12 CFR Ch. I (1–1–21 Edition)

Comptroller of the Currency, Treasury Pt. 3

be consistent with the requirements agreeing to compensate the bank for and principles of this section. the use of its premises, employees, or (b) It is an unsafe and unsound prac- good will. However, the employee, offi- tice for any director, officer, employee, cer, director, or principal shareholder or principal shareholder of a national shall turn over to the bank as com- bank (including any entity in which pensation all income received from the this person owns an interest of more sale of the credit life insurance to the than ten percent), who is involved in bank’s loan customers. the sale of credit life insurance to loan (b) Income derived from credit life in- customers of the national bank, to surance sales to loan customers may be take advantage of that business oppor- credited to an affiliate operating under tunity for personal profit. Rec- the Bank Holding Company Act of 1956, ommendations to customers to buy insurance should be based on the benefits 12 U.S.C. 1841 et seq., or to a trust for of the policy, not the commissions re- the benefit of all shareholders, pro- ceived from the sale. vided that the bank receives reasonable (c) Except as provided in §§ 2.4 and compensation in recognition of the role 2.5(b), and paragraph (d) of this section, played by its personnel, premises, and a director, officer, employee, or prin- good will in credit life insurance sales. cipal shareholder of a national bank, or Reasonable compensation generally an entity in which such person owns an means an amount equivalent to at interest of more than ten percent, may least 20 percent of the affiliate’s net in- not retain commissions or other income attributable to the bank’s credit come from the sale of credit life insur- life insurance sales. ance in connection with any loan made by that bank, and income from credit PART 3—CAPITAL ADEQUACY life insurance sales to loan customers STANDARDS must be credited to the income accounts of the bank. (d) The requirements of paragraph (c) Subpart A—General Provisions of this section do not apply to a direc- Sec. tor, officer, employee, or principal 3.1 Purpose, applicability, reservations of shareholder if: authority, and timing. (1) The person is employed by a third 3.2 Definitions. party that has contracted with the 3.3 Operational requirements for certain ex- bank on an arm’s-length basis to sell posures. financial products on bank premises; 3.4–3.9 [Reserved] and (2) The person is not involved in the Subpart B—Capital Ratio Requirements bank’s credit decision process. and Buffers

§ 2.4 Bonus and incentive plans. 3.10 Minimum capital requirements. 3.11 Capital conservation buffer and coun- A bank employee or officer may par- tercyclical capital buffer amount. ticipate in a bonus or incentive plan 3.12 Community bank leverage ratio frame- based on the sale of credit life insur- work. ance if payments to the employee or of- 3.13–3.19 [Reserved] ficer in any one year do not exceed the greater of: Subpart C—Definition of Capital (a) Five percent of the recipient’s annual salary; or 3.20 Capital components and eligibility cri- (b) Five percent of the average salary teria for regulatory capital instruments. of all loan officers participating in the 3.21 Minority interest. plan. 3.22 Regulatory capital adjustments and deductions. § 2.5 Bank compensation. 3.23–3.29 [Reserved] (a) Nothing contained in this part Subpart D—Risk-Weighted Assets— prohibits a bank employee, officer, di- Standardized Approach rector, or principal shareholder who holds an insurance agent’s license from 3.30 Applicability.

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RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK RISK 3.31 Mechanics for calculating risk-weight- 3.131 Mechanics for calculating total whole- ed assets for general credit risk. sale and retail risk-weighted assets. 3.32 General risk weights. 3.132 Counterparty credit risk of repo-style 3.33 Off-balance sheet exposures. transactions, eligible margin loans, and 3.34 Derivative contracts. OTC derivative contracts. 3.35 Cleared transactions. 3.133 Cleared transactions. 3.36 Guarantees and credit derivatives: Sub- 3.134 Guarantees and credit derivatives: PD stitution treatment. substitution and LGD adjustment ap- 3.37 Collateralized transactions. proaches. 3.135 Guarantees and credit derivatives: RISK-WEIGHTED ASSETS FOR UNSETTLED Double default treatment. TRANSACTIONS 3.136 Unsettled transactions. 3.38 Unsettled transactions. 3.137–3.140 [Reserved] 3.39–3.40 [Reserved] RISK-WEIGHTED ASSETS FOR SECURITIZATION RISK-WEIGHTED ASSETS FOR SECURITIZATION EXPOSURES EXPOSURES 3.141 Operational criteria for recognizing 3.41 Operational requirements for the transfer of risk. securitization exposures. 3.142 Risk-weighted assets for securitization 3.42 Risk-weighted assets for securitization exposures. exposures. 3.143 Supervisory formula approach (SFA). 3.43 Simplified supervisory formula ap- 3.144 Simplified supervisory formula approach (SSFA) and the gross-up approach (SSFA). proach. 3.145 Recognition of credit risk mitigants 3.44 Securitization exposures to which the for securitization exposures. SSFA and gross-up approach do not 3.146–3.150 [Reserved] apply. 3.45 Recognition of credit risk mitigants for RISK-WEIGHTED ASSETS FOR EQUITY securitization exposures. EXPOSURES 3.46–3.50 [Reserved] 3.151 Introduction and exposure measurement. RISK-WEIGHTED ASSETS FOR EQUITY 3.152 Simple risk weight approach (SRWA). EXPOSURES 3.153 Internal models approach (IMA). 3.51 Introduction and exposure measure- 3.154 Equity exposures to investment funds. ment. 3.155 Equity derivative contracts. 3.52 Simple risk-weight approach (SRWA). 3.156–3.160 [Reserved] 3.53 Equity exposures to investment funds. 3.54–3.60 [Reserved] RISK-WEIGHTED ASSETS FOR OPERATIONAL RISK DISCLOSURES 3.161 Qualification requirements for incor- 3.61 Purpose and scope. poration of operational risk mitigants. 3.62 Disclosure requirements. 3.162 Mechanics of risk-weighted asset cal- 3.63 Disclosures by national banks or Fed- culation. eral savings associations described in 3.163–3.170 [Reserved] § 3.61. 3.64–3.99 [Reserved] DISCLOSURES 3.171 Purpose and scope. Subpart E—Risk-Weighted Assets—Internal 3.172 Disclosure requirements. Ratings-Based and Advanced Meas- 3.173 Disclosures by certain advanced ap- urement Approaches proaches national banks or Federal savings associations and Category III na- 3.100 Purpose, applicability, and principle of tional banks or Federal savings associa- conservatism. tions. 3.101 Definitions. 3.174–3.200 [Reserved] 3.102–3.120 [Reserved]

QUALIFICATION Subpart F—Risk-Weighted Assets—Market Risk 3.121 Qualification process. 3.122 Qualification requirements. 3.201 Purpose, applicability, and reservation 3.123 Ongoing qualification. of authority. 3.124 Merger and acquisition transitional 3.202 Definitions. arrangements. 3.203 Requirements for application of this 3.125–3.130 [Reserved] subpart F.

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3.204 Measure for market risk. Subpart A—General Provisions 3.205 VaR-based measure. 3.206 Stressed VaR-based measure. 3.207 Specific risk. SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. 3.208 Incremental risk. 3.209 Comprehensive risk. § 3.1 Purpose, applicability, reserva- 3.210 Standardized measurement method for tions of authority, and timing. specific risk. 3.211 Simplified supervisory formula ap- (a) Purpose. This part establishes proach (SSFA). minimum capital requirements and 3.212 Market risk disclosures. overall capital adequacy standards for 3.213–3.299 [Reserved] national banks and Federal savings associations. This part does not apply to Subpart G—Transition Provisions Federal branches and agencies of foreign banks. This part includes meth- 3.300 Transitions. 3.301 Current Expected Credit Losses odologies for calculating minimum (CECL) transition. capital requirements, public disclosure 3.302 Exposures related the Money Market requirements related to the capital re- Mutual Fund Liquidity Facility. quirements, and transition provisions 3.303 Temporary changes to the community for the application of this part. bank leverage ratio framework. (b) Limitation of authority. Nothing in 3.304 Temporary exclusions from total le- this part shall be read to limit the au- verage exposure. thority of the OCC to take action 3.305 Exposures related to the Paycheck under other provisions of law, includ- Protection Program Lending Facility. ing action to address unsafe or unsound practices or conditions, deficient cap- Subpart H—Establishment of Minimum ital levels, or violations of law or regu- Capital Ratios for an Individual Bank or lation, under section 8 of the Federal Individual Federal Savings Association Deposit Insurance Act. 3.401 Purpose and scope. (c) Applicability. Subject to the re- 3.402 Applicability. quirements in paragraphs (d) and (f) of 3.403 Standards for determination of appro- this section: priate individual minimum capital ra- (1) Minimum capital requirements and tios. overall capital adequacy standards. Each 3.404 Procedures. national bank or Federal savings asso- 3.405 Relation to other actions. ciation must calculate its minimum capital requirements and meet the Subpart I—Enforcement overall capital adequacy standards in 3.501 Remedies. subpart B of this part. (2) Regulatory capital. Each national Subpart J—Issuance of a Directive bank or Federal savings association must calculate its regulatory capital in 3.601 Purpose and scope. accordance with subpart C of this part. 3.602 Notice of intent to issue a directive. (3) Risk-weighted assets. (i) Each na- 3.603 Response to notice. tional bank or Federal savings associa- 3.604 Decision. 3.605 Issuance of a directive. tion must use the methodologies in 3.606 Change in circumstances. subpart D of this part (and subpart F of 3.607 Relation to other administrative ac- this part for a market risk national tions. bank or Federal savings association) to calculate standardized total risk- Subpart K—Interpretations weighted assets. (ii) Each advanced approaches na- 3.701 Capital and surplus. tional bank or Federal savings associa- AUTHORITY: 12 U.S.C. 93a, 161, 1462, 1462a, tion must use the methodologies in 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, subpart E (and subpart F of this part 1835, 3907, 3909, 5412(b)(2)(B), and Pub. L. 116– for a market risk national bank or 136, 134 Stat. 281. Federal savings association) to cal- SOURCE: 50 FR 10216, Mar. 14, 1985, unless culate advanced approaches total risk- otherwise noted. weighted assets.

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(4) Disclosures. (i) Except for an ad- part by the national bank or Federal vanced approaches national bank or savings association for one or more ex- Federal savings association that is posures is not commensurate with the making public disclosures pursuant to risks associated with those exposures, the requirements in subpart E of this the OCC may require the national bank part, each national bank or Federal or Federal savings association to as- savings association with total consoli- sign a different risk-weighted asset dated assets of $50 billion or more must amount to the exposure(s) or to deduct make the public disclosures described the amount of the exposure(s) from its in subpart D of this part. regulatory capital. (ii) Each market risk national bank (4) Total leverage. If the OCC deter- or Federal savings association must mines that the total leverage exposure, make the public disclosures described or the amount reflected in the national in subpart F of this part. bank’s or Federal savings association’s (iii) Each advanced approaches na- reported average total consolidated as- tional bank or Federal savings associa- sets, for an on- or off-balance sheet ex- tion must make the public disclosures posure calculated by a national bank described in subpart E of this part. or Federal savings association under (d) Reservation of authority—(1) Addi- § 3.10 is inappropriate for the expo- tional capital in the aggregate. The OCC sure(s) or the circumstances of the na- may require a national bank or Federal tional bank or Federal savings associa- savings association to hold an amount tion, the OCC may require the national of regulatory capital greater than oth- bank or Federal savings association to erwise required under this part if the adjust this exposure amount in the nu- OCC determines that the national merator and the denominator for pur- bank’s or Federal savings association’s poses of the leverage ratio calcula- capital requirements under this part tions. are not commensurate with the national bank’s or Federal savings asso- (5) Consolidation of certain exposures. ciation’s credit, market, operational, The OCC may determine that the risk- or other risks. based capital treatment for an expo- (2) Regulatory capital elements. (i) If sure or the treatment provided to an the OCC determines that a particular entity that is not consolidated on the common equity tier 1, additional tier 1, national bank’s or Federal savings as- or tier 2 capital element has character- sociation’s balance sheet is not com- istics or terms that diminish its ability mensurate with the risk of the expo- to absorb losses, or otherwise present sure and the relationship of the na- safety and soundness concerns, the tional bank or Federal savings associa- OCC may require the national bank or tion to the entity. Upon making this Federal savings association to exclude determination, the OCC may require all or a portion of such element from the national bank or Federal savings common equity tier 1 capital, addi- association to treat the exposure or en- tional tier 1 capital, or tier 2 capital, tity as if it were consolidated on the as appropriate. balance sheet of the national bank or (ii) Notwithstanding the criteria for Federal savings association for pur- regulatory capital instruments set poses of determining the national forth in subpart C of this part, the OCC bank’s or Federal savings association’s may find that a capital element may be risk-based capital requirements and included in a national bank’s or Fed- calculating the national bank’s or Fed- eral savings association’s common eq- eral savings association’s risk-based uity tier 1 capital, additional tier 1 capital ratios accordingly. The OCC capital, or tier 2 capital on a perma- will look to the substance of, and risk nent or temporary basis consistent associated with, the transaction, as with the loss absorption capacity of well as other relevant factors the OCC the element and in accordance with deems appropriate in determining § 3.20(e). whether to require such treatment. (3) Risk-weighted asset amounts. If the (6) Other reservation of authority. With OCC determines that the risk-weighted respect to any deduction or limitation asset amount calculated under this required under this part, the OCC may

