exposures underlying securitization positions. (1) A Board-reg- the securitization exposures. ulated institution must demonstrate to (ii) On an on-going basis (no less fre- the satisfaction of the Board a com- quently than quarterly), evaluating, prehensive understanding of the fea- reviewing, and updating as appropriate tures of a securitization position that the analysis required under paragraph would materially affect the perform- (f)(1) of this section for each ance of the position by conducting and securitization position. documenting the analysis set forth in [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as paragraph (f)(2) of this section. The amended at 79 FR 78295, Dec. 30, 2014] Board-regulated institution’s analysis must be commensurate with the com- § 217.211 Simplified supervisory for- plexity of the securitization position mula approach (SSFA). and the materiality of the position in (a) General requirements. To use the relation to capital. SSFA to determine the specific risk- (2) A Board-regulated institution weighting factor for a securitization must demonstrate its comprehensive position, a Board-regulated institution understanding for each securitization must have data that enables it to as- position by: sign accurately the parameters de- (i) Conducting an analysis of the risk scribed in paragraph (b) of this section. characteristics of a securitization posi- Data used to assign the parameters de- tion prior to acquiring the position and scribed in paragraph (b) of this section document such analysis within three must be the most currently available business days after acquiring position, data; if the contracts governing the un- considering: derlying exposures of the securitization (A) Structural features of the require payments on a monthly or securitization that would materially quarterly basis, the data used to assign impact the performance of the posi- the parameters described in paragraph tion, for example, the contractual cash (b) of this section must be no more flow waterfall, waterfall-related trig- than 91 calendar days old. A Board-reg- gers, credit enhancements, liquidity ulated institution that does not have enhancements, fair value triggers, the the appropriate data to assign the pa- performance of organizations that serv- rameters described in paragraph (b) of ice the position, and deal-specific defi- this section must assign a specific risk- nitions of default; weighting factor of 100 percent to the (B) Relevant information regarding position. the performance of the underlying (b) SSFA parameters. To calculate the credit exposure(s), for example, the specific risk-weighting factor for a percentage of loans 30, 60, and 90 days securitization position using the SSFA, past due; default rates; prepayment a Board-regulated institution must rates; loans in foreclosure; property have accurate information on the five types; occupancy; average credit score inputs to the SSFA calculation de- or other measures of creditworthiness; scribed in paragraphs (b)(1) through average loan-to-value ratio; and indus- (b)(5) of this section. try and geographic diversification data (1) KG is the weighted-average (with on the underlying exposure(s); unpaid principal used as the weight for

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each exposure) total capital require- rameter A is expressed as a decimal ment of the underlying exposures cal- value between zero and one. culated using subpart D. KG is ex- (4) Parameter D is the detachment pressed as a decimal value between point for the position, which represents zero and one (that is, an average risk the threshold at which credit losses of weight of 100 percent represents a value principal allocated to the position of KG equal to 0.08). would result in a total loss of principal. (2) Parameter W is expressed as a Except as provided in decimal value between zero and one. § 217.210(b)(2)(vii)(D) for nth-to-default Parameter W is the ratio of the sum of credit derivatives, parameter D equals the dollar amounts of any underlying parameter A plus the ratio of the cur- exposures of the securitization that rent dollar amount of the meet any of the criteria as set forth in securitization positions that are pari paragraphs (b)(2)(i) through (vi) of this passu with the position (that is, have section to the balance, measured in equal seniority with respect to credit dollars, of underlying exposures: risk) to the current dollar amount of (i) Ninety days or more past due; the underlying exposures. Parameter D (ii) Subject to a bankruptcy or insol- is expressed as a decimal value between vency proceeding; zero and one. (iii) In the process of foreclosure; (5) A supervisory calibration param- (iv) Held as real estate owned; eter, p, is equal to 0.5 for securitization (v) Has contractually deferred pay- positions that are not resecuritization ments for 90 days or more, other than positions and equal to 1.5 for principal or interest payments deferred resecuritization positions. on: (c) Mechanics of the SSFA. KG and W (A) Federally-guaranteed student are used to calculate KA, the aug- loans, in accordance with the terms of mented value of KG, which reflects the those guarantee programs; or observed credit quality of the under- (B) Consumer loans, including non- lying exposures. KA is defined in para- federally-guaranteed student loans, graph (d) of this section. The values of provided that such payments are de- parameters A and D, relative to KA de- ferred pursuant to provisions included termine the specific risk-weighting fac- in the contract at the time funds are tor assigned to a position as described disbursed that provide for period(s) of in this paragraph (c) and paragraph (d) deferral that are not initiated based on of this section. The specific risk- changes in the creditworthiness of the weighting factor assigned to a borrower; or securitization position, or portion of a (vi) Is in default. position, as appropriate, is the larger (3) Parameter A is the attachment of the specific risk-weighting factor de- point for the position, which represents termined in accordance with this para- the threshold at which credit losses graph (c), paragraph (d) of this section, will first be allocated to the position. and a specific risk-weighting factor of Except as provided in 1.6 percent. § 217.210(b)(2)(vii)(D) for nth-to-default (1) When the detachment point, pa- credit derivatives, parameter A equals rameter D, for a securitization position the ratio of the current dollar amount is less than or equal to KA, the position of underlying exposures that are subor- must be assigned a specific risk- dinated to the position of the Board- weighting factor of 100 percent. regulated institution to the current (2) When the attachment point, pa- dollar amount of underlying exposures. rameter A, for a securitization position Any reserve account funded by the ac- is greater than or equal to KA, the cumulated cash flows from the under- Board-regulated institution must cal- lying exposures that is subordinated to culate the specific risk-weighting fac- the position that contains the Board- tor in accordance with paragraph (d) of regulated institution’s securitization this section. exposure may be included in the cal- (3) When A is less than KA and D is culation of parameter A to the extent greater than KA, the specific risk- that cash is present in the account. Pa- weighting factor is a weighted-average

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of 1.00 and KSSFA calculated under para- tion. For the purpose of this calcula- graphs (c)(3)(i) and (c)(3)(ii) of this sec- tion: (i) The weight assigned to 1.00 equals

§ 217.212 Market risk disclosures. Board-regulated institution’s capital adequacy and risk profile, then a brief (a) Scope. A Board-regulated institu- discussion of this change and its likely tion must comply with this section un- impact must be provided as soon as less it is a consolidated subsidiary of a bank holding company or a depository practicable thereafter. Qualitative dis- institution that is subject to these re- closures that typically do not change quirements or of a non-U.S. banking each quarter may be disclosed annu- organization that is subject to com- ally, provided any significant changes parable public disclosure requirements are disclosed in the interim. If a Board- in its home jurisdiction. A Board-regu- regulated institution believes that dis- lated institution must make timely closure of specific commercial or finan- public disclosures each calendar quar- cial information would prejudice seri- ter. If a significant change occurs, such ously its position by making public that the most recent reporting certain information that is either pro- amounts are no longer reflective of the prietary or confidential in nature, the

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Board-regulated institution is not re- the reporting period and the incre- quired to disclose these specific items, mental risk capital requirement at pe- but must disclose more general infor- riod-end; mation about the subject matter of the (iv) The high, low, and mean com- requirement, together with the fact prehensive risk capital requirements that, and the reason why, the specific over the reporting period and the com- items of information have not been dis- prehensive risk capital requirement at closed. The Board-regulated institu- period-end, with the period-end re- tion’s management may provide all of quirement broken down into appro- the disclosures required by this section priate risk classifications (for example, in one place on the Board-regulated in- default risk, migration risk, correla- stitution’s public Web site or may pro- tion risk); vide the disclosures in more than one (v) Separate measures for interest public financial report or other regu- rate risk, credit spread risk, equity latory reports, provided that the price risk, foreign exchange risk, and Board-regulated institution publicly provides a summary table specifically commodity price risk used to calculate indicating the location(s) of all such the VaR-based measure; and disclosures. (vi) A comparison of VaR-based esti- (b) Disclosure policy. The Board-regu- mates with actual gains or losses expe- lated institution must have a formal rienced by the Board-regulated institu- disclosure policy approved by the board tion, with an analysis of important of directors that addresses the Board- outliers. regulated institution’s approach for de- (2) In addition, the Board-regulated termining its market risk disclosures. institution must disclose publicly the The policy must address the associated following information at least quar- internal controls and disclosure con- terly: trols and procedures. The board of di- (i) The aggregate amount of on-bal- rectors and senior management must ance sheet and off-balance sheet ensure that appropriate verification of securitization positions by exposure the disclosures takes place and that ef- type; and fective internal controls and disclosure (ii) The aggregate amount of correla- controls and procedures are main- tion trading positions. tained. One or more senior officers of (d) Qualitative disclosures. For each the Board-regulated institution must material portfolio of covered positions, attest that the disclosures meet the re- the Board-regulated institution must quirements of this subpart, and the provide timely public disclosures of the board of directors and senior manage- following information at least annually ment are responsible for establishing after the end of the fourth calendar and maintaining an effective internal quarter, or more frequently in the control structure over financial report- event of material changes for each ing, including the disclosures required portfolio: by this section. (1) The composition of material port- (c) Quantitative disclosures. (1) For folios of covered positions; each material portfolio of covered posi- tions, the Board-regulated institution (2) The Board-regulated institution’s must provide timely public disclosures valuation policies, procedures, and of the following information at least methodologies for covered positions in- quarterly: cluding, for securitization positions, (i) The high, low, and mean VaR- the methods and key assumptions used based measures over the reporting pe- for valuing such positions, any signifi- riod and the VaR-based measure at pe- cant changes since the last reporting riod-end; period, and the impact of such change; (ii) The high, low, and mean stressed (3) The characteristics of the internal VaR-based measures over the reporting models used for purposes of this sub- period and the stressed VaR-based part. For the incremental risk capital measure at period-end; requirement and the comprehensive (iii) The high, low, and mean incre- risk capital requirement, this must in- mental risk capital requirements over clude:

