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standards for cooking products, and needed if these products cannot meet FEDERAL RESERVE SYSTEM submit comments to DOE. the proposed standard levels. DOE is In view of the request for a comment also seeking test data showing how the 12 CFR Parts 217 and 225 period extension for the September 2016 design differences for commercial-style [Docket No. R–1547] SNOPR, DOE has determined that a 30- cooking tops impact cooking day extension of the public comment performance relative to residential-style RIN 7100 AE–58 period for the September 2016 SNOPR products. is appropriate. The comment period is Regulations Q and Y; Risk-Based AHAM and GE Appliances, a Haier extended until November 2, 2016. DOE Capital and Other Regulatory further notes that any submissions of Company (GE) also objected to the Requirements for Activities of comments or other information proposed test method for determining Financial Holding Companies Related submitted between the original the standby power consumption of to Physical Commodities and Risk- comment end date and the extension of combined cooking products (i.e., Based Capital Requirements for the comment period will be deemed household cooking appliances that Merchant Banking Investments timely filed. combines a conventional cooking top DOE also notes that, in response to and/or conventional oven with other AGENCY: Board of Governors of the the August 2016 TP SNOPR, it received appliance functionality, which may or Federal Reserve System (Board). a number of comments pertaining to the may not include another cooking ACTION: Notice of proposed rulemaking. test procedure that impact the proposed product). GE urged DOE to consider standard levels from the September adopting for conventional cooking tops SUMMARY: The Board is seeking 2016 SNOPR.1 Based on these the same prescriptive design comment on a proposal to adopt additional limitations on physical comments and the extension of the requirement for the power supply that commodity trading activities conducted comment period, DOE has identified was proposed for conventional ovens. additional information and data it is by financial holding companies under DOE welcomes comments on the merits complementary authority granted seeking that would be beneficial for the of the approach of adopting a analysis in support of the standards pursuant to section 4(k) of the Bank prescriptive standard for the power Holding Company Act and clarify rulemaking. supply for conventional cooking tops, Sub-Zero Group, Inc. commented that certain existing limitations on those including data on combined cooking activities; amend the Board’s risk-based the proposed test procedure and products. standards do not take into account capital requirements to better reflect the design features associated with AHAM and GE also expressed risks associated with a financial holding commercial-style gas cooking tops that concern regarding the proposed company’s physical commodity impact efficiency, including: requirement to test each unique size activities; rescind the findings • High input rate burners with large setting of multi-ring surface units. underlying the Board orders authorizing diameters and high controllability of the AHAM and GE stated that multi-ring certain financial holding companies to flame, for quicker heat-up times as well elements provide consumers the ability engage in energy management services as the ability to simmer foods such as to adjust the element size to the size of and energy tolling; remove copper from chocolates and sauces; the cookware, which in turn saves the list of metals that bank holding • Heavy cast iron grates for better energy. AHAM and GE noted that companies are permitted to own and heat distribution and strength to support because the inner elements of multi-ring store as an activity closely related to banking; and increase transparency large loads; surface units operate at lower efficiency, • regarding physical commodity activities Greater distance from the burner to the proposed test procedure could result of financial holding companies through the grate for heat distribution and in the elimination of multi-ring reduction of carbon monoxide; and more comprehensive regulatory • elements. DOE welcomes data reporting. Larger open area for primary and comparing available surface element secondary air for combustion and diameters and cooking top energy use DATES: Comments must be received on exhaust of combustion byproducts. for cooking tops with multi-ring surface or before December 22, 2016. DOE welcomes data showing how units and those that do not have this ADDRESSES: You may submit comments, these design factors affect the measured feature. identified by Docket No. R–1547 and annual energy consumption relative to RIN 7100 AE–58 by any of the following the proposed standard levels. As noted Issued in Washington, DC, on September methods: in the September 2016 SNOPR, DOE 23, 2016. • Agency Web site: http:// selected the proposed standard level for Kathleen B. Hogan, www.federalreserve.gov. Follow the gas cooking tops to maintain the full Deputy Assistant Secretary for Energy instructions for submitting comments at functionality of cooking tops marketed Efficiency, Energy Efficiency and Renewable http://www.federalreserve.gov/ as commercial-style and noted that Energy. generalinfo/foia/ProposedRegs.aspx. commercial-style gas cooking tops are [FR Doc. 2016–23660 Filed 9–29–16; 8:45 am] • Federal eRulemaking Portal: http:// available on the market that meet the BILLING CODE 6450–01–P www.regulations.gov. Follow the proposed efficiency level. 81 FR 60784, instructions for submitting comments. 60817, 60865. As a result, DOE is also • Email: regs.comments@ seeking data specifically on the federalreserve.gov. Include the docket efficiency of commercial-style products number and RIN number in the subject relative to the proposed standard level line of the message. and the design changes that would be • Fax: (202) 452–3819 or (202) 452– 3102. 1 These comments are available in the • conventional cooking products test procedure Mail: Robert deV. Frierson, docket at https://www.regulations.gov/docket?D= Secretary, Board of Governors of the EERE-2012-BT-TP-0013. Federal Reserve System, 20th Street and

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Constitution Avenue NW., Washington, C. The Scope of Permitted Complementary the financial system generally.3 DC 20551. Commodity Activities Pursuant to this authority, the Board has All public comments will be made 1. Background authorized certain FHCs to engage in available on the Board’s Web site at a. Physical Commodity Trading physical commodity trading as well as b. Energy Management Services and Energy energy management services and energy http://www.federalreserve.gov/ Tolling generalinfo/foia/ProposedRegs.aspx as 2. Reconsideration of the Approval of tolling. The GLB Act also added a submitted, unless modified for technical Energy Management and Tolling as grandfather provision that permits reasons. Accordingly, your comments Complementary Activities certain FHCs to continue to engage in a will not be edited to remove any 3. Conformance Period broad range of physical commodity identifying or contact information. E. Reclassification of Copper as an activities.4 Finally, the GLB Act Public comments may also be viewed Industrial Metal authorizes FHCs to make merchant electronically or in paper form in Room F. New Financial Reporting Data on banking investments in any type of 3515, 1801 K Street NW. (between 18th Physical Commodity Activities nonfinancial company, including a 1. General and 19th Streets NW.), Washington, DC company engaged in activities involving 2. Schedule HC–W physical commodities.5 20006 between 9:00 a.m. and 5:00 p.m. 3. Schedule HC–R Modifications on weekdays. For security reasons, the 4. Public Disclosure B. Risks Associated With Physical Board requires that visitors make an III. Regulatory Analysis Commodity Activities appointment to inspect comments. You A. Regulatory Flexibility Act Analysis may do so by calling (202) 452–3684. B. Paperwork Reduction Act There are a number of potential legal, Upon arrival, visitors will be required to C. Solicitation of Comments on Use of reputational and financial risks present valid government-issued photo Plain Language associated with the conduct of physical commodity trading activities. Over the identification and to submit to security I. Introduction screening in order to inspect and past decade, monetary damages photocopy comments. A. Background associated with an environmental catastrophe involving physical FOR FURTHER INFORMATION CONTACT: Bank holding companies (BHCs) and commodities have ranged from Board: Constance M. Horsley, Assistant their subsidiaries engage in certain hundreds of millions to tens of billions Director, (202) 452–5239, Elizabeth types of physical commodity activities of dollars. These damages can exceed MacDonald, Manager, (202) 475–6316, under a variety of authorities. Pursuant the market value of the physical Kevin Tran, Supervisory Financial to the Bank Holding Company Act (BHC commodity involved in the catastrophic Analyst, (202) 452–2309, or Vanessa Act), BHCs may engage in activities that event, and can exceed the committed Davis, Supervisory Financial Analyst, are ‘‘so closely related to banking as to capital and insurance policies of the (202) 475–6674, Division of Banking be a proper incident thereto.’’ 1 This organization. Certain federal Supervision and Regulation; or Laurie authority allows BHCs to buy, sell, or environmental laws, including the Oil Schaffer, Associate General Counsel, hold precious metals, such as gold, Pollution Act of 1990 (OPA),6 the (202) 452–2277, Michael Waldron, silver, platinum, and palladium; Comprehensive Environmental Special Counsel, (202) 452–2798, Will participate as a principal in cash-settled Response, Compensation, and Liability Giles, Counsel, (202) 452–3351, or Mary derivative contracts based on Act of 1980 (CERCLA),7 and the Clean Watkins, Attorney, (202) 452–3722, commodities; and trade in commodity Water Act (CWA),8 generally impose Legal Division, Board of Governors of derivatives that allow for physical liability on owners and operators of the Federal Reserve System, 20th and C settlement under certain circumstances. facilities and vessels for the release of Streets NW., Washington, DC 20551. For In the Gramm-Leach-Bliley Act (GLB physical commodities, such as oil, the hearing impaired only, Act) enacted in 1999, Congress distillate fuel oil, jet fuel, liquefied Telecommunication Device for the Deaf expanded the activities in which a BHC petroleum gas, gasoline, fertilizer, (TDD), (202) 263–4869. may engage.2 The GLB Act permits natural gas, and propylene.9 SUPPLEMENTARY INFORMATION: BHCs that are well capitalized and well Consequently, a company that directly managed to elect to become financial owns an oil tanker or petroleum refinery Table of Contents holding companies (FHCs) and engage that releases crude oil in a navigable I. Introduction in a broader range of activities than waterway or adjoining shoreline in the A. Background permitted for BHCs that are not FHCs. United States may be liable for removal B. Risks Associated With Physical Three provisions of the GLB Act permit costs and damages for that release under Commodity Activities FHCs to conduct a broader range of the OPA.10 C. Limitations on Physical Commodity physical commodity activities and Activities 3 See Gramm-Leach-Bliley Act § 103, 12 U.S.C. D. Summary of the Advance Notice of investments than are otherwise permitted for BHCs. First, the GLB Act 1843(k)(1)(B). Proposed Rulemaking (ANPR) and 4 permits FHCs to engage in any activity 12 U.S.C. 1843(o). Comments on the ANPR 5 12 U.S.C. 1843(k)(4)(H). II. Description of Proposed Rule that the Board (in its sole discretion) 6 See 33 U.S.C. 2701–02. A. Scope of Permissible Physical determines is complementary to a 7 See 42 U.S.C. 9607. Commodity Activities financial activity and does not pose a 8 See 33 U.S.C. 1321. In general, liability under 1. Level of Complementary Commodity substantial risk to the safety and the OPA, CWA, and CERCLA is subject to limited Activities Permitted soundness of depository institutions or defenses, including releases caused by an act of 2. Clarification of Prohibitions on Certain God. See, e.g., 33 U.S.C. 2703; 42 U.S.C. 9607. Operations 9 See 33 U.S.C. 1321, 2701 (defining ‘‘oil’’), 42 1 B. Risk-Based Capital Requirements for See 12 U.S.C. 1843(c)(8). In addition, national U.S.C. 7412, 9601 (defining ‘‘hazardous air Covered Physical Commodities banks owned by BHCs may engage in certain pollutant’’ and ‘‘hazardous substance,’’ limited types of physical commodity activities respectively). 1. Overview pursuant to authority granted under the National 10 See 33 U.S.C. 2702. The OPA generally limits 2. Calculation of Exposure Amount for Bank Act. State-chartered banks also may be liability for spills from facilities to $350,000,000 Covered Physical Commodities authorized to engage in the same activities under and liability from spills from vessels to the greater 3. Impact Analysis of Proposed Capital state statutes. of $1,900 per gross ton or $22,000,000. Id. at 2704. Requirements 2 Public Law 106–102, 113 Stat. 1338 (1999). Continued