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require a different deduction or limita- holding company that is an advanced tion, provided that such alternative de- approaches national bank or Federal duction or limitation is commensurate savings association must: with the national bank’s or Federal (i) Beginning on January 1, 2015, cal- savings association’s risk and con- culate standardized total risk-weighted sistent with safety and soundness. assets in accordance with subpart D, (e) Notice and response procedures. In and if applicable, subpart F of this making a determination under this sec- part; and tion, the OCC will apply notice and re- (ii) Beginning on January 1, 2015, cal- sponse procedures in the same manner culate and maintain minimum capital as the notice and response procedures ratios in accordance with subparts A, B in § 3.404. and C of this part, provided, however, (f) Timing. (1) Subject to the transi- that from January 1, 2015 to December tion provisions in subpart G of this 31, 2017, a savings and loan holding part, an advanced approaches national company that is an advanced ap- bank or Federal savings association proaches national bank or Federal sav- that is not a savings and loan holding ings association: company must: (A) Is not required to maintain a sup- (i) Except as described in paragraph plementary leverage ratio; and (f)(1)(ii) of this section, beginning on (B) Must calculate a supplementary January 1, 2014, calculate advanced ap- leverage ratio in accordance with proaches total risk-weighted assets in § 3.10(c), and must report the calculated accordance with subpart E and, if ap- supplementary leverage ratio on any plicable, subpart F of this part and, be- applicable regulatory reports. ginning on January 1, 2015, calculate (3) Beginning on January 1, 2016, and standardized total risk-weighted assets subject to the transition provisions in in accordance with subpart D and, if subpart G of this part, a national bank applicable, subpart F of this part; or Federal savings association is sub- (ii) [Reserved] ject to limitations on distributions and (iii) Beginning on January 1, 2014, discretionary bonus payments with re- calculate and maintain minimum cap- spect to its capital conservation buffer ital ratios in accordance with subparts and any applicable countercyclical cap- A, B, and C of this part, provided, how- ital buffer amount, in accordance with ever, that such national bank or Fed- subpart B of this part. eral savings association must: (4) No national bank or Federal sav- (A) From January 1, 2014 to Decem- ings association that is not an ad- ber 31, 2014, maintain a minimum com- vanced approaches bank or advanced mon equity tier 1 capital ratio of 4 per- approaches savings association is sub- cent, a minimum tier 1 capital ratio of ject to this part 3 until January 1, 2015. 5.5 percent, a minimum total capital (5) A national bank or Federal sav- ratio of 8 percent, and a minimum le- ings association that changes from one verage ratio of 4 percent; and category of national bank or Federal (B) From January 1, 2015 to Decem- savings association to another of such ber 31, 2017, an advanced approaches categories must comply with the re- national bank or Federal savings asso- quirements of its category in this part, ciation: including applicable transition provi- (1) Is not required to maintain a sup- sions of the requirements in this part, plementary leverage ratio; and no later than on the first day of the (2) Must calculate a supplementary second quarter following the change in leverage ratio in accordance with the national bank’s or Federal savings § 3.10(c), and must report the calculated association’s category. supplementary leverage ratio on any applicable regulatory reports. [78 FR 62157, 62273, Oct. 11, 2013, as amended (2) Subject to the transition provi- at 79 FR 57740, Sept. 26, 2014; 84 FR 35248, sions in subpart G of this part, a na- July 22, 2019; 84 FR 56374, Oct. 22, 2019; 84 FR tional bank or Federal savings associa- 59263, Nov. 1, 2019] tion that is not an advanced approaches national bank or Federal sav- § 3.2 Definitions. ings association or a savings and loan As used in this part:

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Additional tier 1 capital is defined in supervisory authorities have found to § 3.20(c). be significantly impaired by protracted Adjusted allowances for credit losses transfer risk problems. (AACL) means, with respect to a na- Allowances for loan and lease losses tional bank or Federal savings associa- (ALLL) means valuation allowances tion that has adopted CECL, valuation that have been established through a allowances that have been established charge against earnings to cover esti- through a charge against earnings or mated credit losses on loans, lease fi- retained earnings for expected credit nancing receivables or other extensions losses on financial assets measured at of credit as determined in accordance amortized cost and a lessor’s net in- with GAAP. ALLL excludes ‘‘allocated vestment in leases that have been es- transfer risk reserves.’’ For purposes of tablished to reduce the amortized cost this part, ALLL includes allowances basis of the assets to amounts expected that have been established through a to be collected as determined in ac- charge against earnings to cover esti- cordance with GAAP. For purposes of mated credit losses associated with off- this part, adjusted allowances for cred- balance sheet credit exposures as deter- it losses include allowances for ex- mined in accordance with GAAP. pected credit losses on off-balance Asset-backed commercial paper (ABCP) sheet credit exposures not accounted program means a program established for as insurance as determined in ac- primarily for the purpose of issuing cordance with GAAP. Adjusted allow- commercial paper that is investment ances for credit losses exclude ‘‘allo- grade and backed by underlying expo- cated transfer risk reserves’’ and allow- sures held in a bankruptcy-remote spe- ances created that reflect credit losses cial purpose entity (SPE). on purchased credit deteriorated assets Asset-backed commercial paper (ABCP) and available-for-sale debt securities. program sponsor means a national bank Advanced approaches national bank or or Federal savings association that: Federal savings association means a na- (1) Establishes an ABCP program; tional bank or Federal savings associa- (2) Approves the sellers permitted to tion that is described in § 3.100(b)(1). participate in an ABCP program; Advanced approaches total risk-weight- (3) Approves the exposures to be pur- ed assets means: chased by an ABCP program; or (1) The sum of: (4) Administers the ABCP program (i) Credit-risk-weighted assets; by monitoring the underlying expo- (ii) Credit valuation adjustment sures, underwriting or otherwise ar- (CVA) risk-weighted assets; ranging for the placement of debt or (iii) Risk-weighted assets for oper- other obligations issued by the pro- ational risk; and gram, compiling monthly reports, or (iv) For a market risk national bank ensuring compliance with the program or Federal savings association only, ad- documents and with the program’s vanced market risk-weighted assets; credit and investment policy. minus Bank holding company means a bank (2) Excess eligible credit reserves not holding company as defined in section 2 included in the national bank’s or Fed- of the Bank Holding Company Act. eral savings association’s tier 2 capital. Bank Holding Company Act means the Advanced market risk-weighted assets Bank Holding Company Act of 1956, as means the advanced measure for mar- amended (12 U.S.C. 1841 et seq.). ket risk calculated under § 3.204 multi- Bankruptcy remote means, with re- plied by 12.5. spect to an entity or asset, that the en- Affiliate with respect to a company, tity or asset would be excluded from an means any company that controls, is insolvent entity’s estate in receiver- controlled by, or is under common con- ship, insolvency, liquidation, or similar trol with, the company. proceeding. Allocated transfer risk reserves means Basis derivative contract means a non- reserves that have been established in foreign-exchange derivative contract accordance with section 905(a) of the (i.e., the contract is denominated in a International Lending Supervision Act, single currency) in which the cash against certain assets whose value U.S. flows of the derivative contract depend

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on the difference between two risk fac- for the most recent quarter or average tors that are attributable solely to one of the most recent quarters, as applica- of the following derivative asset class- ble; and es: Interest rate, credit, equity, or (2) Cross-jurisdictional activity, cal- commodity. culated based on the average of its Call Report means Consolidated Re- cross-jurisdictional activity for the ports of Condition and Income. four most recent calendar quarters, of Carrying value means, with respect to $75 billion or more. Cross-jurisdictional an asset, the value of the asset on the activity is the sum of cross-jurisdic- balance sheet of the national bank or tional claims and cross-jurisdictional Federal savings association as deter- liabilities, calculated in accordance mined in accordance with GAAP. For with the instructions to the FR Y–15 or all assets other than available-for-sale equivalent reporting form. debt securities or purchased credit de- (iii) After meeting the criteria in teriorated assets, the carrying value is paragraph (2)(ii) of this definition, a not reduced by any associated credit national bank or Federal savings asso- loss allowance that is determined in ciation continues to be a Category II accordance with GAAP. national bank or Federal savings asso- Category II national bank or Federal ciation until the national bank or Fed- savings association means: eral savings association has: (1) A national bank or Federal sav- (A)(1) Less than $700 billion in total ings association that is a subsidiary of consolidated assets, as reported on the a Category II banking organization, as Call Report, for each of the four most defined pursuant to 12 CFR 252.5 or 12 recent calendar quarters; and CFR 238.10, as applicable; or (2) Less than $75 billion in cross-ju- (2) A national bank or Federal sav- risdictional activity for each of the ings association that: four most recent calendar quarters. (i) Is not a subsidiary of a depository Cross-jurisdictional activity is the sum institution holding company; and of cross-jurisdictional claims and (ii)(A) Has total consolidated assets, cross-jurisdictional liabilities, cal- calculated based on the average of the culated in accordance with the instruc- national bank’s or Federal savings as- tions to the FR Y–15 or equivalent re- sociation’s total consolidated assets for porting form; or the four most recent calendar quarters (B) Less than $100 billion in total as reported on the Call Report, equal to consolidated assets, as reported on the $700 billion or more. If the national Call Report, for each of the four most bank or Federal savings association recent calendar quarters. has not filed the Call Report for each of Category III national bank or Federal the four most recent calendar quarters, savings association means: total consolidated assets is calculated (1) A national bank or Federal sav- based on its total consolidated assets, ings association that is a subsidiary of as reported on the Call Report, for the a Category III banking organization, as most recent quarter or the average of defined pursuant to 12 CFR 252.5 or 12 the most recent quarters, as applicable; CFR 238.10, as applicable; or (2) A national bank or Federal sav- (B) Has: ings association that is a subsidiary of (1) Total consolidated assets, cal- a depository institution that meets the culated based on the average of the na- criteria in paragraph (3)(ii)(A) or (B) of tional bank’s or Federal savings asso- this definition; or ciation’s total consolidated assets for (3) A national bank or Federal sav- the four most recent calendar quarters ings association that: as reported on the Call Report, of $100 (i) Is not a subsidiary of a depository billion or more but less than $700 bil- institution holding company; and lion. If the national bank or Federal (ii)(A) Has total consolidated assets, savings association has not filed the calculated based on the average of the Call Report for each of the four most depository institution’s total consoli- recent quarters, total consolidated as- dated assets for the four most recent sets is based on its total consolidated calendar quarters as reported on the assets, as reported on the Call Report, Call Report, equal to $250 billion or