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(i) The approach used by the Board- (8) A description of the Board-regu- regulated institution to determine li- lated institution’s processes for moni- quidity horizons; toring changes in the credit and mar- (ii) The methodologies used to ket risk of securitization positions, in- achieve a capital assessment that is cluding how those processes differ for consistent with the required soundness resecuritization positions; and standard; and (9) A description of the Board-regu- (iii) The specific approaches used in lated institution’s policy governing the the validation of these models; use of credit risk mitigation to miti- (4) A description of the approaches used for validating and evaluating the gate the risks of securitization and accuracy of internal models and mod- resecuritization positions. eling processes for purposes of this sub- part; §§ 217.213–217.299 [Reserved] (5) For each market risk category (that is, interest rate risk, credit Subpart G—Transition Provisions spread risk, equity price risk, foreign exchange risk, and commodity price § 217.300 Transitions. risk), a description of the stress tests (a) Capital conservation and counter- applied to the positions subject to the cyclical capital buffer. (1) From January factor; 1, 2014 through December 31, 2015, a (6) The results of the comparison of Board-regulated institution is not sub- the Board-regulated institution’s inter- ject to limits on distributions and dis- nal estimates for purposes of this sub- cretionary bonus payments under part with actual outcomes during a sample period not used in model devel- § 217.11 of subpart B of this part not- opment; withstanding the amount of its capital (7) The soundness standard on which conservation buffer or any applicable the Board-regulated institution’s inter- countercyclical capital buffer amount. nal capital adequacy assessment under (2) Notwithstanding § 217.11, begin- this subpart is based, including a de- ning January 1, 2016 through December scription of the methodologies used to 31, 2018 a Board-regulated institution’s achieve a capital adequacy assessment maximum payout ratio shall be deter- that is consistent with the soundness mined as set forth in Table 1 to standard; § 217.300.

TABLE 1 TO § 217.300

Maximum payout ratio Transition period Capital conservation buffer (as a percentage of eligible retained income)

Calendar year 2016 Greater than 0.625 percent plus 25 percent of any applicable counter- No payout ratio limitation cyclical capital buffer amount and 25 percent of any applicable GSIB applies under this section. surcharge. Less than or equal to 0.625 percent plus 25 percent of any applicable 60 percent. countercyclical capital buffer amount and 25 percent of any applicable GSIB surcharge, and greater than 0.469 percent plus 17.25 percent of any applicable countercyclical capital buffer amount and 17.25 percent of any applicable GSIB surcharge. Less than or equal to 0.469 percent plus 17.25 percent of any applicable 40 percent. countercyclical capital buffer amount and 17.25 percent of any applica- ble GSIB surcharge, and greater than 0.313 percent plus 12.5 percent of any applicable countercyclical capital buffer amount and 12.5 percent of any applicable GSIB surcharge. Less than or equal to 0.313 percent plus 12.5 percent of any applicable 20 percent. countercyclical capital buffer amount and 12.5 percent of any applicable GSIB surcharge, and greater than 0.156 percent plus 6.25 percent of any applicable countercyclical capital buffer amount and 6.25 percent of any applicable GSIB surcharge. Less than or equal to 0.156 percent plus 6.25 percent of any applicable 0 percent. countercyclical capital buffer amount and 6.25 percent of any applicable GSIB surcharge. Calendar year 2017 Greater than 1.25 percent plus 50 percent of any applicable counter- No payout ratio limitation cyclical capital buffer amount and 50 percent of any applicable GSIB applies under this section. surcharge.

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TABLE 1 TO § 217.300—Continued

Maximum payout ratio Transition period Capital conservation buffer (as a percentage of eligible retained income)

Less than or equal to 1.25 percent plus 50 percent of any applicable 60 percent. countercyclical capital buffer amount and 50 percent of any applicable GSIB surcharge, and greater than 0.938 percent plus 37.5 percent of any applicable countercyclical capital buffer amount and 37.5 percent of any applicable GSIB surcharge. Less than or equal to 0.938 percent plus 37.5 percent of any applicable 40 percent. countercyclical capital buffer amount and 37.5 percent of any applicable GSIB surcharge, and greater than 0.625 percent plus 25 percent of any applicable countercyclical capital buffer amount and 25 percent of any applicable GSIB surcharge. Less than or equal to 0.625 percent plus 25 percent of any applicable 20 percent. countercyclical capital buffer amount and 25 percent of any applicable GSIB surcharge, and greater than 0.313 percent plus 12.5 percent of any applicable countercyclical capital buffer amount and 12.5 percent of any applicable GSIB surcharge. Less than or equal to 0.313 percent plus 12.5 percent of any applicable 0 percent. countercyclical capital buffer amount and 12.5 percent of any applicable GSIB surcharge. Calendar year 2018 Greater than 1.875 percent plus 75 percent of any applicable counter- No payout ratio limitation cyclical capital buffer amount and 75 percent of any applicable GSIB applies under this section. surcharge. Less than or equal to 1.875 percent plus 75 percent of any applicable 60 percent. countercyclical capital buffer amount and 75 percent of any applicable GSIB surcharge, and greater than 1.406 percent plus 56.25 percent of any applicable countercyclical capital buffer amount and 56.25 percent of any applicable GSIB surcharge. Less than or equal to 1.406 percent plus 56.25 percent of any applicable 40 percent countercyclical capital buffer amount and 56.25 percent of any applica- ble GSIB surcharge, and greater than 0.938 percent plus 37.5 percent of any applicable countercyclical capital buffer amount and 37.5 percent of any applicable GSIB surcharge. Less than or equal to 0.938 percent plus 37.5 percent of any applicable 20 percent. countercyclical capital buffer amount and 37.5 percent of any applicable GSIB surcharge, and greater than 0.469 percent plus 18.75 percent of any applicable countercyclical capital buffer amount and 18.75 percent of any applicable GSIB surcharge. Less than or equal to 0.469 percent plus 18.75 percent of any applicable 0 percent. countercyclical capital buffer amount and 18.75 percent of any applica- ble GSIB surcharge.

(b) Regulatory capital adjustments and ning January 1, 2015 for a Board-regu- deductions. Beginning January 1, 2014 lated institution that is not an ad- for an advanced approaches Board-reg- vanced approaches Board-regulated in- ulated institution, and beginning Janu- stitution, and in each case through De- ary 1, 2015 for a Board-regulated insti- cember 31, 2017, a Board-regulated in- tution that is not an advanced ap- stitution, must make the deductions proaches Board-regulated institution, required under § 217.22(a)(1)–(7) from and in each case through December 31, common equity tier 1 or tier 1 capital 2017, a Board-regulated institution elements in accordance with the per- must make the capital adjustments centages set forth in Table 2 and Table and deductions in § 217.22 in accordance 3 to § 217.300. with the transition requirements in (i) A Board-regulated institution this paragraph (b). Beginning January must deduct the following items from 1, 2018, a Board-regulated institution common equity tier 1 and additional must make all regulatory capital ad- tier 1 capital in accordance with the justments and deductions in accord- percentages set forth in Table 2 to ance with § 217.22. § 217.300: goodwill (§ 217.22(a)(1)), DTAs (1) Transition deductions from common that arise from net operating loss and equity tier 1 capital. Beginning January tax credit carryforwards (§ 217.22(a)(3)), 1, 2014 for an advanced approaches a gain-on-sale in connection with a Board-regulated institution, and begin- securitization exposure (§ 217.22(a)(4)),

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defined benefit pension fund assets allel run process and that have re- (§ 217.22(a)(5)), expected credit loss that ceived notifications from the Board exceeds eligible credit reserves (for ad- pursuant to § 217.121(d) of subpart E) vanced approaches Board-regulated in- (§ 217.22(a)(6)), and financial subsidi- stitutions that have completed the par- aries (§ 217.22(a)(7)).

TABLE 2 TO § 217.300

Transition deductions Transition deductions under § 217.22(a)(3)–(6) under § 217.22(a)(1) and (7) Transition period Percentage of the Percentage of the Percentage of the deductions from com- deductions from tier 1 deductions from com- mon equity tier 1 capital capital mon equity tier 1 capital

Calendar year 2014 ...... 100 20 80 Calendar year 2015 ...... 100 40 60 Calendar year 2016 ...... 100 60 40 Calendar year 2017 ...... 100 80 20 Calendar year 2018, and thereafter ...... 100 100 0

(ii) A Board-regulated institution (iii) A Board-regulated institution must deduct from common equity tier must apply a 100 percent risk-weight to 1 capital any intangible assets other the aggregate amount of intangible as- than goodwill and MSAs in accordance sets other than goodwill and MSAs with the percentages set forth in Table that are not required to be deducted 3 to § 217.300. from common equity tier 1 capital under this section.

TABLE 3 TO § 217.300

Transition deductions under § 217.22(a)(2)— Transition period percentage of the deductions from common equity tier 1 capital

Calendar year 2014 ...... 20 Calendar year 2015 ...... 40 Calendar year 2016 ...... 60 Calendar year 2017 ...... 80 Calendar year 2018, and thereafter ...... 100

(2) Transition adjustments to common and tier 1 capital in accordance with equity tier 1 capital. Beginning January the percentages set forth in Table 4 to 1, 2014 for an advanced approaches § 217.300. Board-regulated institution, and begin- (i) If the aggregate amount of the ad- ning January 1, 2015 for a Board-regu- justment is positive, the Board-regu- lated institution that is not an ad- lated institution must allocate the de- vanced approaches Board-regulated in- duction between common equity tier 1 stitution, and in each case through De- and tier 1 capital in accordance with cember 31, 2017, a Board-regulated in- Table 4 to § 217.300. stitution, must allocate the regulatory (ii) If the aggregate amount of the adjustments related to changes in the adjustment is negative, the Board-reg- fair value of liabilities due to changes ulated institution must add back the in the Board-regulated institution’s adjustment to common equity tier 1 own credit risk (§ 217.22(b)(1)(iii)) be- capital or to tier 1 capital, in accord- tween common equity tier 1 capital ance with Table 4 to § 217.300.