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In addition to Federal environmental entity exercises a high degree of control C. Limitations on Physical Commodity law, state environmental laws separately over the liable company.15 Courts Activities impose liability for the harmful or typically require multiple indicia of To help address these risks, the Board unauthorized release of an control before assigning liability to the 11 placed a number of limitations, environmentally sensitive commodity. parent or affiliated company.16 Common discussed below, on the physical Like Federal environmental law, many indicia include managing day-to-day commodity activities it has authorized states impose strict liability for damages operations, undercapitalizing under the GLB Act. from the unauthorized release of subsidiaries, and commingling of assets, Section 4(k)(1)(B) Complementary specified harmful substances on the employees, legal advice, accounting, or Authority. The GLB Act added section owners and operators of the facility or office space.17 Courts have also used the 4(k)(1)(B) to the BHC Act to permit an vessel from which the discharge concept of veil piercing to assign FHC to engage in activities that the occurred. Many states also impose Board determines to be complementary liability based on the causal connection liability under Federal environmental 18 to a financial activity (complementary between a party’s actions and the law. authority). The provision’s purpose was prohibited release.12 Some state statutes Further, even if a parent company is to allow the Board to permit FHCs to also impose strict liability directly on not assigned liability through a veil engage in an activity that appears to be owners of the covered substance for piercing action, the parent company commercial rather than financial in damages caused by, and/or cleanup and may provide support to affiliated nature, but that is meaningfully removal costs incurred as a result of, the entities involved in an environmental release of the substance.13 State connected to a financial activity such catastrophe to limit reputational damage that it complements the financial common law tort doctrines may also or as a condition to a settlement 20 provide additional bases for liability for activity. When determining that an agreement. For example, BP p.l.c., the activity is complementary to a financial environmental harm, such as ultimate parent company of BP 14 activity for an FHC, the Board must find negligence, trespass, and nuisance. Exploration & Production, Inc. and BP State laws also allow for the that the activity does not pose a Corporation North America, Inc., assignment of the liability of one substantial risk to the safety and company to its parent and/or another guaranteed the payment of more than soundness of depository institution affiliated company even if the affiliated $20 billion as part of a consent decree subsidiaries of the FHC or the financial company did not directly participate in resolving claims against its subsidiaries system generally.21 In addition, the the wrongdoing. This concept of resulting from the Deepwater Horizon Board is required to consider whether ‘‘piercing the corporate veil’’ is an oil spill.19 performance of the activity can exception to the general rule in reasonably be expected to produce corporate law that a parent company is 15 See, e.g., See William Passalacqua Builders, benefits to the public—such as greater not liable for the acts of its subsidiaries, Inc., v. Resnick Developers South, Inc., 933 F.2d convenience, increased competition, or 131, 137–141 (2d Cir. 1991); Berkey v. Third gains in efficiency—that outweigh and may be applied when the affiliated Avenue Ry. Co., 244 N.Y. 84, 155 NE. 58 (1926), (holding that ‘‘domination must be so complete, possible adverse effects, such as undue However, the OPA liability cap will not apply if the interference so obtrusive, that by the general rules concentration of resources, decreased or party engaged in certain types of misconduct (e.g., of agency the parent will be a principal and the unfair competition, conflicts of interest, willful misconduct, gross negligence, violation of subsidiary an agent . . .’’); Fletcher Cyclopedia of or unsound banking practices.22 Federal safety regulation, failure to report incident). the Law of Corporations 41.30–.60 (rev. ed. 2006). Id. See also Letter from the Securities Industry and Under this authority, the Board has 11 The OPA, CERCLA, and CWA explicitly state Financial Markets Association et al., dated April 16, approved the requests of a limited that the statutes do not preempt state laws imposing 2014, Appendix B, pg. 41 (SIFMA Comment Letter). number of FHCs to engage in three additional liability or requirements with respect to Other courts have articulated the first prong of this complementary activities related to the discharge of hazardous substances. 33 U.S.C. inquiry—whether there was domination—as an physical commodities: (1) Physical 1312(o), 2718(a); 42 U.S.C. 9614(a). inquiry into whether the two companies operated 12 N.J. Admin. Code tit. 7, section 1E:1.6; State v. as a single economic unit or alter ego. See Fletcher commodity trading involving the Montayne, 604 N.Y.S.2d 978 (N.Y. App. Div. 1993) v. Atex, Inc., 68 F.3d 1451, 1457 (1995); NetJets purchase and sale of commodities in the (finding an oil broker liable under New York Aviation, Inc. v. LHC Communications, LLC, 537 spot market, and taking and making Navigation Law section 181 because the broker was F.3d 168, 176 (2d Cir. 2008). delivery of physical commodities to contractually obligated to provide the oil and 16 See William Passalacqua Builders, Inc., v. specify the means of its delivery even though the Resnick Developers South, Inc., 933 F.2d 131, 137– settle commodity derivatives (physical 23 broker did not own the oil and had used third 141 (2d Cir. 1991); United States v. Golden Acres, commodity trading); (2) providing parties to move and store the oil). See also N.J. Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988) aff’d transactions and advisory services to Dep’t of Envtl. Prot. v. Dimant, 212 N.J. 153, 177, 879 F.2d 860, 1104 (3d Cir. 1989). See also Harco power plant owners (energy 51 A.3d 816 (2012) (summarizing prior state cases Nat. Ins. Co. v. Green Farms, Inc., 15 Del. J. Corp. to require some connection between the discharge L. 1030, 1038–1040 (Del. Ch. 1989). complained of and the alleged discharger); 17 See, e.g., United States v. Golden Acres, Inc., 20 Citigroup Inc., 89 Fed. Res. Bull. 508 (2003), Authority of New Brunswick v. Suydam Investors, 702 F. Supp. at 1104; New York State Elec. and Gas note 8 and related text (‘‘2003 Citi Order’’). 826 A.2d 673, 683 (N.J. 2003) (suggesting that such Corp. v. First Energy Corp., 766 F.3d 212, 224–227 21 12 U.S.C. 1843(k)(1)(B). causal liability under New Jersey law should be (2nd Cir. 2014); William Passalacqua Builders, Inc., 22 12 U.S.C. 1843(j)(2). read to impose liability on persons responsible for v. Resnick Developers South, Inc., 933 F.2d 131, 23 See Board orders regarding Citigroup Inc., 89 the discharge of the substance). 137–141 (2d Cir. 1991). Fed. Res. Bull. 508 (2003); Fortis S.A./N.V., 94 Fed. 13 See, e.g., Alaska Stat. section 46.03.822; Cal. 18 See, e.g., United States v. Bestfoods, 524 U.S.C. Res. Bull. C20 (2008); Socie´te´ Ge´ne´rale, 92 Fed. Res. Gov’t Code §§ 8670.3, 8670.56.5; Fla. Stat. section 51, 63–64 (1998); AT&T Global Info. Solutions Co. Bull. C113 (2006); Deutsche Bank AG, 91 Fed. Res. 376.12 (imposing liability for cleanup costs on the v. Union Tank Car Co., 29 F.Supp.2d 857, 869 (S.D. Bull. C54 (2005); JPMorgan Chase & Co., 91 Fed. owner of the covered substance but only if the Oh. 1998). Res. Bull. C57 (2005); Barclays Bank PLC, 90 Fed. owner and operator of the facility or vessel do not 19 U.S. v. BP Exploration & Production Inc., et al., Res. Bull. 511 (2004); UBS AG, 90 Fed. Res. Bull. pay such costs and such parties were not in No. 10–4536 in MDL 2179 (E.D. La.) Consent Decree 215 (2004); and The Royal Bank of Scotland Group compliance with the financial security among defendant BP Exploration & Production Inc., plc, 94 Fed. Res. Bull. C60 (2008). See also Board requirements of the statute at the time of the The United States of America, and the States of letters regarding Bank of America Corporation release); Md. Envir. Code Ann. § 4–401; Or. Rev. Alabama, Florida, Louisiana, Mississippi, and (April 24, 2007), BNP Paribas (August 31, 2007), Stat. § 468B.310; Wash. Rev. Code Ann. section Texas, Document 16093, Appendix 9, available at Credit Suisse Group (March 27, 2007), Fortis S.A./ 90.56.370. http://www.laed.uscourts.gov/sites/default/files/ N.V. (September 29, 2006), Wachovia Corporation 14 Restatement (Second) of Torts sections 158, OilSpill/4042016ConsentDecree_0.pdf. See also (April 13, 2006), Bank of Nova Scotia (February 17, 165, 390, 822, 825, 826. https://www.justice.gov/enrd/deepwater-horizon. 2011).

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management services); 24 and (3) paying Section 4(o) Grandfather Authority. In ownership interest and in any type of a power plant owner fixed periodic the GLB Act, Congress amended the nonfinancial company (portfolio payments that compensate the owner for BHC Act to allow certain companies to company). The GLB Act imposes its fixed costs in exchange for the right continue to engage in a broad range of conditions on the merchant banking to all or part of the plant’s power output activities involving physical investment activities of FHCs. First, the (energy tolling).25 Together, these three commodities if these companies investment must be part of ‘‘a bona fide activities are referred to as subsequently became FHCs.27 Under underwriting or merchant or investment complementary commodity activities. section 4(o) of the BHC Act, a company banking activity’’ and may not be held The Board placed certain restrictions that was not a BHC prior to and by an IDI or subsidiary of an IDI.30 on each complementary commodity becomes an FHC after November 12, Second, an FHC making merchant activity to protect against the risks the 1999, may continue to engage in banking investments must own or activity could pose to the safety and activities related to the trading, sale, or control a securities affiliate or a soundness of the FHC, any of its insured investment in commodities that were registered investment adviser that depository institution (IDI) subsidiaries, not permissible for BHCs as of advises an affiliated insurance and the U.S. financial system. For September 30, 1997, if the company was company.31 Third, merchant banking example, the Board limited the size of engaged in the United States in any of investments must be held only ‘‘for a these activities by imposing limits on such activities as of September 30, 1997 period of time to enable the sale or the amount of assets or revenue that an (section 4(o) grandfather authority).28 disposition thereof on a reasonable basis FHC could have committed to Section 4(o) grandfathered firms are consistent with the financial viability of complementary commodity activities. permitted by statute to engage in a the activities.’’ 32 Finally, an FHC may Specifically, the aggregate market value broader range of activities than firms not routinely manage or operate the of commodities held under physical that are limited to conducting physical portfolio company ‘‘except as may be commodity trading and energy tolling commodity activities under necessary or required to obtain a may represent no more than 5 percent complementary authority. This broader reasonable return on investment upon of the tier 1 capital of the FHC. The range of activities includes storing, resale or disposition.’’ 33 Board also imposed a cap on energy transporting, extracting, and altering The Board’s rules contain limitations management services of no more than 5 commodities. Section 4(o) imposes only that implement these statutory percent of an FHC’s consolidated two conditions on the conduct of requirements. For example, Regulation operating revenues. To help protect activities: (i) The activities are limited to Y prohibits FHCs in most cases from against dealing in illiquid commodities, no more than 5 percent of the total holding merchant banking investments the Board also limited the physical consolidated assets of the FHC, and (ii) for more than 10 years (or for more than commodity trading authority to only the FHC is prohibited from cross- 15 years for investments held in a physical commodities approved by the marketing the services of its subsidiary qualifying private equity fund).34 Commodity Futures Trading depository institution(s) and Further, Regulation Y limits the Commission (CFTC) for trading on a subsidiary(ies) engaged in activities duration of routine management to the U.S. futures exchange (unless under the section 4(o) grandfather period necessary to address the cause of specifically excluded by the Board) or authority. The 5 percent of assets limit the FHC’s involvement, to obtain commodities the Board otherwise permits section 4(o) grandfathered FHCs suitable alternative management approves.26 to hold significantly larger amounts of a arrangements, to dispose of the The Board also prohibited FHCs from wider range of commodity-related assets investment, or to otherwise obtain a owning, operating, or investing in than those FHCs that conduct reasonable return upon the resale or facilities that extract, transport, store, or commodities activities under disposition of the investment.35 alter commodities under complementary authority, which does Additionally, an FHC must establish complementary authority. FHCs also are not permit storage, transport, extraction risk-management policies and required to ensure that the third-party or similar activities and imposes a procedures for its merchant banking contractors hired to store, transport, and stricter limit of 5 percent of tier 1 capital activities, and policies and procedures otherwise handle the physical on the more limited class of commodity that maintain corporate separateness commodities of the FHC are reputable. holdings that are permitted under between the FHC and its portfolio complementary authority. companies. Maintaining corporate Merchant Banking Authority. The 24 See, e.g., The Royal Bank of Scotland Group separateness protects the FHC and its plc, 94 Fed. Res. Bull. C60 (2008) (2008 RBS Order), GLB Act also amended the BHC Act to subsidiary IDIs from potential legal and Fortis S.A./N.V., 94 Fed. Res. Bull. C20 (2008) allow FHCs to engage in merchant liability associated with the operations (2007 Fortis Order). banking activities. Under section and financial obligations of the FHC’s 25 Under energy tolling, the toller provides (or 4(k)(4)(H) of the BHC Act, FHCs may portfolio companies and private equity pays for) the fuel needed to produce the power that invest in nonfinancial companies as part it directs the owner to produce. See, e.g., 2008 RBS funds.36 The Board’s regulatory capital Order. The agreements also generally provide that of a bona fide securities underwriting or rule (Regulation Q) addresses merchant the owner will receive a marginal payment for each merchant or investment banking activity banking investments through risk- megawatt hour produced by the plant to cover the 29 (merchant banking authority). These weighting in the equity framework.37 owner’s variable costs plus a profit margin. Id. The investments may be made in any type of plant owner, however, retains control over the day- to-day operations of the plant and physical plant 30 12 U.S.C. 1843(k)(4)(H)(i), (ii). 27 See 12 U.S.C. 1843(o). assets at all times. Id. 31 Id. at 1843(k)(4)(H)(ii). 26 28 12 U.S.C. 1843(o). Two firms are authorized to See 2003 Citi Order. In limited cases, the Board 32 Id. at 1843(k)(4)(H)(iii). has permitted FHCs to take and make physical engage in these activities: The Goldman Sachs 33 12 U.S.C. 1843(k)(4)(H)(iv). delivery of a non-CFTC-approved commodity if the Group, Inc. and Morgan Stanley, both of which 34 FHC demonstrated that there is a market in became bank holding companies in 2008 and made See 12 CFR 225.172-.173. financially-settled contracts on that commodity, the successful elections to become financial holding 35 12 CFR 225.171(e). Regulation Y also imposes commodity is fungible, the commodity is liquid, companies at that time. documentation requirements on these extraordinary and the FHC has in place trading limits that address 29 Id. The statute grants similar authority to management activities. Id. concentration risk and overall exposure. See, e.g., insurance companies that are FHCs or subsidiaries 36 See also id. at 225.175(b). 2008 RBS Order. of FHCs. Id. at 1843(k)(4)(I). 37 12 CFR 217.52–.53 and 217.153–.154.

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D. Summary of the Advance Notice of form letters in response to the ANPR Commenters that opposed FHCs Proposed Rulemaking (ANPR) and from end users of commodities (e.g., engaging in physical commodity Comments on the ANPR non-financial entities that use activities or that favored additional Over the last 15 years, a number of commodities in their operations or limitations on such activities expressed FHCs have engaged in physical businesses), trade associations, public concern that FHCs have conflicts of interest in dealing with customers and commodity activities pursuant to these interest groups, academics, members of enjoy an unfair competitive advantage. authorities and the Federal Reserve has Congress, and other individuals. In These commenters cited news articles gained supervisory experience with the general, comments from individuals, alleging market manipulation by certain implementation of these restrictions. In members of Congress and public interest FHCs in the aluminum and copper addition, the Federal Reserve has groups opposed FHC involvement in markets. Some commenters also argued monitored the connection between physical commodity activities or that the ability of FHCs to make authorized physical commodity supported additional restrictions on proprietary trades and purchases of activities and financial activities, FHC involvement in physical physical commodities may conflict with including derivative trading and commodities. In contrast, comments from end users, FHCs, and banking the interests of their customers. These hedging activities. The Board notes that commenters argued that FHCs may after an initial growth of physical trade organizations were generally supportive of FHC involvement in provide less favorable terms on products commodity activities of FHCs, the level and services to customers when those of physical commodity activities at physical commodity activities or opposed additional restrictions on these customers compete with FHCs in the FHCs has generally declined. physical commodity markets. Finally, In January 2014, as part of an ongoing activities. Comments from insurance companies urged the Board to consider some commenters stated that the ability review of the commodities activities of of FHCs to trade in physical commodity FHCs, the Board sought public comment the differences between insurance companies and FHCs in terms of their markets and own physical commodities on a variety of issues related to the provides an opportunity for FHCs to use unique and significant risks of physical business models, risks, and regulations. Risks of FHC participation in physical information gleaned from their trading commodity activities through an activities to manipulate financial 38 commodity activities. Commenters that ANPR. In the ANPR, the Board invited markets. comment on whether additional opposed FHC participation in physical commodity markets or that favored Commenters in favor of FHC prudential restrictions or limitations on participation in the physical commodity additional limitations on these activities commodities-related activities were markets or opposed to additional argued that these activities pose risks to appropriate to further mitigate the risks restrictions on these activities argued FHCs individually and to the financial of those activities. that FHC participation in these markets system generally. These commenters In light of the potential risks provides valuable and hard-to-replace generally described risks associated associated with physical commodity services to end users of commodities. with physical commodity activities, activities, the ANPR queried whether Some commented that FHCs were including environmental risks, the current capital and insurance desirable counterparties in these catastrophic risks, geopolitical risks requirements adequately account for the markets because FHCs are well (e.g., commodities activities conducted degree and types of liabilities that capitalized, well regulated, and familiar would result from physical commodities in regions experiencing political with their customers’ businesses. in the event of an environmental turmoil), compliance risks (e.g., bribery, Commenters commonly argued that the catastrophe. The ANPR also sought environmental risks), and supply chain ability of FHCs to offer bespoke hedging comment on whether FHCs’ vendor- issues. Some of these commenters arrangements to customers would not be approval processes and current industry recommended that the Board prohibit possible without their participation in safety policies and procedures are trading in or ownership of commodities physical commodity activities. adequate in light of recent associated with catastrophic risk, Commenters also cautioned that costs environmental disasters.39 strengthen prudential safeguards, or for end users would increase if FHCs Apart from direct and indirect require additional capital in connection exited physical commodity markets, financial liability, the ANPR observed with such activities. including costs to municipalities and that the public confidence in a holding Many of these commenters expressed retail purchasers of commodities. company that was engaged in a physical concern regarding the ability of FHCs to Some commenters contended that commodity activity could suddenly and monitor these risks and questioned the FHC involvement in physical severely be undermined by an ability of FHCs to insure or hedge commodity activities enhances liquidity environmental disaster, as could the against these risks. Some commenters and efficiency in physical commodity confidence in the company’s subsidiary argued that FHCs face a challenge in markets. Multiple commenters cited a IDI or their access to funding markets. monitoring commodities risks because correlation between recent reductions in Financial companies, and in particular of the diverse nature of commodities wholesale power sales in California holding companies of IDIs, are activities and the number of federal with the exit of certain FHCs from those particularly vulnerable to reputational agencies involved in commodities markets. Commenters supportive of FHC damage in their banking operations. As regulation. Some commenters participation in physical commodity a result, a catastrophic event involving contended that regulators face these activities stated that there was not an FHC could undermine confidence in same challenges in monitoring sufficient evidence to substantiate the the FHC’s subsidiary bank or may limit commodities risks. Those opposed to risks described in the ANPR. They its access to funding markets until the FHC participation in physical responded by distinguishing events extent of the FHC’s liability is assessed. commodity markets expressed concern cited in the ANPR, like the Deepwater The Board received more than 180 that excessive speculation in Horizon oil spill, from the exposures unique comments and more than 16,900 commodities markets, which they commonly faced by commodity traders attributed in part to FHC involvement in both in terms of the extent of potential 38 See 79 FR 3329 (Jan. 21, 2014). these markets, causes market damages from an incident and the 39 See 79 FR 3329, 3332 (Jan. 21, 2014). distortions. potential to be held financially