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more. If the depository institution has (A) Has: not filed the Call Report for each of the (1) Less than $250 billion in total con- four most recent calendar quarters, solidated assets, as reported on the total consolidated assets is calculated Call Report, for each of the four most based on its total consolidated assets, recent calendar quarters; as reported on the Call Report, for the (2) Less than $75 billion in total most recent quarter or average of the nonbank assets, calculated in accord- most recent quarters, as applicable; or ance with the instructions to the FR (B) Has: Y–9LP or equivalent reporting form, (1) Total consolidated assets, cal- for each of the four most recent calculated based on the average of the de- endar quarters; pository institution’s total consoli- (3) Less than $75 billion in weighted dated assets for the four most recent short-term wholesale funding, cal- calendar quarters as reported on the culated in accordance with the instruc- Call Report, of $100 billion or more but tions to the FR Y–15 or equivalent re- less than $250 billion. If the depository porting form, for each of the four most institution has not filed the Call Re- recent calendar quarters; and port for each of the four most recent (4) Less than $75 billion in off-balance calendar quarters, total consolidated sheet exposure for each of the four assets is calculated based on its total most recent calendar quarters. Off-bal- consolidated assets, as reported on the ance sheet exposure is a national Call Report, for the most recent quar- bank’s or Federal savings association’s ter or average of the most recent quar- total exposure, calculated in accord- ters, as applicable; and ance with the instructions to the FR (2) At least one of the following in Y–15 or equivalent reporting form, paragraphs (3)(ii)(B)(2)(i) through (iii) minus the total consolidated assets of of this definition, each calculated as the national bank or Federal savings the average of the four most recent cal- association, as reported on the Call Re- endar quarters, or if the depository in- port; or stitution has not filed each applicable reporting form for each of the four (B) Has less than $100 billion in total most recent calendar quarters, for the consolidated assets, as reported on the most recent quarter or quarters, as ap- Call Report, for each of the four most plicable: recent calendar quarters; or (i) Total nonbank assets, calculated (C) Is a Category II national bank or in accordance with the instructions to Federal savings association. the FR Y–9LP or equivalent reporting Central counterparty (CCP) means a form, equal to $75 billion or more; counterparty (for example, a clearing (ii) Off-balance sheet exposure equal house) that facilitates trades between to $75 billion or more. Off-balance counterparties in one or more financial sheet exposure is a depository institu- markets by either guaranteeing trades tion’s total exposure, calculated in ac- or novating contracts. cordance with the instructions to the CFTC means the U.S. Commodity Fu- FR Y–15 or equivalent reporting form, tures Trading Commission. minus the total consolidated assets of Clean-up call means a contractual the depository institution, as reported provision that permits an originating on the Call Report; or national bank or Federal savings asso- (iii) Weighted short-term wholesale ciation or servicer to call funding, calculated in accordance with securitization exposures before their the instructions to the FR Y–15 or stated maturity or call date. equivalent reporting form, equal to $75 Cleared transaction means an exposure billion or more. associated with an outstanding deriva- (iii) After meeting the criteria in tive contract or repo-style transaction paragraph (3)(ii) of this definition, a that a national bank or Federal sav- national bank or Federal savings asso- ings association or clearing member ciation continues to be a Category III has entered into with a central national bank or Federal savings asso- counterparty (that is, a transaction ciation until the national bank or Fed- that a central counterparty has accept- eral savings association: ed).

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(1) The following transactions are Clearing member means a member of, cleared transactions: or direct participant in, a CCP that is (i) A transaction between a CCP and entitled to enter into transactions with a national bank or Federal savings as- the CCP. sociation that is a clearing member of Clearing member client means a party the CCP where the national bank or to a cleared transaction associated Federal savings association enters into with a CCP in which a clearing member the transaction with the CCP for the acts either as a financial intermediary national bank’s or Federal savings as- with respect to the party or guarantees sociation’s own account; the performance of the party to the (ii) A transaction between a CCP and CCP. a national bank or Federal savings as- Client-facing derivative transaction sociation that is a clearing member of means a derivative contract that is not the CCP where the national bank or a cleared transaction where the na- Federal savings association is acting as tional bank or Federal savings associa- a financial intermediary on behalf of a tion is either acting as a financial clearing member client and the trans- intermediary and enters into an offset- action offsets another transaction that ting transaction with a qualifying cen- satisfies the requirements set forth in tral counterparty (QCCP) or where the § 3.3(a); national bank or Federal savings asso- (iii) A transaction between a clearing member client national bank or Fed- ciation provides a guarantee on the eral savings association and a clearing performance of a client on a trans- member where the clearing member action between the client and a QCCP. acts as a financial intermediary on be- Collateral agreement means a legal half of the clearing member client and contract that specifies the time when, enters into an offsetting transaction and circumstances under which, a with a CCP, provided that the require- counterparty is required to pledge col- ments set forth in § 3.3(a) are met; or lateral to a national bank or Federal (iv) A transaction between a clearing savings association for a single finan- member client national bank or Fed- cial contract or for all financial con- eral savings association and a CCP tracts in a netting set and confers upon where a clearing member guarantees the national bank or Federal savings the performance of the clearing mem- association a perfected, first-priority ber client national bank or Federal security interest (notwithstanding the savings association to the CCP and the prior security interest of any custodial transaction meets the requirements of agent), or the legal equivalent thereof, § 3.3(a)(2) and (3). in the collateral posted by the (2) The exposure of a national bank counterparty under the agreement. or Federal savings association that is a This security interest must provide the clearing member to its clearing mem- national bank or Federal savings asso- ber client is not a cleared transaction ciation with a right to close-out the fi- where the national bank or Federal nancial positions and liquidate the col- savings association is either acting as lateral upon an event of default of, or a financial intermediary and enters failure to perform by, the counterparty into an offsetting transaction with a under the collateral agreement. A con- CCP or where the national bank or tract would not satisfy this require- Federal savings association provides a ment if the national bank’s or Federal guarantee to the CCP on the perform- savings association’s exercise of rights ance of the client.3 under the agreement may be stayed or avoided: 3 For the standardized approach treatment (1) Under applicable law in the rel- of these exposures, see § 3.34(e) (OTC deriva- evant jurisdictions, other than: tive contracts) or § 3.37(c) (repo-style trans- (i) In receivership, conservatorship, actions). For the advanced approaches treat- or resolution under the Federal Deposit ment of these exposures, see §§ 3.132(c)(8) and Insurance Act, Title II of the Dodd- (d) (OTC derivative contracts) or §§ 3.132(b) and 3.132(d) (repo-style transactions) and for calculation of the margin period of risk, see tracts) and 3.132(d)(5)(iii)(A) (repo-style §§ 3.132(d)(5)(iii)(C) (OTC derivative con- transactions).

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Frank Act, or under any similar insol- other instrument linked to commod- vency law applicable to GSEs, or laws ities that gives rise to similar of foreign jurisdictions that are sub- counterparty credit risks. stantially similar 4 to the U.S. laws ref- Commodity Exchange Act means the erenced in this paragraph (1)(i) in order Commodity Exchange Act of 1936 (7 to facilitate the orderly resolution of U.S.C. 1 et seq.) the defaulting counterparty; Common equity tier 1 capital is defined (ii) Where the agreement is subject in § 3.20(b). by its terms to any of the laws ref- Common equity tier 1 minority interest erenced in paragraph (1)(i) of this defi- means the common equity tier 1 cap- nition; or ital of a depository institution or for- (2) Other than to the extent nec- eign bank that is: essary for the counterparty to comply (1) A consolidated subsidiary of a na- with the requirements of part 47, sub- tional bank or Federal savings associa- part I of part 252, and part 382 of this tion; and title 12, as applicable. (2) Not owned by the national bank Commercial end-user means an entity or Federal savings association. that: Company means a corporation, part- (1)(i) Is using derivative contracts to nership, limited liability company, de- hedge or mitigate commercial risk; and pository institution, business trust, (ii)(A) Is not an entity described in special purpose entity, association, or section 2(h)(7)(C)(i)(I) through (VIII) of similar organization. the Commodity Exchange Act (7 U.S.C. Control. A person or company controls 2(h)(7)(C)(i)(I) through (VIII)); or a company if it: (B) Is not a ‘‘financial entity’’ for (1) Owns, controls, or holds with purposes of section 2(h)(7) of the Com- power to vote 25 percent or more of a modity Exchange Act (7 U.S.C. 2(h)) by class of voting securities of the com- virtue of section 2(h)(7)(C)(iii) of the pany; or Act (7 U.S.C. 2(h)(7)(C)(iii)); or (2) Consolidates the company for fi- (2)(i) Is using derivative contracts to nancial reporting purposes. hedge or mitigate commercial risk; and Core capital means tier 1 capital, as (ii) Is not an entity described in sec- calculated in accordance with subpart tion 3C(g)(3)(A)(i) through (viii) of the B of this part. Securities Exchange Act of 1934 (15 Corporate exposure means an exposure U.S.C. 78c–3(g)(3)(A)(i) through (viii)); to a company that is not: or (1) An exposure to a sovereign, the (3) Qualifies for the exemption in sec- Bank for International Settlements, tion 2(h)(7)(A) of the Commodity Ex- the European Central Bank, the Euro- change Act (7 U.S.C. 2(h)(7)(A)) by vir- pean Commission, the International tue of section 2(h)(7)(D) of the Act (7 Monetary Fund, the European Sta- U.S.C. 2(h)(7)(D)); or (4) Qualifies for an exemption in sec- bility Mechanism, the European Finan- tion 3C(g)(1) of the Securities Exchange cial Stability Facility, a multi-lateral Act of 1934 (15 U.S.C. 78c–3(g)(1)) by vir- development bank (MDB), a depository tue of section 3C(g)(4) of the Act (15 institution, a foreign bank, a credit U.S.C. 78c–3(g)(4)). union, or a public sector entity (PSE); Commitment means any legally bind- (2) An exposure to a GSE; ing arrangement that obligates a na- (3) A residential mortgage exposure; tional bank or Federal savings associa- (4) A pre-sold construction loan; tion to extend credit or to purchase as- (5) A statutory multifamily mort- sets. gage; Commodity derivative contract means a (6) A high volatility commercial real commodity-linked swap, purchased estate (HVCRE) exposure; commodity-linked option, forward (7) A cleared transaction; commodity-linked contract, or any (8) A default fund contribution; (9) A securitization exposure; 4 The OCC expects to evaluate jointly with (10) An equity exposure; or the Board and FDIC whether foreign special (11) An unsettled transaction. resolution regimes meet the requirements of (12) A policy loan; this paragraph. (13) A separate account; or

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(14) A Paycheck Protection Program tion provider) for a certain period of covered loan as defined in section time. 7(a)(36) of the Small Business Act (15 Credit-enhancing interest-only strip U.S.C. 636(a)(36)). (CEIO) means an on-balance sheet asset Country risk classification (CRC) with that, in form or in substance: respect to a sovereign, means the most (1) Represents a contractual right to recent consensus CRC published by the receive some or all of the interest and Organization for Economic Coopera- no more than a minimal amount of tion and Development (OECD) as of De- principal due on the underlying expo- cember 31st of the prior calendar year sures of a securitization; and that provides a view of the likelihood (2) Exposes the holder of the CEIO to that the sovereign will service its ex- credit risk directly or indirectly asso- ternal debt. ciated with the underlying exposures Covered savings and loan holding com- that exceeds a pro rata share of the pany means a top-tier savings and loan holder’s claim on the underlying expo- holding company other than: sures, whether through subordination (1) A top-tier savings and loan hold- provisions or other credit-enhancement ing company that is: techniques. (i) A grandfathered unitary savings Credit-enhancing representations and and loan holding company as defined in warranties means representations and section 10(c)(9)(A) of HOLA; and warranties that are made or assumed (ii) As of June 30 of the previous cal- in connection with a transfer of under- endar year, derived 50 percent or more lying exposures (including loan serv- of its total consolidated assets or 50 icing assets) and that obligate a na- percent of its total revenues on an en- tional bank or Federal savings associa- terprise-wide basis (as calculated under tion to protect another party from GAAP) from activities that are not fi- losses arising from the credit risk of nancial in nature under section 4(k) of the underlying exposures. Credit-en- the Bank Holding Company Act (12 hancing representations and warran- U.S.C. 1842(k)); ties include provisions to protect a (2) A top-tier savings and loan hold- party from losses resulting from the ing company that is an insurance un- default or nonperformance of the derwriting company; or counterparties of the underlying expo- (3)(i) A top-tier savings and loan sures or from an insufficiency in the holding company that, as of June 30 of value of the collateral backing the un- the previous calendar year, held 25 per- derlying exposures. Credit-enhancing cent or more of its total consolidated representations and warranties do not assets in subsidiaries that are insur- include: ance underwriting companies (other (1) Early default clauses and similar than assets associated with insurance warranties that permit the return of, for credit risk); and or premium refund clauses covering, 1– (ii) For purposes of paragraph (3)(i) of 4 family residential first mortgage this definition, the company must cal- loans that qualify for a 50 percent risk culate its total consolidated assets in weight for a period not to exceed 120 accordance with GAAP, or if the com- days from the date of transfer. These pany does not calculate its total con- warranties may cover only those loans solidated assets under GAAP for any that were originated within 1 year of regulatory purpose (including compli- the date of transfer; ance with applicable securities laws), (2) Premium refund clauses that the company may estimate its total cover assets guaranteed, in whole or in consolidated assets, subject to review part, by the U.S. Government, a U.S. and adjustment by the Board. Government agency or a GSE, provided Credit derivative means a financial the premium refund clauses are for a contract executed under standard in- period not to exceed 120 days from the dustry credit derivative documentation date of transfer; or that allows one party (the protection (3) Warranties that permit the return purchaser) to transfer the credit risk of of underlying exposures in instances of one or more exposures (reference expo- misrepresentation, fraud, or incom- sure(s)) to another party (the protec- plete documentation.