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TABLE 4 TO § 217.300

Transition adjustments under § 217.22(b)(2) Transition period Percentage of the adjustment ap- Percentage of the adjustment plied to common equity tier 1 capital applied to tier 1 capital

Calendar year 2014 ...... 20 80 Calendar year 2015 ...... 40 60 Calendar year 2016 ...... 60 40 Calendar year 2017 ...... 80 20 Calendar year 2018, and thereafter ...... 100 0

(3) Transition adjustments to AOCI for (C) Any amounts recorded in AOCI an advanced approaches Board-regulated attributed to defined benefit post- institution and a Board-regulated institu- retirement plans resulting from the tion that has not made an AOCI opt-out initial and subsequent application of election under § 217.22(b)(2). Beginning the relevant GAAP standards that per- January 1, 2014 for an advanced ap- tain to such plans (excluding, at the proaches Board-regulated institution, Board-regulated institution’s option, and beginning January 1, 2015 for a the portion relating to pension assets Board-regulated institution that is not deducted under section 22(a)(5)), plus an advanced approaches Board-regu- (D) Accumulated net gains or losses lated institution that has not made an AOCI opt-out election under on cash flow hedges related to items § 217.22(b)(2), and in each case through that are reported on the balance sheet December 31, 2017, a Board-regulated at fair value included in AOCI, plus institution must adjust common equity (E) Net unrealized gains or losses on tier 1 capital with respect to the tran- held-to-maturity securities that are in- sition AOCI adjustment amount (tran- cluded in AOCI. sition AOCI adjustment amount): (ii) A Board-regulated institution (i) The transition AOCI adjustment must make the following adjustment amount is the aggregate amount of a to its common equity tier 1 capital: Board-regulated institution’s: (A) If the transition AOCI adjust- (A) Unrealized gains on available-for- ment amount is positive, the appro- sale securities that are preferred stock priate amount must be deducted from classified as an equity security under common equity tier 1 capital in accord- GAAP or available-for-sale equity ex- ance with Table 5 to § 217.300. posures, plus (B) Net unrealized gains or losses on (B) If the transition AOCI adjustment available-for-sale securities that are amount is negative, the appropriate not preferred stock classified as an eq- amount must be added back to com- uity security under GAAP or available- mon equity tier 1 capital in accordance for-sale equity exposures, plus with Table 5 to § 217.300.

TABLE 5 TO § 217.300

Percentage of the transition AOCI Transition period adjustment amount to be applied to common equity tier 1 capital

Calendar year 2014 ...... 80 Calendar year 2015 ...... 60 Calendar year 2016 ...... 40 Calendar year 2017 ...... 20 Calendar year 2018 and thereafter ...... 0

(iii) A Board-regulated institution as an equity security under GAAP and may include in tier 2 capital the per- available-for-sale equity exposures as centage of unrealized gains on avail- set forth in Table 6 to § 217.300. able-for-sale preferred stock classified

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TABLE 6 TO § 217.300

Percentage of unrealized gains on available- for-sale preferred stock classified as an Transition period equity security under GAAP and available- for-sale equity exposures that may be included in tier 2 capital

Calendar year 2014 ...... 36 Calendar year 2015 ...... 27 Calendar year 2016 ...... 18 Calendar year 2017 ...... 9 Calendar year 2018 and thereafter ...... 0

(4) Additional transition deductions must be deducted from common equity from regulatory capital. (i) Beginning tier 1 capital. January 1, 2014 for an advanced ap- (ii) Beginning January 1, 2014 for an proaches Board-regulated institution, advanced approaches Board-regulated and beginning January 1, 2015 for a institution, and beginning January 1, Board-regulated institution that is not 2015 for a Board-regulated institution an advanced approaches Board-regu- that is not an advanced approaches lated institution, and in each case Board-regulated institution, and in through December 31, 2017, a Board-reg- each case through December 31, 2017, a ulated institution, must use Table 7 to Board-regulated institution must apply § 217.300 to determine the amount of in- a 100 percent risk-weight to the aggre- gate amount of the items subject to vestments in capital instruments and the 10 and 15 percent common equity the items subject to the 10 and 15 per- tier 1 capital deduction thresholds that cent common equity tier 1 capital de- are not deducted under this section. As duction thresholds (§ 217.22(d)) (that is, set forth in § 217.22(d)(2), beginning Jan- MSAs, DTAs arising from temporary uary 1, 2018, a Board-regulated institu- differences that the Board-regulated tion must apply a 250 percent risk- institution could not realize through weight to the aggregate amount of the net operating loss carrybacks, and sig- items subject to the 10 and 15 percent nificant investments in the capital of common equity tier 1 capital deduction unconsolidated financial institutions thresholds that are not deducted from in the form of common stock) that common equity tier 1 capital.

TABLE 7 TO § 217.300

Transitions for deductions under § 217.22(c) Transition period and (d)—Percentage of additional deductions from regulatory capital

Calendar year 2014 ...... 20 Calendar year 2015 ...... 40 Calendar year 2016 ...... 60 Calendar year 2017 ...... 80 Calendar year 2018 and thereafter ...... 100

(iii) For purposes of calculating the ing from temporary differences that transition deductions in this paragraph the Board-regulated institution could (b)(4) beginning January 1, 2014 for an not realize through net operating loss advanced approaches Board-regulated carrybacks, and significant invest- institution, and beginning January 1, ments in the capital of unconsolidated 2015 for a Board-regulated institution financial institutions in the form of that is not an advanced approaches common stock is equal to 15 percent of Board-regulated institution, and in the sum of the Board-regulated institu- each case through December 31, 2017, a tion’s common equity tier 1 elements, Board-regulated institution’s 15 per- after regulatory adjustments and de- cent common equity tier 1 capital de- ductions required under § 217.22(a) duction threshold for MSAs, DTAs aris-

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through (c) (transition 15 percent com- tual holding company prior to May 19, mon equity tier 1 capital deduction 2010 (2010 MHC) (depository institution threshold). holding company of $15 billion or (iv) Beginning January 1, 2018, a more). Board-regulated institution must cal- (2) Mergers and acquisitions. (i) A de- culate the 15 percent common equity pository institution holding company tier 1 capital deduction threshold in ac- of $15 billion or more that acquires ei- cordance with § 217.22(d). ther a depository institution holding (c) Non-qualifying capital instru- company with total consolidated assets ments—(1) Depository institution holding of less than $15 billion as of December companies with total consolidated assets 31, 2009 (depository institution holding of more than $15 billion as of December 31, company under $15 billion) or a deposi- 2009 that were not mutual holding compa- tory institution holding company that nies prior to May 19, 2010. The transition is a 2010 MHC, may include in regu- provisions in this paragraph (c)(1) latory capital the non-qualifying cap- apply to debt or equity instruments ital instruments issued by the acquired that do not meet the criteria for addi- organization up to the applicable per- tional tier 1 or tier 2 capital instru- centages set forth in Table 8 to ments in § 217.20, but that were issued § 217.300. and included in tier 1 or tier 2 capital, (ii) If a depository institution hold- respectively (or, in the case of a sav- ing company under $15 billion acquires ings and loan holding company, would a depository institution holding com- have been included in tier 1 or tier 2 pany under $15 billion or a 2010 MHC, capital if the savings and loan holding and the resulting organization has company had been subject to the gen- total consolidated assets of $15 billion eral risk-based capital rules under 12 or more as reported on the resulting CFR part 225, appendix A), prior to organization’s FR Y–9C for the period May 19, 2010 (non-qualifying capital in- in which the transaction occurred, the struments), and that were issued by a resulting organization may include in depository institution holding com- regulatory capital non-qualifying in- pany with total consolidated assets struments of the resulting organization greater than or equal to $15 billion as up to the applicable percentages set of December 31, 2009 that was not a mu- forth in Table 8 to § 217.300.

TABLE 8 TO § 217.300

Percentage of non-qualifying capital instruments includable in additional tier 1 or Transition period (calendar year) tier 2 capital for a depository institution holding company of $15 billion or more

Calendar year 2014 ...... 50 Calendar year 2015 ...... 25 Calendar year 2016 and thereafter ...... 0

(3) Depository institution holding com- after applying all regulatory capital panies under $15 billion and 2010 MHCs. deductions and adjustments to tier 1 (i) Non-qualifying capital instruments capital. issued by depository institution hold- (iii) Non-qualifying capital instru- ing companies under $15 billion and ments that are not included in tier 1 as 2010 MHCs prior to May 19, 2010, may be a result of the limitation in paragraph included in additional tier 1 or tier 2 (c)(3)(ii) of this section are includable capital if the instrument was included in tier 2 capital. in tier 1 or tier 2 capital, respectively, (4) Depository institutions. (i) Begin- as of January 1, 2014. ning on January 1, 2014, a depository (ii) Non-qualifying capital instru- institution that is an advanced ap- ments includable in tier 1 capital are proaches Board-regulated institution, subject to a limit of 25 percent of tier and beginning on January 1, 2015, all 1 capital elements, excluding any non- qualifying capital instruments and

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other depository institutions, may in- ary 1, 2014 in accordance with Table 9 clude in regulatory capital debt or eq- to § 217.300. uity instruments issued prior to Sep- (ii) Table 9 to § 217.300 applies sepa- tember 12, 2010 that do not meet the rately to tier 1 and tier 2 non-quali- criteria for additional tier 1 or tier 2 fying capital instruments. capital instruments in § 217.20 but that (iii) The amount of non-qualifying were included in tier 1 or tier 2 capital capital instruments that cannot be in- respectively as of September 12, 2010 cluded in additional tier 1 capital (non-qualifying capital instruments under this section may be included in issued prior to September 12, 2010) up tier 2 capital without limitation, pro- to the percentage of the outstanding vided that the instruments meet the principal amount of such non-quali- criteria for tier 2 capital instruments fying capital instruments as of Janu- under § 217.20(d).