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responsible for such incidents. More investments for several reasons. First, period to unwind or divest these specifically, these commenters they argued that merchant banking activities; (iv) remove copper from the expressed confidence that adequate authority reflects a considered list of metals that BHCs are permitted to insurance generally was available or Congressional determination that own and store as an activity closely that the FHC corporate structure offered accounted for both the benefits and the related to banking under section 4(c)(8) adequate protection against legal risks of these activities and determined of the BHC Act and Regulation Y; and liability. Many FHCs and banking trade the appropriate balance of restrictions (v) increase transparency regarding the organizations argued that FHCs could on merchant banking activities. physical commodity activities of FHCs manage risks arising from physical Commenters contended that additional through more comprehensive regulatory commodity activities through a robust restrictions on merchant banking reporting. The Board invites public risk-management framework that is investments would undermine the comment on all aspects of this proposal, tailored to specific categories of risk. benefits of merchant banking activities including in particular the issues Finally, commenters in favor of FHC and hamper economic growth by, for identified below. participation in these activities regarded example, reducing access to seed capital the reputational risks associated with for some small-to-medium-sized A. Scope of Permissible Physical physical commodities as being either businesses. Some commenters Commodity Activities not substantial or not unique to maintained that current regulatory and 1. Level of Complementary Commodity commodities. risk-management safeguards are Activities Permitted Complementarity of Complementary adequate to prevent or limit risks of Commodity Activities. Multiple merchant banking activities to financial As a condition of approving notices commenters argued that physical institutions. In support of this position, filed by FHCs to engage in physical commodity activities conducted in some pointed to the lack of significant commodity trading, the Board limited connection with derivatives activities liability resulting from past merchant the market value of the commodities an are complementary to financial banking activities. Some commenters FHC could hold under complementary activities for the reasons cited in the argued that imposing further restrictions authority to an aggregate of 5 percent of Board’s orders. For example, on merchant banking could increase the FHC’s consolidated tier 1 capital. commenters argued that physical risks to FHCs by preventing FHCs from The Board imposed this limit to reduce commodity activities conducted taking over routine management the safety and soundness risks of pursuant to the complementary functions when necessary to avoid holding physical commodities, which authority better enable FHCs to fulfill significant loss, and by preventing FHCs include unique risks such as legal and their obligations under commodity from diversifying their investment environmental risks described above as derivatives contracts and to net physical portfolios through merchant banking well as operational risks associated with and financial contracts by allowing investments. Other commenters argued the storage and transportation of physical settlement.40 that if FHCs are given an insufficient physical products (e.g., delay of Other commenters believed that investment horizon there is a greater delivery, loss of product). physical commodity activities are not likelihood that they will be forced to In addition to complementary complementary to financial activities. exit their investments at a loss in order authority, FHCs and their subsidiaries These commenters argued that the scope to comply with holding period may hold physical commodities under of complementary commodity activities requirements. other authorities. For example, the exceeds Congress’s intent for Office of the Comptroller of the complementary authority, which they II. Description of Proposed Rule Currency (OCC) has permitted certain assert envisioned low-risk activities Based on its review of comments and national banks to hold physical such as publishing travel magazines. additional analysis, the Board invites commodities to hedge customer driven, Some commenters argued that FHCs public comment on a proposal to (i) bank-permissible derivative should only be permitted to engage in adopt additional limitations on physical transactions 41 and BHCs may take banking activities. commodity activities conducted possession of physical commodities Merchant Banking Authority. Some pursuant to the complementary activity provided as collateral in satisfaction of commenters supported imposing authority in section 4(k)(1)(B) and debts previously contracted in good additional restrictions on merchant clarify certain existing limitations on faith.42 As some commenters argued, banking activities, including expanding those activities to reduce potential risks holding physical commodities presents the range of actions that would these activities may pose to the safety unique safety and soundness risks to a constitute routine management and and soundness of FHCs and their banking organization regardless of the shortening investment holding periods. depository institutions; (ii) amend the authority under which the commodity is Commenters supportive of additional Board’s risk-based capital requirements held or the entity within the restrictions on merchant banking to increase the requirements associated organization that holds the activities argued that these activities with physical commodity activities and commodities.43 pose many of the same risks to safety merchant banking investments in and soundness and financial stability companies engaged in physical 41 See 12 U.S.C. 24(7); see, e.g., OCC Interpretive that are posed by complementary commodity activities to better reflect the Letter No. 935 (May 14, 2002). commodity activities and section 4(o) potential risks of legal liability 42 12 U.S.C. 1843(c)(2); 12 CFR 225.22(d)(1). grandfather authority, such as associated with a catastrophic event 43 Letter from Senator Carl Levin dated April 16, environmental risks, reputational risks, involving these physical commodity 2014; Senate Permanent Subcommittee on Investigations, Wall Street Bank Involvement with geopolitical risks, compliance risks, and activities; (iii) rescind the findings Physical Commodities, 10, 390–396 (Nov. 20, 2014) supply chain issues. underlying the Board orders authorizing (PSI Report); see also OCC Banking Circular 277 at In contrast, other commenters urged certain FHCs to engage in energy 24 (noting the potential additional risks associated the Board not to place additional management services and energy tolling with physical hedging activities). In a comment letter on the ANPR dated December 17, 2014, restrictions on merchant banking under complementary authority and Senator Carl Levin, then-Chairman of the provide firms currently authorized to Subcommittee, requested that the PSI Report be 40 SIFMA Comment Letter at 28–30. conduct these activities a transition added to the administrative record for the ANPR.

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To address the potential that the the authority of the FHC to expand its involvement in decisions related to the Board’s 5 percent limit may be of physical commodity trading activities facility’s compliance with limited value in addressing the level based on complementary authority if the environmental statutes or regulations, and risks of physical commodity FHC already engages in a substantial including any law or regulation activities of FHCs because FHCs also amount of physical commodity referenced in the proposed definition of rely on other authorities to conduct activities under other authorities. The covered physical commodity (discussed these activities, the Board is proposing proposal would exclude from the below). The proposed list of actions is to account for physical commodities calculation of the cap physical not meant to be exhaustive; an FHC is held by the consolidated banking commodity activities of portfolio expected to take other steps as organization under a broader range of companies held under merchant appropriate to limit the types of actions authorities within the 5 percent limit on banking authority or related to that potentially could impose physical commodity trading that an satisfaction of debts previously environmental liability on the FHC or FHC may conduct under contracted because activities under otherwise suggest that the FHC is complementary authority. The proposed these authorities are temporary and, unduly involved in the activities of tighter limit would better account for because of other restrictions, may be third parties. the risks that activities involving difficult for an FHC to monitor and Question 1. Does the scope of the physical commodities pose to the control. Finally, because insurance proposed list of prohibited actions consolidated organization.44 company investments are regulated appropriately protect against an FHC Specifically, the proposal would under state insurance law, companies being found to ‘‘operate’’ a facility or prohibit an FHC from purchasing, held under section 4(k)(4)(I) are not a vessel under Federal and state selling, or delivering physical part of the Board’s current proposal.46 environmental law? Please explain your commodities pursuant to its authority to answer. Would it be more or less engage in physical commodity trading 2. Clarification of Prohibitions on Certain Operations appropriate for the regulation instead to under section 4(c)(8) or 4(k)(1)(B) if the prohibit any FHC involvement that market value of physical commodities As explainedabove, owners and could subject the FHC to any such owned by the FHC and its subsidiaries operators of facilities and vessels that liability as operator under under any authority, other than extract, process, store or transport environmental law without describing authority to engage in merchant banking certain physical commodities may be what types of actions could lead to the activities, similar investment authority liable for damages and cleanup costs liability, and why? for insurance companies, or authority to associated with a release of the physical acquire assets or voting securities held commodity. Because this liability can be B. Risk-Based Capital Requirements for in satisfaction of debts previously substantial, the Board prohibited FHCs Covered Physical Commodities contracted, exceeds 5 percent of the from owning, operating, or investing in 1. Overview consolidated tier 1 capital of the FHC.45 facilities for the extraction, The proposal would provide FHCs with transportation, storage, or distribution of The Board is proposing to amend its two years from the effective date of this commodities as part of complementary risk-based capital rule to better reflect rule to conform to the revised 5 percent authority.47 the risk of legal liability that an FHC cap. The proposal would codify in may incur as a result of its physical Under the proposal, the cap on an Regulation Y this limitation and commodity activities. The resulting FHC’s physical commodity trading strengthen restrictions designed to increase in capital requirements would activities would be calculated based on ensure that FHCs are not found to be reflected in both the standardized physical commodities the FHC holds on ‘‘operate’’ an entity engaged in physical approach and the advanced approaches a consolidated basis. While it would not commodity activities for purposes of risk-based capital ratios, and would be restrict the ability of a subsidiary to Federal and state environmental laws. in addition to any existing capital engage in a physical commodity activity These restrictions prohibit (1) requirements relating to market risk or pursuant to any authority other than participation in the day-to-day operational risk applicable to the assets complementary authority, it would limit management or operations of the associated with physical commodity facility, (2) participation in management activities of an FHC or relating to 44 An increase in the commodity derivatives and operational decisions that occur in existing counterparty credit risk business of a national bank that is a subsidiary of the ordinary course of the business of applicable to financial transactions an FHC may increase the amount of physical the facility, and (3) managing, directing, associated with such activities. commodities the national bank is able to hold as part of its commodity hedging activities as well as conducting or providing advice As described in more detail below, the capital requirements of the bank and FHC. See regarding operations having to do with covered physical commodities are those OCC Bulletin 2015–35 (Aug. 4, 2015) (limiting the leakage or disposal of a physical with the highest likelihood of exposing physical hedging activities to 5 percent of the commodity or hazardous waste or an FHC to legal liability under Federal notional value of the bank’s derivatives that are in that same particular commodity and allow for or state environmental laws. The physical settlement within 30 days). By including 46 Accord Letter from Teachers Insurance and proposal would not change the risk- the amount of physical commodities held at the Annuity Association of America dated April 16, based capital treatment of other physical national bank within the proposed 5 percent limit, 2014; letter from the American Council of Life commodities. It would moderately the proposed limit also would ensure that the Insurers dated April 16, 2014. amount of physical commodities the FHC is able to 54 For example, an FHC may face liability under increase the risk weight for covered hold under complementary authority does not certain states’ environmental laws based on its physical commodities that are held as increase along with any increase in the amount of ownership of the hazardous substance or on hiring part of a commodity trading activity that physical commodities held at the national bank. third parties to deliver the substance. See supra would be permissible under section 4(k) 45 Consistent with the existing notice notes 12–17 and corresponding text. requirements of FHCs engaging in physical 47 See, e.g., 2003 Citi Order. The Board’s orders of the BHC Act, and would significantly commodity trading, the proposal also would require also prohibit the FHC from processing, refining, or increase the risk weight for covered an FHC to notify the Board if, on a consolidated otherwise altering commodities, and clarify that in physical commodities that an FHC owns basis, the market value of physical commodities conducting its physical commodity trading, the as part of an activity authorized solely owned by the FHC exceeds 4 percent of the FHC will be expected to use appropriate storage and consolidated tier 1 capital of the FHC. See, e.g., transportation facilities owned and operated by under section 4(o) of the BHC Act. The 2003 Citi Order. third parties. Board is proposing a higher risk weight