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Credit risk mitigant means collateral, lar counterparty credit risks. Deriva- a credit derivative, or a guarantee. tive contracts also include unsettled Credit-risk-weighted assets means 1.06 securities, commodities, and foreign multiplied by the sum of: exchange transactions with a contrac- (1) Total wholesale and retail risk- tual settlement or delivery lag that is weighted assets as calculated under longer than the lesser of the market § 3.131; standard for the particular instrument (2) Risk-weighted assets for or five business days. securitization exposures as calculated Discretionary bonus payment means a under § 3.142; and payment made to an executive officer (3) Risk-weighted assets for equity of a national bank or Federal savings exposures as calculated under § 3.151. association, where: Credit union means an insured credit (1) The national bank or Federal sav- union as defined under the Federal ings association retains discretion as Credit Union Act (12 U.S.C. 1752 et seq.). to whether to make, and the amount Current Expected Credit Losses (CECL) of, the payment until the payment is means the current expected credit awarded to the executive officer; losses methodology under GAAP. (2) The amount paid is determined by Current exposure means, with respect the national bank or Federal savings to a netting set, the larger of zero or association without prior promise to, the fair value of a transaction or port- or agreement with, the executive offi- folio of transactions within the netting cer; and set that would be lost upon default of the counterparty, assuming no recov- (3) The executive officer has no con- ery on the value of the transactions. tractual right, whether express or implied, to the bonus payment. Current exposure methodology means the method of calculating the exposure Distribution means: amount for over-the-counter derivative (1) A reduction of tier 1 capital contracts in § 3.34(b). through the repurchase of a tier 1 cap- Custodian means a financial institu- ital instrument or by other means, ex- tion that has legal custody of collat- cept when a national bank or Federal eral provided to a CCP. savings association, within the same Custody bank means a national bank quarter when the repurchase is an- or Federal savings association that is a nounced, fully replaces a tier 1 capital subsidiary of a depository institution instrument it has repurchased by holding company that is a custodial issuing another capital instrument banking organization under 12 CFR that meets the eligibility criteria for: 217.2. (i) A common equity tier 1 capital in- Default fund contribution means the strument if the instrument being re- funds contributed or commitments purchased was part of the national made by a clearing member to a CCP’s bank’s or Federal savings association’s mutualized loss sharing arrangement. common equity tier 1 capital, or Depository institution means a deposi- (ii) A common equity tier 1 or addi- tory institution as defined in section 3 tional tier 1 capital instrument if the of the Federal Deposit Insurance Act. instrument being repurchased was part Depository institution holding company of the national bank’s or Federal sav- means a bank holding company or savings association’s tier 1 capital; ings and loan holding company. (2) A reduction of tier 2 capital Derivative contract means a financial through the repurchase, or redemption contract whose value is derived from prior to maturity, of a tier 2 capital in- the values of one or more underlying strument or by other means, except assets, reference rates, or indices of when a national bank or Federal sav- asset values or reference rates. Deriva- ings association, within the same quar- tive contracts include interest rate deter when the repurchase or redemption rivative contracts, exchange rate de- is announced, fully replaces a tier 2 rivative contracts, equity derivative capital instrument it has repurchased contracts, commodity derivative con- by issuing another capital instrument tracts, credit derivative contracts, and that meets the eligibility criteria for a any other instrument that poses simi- tier 1 or tier 2 capital instrument;

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(3) A dividend declaration or pay- (1) Is exercisable solely at the discre- ment on any tier 1 capital instrument; tion of the originating national bank (4) A dividend declaration or interest or Federal savings association or payment on any tier 2 capital instru- servicer; ment if the national bank or Federal (2) Is not structured to avoid allo- savings association has full discretion cating losses to securitization expo- to permanently or temporarily suspend sures held by investors or otherwise such payments without triggering an structured to provide credit enhance- event of default; or ment to the securitization; and (5) Any similar transaction that the (3)(i) For a traditional securitization, OCC determines to be in substance a is only exercisable when 10 percent or distribution of capital. less of the principal amount of the un- Dodd-Frank Act means the Dodd- derlying exposures or securitization ex- Frank Wall Street Reform and Con- posures (determined as of the inception sumer Protection Act of 2010 (Pub. L. of the securitization) is outstanding; or 111–203, 124 Stat. 1376). (ii) For a synthetic securitization, is Early amortization provision means a only exercisable when 10 percent or less provision in the documentation gov- of the principal amount of the ref- erning a securitization that, when trig- erence portfolio of underlying expo- gered, causes investors in the sures (determined as of the inception of securitization exposures to be repaid the securitization) is outstanding. before the original stated maturity of Eligible credit derivative means a cred- the securitization exposures, unless the it derivative in the form of a credit de- provision: fault swap, nth-to-default swap, total (1) Is triggered solely by events not return swap, or any other form of cred- directly related to the performance of it derivative approved by the OCC, pro- the underlying exposures or the origi- vided that: nating national bank or Federal sav- (1) The contract meets the require- ings association (such as material ments of an eligible guarantee and has changes in tax laws or regulations); or been confirmed by the protection pur- (2) Leaves investors fully exposed to chaser and the protection provider; future draws by borrowers on the un- (2) Any assignment of the contract derlying exposures even after the pro- has been confirmed by all relevant par- vision is triggered. ties; Effective notional amount means for an (3) If the credit derivative is a credit eligible guarantee or eligible credit de- default swap or nth-to-default swap, the rivative, the lesser of the contractual contract includes the following credit notional amount of the credit risk events: mitigant and the exposure amount (or (i) Failure to pay any amount due EAD for purposes of subpart E of this under the terms of the reference expo- part) of the hedged exposure, multi- sure, subject to any applicable minimal plied by the percentage coverage of the payment threshold that is consistent credit risk mitigant. with standard market practice and Eligible ABCP liquidity facility means with a grace period that is closely in a liquidity facility supporting ABCP, line with the grace period of the ref- in form or in substance, that is subject erence exposure; and to an asset quality test at the time of (ii) Receivership, insolvency, liquida- draw that precludes funding against as- tion, conservatorship or inability of sets that are 90 days or more past due the reference exposure issuer to pay its or in default. Notwithstanding the pre- debts, or its failure or admission in ceding sentence, a liquidity facility is writing of its inability generally to pay an eligible ABCP liquidity facility if its debts as they become due, and simi- the assets or exposures funded under lar events; the liquidity facility that do not meet (4) The terms and conditions dic- the eligibility requirements are guar- tating the manner in which the con- anteed by a sovereign that qualifies for tract is to be settled are incorporated a 20 percent risk weight or lower. into the contract; Eligible clean-up call means a clean-up (5) If the contract allows for cash set- call that: tlement, the contract incorporates a

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robust valuation process to estimate ances that reflect credit losses on pur- loss reliably and specifies a reasonable chased credit deteriorated assets and period for obtaining post-credit event available-for-sale debt securities, and valuations of the reference exposure; other specific reserves created against (6) If the contract requires the pro- recognized losses. tection purchaser to transfer an expo- Eligible guarantee means a guarantee sure to the protection provider at set- that: tlement, the terms of at least one of (1) Is written; the exposures that is permitted to be (2) Is either: transferred under the contract provide (i) Unconditional; or that any required consent to transfer (ii) A contingent obligation of the may not be unreasonably withheld; U.S. government or its agencies, the (7) If the credit derivative is a credit enforceability of which is dependent th default swap or n -to-default swap, the upon some affirmative action on the contract clearly identifies the parties part of the beneficiary of the guarantee responsible for determining whether a or a third party (for example, meeting credit event has occurred, specifies servicing requirements); that this determination is not the sole (3) Covers all or a pro rata portion of responsibility of the protection pro- all contractual payments of the obli- vider, and gives the protection pur- gated party on the reference exposure; chaser the right to notify the protec- (4) Gives the beneficiary a direct tion provider of the occurrence of a claim against the protection provider; credit event; and (8) If the credit derivative is a total (5) Is not unilaterally cancelable by return swap and the national bank or the protection provider for reasons Federal savings association records net other than the breach of the contract payments received on the swap as net by the beneficiary; income, the national bank or Federal (6) Except for a guarantee by a sov- savings association records offsetting ereign, is legally enforceable against deterioration in the value of the the protection provider in a jurisdic- hedged exposure (either through reduction where the protection provider has tions in fair value or by an addition to sufficient assets against which a judg- reserves). ment may be attached and enforced; Eligible credit reserves means: (7) Requires the protection provider (1) For a national bank or Federal to make payment to the beneficiary on savings association that has not adopt- the occurrence of a default (as defined ed CECL, all general allowances that in the guarantee) of the obligated have been established through a charge party on the reference exposure in a against earnings to cover estimated timely manner without the beneficiary credit losses associated with on- or off- first having to take legal actions to balance sheet wholesale and retail ex- pursue the obligor for payment; posures, including the ALLL associated (8) Does not increase the bene- with such exposures, but excluding al- ficiary’s cost of credit protection on located transfer risk reserves estab- the guarantee in response to deteriora- lished pursuant to 12 U.S.C. 3904 and tion in the credit quality of the ref- other specific reserves created against erence exposure; recognized losses; and (9) Is not provided by an affiliate of (2) For a national bank or Federal the national bank or Federal savings savings association that has adopted association, unless the affiliate is an CECL, all general allowances that have insured depository institution, foreign been established through a charge bank, securities broker or dealer, or in- against earnings or retained earnings surance company that: to cover expected credit losses associ- (i) Does not control the national ated with on- or off-balance sheet bank or Federal savings association; wholesale and retail exposures, includ- and ing AACL associated with such expo- (ii) Is subject to consolidated super- sures. Eligible credit reserves exclude vision and regulation comparable to allocated transfer risk reserves estab- that imposed on depository institu- lished pursuant to 12 U.S.C. 3904, allow- tions, U.S. securities broker-dealers, or

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U.S. insurance companies (as the case (A) Any exercise of rights under the may be); and agreement will not be stayed or avoid- (10) For purposes of §§ 3.141 through ed under applicable law in the relevant 3.145 and subpart D of this part, is pro- jurisdictions, other than in receiver- vided by an eligible guarantor. ship, conservatorship, or resolution Eligible guarantor means: under the Federal Deposit Insurance (1) A sovereign, the Bank for Inter- Act, Title II of the Dodd-Frank Act, or national Settlements, the Inter- under any similar insolvency law appli- national Monetary Fund, the European cable to GSEs,5 or laws of foreign juris- Central Bank, the European Commis- dictions that are substantially similar 6 sion, a Federal Home Loan Bank, Fed- to the U.S. laws referenced in this eral Agricultural Mortgage Corpora- paragraph (1)(iii)(A) in order to facili- tion (Farmer Mac), the European Sta- tate the orderly resolution of the de- bility Mechanism, the European Finan- faulting counterparty; and cial Stability Facility, a multilateral (B) The agreement may limit the development bank (MDB), a depository right to accelerate, terminate, and institution, a bank holding company, a close-out on a net basis all trans- savings and loan holding company, a actions under the agreement and to liq- credit union, a foreign bank, or a quali- uidate or set-off collateral promptly fying central counterparty; or upon an event of default of the (2) An entity (other than a special counterparty to the extent necessary purpose entity): for the counterparty to comply with (i) That at the time the guarantee is the requirements of part 47, subpart I issued or anytime thereafter, has of part 252, and part 382, of this title 12, issued and outstanding an unsecured as applicable. debt security without credit enhance- (2) In order to recognize an exposure ment that is investment grade; as an eligible margin loan for purposes (ii) Whose creditworthiness is not of this subpart, a national bank or Fed- positively correlated with the credit eral savings association must comply risk of the exposures for which it has with the requirements of § 3.3(b) with provided guarantees; and respect to that exposure. (iii) That is not an insurance com- Eligible servicer cash advance facility pany engaged predominately in the means a servicer cash advance facility business of providing credit protection in which: (such as a monoline bond insurer or re- (1) The servicer is entitled to full re- insurer). imbursement of advances, except that Eligible margin loan means: a servicer may be obligated to make (1) An extension of credit where: non-reimbursable advances for a particular underlying exposure if any such (i) The extension of credit is advance is contractually limited to an collateralized exclusively by liquid and insignificant amount of the out- readily marketable debt or equity se- standing principal balance of that ex- curities, or gold; posure; (ii) The collateral is marked-to-fair value daily, and the transaction is subject to daily margin maintenance re- 5 This requirement is met where all trans- quirements; and actions under the agreement are (i) executed under U.S. law and (ii) constitute ‘‘securities (iii) The extension of credit is con- contracts’’ under section 555 of the Bank- ducted under an agreement that pro- ruptcy Code (11 U.S.C. 555), qualified finan- vides the national bank or Federal sav- cial contracts under section 11(e)(8) of the ings association the right to accelerate Federal Deposit Insurance Act, or netting and terminate the extension of credit contracts between or among financial insti- and to liquidate or set-off collateral tutions under sections 401–407 of the Federal promptly upon an event of default, in- Deposit Insurance Corporation Improvement cluding upon an event of receivership, Act or the Federal Reserve Board’s Regula- tion EE (12 CFR part 231). insolvency, liquidation, conservator- 6 The OCC expects to evaluate jointly with ship, or similar proceeding, of the the Board and FDIC whether foreign special counterparty, provided that, in any resolution regimes meet the requirements of such case: this paragraph.