TABLE 9 TO § 217.300

Percentage of non-qualifying capital Transition period (calendar year) instruments includable in additional tier 1 or tier 2 capital

Calendar year 2014 ...... 80 Calendar year 2015 ...... 70 Calendar year 2016 ...... 60 Calendar year 2017 ...... 50 Calendar year 2018 ...... 40 Calendar year 2019 ...... 30 Calendar year 2020 ...... 20 Calendar year 2021 ...... 10 Calendar year 2022 and thereafter ...... 0

(d) Minority interest—(1) Surplus mi- minority interest), respectively, as set nority interest. Beginning January 1, forth in Table 10 to § 217.300. 2014 for an advanced approaches Board- (2) Non-qualifying minority interest. regulated institution, and beginning Beginning January 1, 2014 for an ad- January 1, 2015 for a Board-regulated vanced approaches Board-regulated in- institution that is not an advanced ap- stitution, and beginning January 1, proaches Board-regulated institution, 2015 for a Board-regulated institution and in each case through December 31, that is not an advanced approaches 2017, a Board-regulated institution may Board-regulated institution, and in include in common equity tier 1 cap- each case through December 31, 2017, a ital, tier 1 capital, or total capital the Board-regulated institution may in- clude in tier 1 capital or total capital percentage of the common equity tier 1 the percentage of the tier 1 minority minority interest, tier 1 minority in- interest and total capital minority in- terest and total capital minority inter- terest outstanding as of January 1, 2014 est outstanding as of January 1, 2014 that does not meet the criteria for ad- that exceeds any common equity tier 1 ditional tier 1 or tier 2 capital instru- minority interest, tier 1 minority in- ments in § 217.20 (non-qualifying minor- terest or total capital minority inter- ity interest), as set forth in Table 10 to est includable under § 217.21 (surplus § 217.300.

TABLE 10 TO § 217.300

Percentage of the amount of surplus or non- qualifying minority interest that can be Transition period included in regulatory capital during the transition period

Calendar year 2014 ...... 80 Calendar year 2015 ...... 60 Calendar year 2016 ...... 40 Calendar year 2017 ...... 20 Calendar year 2018 and thereafter ...... 0

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(e) Prompt corrective action. For pur- BHC pursuant to § 217.402 must cal- poses of 12 CFR part 208, subpart D, a culate its GSIB surcharge pursuant to Board-regulated institution must cal- § 217.403 by December 31 of the year in culate its capital measures and tan- which the bank holding company is gible equity ratio in accordance with identified as a global systemically im- the transition provisions in this sec- portant BHC and must use that GSIB tion. surcharge for purposes of determining (f) Until July 21, 2015, this part will its maximum payout ratio under Table not apply to any bank holding com- 1 to § 217.11 beginning on January 1 of pany subsidiary of a foreign banking the year that is immediately following organization that is currently relying the full calendar year after it is identi- on Supervision and Regulation Letter fied as a global systemically important SR 01–01 issued by the Board (as in ef- BHC. fect on May 19, 2010). (3) Transition provisions for the cal- [Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, as culation and surcharge requirements— amended at 78 FR 62290, Oct. 11, 2013; 80 FR (i) GSIB surcharge requirements for 70672, Nov. 16, 2015; 80 FR 49103, Aug. 14, 2015] bank holding companies with more than $700 billion in total assets or $10 Subpart H—Risk-based Capital trillion in assets under custody. A Surcharge for Global System- bank holding company that is an ad- vanced approaches Board-regulated in- ically Important Bank Holding stitution with more than $700 billion in Companies total assets as reported on the FR Y–9C as of December 31, 2014, or more than AUTHORITY: 12 U.S.C. 5365. $10 trillion in assets under custody as SOURCE: 80 FR 49105, Aug. 14, 2015, unless reported on the FR Y–15 as of Decem- otherwise noted. ber 31, 2014, must calculate its GSIB surcharge by December 31, 2015, and use § 217.400 Purpose and applicability. that GSIB surcharge to determine its (a) Purpose. This subpart implements maximum payout ratio under Table 1 provisions of section 165 of the Dodd- to § 217.11 beginning on January 1, 2016; Frank Act (12 U.S.C. 5365), by estab- provided that for the GSIB surcharges lishing a risk-based capital surcharge required to be calculated by December for global systemically important bank 31, 2015 and by December 31, 2016, the holding companies. bank holding company must calculate (b) Applicability—(1) General. This its short-term wholesale funding score subpart applies to a bank holding com- using the average of its weighted short- pany that is an advanced approaches term wholesale funding amounts (de- Board-regulated institution and that is fined in § 217.406(b)), calculated for July not a consolidated subsidiary of a bank 31, 2015, August 24, 2015, and September holding company or a consolidated sub- 30, 2015. sidiary of a foreign banking organiza- (ii) Calculation and GSIB surcharge re- tion. quirements for other advanced approaches (2) Effective date of calculation and Board-regulated institutions. A bank surcharge requirements. Subject to the holding company that was an advanced transition provisions in paragraph approaches Board-regulated institution (b)(3) of this section: as of December 31, 2014, and is not de- (i) A bank holding company that be- scribed in paragraph (b)(3)(i) of this comes an advanced approaches Board- section must: regulated institution must determine (A) Determine whether it qualifies as whether it qualifies as a global system- a global systemically important BHC ically important BHC pursuant to pursuant to § 217.402 by December 31, § 217.402 by December 31 of the year im- 2015; and mediately following the year in which (B) To the extent it qualifies as a the bank holding company becomes an global systemically important BHC by advanced approaches Board-regulated December 31, 2015, calculate its GSIB institution; and surcharge by December 31, 2016. The (ii) A bank holding company that be- GSIB surcharge calculated by Decem- comes a global systemically important ber 31, 2016, shall equal the method 1

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surcharge (defined in § 217.403) of the (e) Consolidated subsidiary has the bank holding company. meaning set forth in 12 CFR 249.3. (c) Reservation of authority. (1) The (f) Covered asset exchange means a Board may apply this subpart to any transaction in which a bank holding Board-regulated institution, in whole company has provided assets of a given or in part, by order of the Board based liquidity category to a counterparty in on the institution’s capital structure, exchange for assets of a higher liquid- size, level of complexity, risk profile, ity category, and the bank holding scope of operations, or financial condi- company and the counterparty agreed tion. to return such assets to each other at (2) The Board may adjust the amount a future date. Categories of assets, in of the GSIB surcharge applicable to a descending order of liquidity, are level global systemically important BHC, or 1 liquid assets, level 2A liquid assets, extend or accelerate any compliance level 2B liquid assets, and assets that date of this subpart, if the Board deter- are not HQLA. Covered asset exchanges mines that the adjustment, extension, do not include secured funding trans- or acceleration is appropriate in light actions. of the capital structure, size, com- (g) Financial sector entity has the plexity, risk profile, and scope of oper- meaning set forth in 12 CFR 249.3. ations of the global systemically im- (h) GAAP means generally accepted portant BHC. In increasing the size of accounting principles as used in the the GSIB surcharge for a global sys- United States. temically important BHC, the Board (i) High-quality liquid asset (HQLA) shall follow the notice and response has the meaning set forth in 12 CFR procedures in 12 CFR part 263, subpart 249.3. E. (j) Cross-jurisdictional claims means foreign claims on an ultimate risk § 217.401 Definitions. basis, as reported by the bank holding As used in this subpart: company on the FR Y–15. (a) Aggregate global indicator amount (k) Cross-jurisdictional liabilities means means, for each systemic indicator, the total cross-jurisdictional liabilities, as aggregate measure of that indicator, reported by the bank holding company which is equal to the most recent an- on the FR Y–15. nual dollar figure published by the (l) Intra-financial system assets means Board that represents the sum of sys- total intra-financial system assets, as temic indicator values of: reported by the bank holding company (1) The 75 largest global banking or- on the FR Y–15. ganizations, as measured by the Basel (m) Intra-financial system liabilities Committee on Banking Supervision; means total intra-financial system li- and abilities, as reported by the bank hold- (2) Any other banking organization ing company on the FR Y–15. that the Basel Committee on Banking (n) Level 1 liquid asset is an asset that Supervision includes in its sample qualifies as a level 1 liquid asset pursu- total for that year. ant to 12 CFR 249.20(a). (b) Assets under custody means assets (o) Level 2A liquid asset is an asset held as a custodian on behalf of cus- that qualifies as a level 2A liquid asset tomers, as reported by the bank hold- pursuant to 12 CFR 249.20(b). ing company on the FR Y–15. (p) Level 2B liquid asset is an asset (c) Average risk-weighted assets means that qualifies as a level 2B liquid asset the four-quarter average of the meas- pursuant to 12 CFR 249.20(c). ure of total risk-weighted assets asso- (q) Level 3 assets means assets valued ciated with the lower of the bank hold- using Level 3 measurement inputs, as ing company’s common equity tier 1 reported by the bank holding company risk-based capital ratios, as reported on the FR Y–15. on the bank holding company’s FR Y– (r) Notional amount of over-the-counter 9C for each quarter of the previous cal- (OTC) derivatives means the total no- endar year. tional amount of OTC derivatives, as (d) Brokered deposit has the meaning reported by the bank holding company set forth in 12 CFR 249.3. on the FR Y–15.