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for activities permitted to be conducted section 4(o) grandfather authority than connection with the infrastructure asset. solely under section 4(o) because these for activities permissible as part of The proposed 1,250 percent risk weight activities contain the highest legal physical commodity trading under is not intended to require capital against liability and reputational risks (e.g., complementary authority.49 As noted the full amount of legal liability and storing, refining, extracting, transporting above, section 4(o) grandfather authority reputational harm that might result from or altering). The proposed risk weight permits direct ownership or operation of a catastrophic event, which can vary for a merchant banking investment in a facilities that manage, refine, store, significantly depending on the nature company engaged in covered physical extract, transport, or alter covered and extent of the environmental disaster commodity activities would depend on physical commodities. These activities and could be extremely large. Rather, the nature of those activities. increase the potential that an FHC will the risk weight is intended to reflect the The proposed capital requirements be held liable for damages from an higher risks of physical commodity would apply only to activities in environmental catastrophe involving activities permissible only under section physical commodities that are covered physical commodities. To help 4(o) grandfather authority without also substances covered under Federal or address these risks, as well as the making the activities prohibitively relevant state environmental law inherent uncertainty in valuing the costly by attempting to capture the risks (covered physical commodities). These potential damages associated with a of the largest environmental physical commodities carry the greatest catastrophe, the proposal assigns a 1,250 catastrophes. potential liability under relevant percent risk weight—the highest risk The proposal would assign a risk environmental laws. The proposed weight currently specified by the Board weight of 300 percent to covered definition specifically identifies the under the standardized approach 50—to commodities held pursuant to section Federal environmental laws—CERCLA, the market value of all covered physical 4(k) permissible physical commodity OPA, CAA, and CWA—likely to impose commodities permitted to be owned trading.52 The proposed 300 percent such liability.48 However, the proposed only under section 4(o) grandfather risk weight is designed to help ensure definition does not name individual authority.51 The proposal also assigns a that FHCs engaged in commodity state environmental laws. Rather, an 1,250 percent risk weight to the original trading have a level of capitalization for FHC would be required to identify on a cost basis (i.e., cost basis gross of such activities that is roughly state-by-state basis the physical accumulated depreciation and asset comparable to that of nonbank commodities it owns that are not impairment) of section 4(o) commodities trading firms. Because the covered substances under the infrastructure assets, which are any non- risks of an activity generally are enumerated Federal laws. It would then commodity on-balance-sheet assets independent of the authority under be required to determine whether the owned pursuant to section 4(o) which an FHC conducts the activity, the physical commodities it owns in a grandfather authority (e.g., pipelines, proposal would also assign a 300 particular state are subject to liability refineries). The proposal bases the percent risk weight to physical under that state’s environmental laws. capital requirement on the original cost commodity activities conducted under This approach is intended to limit an basis of a 4(o) infrastructure asset rather section 4(o) grandfather authority that FHC’s compliance burden to only those than its carrying value because the risk would be permissible physical commodities and jurisdictions relevant of legal liability does not decline over commodity trading under to the activities actually conducted by the life of the infrastructure asset. The complementary authority. the FHC, while helping to ensure the proposed capital requirement for 4(o) As part of the conditions for an FHC understands the range of its riskiest infrastructure assets is intended to amount of a covered physical commodity owned by an FHC engaged physical commodity activities and the address the risk of legal liability in physical commodity activities under breadth of state environmental laws to resulting from the unauthorized section 4(o) grandfather authority to be which the FHC may be subject. discharge of a covered substance in FHCs may be subject to legal liability assigned a 300 percent risk weight, the in an amount much greater than the 49 The proposal references activities engaged in market value of the amount, when by the FHC under section 4(o) grandfather value of the physical commodities they aggregated with the market value of authority, including activities of the FHC’s almost all of the physical commodities own. An environmental catastrophe subsidiaries. An FHC owning a covered physical owned by the FHC that the proposal linked to an FHC’s physical commodity commodity under section 4(o) grandfather authority may treat the commodity as a section 4(k) would not already subject to a 1,250 activities could suddenly and severely permissible commodity and apply a 300 percent percent risk weight, must not exceed 5 undermine public confidence in the risk weight if it meets certain requirements percent of the consolidated tier 1 capital FHC and any of its subsidiary IDIs, described below. 50 of the FHC. The proposal refers to this limiting its access to funding markets See, e.g., 12 CFR 217.38, .41(c)(1), and .42(a)(1). 51 aggregate amount as the ‘‘section 4(k) until the market assesses the extent of The Board’s regulatory capital rule applies a 1,250 percent risk weight to certain exposures that cap parity amount’’ and, like the the FHC’s liability. Both environmental pose a high degree of risk to the banking proposal’s modifications to the 5 risks and reputational risks are higher organization and regarding which the banking percent cap on physical commodity for activities permissible only under organization may have difficulty determining the extent of the losses. For example, it applies a 1,250 trading, the section 4(k) cap parity percent risk weight to securitization exposures that 48 amount would exclude amounts of A physical commodity would be a covered raise supervisory concerns with the subjectivity physical commodities owned pursuant physical commodity under the proposed definition involved in valuation of the exposure and in if the commodity is a covered substance under the instances where the institution is not able to to merchant banking authority, similar identified Federal environmental laws regardless of demonstrate a comprehensive understanding of the insurance company investment whether the commodity is held in the United potential losses that could result from a default or authority, and authority to acquire States. Applying the Federal environmental law partial default of the exposure. Similarly, the assets and voting securities in framework to all physical commodities held outside proposed 1,250 percent risk weight for section 4(o) the United States acknowledges the risk that FHCs permissible commodities and section 4(o) satisfaction of debts previously may be held liable under similar laws for damages infrastructure assets is intended to address both the contracted. The proposal would assign a or cleanup costs associated with an environmental risk of those activities and the difficulties in 1,250 percent risk weight to this excess catastrophe that occurs outside of the United States determining the legal liability exposure to an FHC without requiring FHCs to identify the physical from its section 4(o) permissible commodities. See amount of section 4(k) permissible commodities and activities for which any foreign 12 CFR 217.41(c)(1) and .42(a)(1); see also 78 FR jurisdiction may impose liability. 62018, 62113 and 62117 (Oct. 11, 2013). 52 Cf. 12 CFR 217.52(b)(5).

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commodities for the reasons the Board Accordingly, the proposal would an environmental catastrophe involving is proposing to tighten the 5 percent of apply a 1,250 percent risk weight to an the portfolio company). tier 1 capital limit on physical FHC’s covered commodity merchant However, nonfinancial companies use commodity trading conducted under banking investment unless all of the covered physical commodities to complementary authority. Physical physical commodity activities of the operate businesses otherwise unrelated commodities that are not covered portfolio company are physical to physical commodities. For example, physical commodities or that are held commodity trading activities grocery stores purchase gasoline to under authorities other than section 4(o) permissible under complementary transport produce and a business or a grandfather authority would not receive authority (commodity trading portfolio warehouse may purchase oil for heating. additional capital requirements.53 company).55 If all of the physical To ensure the proposal would not apply Question 2. To the extent the Board’s commodity activities of the portfolio to all merchant banking investments proposed approach to the section 4(k) company are permissible under that own physical commodities but that cap parity amount creates incentives for complementary authority and the are not engaged in a physical an FHC to conduct physical commodity securities of the portfolio company are commodities business, the proposal activities under authorities that would publicly traded, a 300 percent risk would attempt to define and exempt result in lower capital requirements, weight would be applied to the FHC’s activities of commodity end users from should the Board require that an FHC covered commodity merchant banking physical commodity activities. Under include physical commodity activities investment in the commodity trading the proposal, a portfolio company conducted under authorities that receive portfolio company. Consistent with the would not be subject to these additional less than a 300 percent risk weight first standardized approach to equity capital requirements as a covered for purposes of determining the excess investments not subject to a 100 percent commodity merchant banking amount over the 4(k) cap parity risk weight, the proposal would assign investment solely because the portfolio amount? a 400 percent risk weight to equity company owns or operates a facility or FHCs may also own companies under investments in commodity trading vessel that purchases, stores, or merchant banking authority that are portfolio companies that are not transports a covered physical engaged in physical commodity publicly traded. If an FHC engages in commodity only as necessary to power activities, including activities that any other physical commodity activity, or support the facility or vessel. For involve physical commodity trading, including those that would be example, an investment in a company storage, transportation, and refining. permissible only under the authority that engages only in one physical The proposal refers to investments in provided in section 4(o), the FHC must commodity activity—oil storage—and portfolio companies engaged in apply the 1,250 percent risk weight to does so solely for the purpose of heating activities involving covered physical that merchant banking investment. its facility and operating machines commodities as covered commodity These risk weights are designed to within the facility would not be a merchant banking investments. Because address the risks associated with covered commodity merchant banking these companies may be subject to merchant banking investments investment. The Board is seeking similar types and amounts of liability as generally, the potential reputational comment on whether the proposed FHCs engaging in these activities risks associated with the investment, exclusion and its scope are appropriate directly, the proposal generally would and the possibility that the corporate and, if so, whether the proposed apply the same risk weights to covered definition of the exclusion is workable. veil may be pierced and the FHC held commodity merchant banking Question 3. Should investments in liable for environmental damage caused investments as the proposal would certain portfolio companies, such as by the portfolio company. (A somewhat apply to covered physical commodities end users of covered physical used in physical commodity activities higher risk weight would be assigned to commodities, be exempted from under complementary authority and privately traded portfolio companies in additional capital requirements as a section 4(o) grandfather authority, recognition of the risk that an FHC may covered commodity merchant banking respectively. Moreover, the proposal not be able to gain access to markets for investment? If an exemption is would not permit covered commodity a privately held portfolio company after appropriate, what should be the scope merchant banking investments to of the exemption? receive the 100 percent risk weight certain other types of equity exposures must be The Board is also considering the assigned a 100 percent risk weight to the extent that assigned to non-significant equity the aggregate carrying value of the equity exposures appropriate risk-based capital treatment exposures.54 does not exceed 10 percent of the Board-regulated for all merchant banking investments. institution’s total capital. 12 CFR 217.52(b)(3). For example, the Board is considering 53 In addition, in order for an amount of a covered 55 Similar to the proposed restrictions on the 300 whether to continue to include physical commodity owned under section 4(o) percent risk weight for covered physical merchant banking investments as ‘‘non- grandfather authority to be considered an amount commodities held under section 4(o) authority, a of section 4(k) permissible commodities, the company would be considered a physical significant equity exposures’’ under the commodity must be one for which a derivative commodity trading company if its activities Board’s standardized approach to risk- contract has been authorized for trading on a U.S. involving covered physical commodities consisted based capital rules. futures exchange by the CFTC (unless specifically only of purchasing covered physical commodities Question 4. How are the risks excluded by the Board) or another commodity that (that are approved physical commodities) in the associated with merchant banking has been specifically authorized by the Board under spot market and/or taking or making physical complementary authority (approved physical delivery of such commodities to settle forwards, investments in companies involved in commodity). The FHC also must have purchased options, swaps, or similar contracts. However, a physical commodity activities different the amount of the commodity in the spot market or portfolio company would be considered a from or similar to other merchant own the amount for the purpose of taking or making commodity trading portfolio company regardless of physical delivery of the commodity to settle a the amount of covered physical commodities it banking investments? Do the Board’s forward, option, swap, or similar contract. Finally, held; as discussed above, obtaining daily current capital requirements adequately the FHC must have not stored, extracted, produced, information on the amounts of a portfolio capture the risks of merchant banking transported, or altered that amount while the FHC company’s commodities holdings or placing limits investments not covered under the owned the commodity but instead must have hired on the commodities activities of the company may reputable third parties to do so. be inconsistent with the more limited, generally- proposal? If not, what additional capital 54 Under the Board’s current standardized permissible involvement of an FHC in its portfolio requirements should be applied to approach, merchant banking investments and companies. merchant banking investments

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generally? For example, is it appropriate the covered physical commodity over permitted solely under section 4(o) to continue to include merchant the previous 60-month period. If the grandfather authority; and (iii) Board banking investments as ‘‘non-significant market price of a covered physical estimates of the amount of physical equity exposures’’ under the Board’s commodity (e.g., oil) varies based on commodity holdings of an FHC that risk-based capital rules? type, grade, and/or classification, the would be considered a covered physical FHC would calculate the average market 2. Calculation of Exposure Amount for commodity under this proposal. This price for each classification as a distinct Covered Physical Commodities estimate assumes that all physical covered physical commodity. The Board commodities of FHCs would be covered Under the proposal, the proposed risk notes that FHCs should have physical commodities and therefore weights would be multiplied by (1) the mechanisms in place to monitor the subject to the proposed additional risk market value of all section 4(o) prices of the commodities held under weights.59 permissible commodities; (2) the complementary authority and The estimated increase in risk- original cost basis of section 4(o) grandfather authority.58 weighted assets resulting from the infrastructure assets; (3) the market proposal would be insignificant (0.7 value of section 4(k) permissible 3. Impact Analysis of Proposed Capital Requirements percent) relative to the total risk- commodities; and (4) the carrying value weighted assets among FHCs that of an FHC’s equity investment in The proposal would not amend the engage in physical commodity companies that engage in covered scope of application of the Board’s activities. The estimated increase physical commodity activities to capital rules. Therefore, only FHCs relative to market-risk-weighted assets determine an FHC’s risk-based capital conducting complementary, section 4(o) of these FHCs (that is, risk-weighted requirements for covered physical grandfather, or merchant banking assets attributed to trading business) is commodity activities. activities would be subject to the 7.1 percent. This increase in risk An FHC would be required to proposal. Foreign banking organizations weighting would not cause any FHC to calculate the market value of its covered conducting such activities in the United breach the minimum capital physical commodities based on the States would be subject to the proposal requirements, and FHCs could likely quantity of each covered physical only to the extent the Board’s capital absorb the increase in required capital at commodity multiplied by the market rules apply to the organizations. the firm level if they determine that price of the covered physical The Board conducted an analysis of physical commodity activities are commodity.56 The proposed measure of the impact of the proposed capital important to the firm’s overall strategy. exposure is designed to reflect an FHC’s requirements on FHCs and physical However, if FHCs consider their ongoing level of involvement in covered commodities markets. In doing so, the physical commodity trading on a physical commodity activities, and to be Board considered the extent of FHC standalone basis, the proposed increases relatively stable in the face of market activity in the physical commodity in capital requirements could make this price movements and individual markets, the share of exposure and activity significantly less attractive holding amounts, as explained below. revenue that physical commodity based on its return on capital, and could The quantity of a covered physical activities represent at FHCs, and the result in decreased activity. Such a commodity would be measured as a impact of the proposed capital daily average of the amount of each requirements on an FHC’s physical reduction in activity is not expected to covered physical commodity held by an commodity activities relative to the have a material impact on the broader FHC over the previous calendar existing risk-based capital requirements physical commodity markets. Information on physical commodity quarter.57 A measurement based on an applicable to FHCs. markets, in particular those covered by average should reduce the potential for The Board estimates that, across all variations in capital requirements that FHCs that engage in physical this proposal, is relatively scarce. could result from using a point-in-time commodity activities, the proposed Nonetheless, it appears that the bulk of measurement. Furthermore, use of a capital requirements could increase activity and inventory is conducted and daily, as opposed to a weekly or risk-weighted assets as much as $34.0 held by non-Board-regulated entities monthly, average should mitigate billion. Assuming an average risk-based (such as energy firms and end users of fluctuations in the quantities of covered capital ratio of 12 percent, the proposal physical commodities) rather than physical commodities held by an FHC could increase the amount of capital FHCs. Information available to the that could misrepresent the FHC’s required to be held to meet regulatory Board supports this view, with market holdings over a longer period. requirements by FHCs that engage in participants asserting that, in general, The calculation of the market price of physical commodity activities under FHCs’ market shares in physical a covered physical commodity would be any authority by approximately $4.1 commodity markets are quite low and determined as a rolling average of the billion in the aggregate. These figures typically represent less than 1 percent of month-end, end-of-day spot prices for are based on (i) FHC-provided the market. categorizations of their physical FHCs play a larger, but still limited, 56 An FHC that owns section 4(k) permissible commodity holdings; (ii) FHC-provided role in commodity derivatives trading, commodities pursuant to section 4(o) grandfather estimates of their physical commodity and a significant portion of FHCs’ authority would also be required to calculate the holdings that are related to activities physical commodity activity is related market value of other physical commodities as part to their commodity derivative trading of the proposed section 4(k) cap parity amount. 57 To calculate the quantity of a covered physical 58 FHCs engaging in physical commodity trading activity. Based on the CFTC Bank commodity, an FHC would be required to apply the currently must ensure the market value of Participation Report, the market share of appropriate unit of measurement customarily used commodities held under complementary authority U.S. banks in derivative contracts for each covered physical commodity. Customary does not exceed 5 percent of the FHC’s consolidated involving physical commodities units of measurement generally are reflected tier 1 capital. FHCs engaging in activities under through industry convention and the actions of section 4(o) grandfather authority must ensure that typically ranges from 2 percent to 15 market participants. For example, physical attributed aggregate consolidated assets of the commodity activities involving oil and oil products companies held by the FHC pursuant to section 4(o) 59 The impact on capital would be less to the typically use barrels as the unit of measurement; grandfather authority are not more than 5 percent extent that physical commodities of FHCs would transactions involving liquid natural gas would of the total consolidated assets of the FHC. 12 not be covered physical commodities under the measure quantity in metric tons or gallons. U.S.C. 1843(o)(2). proposal.