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(2) The servicer’s right to reimburse- tract, currency option purchased, or ment is senior in right of payment to any other instrument linked to ex- all other claims on the cash flows from change rates that gives rise to similar the underlying exposures of the counterparty credit risks. securitization; and Executive officer means a person who (3) The servicer has no legal obliga- holds the title or, without regard to tion to, and does not make advances to title, salary, or compensation, per- the securitization if the servicer con- forms the function of one or more of cludes the advances are unlikely to be the following positions: President, repaid. chief executive officer, executive chair- Employee stock ownership plan has the man, chief operating officer, chief fi- same meaning as in 29 CFR 2550.407d–6. nancial officer, chief investment offi- Equity derivative contract means an cer, chief legal officer, chief lending of- equity-linked swap, purchased equity- ficer, chief risk officer, or head of a linked option, forward equity-linked major business line, and other staff contract, or any other instrument that the board of directors of the na- linked to equities that gives rise to tional bank or Federal savings associa- similar counterparty credit risks. tion deems to have equivalent responsi- Equity exposure means: bility. (1) A security or instrument (whether Expected credit loss (ECL) means: voting or non-voting) that represents a (1) For a wholesale exposure to a non- direct or an indirect ownership interest defaulted obligor or segment of non-de- in, and is a residual claim on, the as- faulted retail exposures that is carried sets and income of a company, unless: at fair value with gains and losses flow- (i) The issuing company is consoli- ing through earnings or that is classi- dated with the national bank or Fed- fied as held-for-sale and is carried at eral savings association under GAAP; the lower of cost or fair value with (ii) The national bank or Federal sav- losses flowing through earnings, zero. ings association is required to deduct (2) For all other wholesale exposures the ownership interest from tier 1 or to non-defaulted obligors or segments tier 2 capital under this part; of non-defaulted retail exposures, the (iii) The ownership interest incor- product of the probability of default porates a payment or other similar ob- (PD) times the loss given default (LGD) ligation on the part of the issuing com- times the exposure at default (EAD) for pany (such as an obligation to make the exposure or segment. periodic payments); or (3) For a wholesale exposure to a de- (iv) The ownership interest is a faulted obligor or segment of defaulted securitization exposure; retail exposures, the national bank’s or (2) A security or instrument that is Federal savings association’s impair- mandatorily convertible into a secu- ment estimate for allowance purposes rity or instrument described in para- for the exposure or segment. graph (1) of this definition; (4) Total ECL is the sum of expected (3) An option or warrant that is exer- credit losses for all wholesale and re- cisable for a security or instrument detail exposures other than exposures for scribed in paragraph (1) of this defini- which the national bank or Federal tion; or savings association has applied the (4) Any other security or instrument double default treatment in § 3.135. (other than a securitization exposure) Exposure amount means: to the extent the return on the secu- (1) For the on-balance sheet compo- rity or instrument is based on the per- nent of an exposure (other than an formance of a security or instrument available-for-sale or held-to-maturity described in paragraph (1) of this defi- security, if the national bank or Fed- nition. eral savings association has made an ERISA means the Employee Retire- AOCI opt-out election (as defined in ment Income and Security Act of 1974 § 3.22(b)(2)); an OTC derivative contract; (29 U.S.C. 1001 et seq.). a repo-style transaction or an eligible Exchange rate derivative contract margin loan for which the national means a cross-currency interest rate bank or Federal savings association de- swap, forward foreign-exchange con- termines the exposure amount under

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§ 3.37; a cleared transaction; a default (8) For an exposure that is a fund contribution; or a securitization securitization exposure, the exposure exposure), the national bank’s or Fed- amount determined under § 3.42. eral savings association’s carrying Federal Deposit Insurance Act means value of the exposure. the Federal Deposit Insurance Act (12 (2) For a security (that is not a U.S.C. 1813). securitization exposure, equity expo- Federal Deposit Insurance Corporation sure, or preferred stock classified as an Improvement Act means the Federal De- equity security under GAAP) classified posit Insurance Corporation Improve- as available-for-sale or held-to-matu- ment Act of 1991 (12 U.S.C. 4401). rity if the national bank or Federal Federal savings association means an savings association has made an AOCI insured Federal savings association or opt-out election (as defined in an insured Federal savings bank char- § 3.22(b)(2)), the national bank’s or Fed- tered under section 5 of the Home Own- eral savings association’s carrying ers’ Loan Act of 1933. value (including net accrued but un- Fiduciary or custodial and safekeeping paid interest and fees) for the exposure account means, for purposes of less any net unrealized gains on the ex- § 3.10(c)(4)(ii)(J), an account adminis- posure and plus any net unrealized tered by a custody bank for which the losses on the exposure. custody bank provides fiduciary or cus- (3) For available-for-sale preferred todial and safekeeping services, as au- stock classified as an equity security thorized by applicable Federal or state under GAAP if the national bank or law. Federal savings association has made Financial collateral means collateral: an AOCI opt-out election (as defined in (1) In the form of: § 3.22(b)(2)), the national bank’s or Fed- (i) Cash on deposit with the national eral savings association’s carrying bank or Federal savings association (including cash held for the national value of the exposure less any net unre- bank or Federal savings association by alized gains on the exposure that are a third-party custodian or trustee); reflected in such carrying value but ex- (ii) Gold bullion; cluded from the national bank’s or (iii) Long-term debt securities that Federal savings association’s regu- are not resecuritization exposures and latory capital components. that are investment grade; (4) For the off-balance sheet compo- (iv) Short-term debt instruments nent of an exposure (other than an OTC that are not resecuritization exposures derivative contract; a repo-style trans- and that are investment grade; action or an eligible margin loan for (v) Equity securities that are pub- which the national bank or Federal licly traded; savings association calculates the ex- (vi) Convertible bonds that are pub- posure amount under § 3.37; a cleared licly traded; or transaction; a default fund contribu- (vii) Money market fund shares and tion; or a securitization exposure), the other mutual fund shares if a price for notional amount of the off-balance the shares is publicly quoted daily; and sheet component multiplied by the ap- (2) In which the national bank and propriate credit conversion factor Federal savings association has a per- (CCF) in § 3.33. fected, first-priority security interest (5) For an exposure that is an OTC or, outside of the United States, the derivative contract, the exposure legal equivalent thereof (with the ex- amount determined under § 3.34. ception of cash on deposit; and not- (6) For an exposure that is a cleared withstanding the prior security inter- transaction, the exposure amount de- est of any custodial agent or any pri- termined under § 3.35. ority security interest granted to a (7) For an exposure that is an eligible CCP in connection with collateral post- margin loan or repo-style transaction ed to that CCP). for which the bank calculates the expo- Financial institution means: sure amount as provided in § 3.37, the (1) A bank holding company; savings exposure amount determined under and loan holding company; nonbank fi- § 3.37. nancial institution supervised by the

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

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Foreign bank means a foreign bank as pursuant to paragraph (6) of this defini- defined in § 211.2 of the Federal Reserve tion— Board’s Regulation K (12 CFR 211.2) (i) Primarily finances, has financed, (other than a depository institution). or refinances the acquisition, develop- Forward agreement means a legally ment, or construction of real property; binding contractual obligation to pur- (ii) Has the purpose of providing fi- chase assets with certain drawdown at nancing to acquire, develop, or improve a specified future date, not including such real property into income-pro- commitments to make residential ducing real property; and mortgage loans or forward foreign ex- (iii) Is dependent upon future income change contracts. or sales proceeds from, or refinancing FR Y–9LP means the Parent Com- of, such real property for the repay- pany Only Financial Statements for ment of such credit facility; Large Holding Companies. (2) An HVCRE exposure does not in- FR Y–15 means the Systemic Risk clude a credit facility financing— Report. (i) The acquisition, development, or GAAP means generally accepted ac- construction of properties that are— counting principles as used in the (A) One- to four-family residential United States. properties. Credit facilities that do not Gain-on-sale means an increase in the finance the construction of one- to equity capital of a national bank or four-family residential structures, but Federal savings association (as re- instead solely finance improvements ported on [Schedule RC of the Call Re- such as the laying of sewers, water port or Schedule HC of the FR Y–9C]) pipes, and similar improvements to resulting from a traditional land, do not qualify for the one- to securitization (other than an increase four-family residential properties ex- in equity capital resulting from the na- clusion; tional bank’s or Federal savings asso- (B) Real property that would qualify ciation’s receipt of cash in connection as an investment in community devel- with the securitization or reporting of opment; or a mortgage servicing asset on [Sched- (C) Agricultural land; ule RC of the Call Report or Schedule (ii) The acquisition or refinance of HC of the FRY–9C]). existing income-producing real prop- General obligation means a bond or erty secured by a mortgage on such similar obligation that is backed by property, if the cash flow being gen- the full faith and credit of a public sec- erated by the real property is sufficient tor entity (PSE). to support the debt service and ex- Government-sponsored enterprise (GSE) penses of the real property, in accord- means an entity established or char- ance with the national bank’s or Fed- tered by the U.S. government to serve eral savings association’s applicable public purposes specified by the U.S. loan underwriting criteria for perma- Congress but whose debt obligations nent financings; are not explicitly guaranteed by the (iii) Improvements to existing in- full faith and credit of the U.S. govern- come-producing improved real property ment. secured by a mortgage on such prop- Guarantee means a financial guar- erty, if the cash flow being generated antee, letter of credit, insurance, or by the real property is sufficient to other similar financial instrument support the debt service and expenses (other than a credit derivative) that al- of the real property, in accordance lows one party (beneficiary) to transfer with the national bank’s or Federal the credit risk of one or more specific savings association’s applicable loan exposures (reference exposure) to an- underwriting criteria for permanent other party (protection provider). financings; or High volatility commercial real estate (iv) Commercial real property (HVCRE) exposure means: projects in which— (1) A credit facility secured by land (A) The loan-to-value ratio is less or improved real property that, prior than or equal to the applicable max- to being reclassified by the depository imum supervisory loan-to-value ratio institution as a non-HVCRE exposure as determined by the OCC;