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(s) Operational deposit has the mean- method 1 score, as calculated under ing set forth in 12 CFR 249.3. § 217.404, equals or exceeds 130 basis (t) Payments activity means payments points. Subject to § 217.400(b)(2), a bank activity, as reported by the bank hold- holding company must calculate its ing company on the FR Y–15. method 1 score on an annual basis by (u) Retail customer or counterparty has December 31 of each year. the meaning set forth in 12 CFR 249.3. (v) Secured funding transaction has the § 217.403 GSIB surcharge. meaning set forth in 12 CFR 249.3. (a) General. Subject to § 217.400(b)(2), a (w) Securities outstanding means total company identified as a global system- securities outstanding, as reported by ically important BHC pursuant to the bank holding company on the FR § 217.402 must calculate its GSIB sur- Y–15. charge on an annual basis by December (x) Short position means a transaction 31 of each year. For any given year, in which a bank holding company has subject to paragraph (d) of this section, borrowed or otherwise obtained a secu- the GSIB surcharge is equal to the rity from a counterparty and sold that security, and the bank holding com- greater of: pany must return the security to the (1) The method 1 surcharge cal- initial counterparty in the future. culated in accordance with paragraph (y) Systemic indicator includes the fol- (b) of this section; and lowing indicators included on the FR (2) The method 2 surcharge cal- Y–15: culated in accordance with paragraph (1) Total exposures; (c) of this section. (2) Intra-financial system assets; (b) Method 1 surcharge—(1) General. (3) Intra-financial system liabilities; The method 1 surcharge of a global sys- (4) Securities outstanding; temically important BHC is the (5) Payments activity; amount set forth in Table 1 of this sec- (6) Assets under custody; tion that corresponds to the global sys- (7) Underwritten transactions in debt temically important BHC’s method 1 and equity markets; score, calculated pursuant to § 217.404. (8) Notional amount of over-the- counter (OTC) derivatives; TABLE 1 TO § 217.403—METHOD 1 SURCHARGE (9) Trading and available-for-sale (AFS) securities; Method 1 score Method 1 surcharge (10) Level 3 assets; Below 130 ...... 0.0 percent. (11) Cross-jurisdictional claims; or 130—229 ...... 1.0 percent. (12) Cross-jurisdictional liabilities. 230—329 ...... 1.5 percent. (z) Total exposures means total expo- 330—429 ...... 2.0 percent. sures as reported by the bank holding 430—529 ...... 2.5 percent. company on the FR Y–15. 530—629 ...... 3.5 percent. (aa) Trading and AFS securities means (2) Higher method 1 surcharges. To the total adjusted trading and available- extent that the method 1 score of a for-sale securities as reported by the global systemically important BHC bank holding company on the FR Y–15. (bb) Underwritten transactions in debt equals or exceeds 630 basis points, the and equity markets means total under- method 1 surcharge equals the sum of: writing activity as reported by the (i) 4.5 percent; and bank holding company on the FR Y–15. (ii) An additional 1.0 percent for each (cc) Unsecured wholesale funding has 100 basis points that the global system- the meaning set forth in 12 CFR 249.3. ically important BHC’s score exceeds (dd) Wholesale customer or 630 basis points. counterparty has the meaning set forth (c) Method 2 surcharge—(1) General. in 12 CFR 249.3. The method 2 surcharge of a global sys- temically important BHC is the § 217.402 Identification as a global sys- amount set forth in Table 2 of this sec- temically important BHC. tion that corresponds to the global sys- A bank holding company is a global temically important BHC’s method 2 systemically important BHC if its score, calculated pursuant to § 217.405.

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TABLE 2 TO § 217.403: METHOD 2 SURCHARGE 1 to § 217.11) on January 1 of the year immediately following the calendar Method 2 score Method 2 surcharge year in which the decreased GSIB sur- Below 130 ...... 0.0 percent. charge was calculated. 130—229 ...... 1.0 percent. 230—329 ...... 1.5 percent. § 217.404 Method 1 score. 330—429 ...... 2.0 percent. 430—529 ...... 2.5 percent. (a) General. A bank holding com- 530—629 ...... 3.0 percent. pany’s method 1 score is the sum of its 630—729 ...... 3.5 percent. 730—829 ...... 4.0 percent. systemic indicator scores for the 830—929 ...... 4.5 percent. twelve systemic indicators set forth 930—1029 ...... 5.0 percent. Table 1 of this section, as determined 1030—1129 ...... 5.5 percent. under paragraph (b) of this section. (2) Higher method 2 surcharges. To the (b) Systemic indicator score. (1) Except extent that the method 2 score of a as provided in paragraph (b)(2) of this global systemically important BHC section, the systemic indicator score in equals or exceeds 1130 basis points, the basis points for a given systemic indi- method 2 surcharge equals the sum of: cator is equal to: (i) 6.5 percent; and (i) The ratio of: (ii) An additional 0.5 percent for each (A) The amount of that systemic in- 100 basis points that the global system- dicator, as reported on the bank hold- ically important BHC’s score exceeds ing company’s most recent FR Y–15; to 1130 basis points. (B) The aggregate global indicator (d) Effective date of an adjusted GSIB amount for that systemic indicator surcharge—(1) Increase in GSIB sur- published by the Board in the fourth charge. An increase in the GSIB sur- quarter of that year; charge of a global systemically impor- (ii) Multiplied by 10,000; and tant BHC will take effect (i.e., be incor- (iii) Multiplied by the indicator porated into the maximum payout weight corresponding to the systemic ratio under Table 1 to § 217.11) on Janu- indicator as set forth in Table 1 of this ary 1 of the year that is one full cal- section. endar year after the increased GSIB (2) Maximum substitutability score. The surcharge was calculated. sum of the systemic indicator scores (2) Decrease in GSIB surcharge. A de- for the indicators in the substitut- crease in the GSIB surcharge of a glob- ability category (assets under custody, al systemically important BHC will payments systems activity, and under- take effect (i.e., be incorporated into writing activity) will not exceed 100 the maximum payout ratio under Table basis points.

TABLE 1 TO § 217.404—SYSTEMIC INDICATOR WEIGHTS

Category Systemic indicator Indicator weight

Size ...... Total exposures ...... 20 percent. Interconnectedness ...... Intra-financial system assets ...... 6.67 percent. Intra-financial system liabilities ...... 6.67 percent. Securities outstanding ...... 6.67 percent. Substitutability ...... Payments activity ...... 6.67 percent. Assets under custody ...... 6.67 percent. Underwritten transactions in debt and equity markets ...... 6.67 percent. Complexity ...... Notional amount of over-the-counter (OTC) derivatives ...... 6.67 percent. Trading and available-for-sale (AFS) securities ...... 6.67 percent. Level 3 assets ...... 6.67 percent. Cross-jurisdictional activity ...... Cross-jurisdictional claims ...... 10 percent. Cross-jurisdictional liabilities ...... 10 percent.

EFFECTIVE DATE NOTE: At 81 FR 90954, Dec. § 217.404 Method 1 score. 16, 2016, § 217.404 was amended by revising paragraph (b)(1), effective Jan. 17, 2017. For * * * * * the convenience of the user, the revised text is set forth as follows: (b) * * * (1) Except as provided in paragraph (b)(2) of this section, the systemic indicator score in

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basis points for a given systemic indicator is (1) The sum of: equal to: (i) The global systemically important (i) The ratio of: BHC’s systemic indicator scores for the (A) The amount of that systemic indicator, nine systemic indicators set forth as reported by the bank holding company as of December 31 of the previous calendar year; Table 1 of this section, as determined to under paragraph (b) of this section; and (B) The aggregate global indicator amount (ii) The global systemically impor- for that systemic indicator published by the tant BHC’s short-term wholesale fund- Board in the fourth quarter of that year; ing score, calculated pursuant to (ii) Multiplied by 10,000; and § 217.406. (iii) Multiplied by the indicator weight (b) Systemic indicator score. A global corresponding to the systemic indicator as systemically important BHC’s score for set forth in Table 1 of this section. a systemic indicator is equal to: (1) The amount of the systemic indi- * * * * * cator, as reported on the global sys- temically important BHC’s most recent § 217.405 Method 2 score. FR Y–15; (a) General. A global systemically im- (2) Multiplied by the coefficient cor- portant BHC’s method 2 score is equal responding to the systemic indicator to: set forth in Table 1 of this section.

TABLE 1 TO § 217.405—COEFFICIENTS FOR SYSTEMIC INDICATORS

Coefficient value Category Systemic indicator (%)

Size ...... Total exposures ...... 4.423 Interconnectedness ...... Intra-financial system assets ...... 12.007 Intra-financial system liabilities ...... 12.490 Securities outstanding ...... 9.056 Complexity ...... Notional amount of over-the-counter (OTC) derivatives ...... 0.155 Trading and available-for-sale (AFS) securities ...... 30.169 Level 3 assets ...... 161.177 Cross-jurisdictional activity ...... Cross-jurisdictional claims ...... 9.277 Cross-jurisdictional liabilities ...... 9.926

EFFECTIVE DATE NOTE: At 81 FR 90954, Dec. term wholesale funding amount (de- 16, 2016, § 217.405 was amended by revising fined in paragraph (b) of this section); paragraph (b)(1), effective Jan. 17, 2017. For (2) Divided by the global system- the convenience of the user, the revised text is set forth as follows: ically important BHC’s average risk- weighted assets; and § 217.405 Method 2 score. (3) Multiplied by a fixed factor of 350. (b) Weighted short-term wholesale fund- * * * * * ing amount. (1) To calculate its weight- (b) * * * ed short-term wholesale funding (1) The amount of the systemic indicator, amount, a global systemically impor- as reported by the bank holding company as tant BHC must calculate the amount of of December 31 of the previous calendar year, its short-term wholesale funding on a expressed in billions of dollars; consolidated basis for each business day of the previous calendar year and * * * * * weight the components of short-term wholesale funding in accordance with § 217.406 Short-term wholesale fund- Table 1 of this section. ing score. (2) Short-term wholesale funding in- (a) General. Except as provided in cludes the following components, each § 217.400(b)(3)(ii), a global systemically as defined in paragraph (c) of this sec- important BHC’s short-term wholesale tion: funding score is equal to: (i) All funds that the bank holding (1) The average of the global system- company must pay under each secured ically important BHC’s weighted short- funding transaction, other than an

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operational deposit, with a remaining short position to the extent that the maturity of 1 year or less; borrowed asset does not qualify as a (ii) All funds that the bank holding Level 1 liquid asset or a Level 2A liquid company must pay under all unsecured asset; and wholesale funding, other than an oper- (v) All brokered deposits held at the ational deposit, with a remaining ma- bank holding company provided by a turity of 1 year or less; retail customer or counterparty. (iii) The fair value of an asset as de- (3) For purposes of calculating the termined under GAAP that a bank short-term wholesale funding amount holding company must return under a and the components thereof, a bank covered asset exchange with a remain- holding company must assume that ing maturity of 1 year or less; each asset or transaction described in (iv) The fair value of an asset as de- paragraph (b)(2) of this section matures termined under GAAP that the bank in accordance with the criteria set holding company must return under a forth in 12 CFR 249.31.