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percent.60 Derivatives activity related to Question 8. What are the operational FHCs’’—specifically, commodity non-bank subsidiaries of FHCs is or practical challenges that derivatives activities, which are estimated to be similar or slightly implementing the proposed permissible financial activities. larger.61 Thus, any reduction in activity formulations for calculating the capital Permissible financial commodity related to financial contracts that may requirement would impose? derivatives trading activities involved arise from the proposal should not Question 9. What, if any, alternative derivatives that the FHC could materially impact the overall market for methodologies for calculating the terminate, assign, or cash-settle without financial commodity contracts. quantity of the covered physical taking delivery of the underlying With respect to FHCs’ merchant commodity should the Board consider? physical commodity.64 Complementary banking investment activities, the Question 10. Would the proposed physical commodity trading allows an estimated impact of the proposed capital requirements provide foreign increased capital requirements appears FHC to physically settle the derivatives banking organizations engaging in contract. insignificant. The aggregate value of physical commodity activities, to the merchant banking investments among extend these organizations are not The Board found physical commodity FHCs is approximately $29 billion.62 already subject to the Board’s capital trading to be a complementary activity More granular information regarding the rules, with a competitive advantage over to financial commodities derivatives proportion of merchant banking FHCs organized in the United States trading for a number of reasons. investment activity attributable to that engage in physical commodity Physical commodity trading activities portfolio companies that engage in activities? If so, what are the nature and would flow from existing commodity physical commodity activities is not amount of the competitive advantages? derivatives activities. Physical available. Nevertheless, given the small Question 11. What additional commodity trading would enhance the market share of FHCs in the physical considerations or data should the Board ability of FHCs to efficiently provide a commodity markets, the Board expects consider to calculate the estimated full range of commodity-related services that the value of FHC equity impact of the proposal? to their customers; enable FHCs to investments in portfolio companies that transact more efficiently with customers engage in physical commodity activities D. The Scope of Permitted would be significantly less than the Complementary Commodity Activities in a wider variety of commodity markets and transaction formats; and enable estimated $29 billion. Accordingly, the 1. Background proposed increase in capital FHCs to acquire more experience in the requirements for an FHC’s merchant In addition to considering whether physical commodity markets and, in banking investment activity would not conduct of the activities by an FHC turn, improve their understanding of, be expected to have a material impact. poses a substantial risk to the safety and and profitability in, the commodity Question 5. Does the proposed soundness of depository institution derivatives markets. The Board also definition of ‘‘covered physical subsidiaries of the FHC or the financial noted that diversified financial commodity’’ sufficiently cover the system generally, in approving each companies that were not at that time commodities that pose the greatest complementary commodity activity, the BHCs conducted physical commodity legal, reputational, and financial risks Board considered whether each activity trading in connection with their to an FHC? If not, please describe those is ‘‘meaningfully connected’’ to a commodity derivatives business. For high-risk commodities that would fall financial activity such that it these reasons, the Board believed that 63 outside the scope of the definition. complements the financial activity. physical commodity trading was Question 6. What, if any, other criteria Currently, twelve FHCs possess complementary to commodity authority to engage in physical should the Board consider when derivatives activities.65 determining whether a physical commodity trading, and five of those commodity poses a risk that the FHC FHCs also have authority to engage in The Board has not changed its view would be liable for a catastrophe energy management services and energy on the complementarity of these trading involving its physical commodity tolling. For the reasons described below, activities. However, as discussed above, activities? the Board is proposing to rescind the the Board believes added limits are Question 7. How appropriate are the authorization for FHCs to engage in appropriate to reduce potential risks to proposed risk weights for covered energy tolling and energy management depository institution subsidiaries of physical commodities owned as part of services. FHCs or the financial system generally. an FHC’s physical commodity trading a. Physical Commodity Trading b. Energy Management Services and activities or held by FHCs conducting activities solely permitted by section In 2003, the Board determined that Energy Tolling 4(o) grandfather authority and for physical commodity trading—the Following a number of changes to the purchasing and selling of physical merchant banking portfolio companies energy industry, the Board determined commodities in the spot market and the engaged in such activities? If not that certain activities involving power taking and making delivery of physical appropriately calibrated, what are the plants—energy management services shortcomings of the capital requirement commodities to settle derivatives that and energy tolling—were in capturing catastrophic risk and what BHCs were authorized to trade complementary to a financial other factors should the Board consider (commodity derivatives)—was so to calibrate the capital requirements? meaningfully connected to a financial activity that it complemented the 64 See 12 CFR 225.28(b)(8)(ii)(B)(3)–(4); 2003 Citi 60 See Bank Participation Reports, available at financial activity. The Board cited a Order. www.cftc.gov/MarketReports/ number of reasons for its determination. 65 See 2003 Citi Order. Commenters to the ANPR BankParticipationReports. The Board observed that physical also provided an additional example of the 61 See CFTC Commitments of Traders Report, commodity trading activities ‘‘flow from complementarity of physical commodity trading— available at www.cftc.gov/Marketreports/ the ability to net physical and financial contracts CommitmentsofTraders/index.htm. the existing financial activities of under the same master agreement and the ability to 62 Data obtained from top-tier domestic holding take physical delivery of futures to match financial companies that file the FR Y–12 reporting form. 63 See, e.g., 2003 Citi Order. options. SIFMA Comment Letter at 29–30.

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activity.66 The Board permitted six FHC acts as an energy manager that structure of a tolling agreement reflects FHCs to engage in one or both of these provides transactional, advisory and the FHC’s role as principal: The toller activities between December 2007 and administrative services to a power plant pays the owner a fixed periodic June 2010.67 owner.72 An energy manager may also payment in exchange for the right to all In January 2014, the ANPR noted that provide financial intermediation or part of the plant’s power output and three FHCs that engage in physical services. An energy manager performs provides the owner with a marginal commodity activities had announced administrative tasks related to the sale payment based on the amount of energy plans to decrease or discontinue their of power and the delivery of fuel to run produced to compensate for the costs of involvement in the activities.68 These the plant, and may enter into fuel and running the plant. developments, although potentially power contracts for the owner that 2. Reconsideration of the Approval of caused by a variety of factors,69 led the satisfy the owner’s criteria, including by Board to reconsider whether Energy Management and Tolling as purchasing fuel from a third party in Complementary Activities complementary commodity activities order to resell it to the power plant continued to be so meaningfully owner and by purchasing the energy The Board is reconsidering whether connected to a financial activity so as to output of the power plant for release in energy management services and energy complement the financial activity. the market. An FHC, as energy manager, tolling activities are complementary to a Subsequent to the ANPR, many of these also may enter into hedging transactions financial activity. Over time, these two plans were realized and discontinuance with the owner to manage fuel costs and activities have not appeared to be as of physical commodity activities energy prices. The energy manager directly or meaningfully connected to a became more pronounced for FHCs generally is compensated based on a financial activity as is physical engaging in energy tolling and energy percentage of the difference between the commodity trading. 70 Physical commodity trading provides management activities. Of the five delivered fuel prices and the realized FHCs that currently have the authority FHCs with an alternative method of power revenues (the ‘‘spark spread’’) settling BHC-permissible commodity to engage in either energy management with a guaranteed minimum services or energy tolling, at least four derivatives.74 Unlike physical compensation amount. commodity trading, energy management have discontinued these activities in the In seeking approval to conduct energy 71 services and energy tolling do not U.S. management services, FHCs argued that directly support and are not directly Energy management services. Under these services may help a power plant an energy management agreement, an related to engaging in otherwise BHC- owner develop and refine the power permissible commodity derivatives plant’s risk-management policies and 66 The approvals to engage in these activities activities or other financial activities. occurred after Federal and state deregulation of the optimize the plant owner’s decisions Moreover, the expected benefits of energy industry, the energy crisis in the western about when to operate, which are permitting these activities do not appear United States, the growth of independent power heavily influenced by fuel costs, power producers, and the enactment of the Energy Policy to have been realized over time. For Act of 2005, which encouraged investment in prices, and the financing available. example, it was originally expected that electricity energy infrastructure. See Public Law FHCs also argued that these activities allowing FHCs to conduct energy 109–58 (Aug. 8, 2005); Timothy P. Duane, would improve the FHCs’ management services and energy tolling Regulation’s Rationale: Learning from the California understanding of energy markets and Energy Crisis, 19 Yale J. on Reg. 471 (2002). activities would allow FHCs to gain 67 Only five FHCs are currently permitted to their ability to serve as an effective additional information to help manage engage in energy management services or energy competitor in the derivatives markets. commodity-related risks.75 It is not clear tolling in the United States. One of the FHCs Energy Tolling. The FHCs that that energy management services or approved to engage in energy management services currently engage in energy management and energy tolling—Fortis—was acquired by energy tolling significantly improve an another FHC after the Board’s approvals. See Board services also engage in energy tolling. A FHC’s understanding of commodity letter to Robert L. Tortoriello (Dec. 5, 2008). primary difference between energy 68 derivatives markets since—in order to 79 FR 3329, 3334 (Jan. 21, 2014). tolling and energy management is that engage in energy management services 69 See id.; SIFMA Comment Letter at 29. the former permits the ‘‘toller’’ to act as 70 or energy tolling—an FHC must already See, e.g., Mercuria Closes Acquisition of J.P. principal for its own account rather than Morgan Chase Physical Commodities Business, have a thorough understanding of Mercuria (March 10, 2014), available at http:// act as the agent, or otherwise for the commodity derivatives markets. www.mercuria.com/media-room/business-news/ benefit, of the power plant owner. Moreover, FHCs that have divested their mercuria-closes-acquisition-jp-morgan-chase- Under both energy management and physical-commodities-business; Morgan Stanley physical commodity business lines Completes Sale of Global Oil Merchanting Business tolling, an FHC generally is responsible continue to engage in commodity to Castleton Commodities International LLC, for monitoring day-to-day market Morgan Stanley (November 2, 2015), available at conditions to determine when to operate the term of the agreement and the benefits of https://www.morganstanley.com/press-releases/ the plant and when to provide the 21e458d2-0231-493b-a95a-5084c3b4c701. ownership without the capital investment. See Further Definition of ‘‘Swap,’’ ‘‘Security-Based 71 See, e.g., Ron Bousson, Timeline: Deutsche necessary fuel. Unlike the typical energy Swap,’’ and ‘‘Security-Based Swap Agreement’’; Bank’s Commodities Operations, Reuters (December management agreements, pursuant to a Mixed Swaps; Security-Based Swap Agreement 5, 2013), available at http://www.reuters.com/ tolling agreement, an FHC may direct— Recordkeeping, 77 FR 48207, 48242 (Aug. 13, 2012) article/us-deutsche-commodities-timeline- rather than advise—the owner to (citing the letter from Mary Anne Mason, idUSBRE9B40UZ20131205?mod=related& channelName=PersonalFinance; Sempra Energy, operate the plant so that the toller— HoganLovells LLP on behalf of Southern California RBS Complete Sale of Commodities Joint Venture rather than the owner—may capture the Edison Company, Pacific Gas and Electric Company and San Diego Gas and Electric Company, dated North American Assets to JP Morgan Unit, Sempra spark spread.73 The compensation Energy (December 1, 2010), available at http:// July 22, 2011 (2011 CA Utilities Letter); Regulating investor.shareholder.com/sre/releasedetail.cfm? Financial Holding Companies and Physical ReleaseID=534828; Martin Arnold & Daniel Schafer, 72 These services are typically outlines in an Commodities: Hearing Before the S. Subcomm. in Barclays to Wind Down Commodities Trading, energy management plan and risk-management Fin. Insts. and Consumer Prot. (Jan. 15, 2014) Financial Times (April 20, 2014), available at policy that governs how the power plant should be (testimony of Norman Bay, Director, Office of http://www.ft.com/cms/s/0/5761ec06-c707-11e3- operated. E.g., 2007 Fortis Order. Enforcement, Federal Energy Regulatory aa73-00144feabdc0.html; Mercuria Closes 73 The Board compared a tolling agreement to a Commission at 15), available at http:// Acquisition of J.P. Morgan Chase Physical call option with the strike price being the cost of www.banking.senate.gov/public/index.cfm/2014/1/ Commodities Business, Mercuria (March 10, 2014), producing that amount of power. See 2008 RBS regulating-financial-holding-companies-and- available at http://www.mercuria.com/media-room/ Order. A tolling agreement also has been compared physical-commodities. business-news/mercuria-closes-acquisition-jp- to an operating lease agreement because it allows 74 See 2003 Citi Order. morgan-chase-physical-commodities-business.’’ the toller the exclusive right to use the plant during 75 See 2007 Fortis Order.