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(B) The borrower has contributed real property being financed by the capital of at least 15 percent of the real credit facility; and property’s appraised, ‘as completed’ (ii) Cash flow being generated by the value to the project in the form of— real property being sufficient to sup- (1) Cash; port the debt service and expenses of (2) Unencumbered readily marketable the real property, in accordance with assets; the national bank’s or Federal savings (3) Paid development expenses out-of- association’s applicable loan under- pocket; or writing criteria for permanent (4) Contributed real property or im- financings. provements; and (7) For purposes of this definition, a (C) The borrower contributed the national bank or Federal savings asso- minimum amount of capital described ciation is not required to reclassify a under paragraph (2)(iv)(B) of this defi- credit facility that was originated on nition before the national bank or Fed- or after January 1, 2015 and prior to eral savings association advances funds April 1, 2020. (other than the advance of a nominal Home country means the country sum made in order to secure the na- where an entity is incorporated, char- tional bank’s or Federal savings asso- tered, or similarly established. ciation’s lien against the real property) Independent collateral means financial under the credit facility, and such min- collateral, other than variation mar- imum amount of capital contributed by gin, that is subject to a collateral the borrower is contractually required to remain in the project until the agreement, or in which a national bank HVCRE exposure has been reclassified and Federal savings association has a by the national bank or Federal sav- perfected, first-priority security inter- ings association as a non-HVCRE expo- est or, outside of the United States, the sure under paragraph (6) of this defini- legal equivalent thereof (with the ex- tion; ception of cash on deposit; notwith- (3) An HVCRE exposure does not in- standing the prior security interest of clude any loan made prior to January any custodial agent or any prior secu- 1, 2015; and rity interest granted to a CCP in con- (4) An HVCRE exposure does not in- nection with collateral posted to that clude a credit facility reclassified as a CCP), and the amount of which does non-HVCRE exposure under paragraph not change directly in response to the (6) of this definition. value of the derivative contract or con- (5) Value of contributed real prop- tracts that the financial collateral se- erty: For the purposes of this HVCRE cures. exposure definition, the value of any Indirect exposure means an exposure real property contributed by a bor- that arises from the national bank’s or rower as a capital contribution shall be Federal savings association’s invest- the appraised value of the property as ment in an investment fund which determined under standards prescribed holds an investment in the national pursuant to section 1110 of the Finan- bank’s or Federal savings association’s cial Institutions Reform, Recovery, own capital instrument or an invest- and Enforcement Act of 1989 (12 U.S.C. ment in the capital of an unconsoli- 3339), in connection with the extension dated financial institution. of the credit facility or loan to such Insurance company means an insur- borrower. ance company as defined in section 201 (6) Reclassification as a non-HVCRE of the Dodd-Frank Act (12 U.S.C. 5381). exposure: For purposes of this HVCRE Insurance underwriting company exposure definition and with respect to means an insurance company as de- a credit facility and a national bank or fined in section 201 of the Dodd-Frank Federal savings association, a national Act (12 U.S.C. 5381) that engages in in- bank or Federal savings association surance underwriting activities. may reclassify an HVCRE exposure as Insured depository institution means a non-HVCRE exposure upon— an insured depository institution as de- (i) The substantial completion of the fined in section 3 of the Federal De- development or construction of the posit Insurance Act.

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Interest rate derivative contract means Federal savings association for five or a single-currency interest rate swap, fewer business days. basis swap, forward rate agreement, Investment in the national bank’s or purchased interest rate option, when- Federal savings association’s own capital issued securities, or any other instru- instrument means a net long position ment linked to interest rates that calculated in accordance with § 3.22(h) gives rise to similar counterparty cred- in the national bank’s or Federal sav- it risks. ings association’s own common stock International Lending Supervision Act instrument, own additional tier 1 cap- means the International Lending Su- ital instrument or own tier 2 capital pervision Act of 1983 (12 U.S.C. 3901 et instrument, including direct, indirect, seq.). or synthetic exposures to such capital Investing bank means, with respect to instruments. An investment in the na- a securitization, a national bank or tional bank’s or Federal savings asso- Federal savings association that as- ciation’s own capital instrument in- sumes the credit risk of a cludes any contractual obligation to securitization exposure (other than an purchase such capital instrument. originating national bank or Federal Junior-lien residential mortgage expo- savings association of the sure means a residential mortgage ex- securitization). In the typical syn- posure that is not a first-lien residen- thetic securitization, the investing na- tial mortgage exposure. tional bank or Federal savings associa- Main index means the Standard & tion sells credit protection on a pool of Poor’s 500 Index, the FTSE All-World underlying exposures to the origi- Index, and any other index for which nating national bank or Federal sav- the national bank or Federal savings ings association. association can demonstrate to the sat- Investment fund means a company: isfaction of the OCC that the equities (1) Where all or substantially all of represented in the index have com- the assets of the company are financial parable liquidity, depth of market, and assets; and size of bid-ask spreads as equities in (2) That has no material liabilities. the Standard & Poor’s 500 Index and Investment grade means that the enti- FTSE All-World Index. ty to which the national bank or Fed- Market risk national bank or Federal eral savings association is exposed savings association means a national through a loan or security, or the ref- bank or Federal savings association erence entity with respect to a credit that is described in § 3.201(b). derivative, has adequate capacity to Minimum transfer amount means the meet financial commitments for the smallest amount of variation margin projected life of the asset or exposure. that may be transferred between Such an entity or reference entity has counterparties to a netting set pursu- adequate capacity to meet financial ant to the variation margin agreement. commitments if the risk of its default Money market fund means an invest- is low and the full and timely repayment fund that is subject to 17 CFR ment of principal and interest is ex- 270.2a–7 or any foreign equivalent pected. thereof. Investment in the capital of an uncon- Mortgage servicing assets (MSAs) solidated financial institution means a means the contractual rights owned by net long position calculated in accord- a national bank or Federal savings as- ance with § 3.22(h) in an instrument sociation to service for a fee mortgage that is recognized as capital for regu- loans that are owned by others. latory purposes by the primary super- Multilateral development bank (MDB) visor of an unconsolidated regulated fi- means the International Bank for Re- nancial institution or is an instrument construction and Development, the that is part of the GAAP equity of an Multilateral Investment Guarantee unconsolidated unregulated financial Agency, the International Finance Cor- institution, including direct, indirect, poration, the Inter-American Develop- and synthetic exposures to capital in- ment Bank, the Asian Development struments, excluding underwriting po- Bank, the African Development Bank, sitions held by the national bank or the European Bank for Reconstruction

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and Development, the European Invest- proaches national bank or Federal sav- ment Bank, the European Investment ings association owns 10 percent or less Fund, the Nordic Investment Bank, the of the issued and outstanding common Caribbean Development Bank, the Is- stock of the unconsolidated financial lamic Development Bank, the Council institution. of Europe Development Bank, and any Nth-to-default credit derivative means a other multilateral lending institution credit derivative that provides credit or regional development bank in which protection only for the nth-defaulting the U.S. government is a shareholder reference exposure in a group of ref- or contributing member or which the erence exposures. OCC determines poses comparable cred- Operating entity means a company es- it risk. tablished to conduct business with cli- National Bank Act means the Na- ents with the intention of earning a tional Bank Act (12 U.S.C. 24). profit in its own right. Net independent collateral amount Original maturity with respect to an means the fair value amount of the off-balance sheet commitment means independent collateral, as adjusted by the length of time between the date a the standard supervisory haircuts commitment is issued and: under § 3.132(b)(2)(ii), as applicable, (1) For a commitment that is not that a counterparty to a netting set subject to extension or renewal, the has posted to a national bank or Fed- stated expiration date of the commit- eral savings association less the fair ment; or value amount of the independent col- (2) For a commitment that is subject lateral, as adjusted by the standard su- to extension or renewal, the earliest pervisory haircuts under § 3.132(b)(2)(ii), date on which the national bank or as applicable, posted by the national Federal savings association can, at its bank or Federal savings association to option, unconditionally cancel the the counterparty, excluding such commitment. amounts held in a bankruptcy remote Originating national bank or Federal manner or posted to a QCCP and held savings association, with respect to a in conformance with the operational securitization, means a national bank requirements in § 3.3. or Federal savings association that: Netting set means a group of transactions with a single counterparty that (1) Directly or indirectly originated are subject to a qualifying master net- or securitized the underlying exposures ting agreement. For derivative con- included in the securitization; or tracts, netting set also includes a sin- (2) Serves as an ABCP program spon- gle derivative contract between a na- sor to the securitization. tional bank or Federal savings associa- Over-the-counter (OTC) derivative con- tion and a single counterparty. For tract means a derivative contract that purposes of the internal model method- is not a cleared transaction. An OTC ology under § 3.132(d), netting set also derivative includes a transaction: includes a group of transactions with a (1) Between a national bank or Fed- single counterparty that are subject to eral savings association that is a clear- a qualifying cross-product master net- ing member and a counterparty where ting agreement and does not include a the national bank or Federal savings transaction: association is acting as a financial (1) That is not subject to such a mas- intermediary and enters into a cleared ter netting agreement; or transaction with a CCP that offsets the (2) Where the national bank or Fed- transaction with the counterparty; or eral savings association has identified (2) In which a national bank or Fed- specific wrong-way risk. eral savings association that is a clear- Non-significant investment in the cap- ing member provides a CCP a guar- ital of an unconsolidated financial insti- antee on the performance of the tution means an investment by an ad- counterparty to the transaction. vanced approaches national bank or Performance standby letter of credit (or Federal savings association in the cap- performance bond) means an irrevocable ital of an unconsolidated financial in- obligation of a national bank or Fed- stitution where the advanced ap- eral savings association to pay a third-

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party beneficiary when a customer (ac- dence, the escrow funds shall be used to count party) fails to perform on any defray any cost incurred by the na- contractual nonfinancial or commer- tional bank or Federal savings associa- cial obligation. To the extent per- tion; mitted by law or regulation, perform- (7) The builder must incur at least ance standby letters of credit include the first 10 percent of the direct costs arrangements backing, among other of construction of the residence (that things, subcontractors’ and suppliers’ is, actual costs of the land, labor, and performance, labor and materials con- material) before any drawdown is made tracts, and construction bids. under the loan; Pre-sold construction loan means any (8) The loan may not exceed 80 per- one-to-four family residential con- cent of the sales price of the presold struction loan to a builder that meets residence; and the requirements of section 618(a)(1) or (9) The loan is not more than 90 days (2) of the Resolution Trust Corporation past due, or on nonaccrual. Refinancing, Restructuring, and Im- Protection amount (P) means, with re- provement Act of 1991 (12 U.S.C. 1831n spect to an exposure hedged by an eli- note) and the following criteria: gible guarantee or eligible credit deriv- (1) The loan is made in accordance ative, the effective notional amount of with prudent underwriting standards, the guarantee or credit derivative, re- meaning that the national bank or duced to reflect any currency mis- Federal savings association has ob- match, maturity mismatch, or lack of tained sufficient documentation that restructuring coverage (as provided in the buyer of the home has a legally § 3.36 or § 3.134, as appropriate). binding written sales contract and has Publicly-traded means traded on: a firm written commitment for perma- (1) Any exchange registered with the nent financing of the home upon com- SEC as a national securities exchange pletion; under section 6 of the Securities Ex- (2) The purchaser is an individual(s) change Act; or that intends to occupy the residence (2) Any non-U.S.-based securities ex- and is not a partnership, joint venture, change that: trust, corporation, or any other entity (i) Is registered with, or approved by, (including an entity acting as a sole a national securities regulatory au- proprietorship) that is purchasing one thority; and or more of the residences for specula- (ii) Provides a liquid, two-way mar- tive purposes; ket for the instrument in question. (3) The purchaser has entered into a legally binding written sales contract Public sector entity (PSE) means a for the residence; state, local authority, or other govern- (4) The purchaser has not terminated mental subdivision below the sovereign the contract; level. (5) The purchaser has made a sub- Qualifying central bank means: stantial earnest money deposit of no (1) A Federal Reserve Bank; less than 3 percent of the sales price, (2) The European Central Bank; and which is subject to forfeiture if the (3) The central bank of any member purchaser terminates the sales con- country of the OECD, if: tract; provided that, the earnest money (i) Sovereign exposures to the mem- deposit shall not be subject to for- ber country would receive a zero per- feiture by reason of breach or termi- cent risk-weight under § 3.32; and nation of the sales contract on the part (ii) The sovereign debt of the member of the builder; country is not in default or has not (6) The earnest money deposit must been in default during the previous 5 be held in escrow by the national bank years. or Federal savings association or an Qualifying central counterparty independent party in a fiduciary capac- (QCCP) means a central counterparty ity, and the escrow agreement must that: provide that in an event of default aris- (1)(i) Is a designated financial market ing from the cancellation of the sales utility (FMU) under Title VIII of the contract by the purchaser of the resi- Dodd-Frank Act;