TABLE 1 TO § 217.406—SHORT-TERM WHOLESALE FUNDING COMPONENTS AND WEIGHTS

Remaining maturity of Remaining Remaining Remaining Component of short-term wholesale funding 30 days of maturity of maturity of maturity of less 31 to 90 days 91 to 180 181 to 365 or no maturity days days

Category 1 ...... 25 percent .... 10 percent .... 0 percent ...... 0 percent. (1) Secured funding transaction secured by a level 1 liquid asset; (2) Unsecured wholesale funding where the customer or counterparty is not a financial sector entity or a consolidated subsidiary thereof; (3) Brokered deposits provided by a retail customer or counterparty; and (4) Short positions where the borrowed asset does not qualify as either a level 1 liquid asset or level 2A liq- uid asset. Category 2 ...... 50 percent .... 25 percent .... 10 percent ..... 0 percent. (1) Secured funding transaction secured by a level 2A liquid asset; and (2) Covered asset exchanges involving the future ex- change of a Level 1 liquid asset for a Level 2A liquid asset. Category 3 ...... 75 percent .... 50 percent .... 25 percent ..... 10 percent. (1) Secured funding transaction secured by a level 2B liquid asset; (2) Covered asset exchanges (other than those de- scribed in Category 2); and (3) Unsecured wholesale funding (other than unse- cured wholesale funding described in Category 1). Category 4 ...... 100 percent .. 75 percent .... 50 percent ..... 25 percent. Any other component of short-term wholesale funding.

Subpart I—Application of Capital tions and that are subject to this part Rules (Regulation Q, 12 CFR part 217).1 (2) Notwithstanding §§ 217.2 and 217.10, a bank holding company or covered SOURCE: 80 FR 76377, Dec. 9, 2015, unless otherwise noted. savings and loan holding company that is organized as a legal entity other § 217.501 The Board’s Regulatory Cap- than a stock corporation and has ital Framework for Depository In- issued capital instruments that do not stitution Holding Companies Orga- qualify as common equity tier 1 capital nized as Non-Stock Companies. under § 217.20 by virtue of the require- (a) Applicability. (1) This section ap- ments set forth in this section may plies to all depository institution hold- treat those capital instruments as ing companies that are organized as legal entities other than stock corpora- 1 See 12 CFR 217.1(c)(1) through (3).

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common equity tier 1 capital until (1) LLC with one class of membership July 1, 2016. interests. (i) An LLC issues one class of (b) Common equity tier 1 capital criteria membership interests that provides applied to capital instruments issued by that all holders of the interests bear non-stock companies. (1) Subpart C of losses and receive dividends propor- this part provides criteria for capital tionate to their levels of ownership. instruments to qualify as common eq- (ii) Provided that the other criteria uity tier 1 capital. This section de- in § 217.20(b) are met, the membership scribes how certain criteria apply to interests would qualify as common eq- capital instruments issued by bank uity tier 1 capital. holding companies and covered savings (2) Partnership with limited and general and loan holding companies that are partners. (i) A partnership has two organized as legal entities other than classes of interests: General partner- stock corporations, such as limited li- ship interests and limited partnership ability companies (LLCs) and partner- interests. The general partners and the ships. limited partners bear losses and re- (2) Holding companies are organized ceive distributions allocated propor- using a variety of legal structures, in- tionately to their capital contribu- cluding corporate forms, LLCs, part- tions. In addition, the general partner nerships, and similar structures.2 In has unlimited liability for the debts of the Board’s experience, some deposi- the partnership. tory institution holding companies (ii) Provided that the other criteria that are organized in non-stock form in § 217.20(b) are met, the general and issue multiple classes of capital instru- limited partnership interests would ments that allocate profit and loss qualify as common equity tier 1 cap- from a distribution differently among ital. The fact of unlimited liability of classes, which may affect the ability of the general partner is not relevant in those classes to qualify as common eq- the context of the eligibility criteria of 3 uity tier 1 capital. common equity tier 1 capital instru- (3) Common equity tier 1 capital is ments, provided that the general part- defined in § 217.20(b). To qualify as com- ner and limited partners share losses mon equity tier 1 capital, capital in- equally to the extent of the assets of struments must satisfy a number of the partnership, and the general part- criteria. This section provides exam- ner is liable after the assets of the ples of the application of certain com- partnership are exhausted. In this re- mon equity tier 1 capital criteria that gard, the general partner’s unlimited relate to the economic interests in the liability is similar to a guarantee pro- company represented by particular vided by the general partner, rather capital instruments. than a feature of the general partner- (c) Examples. The following examples ship interest. show how the criteria for common eq- (3) Senior and junior classes of capital uity tier 1 capital apply to particular instruments. (i) An LLC issues two 4 partnership or LLC structures. types of membership interests, Class A and Class B. Holders of Class A and 2 A stock corporation’s common stock Class B interests participate equally in should satisfy the CET1 criteria so long as operating distributions and have equal the common stock does not have unusual voting rights. However, in liquidation, features, such as a limited duration. 3 Notably, voting powers or other means of holders of Class B interests must re- exercising control are not relevant for pur- ceive the entire amount of their con- poses of satisfying the CET1 eligibility cri- tributed capital in order for any dis- teria. Thus, the fact that a particular part- tributions to be made to holders of ner or member controls a holding company, Class A interests. for instance, due to serving as general part- (ii) Class B interests have a pref- ner or managing member, is not material to erence over Class A interests in liq- qualification of particular interests as CET1. uidation and, therefore, would not 4 Although the examples refer to specific types of legal entities for purposes of illus- qualify as common equity tier 1 capital tration, the substance of the Regulation Q as the Class B interests are not the criteria reflected in the examples applies to most subordinated claim (criterion (i)) all types of legal entities. and do not share losses proportionately

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(criterion (viii) (§ 217.20(b)(1)(i) and ample in paragraph (c)(4) of this sec- (viii), respectively). tion, the different participation rights (A) If all other criteria are satisfied, apply to distributions in situations Class A interests would qualify as com- where losses are allocated, including mon equity tier 1 capital. losses at liquidation. (B) Class B interests may qualify as (ii) Because holders of the Class A in- additional tier 1 capital, or tier 2 cap- terests do not bear a proportional in- ital, if the Class B interests meet the terest in the losses (criterion (ii) applicable criteria (§ 217.20(c) and (d)). (§ 217.20(b)(1)(ii)), the Class A interests (4) LLC with two classes of membership would not qualify as common equity interests. (i) An LLC issues two types of tier 1 capital. membership interests, Class A and (A) Companies with such structures Class B. To the extent that the LLC may revise their capital structures in makes a distribution, holders of Class order to provide for a sufficiently large A and Class B interests share propor- class of capital instruments that pro- tionately in any losses and receive pro- portionally bear first losses in liquida- portionate shares of contributed cap- tion (that is, the Class B interests in ital. To the extent that a capital dis- this example). tribution includes an allocation of (B) Alternatively, companies with profits, holders of Class A and Class B such structures could revise their cap- interests share proportionately up to ital structure to ensure that all classes the point where all holders receive a of capital instruments that are in- specific annual rate of return on cap- tended to qualify as common equity ital contributions, and, if the distribu- tier 1 capital share equally in losses in tion exceeds that point, holders of liquidation consistent with criteria (i), Class B interests receive double their (ii), (vii), and (viii) in § 217.20(b)(1)(i), proportional share and holders of Class (ii), (vii), respectively, even if each A interests receive the remainder of class of capital instruments has dif- the distribution. ferent rights to allocations of profits, (ii) Class A and Class B interests would both qualify as common equity as in paragraph (c)(4) of this section. tier 1 capital, provided that under all (6) Mandatory distributions. (i) A part- circumstances they share losses pro- nership agreement contains provisions portionately, as measured with respect that require distributions to holders of to each distribution, and that they sat- one or more classes of capital instru- isfy the common equity tier 1 capital ments on the occurrence of particular criteria. The holders of Class A and events, such as upon specific dates or Class B interests may receive different following a significant sale of assets, allocations of profits with respect to a but not including any final distribu- distribution, provided that the dis- tions in liquidation. tribution is made simultaneously to all (ii) Any class of capital instruments members of Class A and Class B inter- that provides holders with rights to ests. Despite the potential for dis- mandatory distributions would not proportionate profits, Class A and qualify as common equity tier 1 capital Class B interests have the same level of because a holding company must have seniority with regard to potential full discretion at all times to refrain losses and therefore they both satisfy from paying any dividends and making all the criteria in § 217.20(b), including any other distributions on the instru- criterion (ii) (§ 217.20(b)(1)(ii)). ment without triggering an event of (5) Alternative LLC with two classes of default, a requirement to make a pay- membership interests. (i) An LLC issues ment-in-kind, or an imposition of any two types of membership interests, other restriction on the holding com- Class A and Class B. In the event that pany (criterion (vi) in § 217.20(b)(1)(vi)). the LLC makes a distribution, holders Companies must ensure that they have of Class A interests bear a dispropor- a sufficient amount of capital instru- tionately low level of any losses, such ments that do not have such rights and that the Class B interests bear a dis- that meet the other criteria of common proportionately high level of losses at equity tier 1 capital, in order to meet the distribution. In contrast to the ex- the requirements of Regulation Q.