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derivatives trading and termination of activities may include providing appropriate conformance period for this their energy management and energy inventory and project finance aspect of the proposal and why? tolling activities is not expected to arrangements involving physical E. Reclassification of Copper as an negatively impact their ability to commodities,78 financially- and Industrial Metal provide commodity derivative services. physically-settled derivatives to hedge The authorizations for energy fuel costs and energy prices,79 buying In 1997, the Board amended management services and energy tolling and selling certain physical Regulation Y to provide that BHCs also noted that unregulated financial commodities in the spot market,80 and could own and store copper, and engage competitors of FHCs engaged in these derivatives advisory services.81 in related incidental activities, as an activities. However, it is unclear over activity so closely related to banking as time what, if any, advantages those 3. Conformance Period to be proper incident thereto.82 The financial firms gain from conducting The proposal would provide FHCs Board has previously permitted BHCs to energy management or energy tolling with a two-year transition period to buy, sell, and store gold, silver, activities over FHCs in the conduct of conform their energy management platinum and palladium bullion, coins, derivatives and other FHC-permissible services and energy tolling agreements bars and rounds for their own accounts physical commodity activities. following the effective date of the final and the accounts of others. The list of Energy tolling was permitted in part rule if adopted. This conformance precious metals was expanded to to allow an FHC to hedge its own, or to period is intended to reduce the include copper, a metal used in minting assist its client to hedge, positions in burdens associated with applying the coins, after trading in copper became 76 energy. However, there are other proposal to existing agreements. As permissible for national banks.83 effective ways for an FHC to hedge its noted, the Board invites comments on Over time, copper has become most positions, and an FHC may assist clients all aspects of the proposal, including commonly used as a base or industrial to hedge their positions without the specific questions regarding the metal, and not as a store of value in the FHC engaging in energy tolling. appropriate conformance period. same way as gold, silver, platinum and The proposal would not appear to Question 12. Are there reasons that palladium.84 While gold, silver, eliminate the benefits commenters, platinum and palladium have industrial including energy companies, commonly support determining energy management services or energy tolling uses as well, these precious metals have noted in letters responding to the traditionally been traded internationally ANPR.77 The proposal would affect the are complementary to a financial activity that are not discussed above? If primarily for their exchange value rather actual activity of only one firm and the than for industrial uses.85 Copper, while theoretical authority of five FHCs to so, what are those reasons? Question 13. Are there any potential it has been used in coins, has never engage in complementary commodity been traded as a precious metal and has activities and would directly limit only effects on the safety and soundness of FHCs engaged in energy management always been classified and traded as a certain types of agreements (i.e., energy ‘‘base’’ or ‘‘industrial’’ metal.86 The tolling and energy management services services and energy tolling of rescinding such authorities? How would the agreements) between FHCs and power 82 62 FR 9290, 9336 (Feb. 28, 1997). The plant owners. In addition, the proposal potential effects differ if only one or the authorization also included ‘‘any other metal would not affect the authority of FHCs other activity was rescinded? approved by the Board.’’ No other metals have been to provide derivatives and related Question 14. What are the average approved by the Board under this authority. financial products and services to power lengths of an energy management 83 Id. at 9311. 84 PSI Report. plants or engage in physical services agreement and an energy tolling 85 commodities trading. Permissible PSI Report at 353. agreement? Under what circumstances 86 Id. The most common benchmark price for may such agreements be terminated copper is the copper futures price established on 76 Physical commodity trading also may be used early and what are the contractual the London Metals Exchange (LME), the largest to hedge positions in energy of FHCs and their consequences of doing so? Are there financial market for metals. PSI Report at 351. The clients. LME identifies four categories of metals; copper is 77 Commenters focused on the benefits of FHC challenges other than termination of included in the ‘‘non-ferrous’’ or ‘‘base’’ metal involvement in physical commodity trading such agreements associated with category, which also includes aluminum, nickel, activities, rather than the benefits of energy conformance to the proposed rescission and zinc, rather than the ‘‘precious metals’’ category management services or energy tolling. For of energy management services and that includes gold, silver, platinum and palladium. example, NRG Energy, Inc., a leading competitive Id. at 352. Since the publication of the PSI Report, power company and major electricity provider, energy tolling orders? To what extent the LME has ceased certain activities with respect noted a number of activities that would not appear may a conformance period alleviate to gold and silver and has initiated activities with to be affected by the proposed elimination of energy those challenges? What is an respect to platinum and palladium. See https:// management services or energy tolling, including www.lme.com/metals/precious-metals/. COMEX, a providing first-lien hedging arrangements, project division of the New York Mercantile Exchange, also 78 financing, market making, ‘‘customized hedging See, e.g., 12 CFR 225.28(b)(1); Chemical New classifies copper as a base metal and gold, silver, and risk management solutions like working York Corp., 59 Fed. Res. Bull. 698 (1973) (approving platinum and palladium as precious metals. See, capital/inventory intermediation facilities and as a permissible lending activity for BHCs an e.g., http://www.cmegroup.com/trading/metals/ volumetric production payment structures,’’ and arrangement under which a BHC would finance a base.html. Moreover, standardized copper futures long-term physical commodity transactions. Letter utility’s coal purchases by purchasing from a third contracts involve large amounts of copper, from NRG Energy, Inc. dated April 15, 2014. See party, and taking title to, a quantity of coal on a comparable to the amounts for futures contracts for also Letter from American Gas Association et al., monthly basis at the direction of the utility base metals such as aluminum, lead and zinc. See dated March 31, 2014 (discussing the importance of customer); Letter to Mr. Lustgarten dated May 15, https://www.lme.com/metals/non-ferrous/copper/ the ability of FHCs to physically-settle derivatives 2006 (finding certain commodity purchase and contract-specifications/futures/ (LME copper transactions); Letter from Electric Power Supply forward sale transactions entered to finance futures contract specification 25 metric tons); Association dated April 16, 2014 (discussing the commodity inventories of an FHC’s customers to be https://www.lme.com/metals/non-ferrous/ importance of FHC’s ability to hedge physical a permissible lending activity of the FHC); Letter to aluminium/contract-specifications/futures/ (LME power producers’ prices and revenues as well as Ms. Davy dated May 15, 2006 (finding certain aluminum futures contract specification 25 metric engage in market making and credit intermediation volumetric production payments to be a permissible tons); https://www.lme.com/metals/non-ferrous/ activities); SIFMA Letter, Appendix G (discussing lending activity). lead/contract-specifications/futures/ (LME lead market making and the provision of market 79 See 12 CFR 225.28(b)(8) and the Board’s futures contract specification 25 metric tons); liquidity, efficient price formation, risk- approvals to engage in physical commodity trading. https://www.lme.com/metals/non-ferrous/lead/ management solutions, project finance, credit 80 See, e.g., 2003 Citi Order. contract-specifications/futures/; https:// extension, and greater competition). 81 12 CFR 225.28(b)(6). www.lme.com/metals/non-ferrous/zinc/contract-

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most significant uses of copper are for list will ensure that the metals new Schedule HC–W, FHCs would be industrial purposes, rather than as a specifically listed as financial assets for required to report the total fair value of store of value.87 Further, the OCC has purposes of derivatives trading activities categories of physical commodities held recently proposed a similar remain consistent with the metals in inventory as follows: reclassification of copper under the permitted to be bought, sold and stored (1) Petroleum and petroleum National Bank Act.88 by BHCs.89 products; For these reasons, the Board proposes The proposal would take effect one (2) Natural gas; to treat the purchase and sale of copper year after the rule is finalized to provide (3) Natural gas liquids; in the same manner as the purchase and BHCs time to conform to this change. (4) Fertilizer; sale of other non-precious metals; Question 15. What is the cumulative (5) Propylene; specifically, as an activity requiring impact on BHCs of the proposed (6) Coal and coal products; FHC status and complementary limitation on physical copper trading (7) Uranium; uranium products; authority and subject to the restrictions authority combined with the proposed (8) Other covered physical and limitations (including the 5 percent additional restrictions on commodities; and of tier 1 capital cap) imposed on FHCs complementary physical commodities (9) All other physical commodities. engaged in complementary commodity trading? What is the cumulative impact The sum of the total fair values of activities. Under the proposal, copper of these proposals on copper markets? commodities reported on Part A as would be removed from the list of Question 16. Is a one-year transition proposed would continue to be reported metals BHCs are permitted to own and period during which BHCs currently as the gross fair value of physical store without limit as an activity closely engaged in buying, selling, and storing commodities held in inventory in item related to banking under section 4(c)(8) copper would be permitted to wind 9 of Schedule HC–D. of the BHC Act and Regulation Y. down their activities with respect to The categories of physical The Board proposes not to authorize copper under this authority sufficient or commodities listed in items (1)–(8) services such as arranging for storage, appropriate? If not, what is the above are proposed to be defined in a safe custody, assaying, and shipment of appropriate transition period and why? manner consistent with the proposed copper. The Board is also proposing to What is the appropriate scope of BHCs definition of ‘‘covered physical make a corresponding change in the that should benefit from such a commodities.’’ Categories (1)–(7) language of section 225.28(b)(8)(ii)(B) of transition period? Should the scope, for generally include those covered Regulation Y to remove copper from the example, be limited to BHCs that own substances under Federal environmental list of metals on which a BHC may enter copper as of the date of this proposal or law. The item ‘‘other covered physical derivatives contracts that require taking BHCs that do not have separate commodities’’ would include all other delivery of the underlying metal as complementary authority to hold covered physical commodities held in principal. Removing copper from this copper? inventory that would not be included in items (1)–(7) described above and F. New Financial Reporting Data on therefore would reflect those covered specifications/futures/ (LME zinc futures contract Physical Commodity Activities specification 25 metric tons); http:// substances under relevant state _ www.cmegroup.com/trading/metals/base/copper 1. General environmental law. contractSpecs_futures.html (COMEX copper futures contract specification 25,000 pounds); http:// The Board is proposing to modify the Part B. On Part B of the proposed new www.cmegroup.com/trading/metals/base/ Consolidated Financial Statements for Schedule HC–W, FHCs would be aluminum-mw-us-transaction-premium-platts- required to indicate affirmatively or _ _ Holding Companies (FR Y–9C) to (i) swap-futures contractSpecs futures.html (COMEX negatively whether they are engaged in aluminum MW US transaction premium plats create a new Schedule HC–W, Physical futures contract specification 25 metric tons). Commodities and Related Activities, particular aspects of physical Precious metals futures contracts, by contrast, and (ii) add data items to Schedule HC– commodity-related activities. involve much smaller amounts. See, e.g., http:// Specifically, FHCs would indicate _ R, Part II, Risk-Weighted Assets. www.cmegroup.com/trading/metals/precious/gold whether they own any covered physical contractSpecs_futures.html (COMEX gold futures Schedule HC–W would collect more contract specification 100 troy ounces); http:// specific information on the covered commodities, any section 4(o) www.cmegroup.com/trading/metals/precious/ infrastructure assets, or investments in _ _ physical commodities holdings and silver contractSpecs futures.html (COMEX silver activities of FHCs, and the covered commodity merchant banking futures contract specification 5,000 troy ounces); investments. FHCs also would indicate http://www.cmegroup.com/trading/metals/ modifications to HC–R, Part II would precious/platinum_contractSpecs_futures.html report the risk-weighted asset amounts whether they are engaged in the (COMEX platinum futures contract specification 50 associated with an FHC’s engagement in exploration, extraction, production, or troy ounces); http://www.cmegroup.com/trading/ refining of physical commodities. FHCs _ _ activities that involve (1) covered metals/precious/palladium contractSpecs also would indicate whether they own futures.html (COMEX palladium futures contract physical commodities, (2) section 4(o) specification 100 troy ounces). infrastructure assets, or (3) investments facilities, vessels or conveyances for the 87 See, e.g., http://minerals.usgs.gov/minerals/ in covered commodity merchant storage or transportation of covered pubs/commodity/copper/, ‘‘Copper Statistics and banking investments. The proposed physical commodities. Further, FHCs Information,’’ (building construction is the single would be required to report (i) the total largest market for copper, followed by electronics reporting requirements would become and electronic products, transportation, industrial effective on the same date as the fair value of section 4(k) permissible machinery, and consumer and general products), proposed risk-weighted asset commodities and section 4(o) compare http://minerals.usgs.gov/minerals/pubs/ requirements. permissible commodities owned; (ii) the commodity/gold/, ‘‘Gold Statistics and original cost basis of any section 4(o) Information,’’ (‘‘Although gold is important to 2. Schedule HC–W industry and the arts, it also retains a unique status infrastructure assets owned; and (iii) the among all commodities as a long-term store of Part A. Currently, BHCs report the carrying value of their investments in value’’); http://minerals.usgs.gov/minerals/pubs/ gross (total) fair value of all physical covered commodity merchant banking commodity/silver/, ‘‘Silver Statistics and commodities on Schedule HC–D to the investments. Information,’’ (‘‘Silver has been used for thousands of years as ornaments and utensils, for trade, and FR Y–9C. On Part A of the proposed 3. Schedule HC–R Modifications as the basis for many monetary systems’’). 88 Available at http://occ.gov/news-issuances/ 89 Copper would be treated as a non-financial The Board is also proposing to modify news-releases/2016/nr-occ-2016-108.html. asset for purposes of 12 CFR 225.28(b)(8)(ii)(B). Schedule HC–R, Part II to include new

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items related to the proposed capital management practices. The Board physical commodity activities of FHCs requirement described in this proposal believes that the information that would and provide supporting data for for a firm’s physical commodity be collected in Part A of proposed assessing the capital requirement? activities conducted under any of the Schedule HR–W would provide the Question 18. How well do the commodity authorities and that involve public with important information on proposed reporting requirements covered physical commodities. New the degree to which FHCs are involved physical commodity activities (both Part line items would be added to Column A in trading covered physical A and Part B) capture FHCs’ physical of Schedule HC–R, Part II to report (1) commodities, improving market commodity activities? What other the market value of an FHC’s covered discipline, and enhancing categorizations should the Board physical commodity activities involving understanding of the role FHCs play in consider for these proposed reporting covered physical commodities these markets through their requirements? (calculated as described in this nonfinancial activities. Public Question 19. What other information, proposal) conducted under section disclosure of the new reporting items if any, should the Board consider 4(k)(1)(B) of the Bank Holding Company would also facilitate supervisory collecting from FHCs for public Act or section 4(o) of the Bank Holding monitoring of commodity activities that reporting purposes in order to enhance Company Act (as applicable); (2) the present particular risks to safety and market discipline and public original cost basis of section 4(o) soundness, as discussed in this understanding of FHCs’ physical infrastructure assets owned pursuant to proposal. The Board proposes to make commodities or merchant banking section 4(o) of the Bank Holding the disclosures in Part B of the new activities? Company Act; and (3) the carrying value proposed Schedule HC–W public for of an FHC’s investments in covered similar reasons. Additionally, the Board III. Regulatory Analysis commodity merchant banking believes that public disclosure of the A. Regulatory Flexibility Act Analysis investments made under section information in Part B will provide The Board is providing an initial 4(k)(4)(H) of the BHC Act. Specifically, market participants, end users, and regulatory flexibility analysis with the following modifications are being supervisors with important information respect to this proposed rule. The proposed: that is not captured in inventory Regulatory Flexibility Act, 5 U.S.C. 601 • New line items would be added to reporting about the nature and extent of et seq. (RFA), generally requires an Column L to allocate a 300 percent risk FHC presence in the physical agency to assess the impact a rule is weight to (A) the market value of an commodities markets over time. This expected to have on small entities. The FHC’s physical commodity activities information would provide additional RFA requires an agency either to involving section 4(k) permissible insight into the potential risks FHCs commodities and (B) the carrying value may bear as part of their commodities provide an initial regulatory flexibility of investments in covered commodity activities as well as a more complete analysis with a proposed rule for which merchant banking investments that are picture of their role in the commodity a general notice of proposed rulemaking publicly traded commodity trading markets. is required or to certify that the portfolio companies to the 300 percent The proposed reporting requirements proposed rule will not have a significant risk weight category; in Schedule HC–W, Part B and proposed impact on a substantial number of small • New line items would be added to modifications to Schedule HC–R, Part II entities. Based on its analysis and for Column M to allocate a 400 percent risk are consistent with other public capital the reasons stated below, the Board weight to the carrying value of reporting requirements. The Board notes believes that this proposed rule will not investments in covered commodity that public disclosure of these proposed have a significant economic impact on merchant banking investments that are items would also be consistent with the a substantial number of small entities. A commodity trading portfolio companies international standards regarding public final regulatory flexibility analysis will and are not publicly traded to the 400 disclosure of regulatory capital under be conducted after comments received percent risk weight category; and Pillar 3 of the Basel Accord. Such during the public comment period have • New line items would be added to disclosure is designed to complement been considered. Column Q to allocate a 1,250 percent the minimum capital requirements and Under regulations issued by the Small risk weight to the (A) the market value the supervisory review process by Business Administration, a small entity of physical commodity activities encouraging market discipline through includes a depository institution, bank involving section 4(o) permissible enhanced and meaningful public holding company, or savings and loan commodities (including section 4(k) disclosure. holding company with total assets of permissible commodities in excess of For the reasons discussed above, the $550 million or less. As of June 30, the section 4(k) cap parity amount); (B) Board is proposing that the proposed 2016, there were approximately 3,203 the original cost basis of section 4(o) new reporting requirements be released small bank holding companies and infrastructure assets owned pursuant to to the public. However, a reporting FHC approximately 162 small savings and section 4(o) of the BHC Act; and (C) the may request confidential treatment for loan holding companies. As described carrying value of investments in covered the proposed reporting items if the above, the Board is proposing to apply commodity merchant banking company believes that, based on its risk-based capital and other regulatory investments that are not commodity particular individual circumstances, requirements for certain physical trading portfolio companies. disclosure of specific commercial or commodities and merchant banking financial information in the report investment activities conducted by 4. Public Disclosure would likely result in substantial harm banking organizations. This proposed The Board proposes to make the to its competitive position or that rule is expected only to apply to information reported as described above disclosure of the submitted information banking organizations that (i) conduct available to the public. The Board has would result in unwarranted invasion of physical commodity activities under long supported meaningful public personal privacy. complementary authority with the disclosure by banking organizations Question 17. To what extent do the Board’s approval; (ii) conduct physical with the objective of improving market proposed regulatory reporting commodity activities under section 4(o) discipline and encouraging sound risk- requirements improve transparency of grandfather authority; or (iii) engage in