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(ii) If not located in the United signed to qualifying central counter- States, is regulated and supervised in a parties under §§ 3.35 and 3.133. manner equivalent to a designated (3) Exception. A QCCP that fails to FMU; or meet the requirements of a QCCP in (iii) Meets the following standards: the future may still be treated as a (A) The central counterparty re- QCCP under the conditions specified in quires all parties to contracts cleared § 3.3(f). by the counterparty to be fully Qualifying master netting agreement collateralized on a daily basis; means a written, legally enforceable agreement provided that: (B) The national bank or Federal sav- (1) The agreement creates a single ings association demonstrates to the legal obligation for all individual satisfaction of the OCC that the cen- transactions covered by the agreement tral counterparty: upon an event of default following any (1) Is in sound financial condition; stay permitted by paragraph (2) of this (2) Is subject to supervision by the definition, including upon an event of Board, the CFTC, or the Securities Ex- receivership, conservatorship, insol- change Commission (SEC), or, if the vency, liquidation, or similar pro- central counterparty is not located in ceeding, of the counterparty; and the United States, is subject to effec- (2) The agreement provides the native oversight by a national super- tional bank or Federal savings associa- visory authority in its home country; tion the right to accelerate, terminate, and and close-out on a net basis all trans- (3) Meets or exceeds the risk-manage- actions under the agreement and to liq- ment standards for central counterpar- uidate or set-off collateral promptly ties set forth in regulations established upon an event of default, including by the Board, the CFTC, or the SEC upon an event of receivership, con- under Title VII or Title VIII of the servatorship, insolvency, liquidation, Dodd-Frank Act; or if the central or similar proceeding, of the counterparty is not located in the counterparty, provided that, in any United States, meets or exceeds simi- such case: lar risk-management standards estab- (i) Any exercise of rights under the lished under the law of its home coun- agreement will not be stayed or avoid- try that are consistent with inter- ed under applicable law in the relevant national standards for central jurisdictions, other than: counterparty risk management as es- (A) In receivership, conservatorship, tablished by the relevant standard set- or resolution under the Federal Deposit ting body of the Bank of International Insurance Act, Title II of the Dodd- Settlements; and Frank Act, or under any similar insol- (2)(i) Provides the national bank or vency law applicable to GSEs, or laws Federal savings association with the of foreign jurisdictions that are sub- 7 central counterparty’s hypothetical stantially similar to the U.S. laws ref- capital requirement or the information erenced in this paragraph (2)(i)(A) in necessary to calculate such hypo- order to facilitate the orderly resolu- thetical capital requirement, and other tion of the defaulting counterparty; or information the national bank or Fed- (B) Where the agreement is subject eral savings association is required to by its terms to, or incorporates, any of obtain under §§ 3.35(d)(3) and 3.133(d)(3); the laws referenced in paragraph (2)(i)(A) of this definition; and (ii) Makes available to the OCC and (ii) The agreement may limit the the CCP’s regulator the information right to accelerate, terminate, and described in paragraph (2)(i) of this def- close-out on a net basis all trans- inition; and actions under the agreement and to liq- (iii) Has not otherwise been deter- uidate or set-off collateral promptly mined by the OCC to not be a QCCP upon an event of default of the due to its financial condition, risk profile, failure to meet supervisory risk 7 The OCC expects to evaluate jointly with management standards, or other weak- the Board and FDIC whether foreign special nesses or supervisory concerns that are resolution regimes meet the requirements of inconsistent with the risk weight as- this paragraph.

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counterparty to the extent necessary (1) Any exercise of rights under the for the counterparty to comply with agreement will not be stayed or avoid- the requirements of part 47, subpart I ed under applicable law in the relevant of part 252, and part 382, of this title 12, jurisdictions, other than in receiver- as applicable. ship, conservatorship, or resolution Regulated financial institution means a under the Federal Deposit Insurance financial institution subject to consoli- Act, Title II of the Dodd-Frank Act, or dated supervision and regulation com- under any similar insolvency law appli- parable to that imposed on the fol- cable to GSEs, or laws of foreign juris- lowing U.S. financial institutions: De- dictions that are substantially similar 8 pository institutions, depository insti- to the U.S. laws referenced in this tution holding companies, nonbank fi- paragraph (3)(ii)(A)(1) in order to facili- nancial companies supervised by the tate the orderly resolution of the de- Board, designated financial market faulting counterparty; and utilities, securities broker-dealers, (2) The agreement may limit the credit unions, or insurance companies. right to accelerate, terminate, and close-out on a net basis all trans- Repo-style transaction means a repur- actions under the agreement and to liq- chase or reverse repurchase trans- uidate or set-off collateral promptly action, or a securities borrowing or se- upon an event of default of the curities lending transaction, including counterparty to the extent necessary a transaction in which the national for the counterparty to comply with bank or Federal savings association the requirements of part 47, subpart I acts as agent for a customer and in- of part 252, and part 382, of this title 12, demnifies the customer against loss, as applicable; or provided that: (B) The transaction is: (1) The transaction is based solely on (1) Either overnight or uncondition- liquid and readily marketable securi- ally cancelable at any time by the na- ties, cash, or gold; tional bank or Federal savings associa- (2) The transaction is marked-to-fair tion; and value daily and subject to daily margin (2) Executed under an agreement that maintenance requirements; provides the national bank or Federal (3)(i) The transaction is a ‘‘securities savings association the right to accel- contract’’ or ‘‘repurchase agreement’’ erate, terminate, and close-out the under section 555 or 559, respectively, transaction on a net basis and to liq- of the Bankruptcy Code (11 U.S.C. 555 uidate or set-off collateral promptly or 559), a qualified financial contract upon an event of counterparty default; under section 11(e)(8) of the Federal De- and posit Insurance Act, or a netting con- (4) In order to recognize an exposure tract between or among financial insti- as a repo-style transaction for purposes tutions under sections 401–407 of the of this subpart, a national bank or Fed- Federal Deposit Insurance Corporation eral savings association must comply Improvement Act or the Federal Re- with the requirements of § 3.3(e) of this serve Board’s Regulation EE (12 CFR part with respect to that exposure. part 231); or Resecuritization means a securitization which has more than one (ii) If the transaction does not meet underlying exposure and in which one the criteria set forth in paragraph (3)(i) or more of the underlying exposures is of this definition, then either: a securitization exposure. (A) The transaction is executed under Resecuritization exposure means: an agreement that provides the na- (1) An on- or off-balance sheet expo- tional bank or Federal savings associa- sure to a resecuritization; tion the right to accelerate, terminate, (2) An exposure that directly or indi- and close-out the transaction on a net rectly references a resecuritization ex- basis and to liquidate or set-off collat- posure. eral promptly upon an event of default, including upon an event of receiver- 8 The OCC expects to evaluate jointly with ship, insolvency, liquidation, or similar the Board and FDIC whether foreign special proceeding, of the counterparty, pro- resolution regimes meet the requirements of vided that, in any such case: this paragraph.

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

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unconsolidated financial institution (ii) Total risk-weighted assets for where the advanced approaches na- cleared transactions and default fund tional bank or Federal savings associa- contributions as calculated under § 3.35; tion owns more than 10 percent of the (iii) Total risk-weighted assets for issued and outstanding common stock unsettled transactions as calculated of the unconsolidated financial institu- under § 3.38; tion. (iv) Total risk-weighted assets for Small Business Act means the Small securitization exposures as calculated Business Act (15 U.S.C. 632). under § 3.42; (v) Total risk-weighted assets for eq- Small Business Investment Act means uity exposures as calculated under the Small Business Investment Act of §§ 3.52 and 3.53; and 1958 (15 U.S.C. 682). (vi) For a market risk national bank Sovereign means a central govern- or Federal savings association only, ment (including the U.S. government) standardized market risk-weighted as- or an agency, department, ministry, or sets; minus central bank of a central government. (2) Any amount of a national bank’s Sovereign default means noncompli- or Federal savings association’s allowance by a sovereign with its external ance for loan and lease losses or ad- debt service obligations or the inabil- justed allowance for credit losses, as ity or unwillingness of a sovereign gov- applicable, that is not included in tier ernment to service an existing loan ac- 2 capital and any amount of ‘‘allocated cording to its original terms, as evi- transfer risk reserves. denced by failure to pay principal and Statutory multifamily mortgage means interest timely and fully, arrearages, a loan secured by a multifamily resi- or restructuring. dential property that meets the re- Sovereign exposure means: quirements under section 618(b)(1) of (1) A direct exposure to a sovereign; the Resolution Trust Corporation Refi- or nancing, Restructuring, and Improve- ment Act of 1991, and that meets the (2) An exposure directly and uncondi- following criteria: 9 tionally backed by the full faith and (1) The loan is made in accordance credit of a sovereign. with prudent underwriting standards; Specific wrong-way risk means wrong- (2) The principal amount of the loan way risk that arises when either: at origination does not exceed 80 per- (1) The counterparty and issuer of cent of the value of the property (or 75 the collateral supporting the trans- percent of the value of the property if action; or the loan is based on an interest rate (2) The counterparty and the ref- that changes over the term of the loan) erence asset of the transaction, are af- where the value of the property is the filiates or are the same entity. lower of the acquisition cost of the Speculative grade means the reference property or the appraised (or, if appro- entity has adequate capacity to meet priate, evaluated) value of the prop- financial commitments in the near erty; term, but is vulnerable to adverse eco- (3) All principal and interest pay- nomic conditions, such that should ments on the loan must have been economic conditions deteriorate, the made on a timely basis in accordance reference entity would present an ele- with the terms of the loan for at least vated default risk. one year prior to applying a 50 percent Standardized market risk-weighted as- risk weight to the loan, or in the case sets means the standardized measure where an existing owner is refinancing for market risk calculated under § 3.204 a loan on the property, all principal multiplied by 12.5. and interest payments on the loan being refinanced must have been made Standardized total risk-weighted assets on a timely basis in accordance with means: (1) The sum of: 9 The types of loans that qualify as loans (i) Total risk-weighted assets for gen- secured by multifamily residential prop- eral credit risk as calculated under erties are listed in the instructions for prep- § 3.31; aration of the Call Report.

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the terms of the loan for at least one (3) Performance of the securitization year prior to applying a 50 percent risk exposures depends upon the perform- weight to the loan; ance of the underlying exposures; and (4) Amortization of principal and in- (4) All or substantially all of the un- terest on the loan must occur over a derlying exposures are financial expo- period of not more than 30 years and sures (such as loans, commitments, the minimum original maturity for re- credit derivatives, guarantees, receiv- payment of principal must not be less ables, asset-backed securities, mort- than 7 years; gage-backed securities, other debt se- (5) Annual net operating income (be- curities, or equity securities). fore making any payment on the loan) Tangible capital means the amount of generated by the property securing the core capital (tier 1 capital), as cal- loan during its most recent fiscal year culated in accordance with subpart B must not be less than 120 percent of the of this part, plus the amount of out- loan’s current annual debt service (or standing perpetual preferred stock (including related surplus) not included in 115 percent of current annual debt serv- tier 1 capital. ice if the loan is based on an interest rate that changes over the term of the Tier 1 capital means the sum of common equity tier 1 capital and addi- loan) or, in the case of a cooperative or tional tier 1 capital. other not-for-profit housing project, the property must generate sufficient Tier 1 minority interest means the tier 1 capital of a consolidated subsidiary of cash flow to provide comparable pro- a national bank or Federal savings as- tection to the national bank or Federal sociation that is not owned by the na- savings association; and tional bank or Federal savings associa- (6) The loan is not more than 90 days tion. past due, or on nonaccrual. Tier 2 capital is defined in § 3.20(d). Sub-speculative grade means the ref- Total capital means the sum of tier 1 erence entity depends on favorable eco- capital and tier 2 capital. nomic conditions to meet its financial Total capital minority interest means commitments, such that should such the total capital of a consolidated sub- economic conditions deteriorate the sidiary of a national bank or Federal reference entity likely would default savings association that is not owned on its financial commitments. by the national bank or Federal sav- Subsidiary means, with respect to a ings association. company, a company controlled by Total leverage exposure is defined in that company. § 3.10(c)(4)(ii) of this part. Synthetic exposure means an exposure Traditional securitization means a whose value is linked to the value of an transaction in which: investment in the national bank’s or (1) All or a portion of the credit risk Federal savings association’s own cap- of one or more underlying exposures is ital instrument or to the value of an transferred to one or more third par- investment in the capital of an uncon- ties other than through the use of cred- solidated financial institution. it derivatives or guarantees; Synthetic securitization means a trans- (2) The credit risk associated with action in which: the underlying exposures has been sep- (1) All or a portion of the credit risk arated into at least two tranches re- of one or more underlying exposures is flecting different levels of seniority; retained or transferred to one or more (3) Performance of the securitization third parties through the use of one or exposures depends upon the perform- more credit derivatives or guarantees ance of the underlying exposures; (other than a guarantee that transfers (4) All or substantially all of the un- only the credit risk of an individual re- derlying exposures are financial expo- tail exposure); sures (such as loans, commitments, (2) The credit risk associated with credit derivatives, guarantees, receiv- the underlying exposures has been sep- ables, asset-backed securities, mort- arated into at least two tranches re- gage-backed securities, other debt se- flecting different levels of seniority; curities, or equity securities);