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(7) Features that Reallocate Prior Dis- APPENDIX A TO PART 217—THE FEDERAL tributions. (i) An LLC issues two types RESERVE BOARD’S FRAMEWORK FOR of membership interests, Class A and IMPLEMENTING THE COUNTER- Class B. The terms of the LLC’s mem- CYCLICAL CAPITAL BUFFER

bership interests provide that, under 1. BACKGROUND certain circumstances, holders of Class A interests must return a portion of (a) In 2013, the Board of Governors of the Federal Reserve System (Board) issued a earlier distributions, which are then final regulatory capital rule (Regulation Q) distributed to holders of Class B inter- in coordination with the Office of the Comp- ests (sometimes called a ‘‘clawback’’). troller of the Currency (OCC) and the Fed- (ii) If the reallocation of prior dis- eral Deposit Insurance Corporation (FDIC) tributions described in paragraph that strengthened risk-based and leverage capital requirements applicable to insured (c)(7)(i) of this section could result in depository institutions and depository insti- holders of the Class B interests bearing tution holding companies (banking organiza- fewer losses on an aggregate basis than tions).1 Among those changes was the intro- Class A interests, the Class B interests duction of a countercyclical capital buffer would not qualify as common equity (CCyB) for large, internationally active banking organizations.2 tier 1 capital. However, where the (b) The CCyB is a supplemental, membership interests provide for dis- macroprudential policy tool that the Board proportionate allocation of profits, can increase during periods of rising such as described in the example in vulnerabilities in the financial system and paragraph (c)(4) of this section, and the reduce when vulnerabilities recede. It is de- signed to increase the resilience of large reallocation of prior distributions banking organizations when there is an ele- would be limited to reversing the dis- vated risk of above-normal losses. Increasing proportionate portions of prior dis- the resilience of large banking organizations tributions, both the Class A and Class will, in turn, improve the resilience of the B interests could qualify as common broader financial system. Above-normal losses often follow periods of rapid asset equity tier 1 capital provided that they price appreciation or credit growth that are met all the other criteria in § 217.20(b). not well supported by underlying economic fundamentals. The circumstances in which § 217.502 Application of the Board’s the Board would most likely begin to in- Regulatory Capital Framework to crease the CCyB above zero percent to aug- Employee Stock Ownership Plans ment minimum capital requirements and that are Depository Institution other capital buffers would be when systemic Holding Companies and Certain vulnerabilities are meaningfully above nor- Trusts that are Savings and Loan mal. By requiring large banking organiza- Holding Companies. tions to hold additional capital during those (a) Employee Stock Ownership Plans. 1 See 12 CFR part 217; Federal Reserve Board Notwithstanding § 217.1(c), a bank hold- Approves Final Rule To Help Ensure Banks ing company or covered savings and Maintain Strong Capital Positions (July 2, loan holding company that is an em- 2013), available at http:// ployee stock ownership plan is exempt www.federalreserve.gov; Agencies Adopt Supple- from this part until the Board adopts mentary Leverage Ratio Notice of Proposed Rulemaking (July 9, 2013), available at http:// regulations that directly relate to the www.occ.gov; and FDIC Board Approves Basel application of capital regulations to III Interim Final Rule and Supplementary Le- employee stock ownership plans. verage Ratio Notice of Proposed Rulemaking (b) Personal or Family Trusts. Not- (July 9, 2013) available at https://www.fdic.gov. withstanding § 217.1(c), a covered sav- 2 12 CFR 217.11(b). The CCyB applies only to banking organizations subject to the ad- ings and loan holding company is ex- vanced approaches capital rules, which gen- empt from this part if it is a personal erally apply to those banking organizations or family trust and not a business trust with greater than $250 billion in assets or until the Board adopts regulations that more than $10 billion in on-balance-sheet for- apply capital regulations to such a cov- eign exposures. See 12 CFR 217.100(b). An ad- ered savings and loan holding com- vanced approaches institution is subject to the CCyB regardless of whether it has com- pany. pleted the parallel run process and received notification from its primary Federal super- visor. See 12 CFR 217.121(d).

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periods of excess and removing the require- most appropriate policy instrument (among ment to hold additional capital when the available policy instruments) to address the vulnerabilities have diminished, the CCyB highlighted financial system vulnerabilities. also is expected to moderate fluctuations in the supply of credit over time. Moderating 3. THE OBJECTIVES OF THE CCYB the supply of credit may mitigate or prevent (a) The objectives of the CCyB are to the conditions that contribute to above-nor- mal losses, such as elevated asset prices and strengthen banking organizations’ resilience excessive leverage, and prevent or mitigate against the build-up of systemic reductions in lending to creditworthy bor- vulnerabilities and reduce fluctuations in rowers that can amplify an economic down- the supply of credit. The CCyB supplements turn. In this way, implementation of the the minimum capital requirements and the CCyB also responds to the Dodd-Frank Act’s capital conservation buffer, which them- requirement that the Board seek to make its selves are designed to provide substantial re- capital requirements countercyclical.3 silience to unexpected losses created by nor- (c) Regulation Q established the initial mal fluctuations in economic and financial CCyB amount with respect to private sector conditions. The capital surcharge on global credit exposures located in the United States systemically important banking organiza- (U.S.-based credit exposures) at zero percent tions adds an additional layer of defense for and provided that the maximum potential the largest and most systemically important amount of the CCyB for credit exposures in institutions, whose financial distress can the United States was 2.5 percent of risk- have outsized effects on the rest of the finan- weighted assets.4 The Board expects to make cial system and the real economy.5 However, decisions about the appropriate level of the periods of financial excesses, for example as CCyB for U.S.-based credit exposures jointly reflected in episodes of rapid asset price ap- with the OCC and FDIC, and expects that the preciation or credit growth not well sup- CCyB amount for U.S.-based credit exposures ported by underlying economic fundamen- will be the same for covered depository insti- tals, are often followed by above-normal tution holding companies and insured deposi- losses that leave banking organizations and tory institutions. The CCyB is designed to other financial institutions undercapitalized. take into account the macrofinancial envi- Therefore, the Board would most likely ronment in which banking organizations begin to increase the CCyB above zero in function and the degree to which that envi- those circumstances when systemic ronment impacts the resilience of advanced vulnerabilities become meaningfully above approaches institutions. Therefore, the ap- normal and progressively raise the CCyB propriate level of the CCyB for U.S.-based level if vulnerabilities become more severe. credit exposures is not closely linked to the (b) The CCyB is expected to help provide characteristics of an individual institution. additional resilience for advanced ap- Rather, the impact of the CCyB on any sin- proaches institutions, and by extension the gle institution will depend on the particular broader financial system, against elevated composition of the private-sector credit ex- vulnerabilities primarily in two ways. First, posures of the institution across national ju- advanced approaches institutions will likely risdictions. hold more capital to avoid limitations on capital distributions and discretionary bonus 2. OVERVIEW AND SCOPE OF THE POLICY payments resulting from implementation of STATEMENT the CCyB. Strengthening their capital posi- This Policy Statement describes the tions when financial conditions are accom- framework that the Board will follow in set- modative would increase the capacity of ad- ting the amount of the CCyB for U.S.-based vanced approaches institutions to absorb credit exposures. The framework consists of outsized losses during a future significant a set of principles for translating assess- economic downturn or period of financial in- ments of financial system vulnerabilities stability, thus making them more resilient. that are regularly undertaken by the Board (c) The second and related goal of the into the appropriate level of the CCyB. Those CCyB is to promote a more sustainable sup- assessments are informed by a broad array of ply of credit over the economic cycle. During quantitative indicators of financial and eco- a credit cycle downturn, better-capitalized nomic performance and a set of empirical institutions have been shown to be more models. In addition, the framework includes likely than weaker institutions to have con- an assessment of whether the CCyB is the tinued access to funding. Better-capitalized

3 12 U.S.C. 1844(b), 1464a(g)(1), and 3907(a)(1) 5 See, Federal Reserve Board Approves Final (codifying sections 616(a), (b), and (c) of the Rule Requiring The Largest, Most Systemically Dodd-Frank Act). Important U.S. Bank Holding Companies To 4 The CCyB is subject to a phase-in ar- Further Strengthen Their Capital Positions rangement between 2016 and 2019. See 12 CFR (July 20, 2015), available at http:// 217.300(a)(2). www.federalreserve.gov.

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institutions also are less likely to take ac- 4. THE FRAMEWORK FOR SETTING THE U.S. tions that lead to broader financial-sector CCYB distress and its associated macroeconomic costs, such as large-scale sales of assets at (a) The Board regularly monitors and as- prices below their fundamental value and sesses threats to financial stability by syn- sharp contractions in credit supply.6 There- thesizing information from a comprehensive fore, it is likely that as a result of the CCyB set of financial-sector and macroeconomic having been put into place during the pre- indicators, supervisory information, surveys, ceding period of rapid credit creation, ad- and other interactions with market partici- vanced approaches institutions would be bet- pants.8 In forming its view about the appro- ter positioned to continue their important priate size of the U.S. CCyB, the Board will intermediary functions during a subsequent consider a number of financial system economic contraction. A timely and credible vulnerabilities, including but not limited to, reduction in the CCyB requirement during a asset valuation pressures and risk appetite, period of high credit losses could reinforce leverage in the nonfinancial sector, leverage those beneficial effects of a higher base level in the financial sector, and maturity and li- of capital, because it would permit advanced quidity transformation in the financial sec- approaches institutions either to realize loan tor. The decision will reflect the implica- losses promptly and remove them from their tions of the assessment of overall financial balance sheets or to expand their balance system vulnerabilities as well as any con- sheets, for example by continuing to lend to cerns related to one or more classes of creditworthy borrowers. vulnerabilities. The specific combination of (d) During a period of cyclically increasing vulnerabilities is important because an ad- vulnerabilities, advanced approaches institu- verse shock to one class of vulnerabilities tions might react to an increase in the CCyB could be more likely than another to exacer- by raising lending standards, otherwise re- bate existing pressures in other parts of the ducing their risk exposure, augmenting their economy or financial system. capital, or some combination of those ac- (b) The Board intends to monitor a wide tions. They may choose to raise capital by range of financial and macroeconomic quan- taking actions that would increase net in- titative indicators including, but not limited come, reducing capital distributions such as to, measures of relative credit and liquidity share repurchases or dividends, or issuing expansion or contraction, a variety of asset new equity. In this regard, an increase in the prices, funding spreads, credit condition sur- CCyB would not prevent advanced ap- veys, indices based on credit default swap proaches institutions from maintaining their spreads, option implied volatilities, and important role as credit intermediaries, but measures of systemic risk.9 In addition, em- would reduce the likelihood that banking or- pirical models that translate a manageable ganizations with insufficient capital would set of quantitative indicators of financial foster unsustainable credit growth or engage in imprudent risk taking. The specific com- and economic performance into potential bination of adjustments and the relative size settings for the CCyB, when used as part of of each adjustment will depend in part on a comprehensive judgmental assessment of the initial capital positions of advanced ap- all available information, can be a useful proaches institutions, the cost of debt and input to the Board’s deliberations. Such equity financing, and the earnings opportu- models may include, but are not limited to, nities presented by the economic situation those that rely on small sets of indicators— at the time.7 such as the nonfinancial credit-to-GDP ratio, its growth rate, and combinations of the credit-to-GDP ratio with trends in the prices 6 For additional background on the rela- of residential and commercial real estate— tionship between financial distress and eco- which some academic research has shown to nomic outcomes, see Carmen Reinhart and be useful in identifying periods of financial Kenneth Rogoff (2009), This Time is Different. excess followed by a period of crisis on a Princeton University Press; O` scar Jorda` & Moritz Schularick & Alan M Taylor (2011), ‘‘Financial Crises, Credit Booms, and Exter- 25(1), pp. 3–28; Skander J. Van den Heuvel nal Imbalances: 140 Years of Lessons,’’ IMF (2008), ‘‘The Welfare Cost of Bank Capital Re- Economic Review, Palgrave Macmillan, vol. quirements.’’ Journal of Monetary Economics 59(2), pages 340–378; and Bank for Inter- 55, pp. 298–320. national Settlements (2010), ‘‘Assessing the 8 Tobias Adrian, Daniel Covitz, and Nellie Long-Run Economic Impact of Higher Cap- Liang (2014), ‘‘Financial Stability Moni- ital and Liquidity Requirements.’’ toring.’’ Finance and Economics Discussion Se- 7 For estimates of the size of certain ad- ries 2013–021. Washington: Board of Governors justments, see Samuel G. Hanson, Anil K. of the Federal Reserve System, http:// Kashyap, and Jeremy C. Stein (2011), ‘‘A www.federalreserve.gov/pubs/feds/2013/201321/ Macroprudential Approach to Financial Reg- 201321pap.pdf. ulation,’’ Journal of Economic Perspectives 9 See 12 CFR 217.11(b)(2)(iv).