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merchant banking investment activities collections, including the validity of the performance and conduct preinspection related to physical commodities. Small methodology and assumptions used; analysis, to monitor and evaluate capital entities generally will not fall into any (c) Ways to enhance the quality, adequacy, to evaluate holding company of these categories. To date, the Board utility, and clarity of the information to mergers and acquisitions, and to analyze has granted approvals to 12 FHCs to be collected; a holding company’s overall financial conduct physical commodity activities (d) Ways to minimize the burden of condition to ensure the safety and under complementary authority, the information collections on soundness of its operations. The FR Y– meanwhile, there are two banking respondents, including through the use 9C serves as standardized financial organizations that are presently of automated collection techniques or statements for the consolidated holding conducting physical commodity other forms of information technology; company. The FR Y–9LP, and FR Y 9SP activities under section 4(o) grandfather and serve as standardized financial authority. In both cases, the banking (e) Estimates of capital or startup costs statements for parent holding organizations all hold total consolidated and costs of operation, maintenance, companies; the FR Y–9ES is a financial assets greater than $50 billion. Further, and purchase of services to provide statement for holding companies that of the approximately $29 billion in total information. are Employee Stock Ownership Plans merchant banking investment activity All comments will become a matter of (ESOPs). The Federal Reserve also has engaged in by banking organizations, public record. Comments on aspects of the authority to use the FR Y–9CS (a approximately 99 percent of this activity this proposed rule that may affect free-form supplement) to collect is conducted by banking organizations reporting, recordkeeping, or disclosure additional information deemed to be (1) with total consolidated assets greater requirements and burden estimates critical and (2) needed in an expedited than $50 billion. should be sent to Robert deV. Frierson, manner. The Board is aware of no other Secretary, Board of Governors of the Current Actions: To implement the Federal rules that duplicate, overlap, or Federal Reserve System, 20th Street and reporting requirement set forth in conflict with this proposal. The Board Constitution Avenue NW., Washington, section F, the Board proposes to revise believes that this proposal will not have DC 20551. A copy of the comments may the FR Y–9C to (1) create a new a significant economic impact on small also be submitted to the OMB desk Schedule HC–W, Physical Commodities banking organizations supervised by the officer by mail to the Office of and Related Activities, which would Board and therefore believes that there Information and Regulatory Affairs, U.S. collect more specific information on the are no significant alternatives to this Office of Management and Budget, New covered physical commodities holdings proposal that would reduce the Executive Office Building, Room 10235, and activities of FHCs and (2) add data economic impact on small banking 725 17th Street NW., Washington, DC items to Schedule HC–R, Part II, Risk- organizations supervised by the Board. 20503 or by facsimile to 202–395–6974. Weighted Assets, which would report the risk-weighted asset amounts B. Paperwork Reduction Act Proposed Revision, Without Extension, associated with an FHC’s engagement in of the Following Information Collection Request for Comment on Proposed covered physical commodity activities. Information Collection Title of Information Collection: It is expected that 14 out of the 667 Consolidated Financial Statements for current FR Y–9C respondents would file In accordance with section 3512 of Holding Companies, Parent Company the new reporting requirements set forth the Paperwork Reduction Act of 1995 Only Financial Statements for Large in section F. The Board estimates that (44 U.S.C. 3501–3521) (PRA), the Board Holding Companies, Parent Company proposed revisions to the FR Y–9C may not conduct or sponsor, and a Only Financial Statements for Small would not materially increase the respondent is not required to respond Holding Companies, Financial estimated average hours per response or to, an information collection unless it Statement for Employee Stock total estimated annual burden. The displays a currently valid Office of Ownership Plan Holding Companies, Board is not proposing to revise the FR Management and Budget (OMB) control and the Supplemental to the Y–9LP, FR Y9–SP, FR Y–9ES, and FR number. The Board reviewed the Consolidated Financial Statements for Y–9CS. The draft reporting forms and proposed rule under the authority Holding Companies. instructions are available on the Board’s delegated to the Board by OMB. OMB Control Number: 7100–0128. public Web site at http:// The proposed rule contains Agency Form Number: FR Y–9C, FR www.federalreserve.gov/apps/ requirements subject to the PRA. The Y–9LP, FR Y–9SP, FR Y–9ES, and FR reportforms/review.aspx. reporting requirements are found in Y–9CS. Estimated Burden per Response: FR section II.F. To implement the reporting Frequency of Response: Quarterly, Y–9C (non advanced approaches requirement set forth in F, the Board semiannually, and annually. holding companies): 50.17 hours; FR Y– proposes to revise the Consolidated Affected Public: Businesses or other 9C (advanced approached holding Financial Statements for Holding for-profit. companies HCs): 51.42 hours; FR Y– Companies (FR Y–9C; OMB No. 7100– Respondents: Bank holding 9LP: 5.25 hours; FR Y–9SP: 5.40 hours; 0128) to create a new Schedule HC–W, companies (BHCs), savings and loan FR Y–9ES: 0.50 hours; FR Y–9CS: 0.50 Physical Commodities and Related holding companies (SLHCs), securities hours. Activities and to add data items to holding companies (SHCs), and U.S. Number of Respondents: FR Y–9C Schedule HC–R, Part II, Risk-Weighted Intermediate Holding Companies (IHCs) (non advanced approaches holding Assets. (collectively, holding companies (HCs)). companies): 654; FR Y–9C (advanced Comments are invited on: Abstract: The FR Y–9 family of approached holding companies): 13; FR (a) Whether the proposed collections reporting forms continues to be the Y–9LP: 792; FR Y–9SP: 4,122; FR Y– of information are necessary for the primary source of financial data on 9ES: 88; FR Y–9CS: 236. proper performance of the Board’s holding companies that examiners rely Total Estimated Annual Burden: FR functions, including whether the on in the intervals between on-site Y–9C (non advanced approaches information has practical utility; inspections. Financial data from these holding companies): 131,245 hours; FR (b) The accuracy of the estimates of reporting forms are used to detect Y–9C (advanced approached holding the burden of the proposed information emerging financial problems, to review companies): 2,674 hours; FR Y–9LP:

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16,632 hours; FR Y–9SP: 44,518 hours; ■ (b) Adding the definition of unauthorized release; provided that, FR Y–9ES: 44 hours; FR Y–9CS: 472 ‘‘Approved physical commodity’’ and with respect to paragraph (5) of this hours. ‘‘Covered physical commodity’’. definition, the Board-regulated ■ (c) Revising the definition of institution owned the commodity in the C. Solicitation of Comments on Use of ‘‘Standardized total risk-weighted state that promulgated the law imposing Plain Language assets’’. such liability during the last reporting Section 722 of the Gramm-Leach- The revisions and additions are set period. Bliley Act requires the agencies to use forth below: * * * * * plain language in all proposed and final § 217.2 Definitions Standardized total risk-weighted rules published after January 1, 2000. assets means: The agencies invite comment on how to * * * * * (1) The sum of: make this interim final rule easier to Advanced approaches total risk- (i) Total risk-weighted assets for understand. For example: weighted assets means general credit risk as calculated under • Have the agencies organized the (1) The sum of: § 217.31; material to suit your needs? If not, how (i) Credit-risk weighted assets; (ii) Total risk-weighted assets for could the rule be more clearly stated? (ii) Credit valuation adjustment (CVA) cleared transactions and default fund • Are the requirements in the rule risk-weighted assets; contributions as calculated under clearly stated? If not, how could the rule (iii) Risk-weighted assets for § 217.35; be more clearly stated? operational risk; • (iii) Total risk-weighted assets for Does the rule contain technical (iv) For a market risk Board-regulated unsettled transactions as calculated language or jargon that is not clear? If institution only, advanced market risk- under § 217.38; so, what language requires clarification? weighted assets; and • (iv) Total risk-weighted assets for Would a different format (grouping (v) Risk-weighted assets for covered covered physical commodity activities and order of sections, use of headings, physical commodity activities as as calculated under §§ 217.39 through paragraphing) make the rule easier to calculated under §§ 217.39 through 217.40; understand? If so, what changes would 217.40; minus (v) Total risk-weighted assets for make the rule easier to understand? (2) Excess eligible credit reserves not • securitization exposures as calculated Would more, but shorter, sections included in the Board-regulated under § 217.42; be better? If so, which sections should institution’s tier 2 capital. (vi) Total risk-weighted assets for be changed? • * * * * * equity exposures as calculated under What else could the agencies do to §§ 217.52 and 217.53; and make the rule easier to understand? Approved physical commodity means a physical commodity for which a (vii) For a market risk Board-regulated List of Subjects derivative contract has been authorized institution only, standardized market risk-weighted assets; minus 12 CFR Part 217 for trading on a U.S. futures exchange by the Commodity Futures Trading (2) Any amount of the Board- Administrative practice and Commission (unless specifically regulated institution’s allowance for procedure; Banks, banking; Capital; excluded by the Board) or other loan and lease losses that is not Federal Reserve System; Holding commodities that have been specifically included in tier 2 capital and any companies; Reporting and authorized by the Board under section amount of allocated transfer risk recordkeeping requirements; Securities. 4(k)(1)(B) of the Bank Holding Company reserves. 12 CFR Part 225 Act 12 (12 U.S.C. 1843(k)(1)(B)). * * * * * ■ * * * * * 3. Section 217.30 is amended by Administrative practice and revising paragraph (b) as follows: procedure, Banks, Banking, Federal Covered physical commodity means Reserve System, Holding companies, any physical commodity that is, or a § 217.30 Applicability. component of which is, specifically Reporting and recordkeeping * * * * * requirements, Securities. named: (b) Notwithstanding paragraph (a) of (1) As a ‘‘hazardous substance’’ under Authority and Issuance this section, a market risk Board- section 104 of the Comprehensive regulated institution must exclude from For the reasons set forth in the Environmental Response, its calculation of risk-weighted assets preamble, the Board proposes to amend Compensation, and Liability Act (42 under this subpart the risk-weighted 12 CFR parts 217 and 225 to as follows: U.S.C. 9601); asset amounts of all covered positions, (2) As ‘‘oil’’ under section 1001 of the as defined in subpart F of this part PART 217—CAPITAL ADEQUACY OF Oil Pollution Act of 1990 (33 U.S.C. (except foreign exchange positions that BANK HOLDING COMPANIES, 2701) or section 311 of the Clean Water are not trading positions, OTC SAVINGS AND LOAN HOLDING Act (33 U.S.C. 1321); derivative positions, cleared COMPANIES, AND STATE MEMBER (3) As a ‘‘hazardous air pollutant’’ transactions, unsettled transactions, and BANKS (REGULATION Q) under section 112 of the Clean Air Act covered physical commodities). (42 U.S.C. 7412); ■ ■ 1. The authority citation for part 217 4. Section 217.31 is revised to read as (4) In regulations interpreting the follows: continues to read as follows: foregoing terms under the Authority: 12 U.S.C. 248(a), 321–338a, corresponding statute; or § 217.31 Mechanics for calculating risk- 481–486, 1462a, 1467a, 1818, 1828, 1831n, (5) In a state statute, or regulation weighted assets for general credit risk. 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, promulgated thereunder, that makes a (a) General risk-weighting 3904, 3906–3909, 4808, 5365, 5368, 5371. party other than a governmental entity requirements. A Board-regulated ■ 2. Section 217.2 is amended by: or fund responsible for removal or institution must apply risk weights to its ■ (a) Revising the definition of remediation efforts related to the exposures as follows: ‘‘Advanced approaches total risk- unauthorized release of the substance or (1) A Board-regulated institution must weighted assets’’. for costs incurred as a result of the determine the exposure amount of each

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on-balance sheet exposure, each OTC paragraph (d) of this section, multiplied 4(k) permissible commodity quantity derivative contract, and each off-balance by the simple average of the covered and the section 4(o) permissible sheet commitment, trade and physical commodity’s month-end, end- commodity quantity of each covered transaction-related contingency, of-day spot prices over the previous 60 physical commodity the Board- guarantee, repo-style transaction, months. regulated institution owns pursuant to financial standby letter of credit, (2) The exposure amount for a section section 4(k)(1)(B) or section 4(o) of the forward agreement, or other similar 4(o) permissible commodity equals the Bank Holding Company Act (12 U.S.C. transaction that is not: section 4(o) permissible commodity 1843(k)(1)(B) or (o)). (i) An unsettled transaction subject to quantity, as determined under (2) For a covered physical commodity § 217.38; paragraph (d) of this section, multiplied that the Board-regulated institution (ii) A cleared transaction subject to by the simple average of the covered owns pursuant to section 4(o) of the § 217.35; physical commodity’s month-end, end- Bank Holding Company Act (12 U.S.C. (iii) A default fund contribution of-day spot prices over the previous 60 1843(o)): subject to § 217.35; months. (i) The section 4(o) permissible (iv) A covered physical commodity, a (3)(i) If the section 4(k) cap parity commodity quantity of a covered section 4(o) infrastructure asset, or a amount of the Board-regulated physical commodity equals the average covered commodity merchant banking institution exceeds 5 percent of the tier of the amounts of the covered physical investment subject to §§ 217.39 through 1 capital of the Board-regulated commodity owned by the Board- 217.40; institution, then such excess (up to the regulated institution recorded as of the (v) A securitization exposure subject sum of the exposure amounts for each close of business on each day of the to §§ 217.41 through 217.45; or section 4(k) permissible commodity previous calendar quarter minus any (vi) An equity exposure (other than an owned by the Board-regulated section 4(k) permissible commodity equity OTC derivative contract) subject institution pursuant to section 4(o) of quantity; to §§ 217.51 through 217.53. the Bank Holding Company Act (12 (ii) If the covered physical commodity (2) The Board-regulated institution U.S.C. 1843(o))) must be risk weighted is an approved physical commodity, the must multiply each exposure amount by at 1,250 percent. section 4(k) permissible commodity the risk weight appropriate to the (ii) For purposes of paragraph (c)(3) of quantity of the covered physical exposure based on the exposure type or this section, section 4(k) cap parity commodity equals the average of the counterparty, eligible guarantor, or amount equals: amounts of the covered physical (A) The sum of the exposure amounts financial collateral to determine the commodity owned by the Board- for each section 4(k) permissible risk-weighted asset amount for each regulated institution as of the close of commodity that is owned by the Board- exposure. business on each day of the previous regulated institution pursuant to section (b) Total risk-weighted assets for calendar quarter, if the daily quantity of 4(o) of the Bank Holding Company Act general credit risk equals the sum of the the covered physical commodity: risk-weighted asset amounts calculated (12 U.S.C. 1843(o)); plus (B) The sum of the market value of (A) Was purchased by the Board- under this section. regulated institution in the spot market ■ each physical commodity (calculated as 5. Section 217.39 is added to read as or is owned for the purpose of the follows: the average of the amounts of the physical commodity owned by the Board-regulated institution taking or § 217.39 Covered Physical Commodity Board-regulated institution recorded as making physical delivery of the Activities. of the close of business on each day of commodity to settle a forward contract, (a) General. A Board-regulated the previous calendar quarter multiplied option, future, option on future, swap, institution’s total risk-weighted assets by the simple average of the physical or a similar contract in which a Board- for covered physical commodity commodity’s month-end, end-of-day regulated institution is authorized to activities equals the sum of the risk- spot prices over the previous 60 engage under section 225.28(b)(8)(ii) of weighted asset amounts for each of its months) that is owned by the Board- the Board’s Regulation Y (12 CFR covered physical commodities, each of regulated institution pursuant to: 225.28(b)(8)(ii)); and its equity exposures to covered (1) Any authority other than sections (B) Was stored, extracted, produced, commodities merchant banking 4(c)(2), 4(k)(4)(H), 4(k)(4)(I), and 4(o) of transported, or altered (including by investments, and each of its 4(o) the Bank Holding Company Act (12 processing or refining) only by infrastructure assets, each as determined U.S.C. 1843(c)(2), (k)(4)(H), (k)(4)(I), and reputable, third-party facilities during under this section and § 217.40. (o)); or that day; and (b) Risk-weighted asset amount for (2) Section 4(o) of the Bank Holding (iii) If the covered physical covered physical commodities. The risk- Company Act (12 U.S.C. 1843(o)), but commodity is not an approved physical weighted asset amount for a covered only with respect to a physical commodity, the section 4(k) permissible physical commodity equals: commodity that is not a covered commodity quantity of the covered (1) The exposure amount for a section physical commodity. physical commodity equals zero. 4(k) permissible commodity multiplied (iii) A Board-regulated institution that (3) For a covered physical commodity by 300 percent, subject to the limitation owns one or more covered physical that the Board-regulated institution in paragraph (c)(3) of this section, plus commodities pursuant to section 4(o) of owns pursuant to section 4(k)(1)(B) of (2) The exposure amount for a section the Bank Holding Company Act (12 the Bank Holding Company Act (12 4(o) permissible commodity multiplied U.S.C. 1843(o)) must determine the U.S.C. 1843(k)(1)(B)): by 1,250 percent. market value of each covered physical (i) The section 4(o) permissible (c) Exposure amounts for covered commodity described in paragraph commodity quantity equals zero; and physical commodities. (c)(ii)(B) of this section pursuant to the (ii) The section 4(k) permissible (1) The exposure amount for a section calculation method described therein. commodity quantity equals the average 4(k) permissible commodity equals the (d) Quantity of a covered physical of the amounts of the covered physical section 4(k) permissible commodity commodity. (1) A Board-regulated commodity owned by the Board- quantity, as determined under institution must determine the section regulated institution recorded as of the

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close of business on each day of the activities that are only the purchasing 217.100 [Amended] previous calendar quarter. and selling of one or more covered ■ 8. Section 217.100(b)(3) is revised to (e) Covered commodity merchant physical commodities (each of which is read as follows: banking investments risk weights. (1) an approved physical commodity) in the The risk-weighted asset amount for a spot market and the taking and making * * * * * covered commodity merchant banking physical delivery of one or more (b) * * * investment, as the term is defined in covered physical commodities (each of (3) A market risk Board-regulated § 217.40, is the exposure amount for the which is an approved physical institution must exclude from its investment multiplied by the commodity) to settle forward contracts, calculation of risk-weighted assets appropriate risk weight, each as options, futures, options on futures, under this subpart the risk-weighted calculated according to this section. swaps, or similar contracts. (2) A Board-regulated institution must (b) Covered physical commodity asset amounts of all covered positions, assign a 1,250 percent risk weight to an activities. For purposes of this section, as defined in subpart F of this part exposure amount for a covered covered physical commodity activities (except foreign exchange positions that commodity merchant banking include, but are not limited to, are not trading positions, over-the- investment except as provided in (1) Storing, producing, transporting, counter derivative positions, cleared paragraphs (e)(3) and (e)(4) of this or altering (including by processing or transactions, unsettled transactions, and section. refining) a covered physical commodity; covered physical commodities). (3) A Board-regulated institution must (2) Buying or selling a covered * * * * * assign a 300 percent risk weight to an physical commodity in the spot market; ■ 9. Section 217.131 is amended by exposure amount for a covered (3) Taking or making physical commodity merchant banking delivery of a covered physical revising the section heading and investment that is a publicly traded commodity to settle a contract; and revising paragraph (e)(3)(vii) to read as commodity trading portfolio company, (4) Owning or operating a facility or follows: as the term is defined in § 217.40. vessel that holds or uses a covered physical commodity. § 217.131 Introduction and exposure (4) A Board-regulated institution must measurement. assign a 400 percent risk weight to an (c) End-user exception. exposure amount for a covered Notwithstanding paragraph (b) of this * * * * * commodity merchant investment that is section, covered physical commodity (e) * * * activities do not include a commodity trading portfolio company, (3) * * * as the term is defined in § 217.40, that (1) Owning or operating an end-user (vii). The risk-weighted asset amount is not publicly traded. facility or vessel; or (f) 4(o) infrastructure assets risk (2) Buying, owning or storing a for any other on-balance-sheet asset that weights. (1) The risk-weighted asset covered physical commodity solely for does not meet the definition of a amount for a 4(o) infrastructure asset purposes of powering or supporting an wholesale, retail, securitization, IMM, equals the original cost basis (cost basis end-user facility or vessel that is owned equity exposure, covered commodity gross of accumulated depreciation and or operated by the portfolio company. merchant banking investment, cleared asset impairment) of the 4(o) (d) Definition of end-user facility or transaction, or default fund contribution infrastructure asset multiplied by 1,250 vessel. For purposes of paragraph (c)(2) and is not subject to deduction under percent. of this section, end-user facility or § 217.22(a), (c), or (d) equals the (2) For purposes of this section, a 4(o) vessel means a facility or vessel that carrying value of the asset. does not store, produce, transport, or infrastructure asset is an on-balance * * * * * sheet exposure owned pursuant to alter a covered physical commodity ■ 10. Section 217.151(a)(1) is revised to section 4(o) of the Bank Holding except as necessary to power or support read as follows: Company Act that is not a physical the facility or vessel. An end-user commodity. facility or vessel does not include a power plant. § 217.151 Introduction and exposure ■ 6. Section 217.40 is added to read as measurement. follows: 217.51 [Amended] (a) General. (1) To calculate its risk- ■ § 217.40 Covered Commodity Merchant 7. Section 217.51(a)(1) is revised to weighted asset amounts for equity Banking Investments. read as follows: exposures that are not equity exposures (a) General. (1) To calculate its risk- (a) Definition of covered commodity to an investment fund or a covered weighted asset amounts for equity merchant banking investment and commodity merchant banking exposures that are not equity exposures commodity trading portfolio company. investment, as defined in § 217.40, a For purposes of this part, to an investment fund, a covered commodity merchant banking Board-regulated institution may apply (1) A covered commodity merchant either the Simple Risk-Weight Approach banking investment is a company investment, as defined in § 217.40, a Board-regulated institution must use the (SRWA) provided in § 217.152 or, if it (i) The shares, assets, or ownership qualifies to do so, the Internal Models interests of which are owned or Simple Risk-Weight Approach (SRWA) provided in § 217.52. A Board-regulated Approach (IMA) in § 217.153. A Board- controlled by the Board-regulated regulated institution must use the look- institution pursuant to section 4(k)(4)(H) institution must use the look-through through approaches provided in of the Bank Holding Company Act (12 approaches provided in § 217.53 to § 217.154 to calculate its risk-weighted U.S.C. 1843(k)(4)(H)); and calculate its risk-weighted asset (ii) Is engaged in covered physical amounts for equity exposures to asset amounts for equity funds and use commodity activities. investment funds and use the approach the approach provided in §§ 217.39 (2) A commodity trading portfolio provided in §§ 217.39 and 217.40 for through 217.40 for equity exposures to company is a covered commodity equity exposures to covered commodity covered commodity merchant banking merchant banking investment that merchant banking investments. investments. engages in covered physical commodity * * * * * * * * * *

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PART 225—BANK HOLDING or vessels for the extraction, CCAR. The qualitative assessment of the COMPANIES AND CHANGE IN BANK transportation, storage, or distribution of capital plans of large and noncomplex CONTROL (REGULATION Y) physical commodities pursuant to firms instead would be conducted section 4(k)(1)(B) of the Bank Holding outside of CCAR through the ■ 11. The authority citation to part 225 Company Act (12 U.S.C. 1843(k)(1)(B)). supervisory review process. For continues to read as follows: (e) For purposes of paragraph (d) of purposes of the proposal, a bank Authority: 12 U.S.C. 1817(j)(13), 1818, this section, the term operate includes holding company or U.S. intermediate 1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b), (1) Participation in the day-to-day holding company with total 1972(1), 3106, 3108, 3310, 3331–3351, 3906, management or operations of the consolidated assets of $50 billion or 3907, and 3909; 15 U.S.C. 1681s, 1681w, facility; 6801 and 6805. greater but less than $250 billion, on- (2) Participation in management and balance sheet foreign exposure of less § 225.28 [Amended] operational decisions that occur in the than $10 billion, and nonbank assets of ■ 12. § 225.28 is amended by removing ordinary course of the business of the less than $75 billion would be the term ‘‘copper’’ from paragraphs facility; and considered a large and noncomplex (b)(8)(ii)(B) and (b)(8)(iii). (3) Managing, directing, conducting, firm. The proposal would also modify ■ 13. Section 225.95 is added to read as or providing advice regarding reporting requirements for large and follows: operations having to do with the leakage noncomplex firms to reduce burdens by or disposal of a physical commodity or raising materiality thresholds, reducing § 225.95 What are some of the hazardous waste or decisions about the the scope of the data collection on these requirements to engage in complementary facility’s compliance with activities? firms’ stress test results, and reducing environmental statutes or regulations, supporting documentation (a) Paragraphs (b)–(e) of this section including any law or regulation requirements. For all bank holding apply to financial holding companies referenced in the definition of covered companies subject to the capital plan that the Board has approved to purchase physical commodity in section 217.2 of and sell physical commodities in the rule, the proposal would simplify the the Board’s Regulation Q (12 CFR initial applicability provisions for the spot market and to take and make 217.2). delivery of physical commodities to capital plan and stress test rules, reduce By order of the Board of Governors of the the amount of additional capital settle contracts identified in section Federal Reserve System, September 23, 2016. 225.28(b)(8)(B) of this part (12 CFR distributions that a bank holding Robert deV. Frierson, 225.28(b)(8)(B)) as an activity that is company may make during a capital complementary to a financial activity Secretary of the Board. plan cycle without seeking the Board’s under section 4(k)(1)(B) of the BHC Act [FR Doc. 2016–23349 Filed 9–29–16; 8:45 am] prior approval, and extend the range of (12 U.S.C. 1843(k)(1)(B)). BILLING CODE P potential as-of dates for the trading and (b) A financial holding company may counterparty scenario component used not purchase or sell physical in the stress test rules. The proposal commodities in the spot market or take FEDERAL RESERVE SYSTEM would also amend the Parent Company Only Financial Statements for Large or make delivery of physical 12 CFR Parts 225 and 252 commodities pursuant to sections Holding Companies (FR Y–9LP) to 4(c)(8) or 4(k)(1)(B) of the Bank Holding [Regulations Y and YY; Docket No. R–1548; include new line item 17 of PC–B Company Act (12 U.S.C. 1843(c)(8), RIN 7100 AE–59] Memoranda (Total nonbank assets of a (k)(1)(B)) if the market value of physical holding company that is subject to the Amendments to the Capital Plan and commodities owned by the financial Federal Reserve Board’s capital plan Stress Test Rules holding company and its subsidiaries rule) for purposes of identifying the large and noncomplex firms. All other (other than through ownership or AGENCY: Board of Governors of the control of assets or subsidiaries Federal Reserve System (Board). bank holding companies subject to the capital plan rule that are not large and pursuant to sections 4(c)(2), 4(k)(4)(H), ACTION: Notice of proposed rulemaking noncomplex firms would remain subject or 4(k)(4)(I) of the Bank Holding with request for comment. Company Act (12 U.S.C. 1843(c)(2), to objection to their capital plan based (k)(4)(H), (k)(4)(I))) exceeds 5 percent of SUMMARY: The Board is inviting on qualitative deficiencies under the the consolidated tier 1 capital of the comment on a notice of proposed rule. financial holding company, as rulemaking to revise the capital plan The proposal would not apply to bank determined under the Board’s and stress test rules for bank holding holding companies with total Regulation Q (12 CFR part 217). companies with $50 billion or more in consolidated assets of less than $50 (c) A financial holding company must total consolidated assets and U.S. billion or to any state member bank or notify the Board if the aggregate market intermediate holding companies of savings and loan holding company. value of physical commodities owned foreign banks. Under the proposal, large DATES: Comments must be received by by the financial holding company and and noncomplex firms, defined below, November 25, 2016. its subsidiaries (other than through would no longer be subject to the ADDRESSES: You may submit comments, ownership or control of assets or provisions of the Board’s capital plan identified by Docket No. R–1548 and subsidiaries pursuant to sections 4(c)(2), rule whereby the Board may object to a RIN 7100 AE–59 by any of the following 4(k)(4)(H) or 4(k)(4)(I) of the Bank capital plan on the basis of qualitative methods: Holding Company Act (12 U.S.C. deficiencies in the firm’s capital • Agency Web site: http:// 1843(c)(2), (k)(4)(H), (k)(4)(I))) exceeds 4 planning process. In connection with www.federalreserve.gov. Follow the percent of the consolidated tier 1 capital this modification, large and noncomplex instructions for submitting comments at of the financial holding company, as firms would no longer be subject to the http://www.federalreserve.gov/ determined under the Board’s qualitative assessment in generalinfo/foia/ProposedRegs.aspx. Regulation Q (12 CFR part 217). Comprehensive Capital Analysis and • Federal eRulemaking Portal: http:// (d) A financial holding company may Review (CCAR), but would remain www.regulations.gov. Follow the not own operate, or invest in facilities subject to a quantitative assessment in instructions for submitting comments.

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