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cross-country basis.10 Such models may also increasing system-wide vulnerabilities. Im- include those that consider larger sets of in- portantly, as a macroprudential policy tool, dicators, which have the advantage of rep- the CCyB will be activated and deactivated resenting conditions in all key sectors of the based on broad developments and trends in economy, especially those specific to risk- the U.S. financial system, rather than the taking, performance, and the financial con- activities of any individual banking organi- dition of large banks.11 zation. (c) However, no single indictor or fixed set (e) Similarly, the Board would remove or of indicators can adequately capture all the reduce the CCyB when the conditions that vulnerabilities in the U.S. economy and fi- led to its activation abate or lessen. Addi- nancial system. Moreover, adjustments in tionally, the Board would remove or reduce the CCyB that were tightly linked to a spe- the CCyB when release of CCyB capital cific model or set of models could be impre- would promote financial stability. Indeed, cise due to the relatively short period that for the CCyB to be most effective, the CCyB some indicators are available, the limited should be deactivated or reduced in a timely number of past crises against which the mod- manner. Deactivating the CCyB in a timely els can be calibrated, and limited experience manner could, for example, promote the with the CCyB as a macroprudential tool. As prompt realization of loan losses by ad- a result, the types of indicators and models vanced approaches institutions and the re- considered in assessments of the appropriate moval of such loans from their balance level of the CCyB are likely to change over sheets and would reduce the likelihood that time based on advances in research and the advanced approaches institutions would sig- experience of the Board with this new nificantly pare their risk-weighted assets in macroprudential tool. order to maintain their capital ratios during (d) The Board will determine the appro- a downturn. priate level of the CCyB for U.S.-based credit (f) The pace and magnitude of changes in exposures based on its analysis of the above the CCyB will depend importantly on the un- factors. Generally, a zero percent U.S. CCyB derlying conditions in the financial sector amount would reflect an assessment that and the economy as well as the desired ef- U.S. economic and financial conditions are fects of the proposed change in the CCyB. If broadly consistent with a financial system in vulnerabilities are rising gradually, then in- which levels of system-wide vulnerabilities cremental increases in the level of the CCyB are within or near their normal range of val- may be appropriate. Incremental increases ues. The Board could increase the CCyB as would allow banks to augment their capital vulnerabilities build. A 2.5 percent CCyB primarily through retained earnings and amount for U.S.-based credit exposures, allow policymakers additional time to assess which is the maximum level under the the effects of the policy change before mak- Board’s rule, would reflect an assessment ing subsequent adjustments. However, if that the U.S. financial sector is experiencing vulnerabilities in the financial system are a period of significantly elevated or rapidly building rapidly, then larger or more fre- quent adjustments may be necessary to in- 10 See, e.g., Jorda, Oscar, Moritz Schularick crease loss-absorbing capacity sooner and po- and Alan Taylor, 2013. ‘‘When Credit Bites tentially to mitigate the rise in Back: Leverage, Business Cycles and Crises,’’ vulnerabilities. Journal of Money, Credit, and Banking, 45(2), (g) The Board will also consider whether pp. 3–28, and Drehmann, Mathias, Claudio the CCyB is the most appropriate of its Borio, and Kostas Tsatsaronis, 2012. ‘‘Char- available policy instruments to address the acterizing the Financial Cycle: Don’t Lose financial system vulnerabilities highlighted Sight of the Medium Term!’’ BIS Working by the framework’s judgmental assessments Papers 380, Bank for International Settle- and empirical models. The CCyB primarily is ments. Jorda, Oscar, Moritz Schularick and intended to address cyclical vulnerabilities, Alan Taylor, 2015. ‘‘Leveraged Bubbles,’’ Cen- rather than structural vulnerabilities that ter for Economic Policy Research Discussion do not vary significantly over time. Struc- Paper No. DP10781. BCBS (2010), ‘‘Guidance tural vulnerabilities are better addressed for National Authorities Operating the Coun- through targeted reforms or permanent in- tercyclical Capital Buffer,’’ BIS. creases in financial system resilience. Two 11 See, e.g., Aikman, David, Michael T. central factors for the Board to consider are Kiley, Seung Jung Lee, Michael G. Palumbo, whether advanced approaches institutions and Missaka N. Warusawitharana (2015), are exposed—either directly or indirectly—to ‘‘Mapping Heat in the U.S. Financial Sys- the vulnerabilities identified in the com- tem,’’ Finance and Economics Discussion Series prehensive judgmental assessment or by the 2015–059. Washington: Board of Governors of quantitative indicators that suggest activa- the Federal Reserve System, http://dx.doi.org/ tion of the CCyB and whether advanced ap- 10.17016/FEDS.2015.059 (providing an example proaches institutions are contributing—ei- of the range of indicators used and type of ther directly or indirectly—to these high- analysis possible). lighted vulnerabilities.

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(h) In setting the CCyB for advanced ap- tivity based on the concerns expressed by the proaches institutions that it supervises, the regulators in communications announcing a Board plans to consult with the OCC and policy change. FDIC on their analyses of financial system (b) The Board will monitor and analyze ad- vulnerabilities and on the extent to which justments by banking organizations and advanced approaches banking organizations other financial institutions to the CCyB: are either exposed to or contributing to whether a change in the CCyB leads to ob- these vulnerabilities. served changes in risk-based capital ratios at advanced approaches institutions, as well as 5. COMMUNICATION OF THE U.S. CCYB WITH whether those adjustments are achieved pas- THE PUBLIC sively through retained earnings, or actively (a) The Board expects to consider at least through changes in capital distributions or once per year the applicable level of the U.S. in risk-weighted assets. Other factors to be CCyB. The Board will review financial condi- monitored include the extent to which loan tions regularly throughout the year and may growth and interest rate spreads on loans adjust the CCyB more frequently as a result made by affected banking organizations of those monitoring activities. change relative to loan growth and loan (b) Further, the Board will continue to spreads at banking organizations that are communicate with the public in other for- not subject to the buffer. Another consider- mats regarding its assessment of U.S. finan- ation in setting the CCyB and other cial stability, including financial system macroprudential tools is the extent to which vulnerabilities. In the event that the Board the adjustments by advanced approaches in- considered that a change in the CCyB were stitutions to higher capital buffers lead to appropriate, it would, in proposing the migration of credit market activity outside change, include a discussion of the reasons of those banking organizations, especially to for the proposed action as determined by the the nonbank financial sector. Depending on particular circumstances. In addition, the the amount of migration, which institutions Board’s biannual Monetary Policy Report to are affected by it, and the remaining expo- Congress, usually published in February and sures of advanced approaches institutions, July, will continue to contain a section that those adjustments could cause the Board to reports on developments pertaining to the favor either a higher or a lower value of the stability of the U.S. financial system.12 That CCyB. portion of the report will be an important (c) The Board will also monitor informa- vehicle for updating the public on how the tion regarding the levels of and changes in Board’s current assessment of financial sys- the CCyB in other countries. The Basel Com- tem vulnerabilities bears on the setting of mittee on Banking Supervision is expected the CCyB. to maintain this information for member countries in a publically available form on 6. MONITORING THE EFFECTS OF THE U.S. its Web site.13 Using that data in conjunction CCYB with supervisory and publicly available (a) The effects of the U.S. CCyB ultimately datasets, the Board will be able to draw not will depend on the level at which it is set, only upon the experience of the United the size and nature of any adjustments in the States but also that of other countries to re- level, and the timeliness with which it is in- fine estimates of the effects of changes in the creased or decreased. The extent to which CCyB. the CCyB may affect vulnerabilities in the [81 FR 63686, Sept. 16, 2016] broader financial system depends upon a complex set of interactions between required capital levels at the largest banking organi- PART 218—EXCEPTIONS FOR zations and the economy and financial mar- BANKS FROM THE DEFINITION OF kets. In addition to the direct effects, the BROKER IN THE SECURITIES EX- secondary economic effects could be ampli- fied if financial markets extract a signal CHANGE ACT OF 1934 (REGULA- from the announcement of a change in the TION R) CCyB about subsequent actions that might be taken by the Board. Moreover, financial Sec. market participants might react by updating 218.100 Definition. their expectations about future asset prices 218.700 Defined terms relating to the net- in specific markets or broader economic ac- working exception from the definition of ‘‘broker.’’ 218.701 Exemption from the definition of 12 For the most recent discussion in this format, see box titled ‘‘Developments Re- ‘‘broker’’ for certain institutional refer- lated to Financial Stability’’ in Board of rals. Governors of the Federal Reserve System, Monetary Policy Report to Congress, June 2016, 13 BIS, Countercyclical capital buffer pp. 20–21. (CCyB), www.bis.org/bcbs/ccyb/index.htm.

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