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(5) The underlying exposures are not offers to buy and sell so that a price owned by an operating company; reasonably related to the last sales (6) The underlying exposures are not price or current bona fide competitive owned by a small business investment bid and offer quotations can be deter- company defined in section 302 of the mined within one day and settled at Small Business Investment Act; that price within a relatively short (7) The underlying exposures are not time frame conforming to trade cus- owned by a firm an investment in tom. which qualifies as a community devel- Unconditionally cancelable means with opment investment under section respect to a commitment, that a na- 24(Eleventh) of the National Bank Act; tional bank or Federal savings associa- (8) The OCC may determine that a tion may, at any time, with or without transaction in which the underlying cause, refuse to extend credit under the exposures are owned by an investment commitment (to the extent permitted firm that exercises substantially unfet- under applicable law). tered control over the size and com- Underlying exposures means one or position of its assets, liabilities, and more exposures that have been off-balance sheet exposures is not a securitized in a securitization trans- traditional securitization based on the action. transaction’s leverage, risk profile, or Unregulated financial institution economic substance; means, for purposes of § 3.131, a finan- (9) The OCC may deem a transaction cial institution that is not a regulated that meets the definition of a tradi- financial institution, including any fi- tional securitization, notwithstanding nancial institution that would meet paragraph (5), (6), or (7) of this defini- the definition of ‘‘financial institution, to be a traditional securitization tion’’ under this section but for the based on the transaction’s leverage, ownership interest thresholds set forth risk profile, or economic substance; in paragraph (4)(i) of that definition. and U.S. Government agency means an in- (10) The transaction is not: strumentality of the U.S. Government (i) An investment fund; whose obligations are fully and explic- (ii) A collective investment fund (as itly guaranteed as to the timely pay- defined in 12 CFR 9.18 (national banks), ment of principal and interest by the 12 CFR 151.40 (Federal saving associa- full faith and credit of the U.S. Govern- tions); ment. (iii) An employee benefit plan (as de- Value-at-Risk (VaR) means the esti- fined in paragraphs (3) and (32) of sec- mate of the maximum amount that the tion 3 of ERISA), a ‘‘governmental value of one or more exposures could plan’’ (as defined in 29 U.S.C. 1002(32)) decline due to market price or rate that complies with the tax deferral movements during a fixed holding pe- qualification requirements provided in riod within a stated confidence inter- the Internal Revenue Code, or any val. similar employee benefit plan estab- Variation margin means financial col- lished under the laws of a foreign juris- lateral that is subject to a collateral diction; agreement provided by one party to its (iv) A synthetic exposure to the cap- counterparty to meet the performance ital of a financial institution to the ex- of the first party’s obligations under tent deducted from capital under § 3.22; one or more transactions between the or parties as a result of a change in value (v) Registered with the SEC under of such obligations since the last time the Investment Company Act of 1940 (15 such financial collateral was provided. U.S.C. 80a–1) or foreign equivalents Variation margin agreement means an thereof. agreement to collect or post variation Tranche means all securitization ex- margin. posures associated with a Variation margin amount means the securitization that have the same se- fair value amount of the variation mar- niority level. gin, as adjusted by the standard super- Two-way market means a market visory haircuts under § 3.132(b)(2)(ii), as where there are independent bona fide applicable, that a counterparty to a

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netting set has posted to a national ship, insolvency, or similar proceeding bank or Federal savings association of either the clearing member or the less the fair value amount of the vari- clearing member’s other clients. Omni- ation margin, as adjusted by the stand- bus accounts established under 17 CFR ard supervisory haircuts under parts 190 and 300 satisfy the require- § 3.132(b)(2)(ii), as applicable, posted by ments of this paragraph (a). the national bank or Federal savings (3) The national bank or Federal sav- association to the counterparty. ings association must conduct suffi- Variation margin threshold means the cient legal review to conclude with a amount of credit exposure of a national bank or Federal savings association to well-founded basis (and maintain suffi- its counterparty that, if exceeded, cient written documentation of that would require the counterparty to post legal review) that in the event of a variation margin to the national bank legal challenge (including one resulting or Federal savings association pursu- from a default or receivership, insol- ant to the variation margin agreement. vency, liquidation, or similar pro- Volatility derivative contract means a ceeding) the relevant court and admin- derivative contract in which the payoff istrative authorities would find the ar- of the derivative contract explicitly de- rangements of paragraph (a)(2) of this pends on a measure of the volatility of section to be legal, valid, binding and an underlying risk factor to the deriva- enforceable under the law of the rel- tive contract. evant jurisdictions. Wrong-way risk means the risk that (4) The offsetting transaction with a arises when an exposure to a particular clearing member must be transferable counterparty is positively correlated under the transaction documents and with the probability of default of such applicable laws in the relevant juris- counterparty itself. diction(s) to another clearing member [78 FR 62157, 62273, Oct. 11, 2013, as amended should the clearing member default, at 79 FR 44123, July 30, 2014; 79 FR 57740, become insolvent, or enter receiver- Sept. 26, 2014; 79 FR 78293, Dec. 30, 2014; 80 FR ship, insolvency, liquidation, or similar 41415, July 15, 2015; 82 FR 56661, Nov. 29, 2017; 84 FR 4237, Feb. 14, 2019; 84 FR 35248, July 22, proceedings. 2019; 84 FR 59263, Nov. 1, 2019; 84 FR 61792, (b) Eligible margin loan. In order to Nov. 13, 2019; 84 FR 68031, Dec. 13, 2019; 85 FR recognize an exposure as an eligible 4400, Jan. 24, 2020; 85 FR 4577, Jan. 27, 2020; 85 margin loan as defined in § 3.2, a na- FR 20393, Apr. 13, 2020; 85 FR 42640, July 14, tional bank or Federal savings associa- 2020] tion must conduct sufficient legal re- § 3.3 Operational requirements for view to conclude with a well-founded counterparty credit risk. basis (and maintain sufficient written For purposes of calculating risk- documentation of that legal review) weighted assets under subparts D and E that the agreement underlying the ex- of this part: posure: (a) Cleared transaction. In order to (1) Meets the requirements of para- recognize certain exposures as cleared graph (1)(iii) of the definition of eligi- transactions pursuant to paragraphs ble margin loan in § 3.2, and (1)(ii), (iii) or (iv) of the definition of (2) Is legal, valid, binding, and en- ‘‘cleared transaction’’ in § 3.2, the expo- forceable under applicable law in the sures must meet the applicable re- relevant jurisdictions. quirements set forth in this paragraph (c) Qualifying cross-product master net- (a). ting agreement. In order to recognize an (1) The offsetting transaction must agreement as a qualifying cross-prod- be identified by the CCP as a trans- uct master netting agreement as de- action for the clearing member client. fined in § 3.101, a national bank or Fed- (2) The collateral supporting the eral savings association must obtain a transaction must be held in a manner that prevents the national bank or written legal opinion verifying the va- Federal savings association from fac- lidity and enforceability of the agreeing any loss due to an event of default, ment under applicable law of the rel- including from a liquidation, receiver- evant jurisdictions if the counterparty

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fails to perform upon an event of de- the CCP as a QCCP for up to three fault, including upon receivership, in- months following the determination. If solvency, liquidation, or similar pro- the CCP fails to remedy the relevant ceeding. deficiency within three months after (d) Qualifying master netting agree- the initial determination, or the CCP ment. In order to recognize an agree- fails to satisfy the requirements set ment as a qualifying master netting forth in paragraphs (2)(i) through agreement as defined in § 3.2, a national (2)(iii) of the definition of a QCCP con- bank or Federal savings association tinuously for a three-month period must: after remedying the relevant defi- (1) Conduct sufficient legal review to ciency, a national bank or Federal sav- conclude with a well-founded basis (and ings association may not treat the CCP maintain sufficient written docu- as a QCCP for the purposes of this part mentation of that legal review) that: until after the national bank or Fed- (i) The agreement meets the require- eral savings association has deter- ments of paragraph (2) of the definition mined that the CCP has satisfied the of qualifying master netting agreement requirements in paragraphs (2)(i) in § 3.2; and through (2)(iii) of the definition of a (ii) In the event of a legal challenge QCCP for three continuous months. (including one resulting from default or from receivership, insolvency, liq- §§ 3.4–3.9 [Reserved] uidation, or similar proceeding) the relevant court and administrative au- Subpart B—Capital Ratio thorities would find the agreement to Requirements and Buffers be legal, valid, binding, and enforceable under the law of the relevant jurisdic- SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, un- tions; and less otherwise noted. (2) Establish and maintain written procedures to monitor possible changes § 3.10 Minimum capital requirements. in relevant law and to ensure that the (a) Minimum capital requirements. (1) A agreement continues to satisfy the re- national bank or Federal savings asso- quirements of the definition of quali- ciation must maintain the following fying master netting agreement in § 3.2. minimum capital ratios: (e) Repo-style transaction. In order to (i) A common equity tier 1 capital recognize an exposure as a repo-style ratio of 4.5 percent. transaction as defined in § 3.2, a na- (ii) A tier 1 capital ratio of 6 percent. tional bank or Federal savings associa- (iii) A total capital ratio of 8 percent. tion must conduct sufficient legal re- (iv) A leverage ratio of 4 percent. view to conclude with a well-founded (v) For advanced approaches national basis (and maintain sufficient written banks or Federal savings associations documentation of that legal review) or, for Category III OCC-regulated in- that the agreement underlying the ex- stitutions, a supplementary leverage posure: ratio of 3 percent. (1) Meets the requirements of para- (vi) For Federal savings associations, graph (3) of the definition of repo-style a tangible capital ratio of 1.5 percent. transaction in § 3.2, and (2) A qualifying community banking (2) Is legal, valid, binding, and en- organization (as defined in § 3.12), that forceable under applicable law in the is subject to the community bank le- relevant jurisdictions. verage ratio framework (as defined in (f) Failure of a QCCP to satisfy the § 3.12), is considered to have met the rule’s requirements. If a national bank minimum capital requirements in this or Federal savings association deter- paragraph (a). mines that a CCP ceases to be a QCCP (b) Standardized capital ratio calcula- due to the failure of the CCP to satisfy tions. Other than as provided in para- one or more of the requirements set graph (c) of this section: forth in paragraphs (2)(i) through (1) Common equity tier 1 capital ratio. A (2)(iii) of the definition of a QCCP in national bank’s or Federal savings as- § 3.2, the national bank or Federal sav- sociation’s common equity tier 1 cap- ings association may continue to treat ital ratio is the ratio of the national

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bank’s or Federal savings association’s in accordance with paragraph (c)(4) of common equity tier 1 capital to stand- this section, beginning with the cal- ardized total risk-weighted assets; endar quarter immediately following (2) Tier 1 capital ratio. A national the quarter in which the national bank bank’s or Federal savings association’s or Federal savings association is iden- tier 1 capital ratio is the ratio of the tified as a Category III national bank national bank’s or Federal savings as- or Federal savings association. sociation’s tier 1 capital to standard- (1) Common equity tier 1 capital ratio. ized total risk-weighted assets; The national bank’s or Federal savings (3) Total capital ratio. A national association’s common equity tier 1 cap- bank’s or Federal savings association’s ital ratio is the lower of: total capital ratio is the ratio of the national bank’s or Federal savings as- (i) The ratio of the national bank’s or sociation’s total capital to standard- Federal savings association’s common ized total risk-weighted assets; and equity tier 1 capital to standardized (4) Leverage ratio. A national bank’s total risk-weighted assets; and or Federal savings association’s lever- (ii) The ratio of the national bank’s age ratio is the ratio of the national or Federal savings association’s com- bank’s or Federal savings association’s mon equity tier 1 capital to advanced tier 1 capital to the national bank’s or approaches total risk-weighted assets. Federal savings association’s average (2) Tier 1 capital ratio. The national total consolidated assets as reported on bank’s or Federal savings association’s the national bank’s or Federal savings tier 1 capital ratio is the lower of: association’s Call Report minus (i) The ratio of the national bank’s or amounts deducted from tier 1 capital Federal savings association’s tier 1 under § 3.22(a), (c) and (d). capital to standardized total risk- (5) Federal savings association tangible weighted assets; and capital ratio. A Federal savings associa- (ii) The ratio of the national bank’s tion’s tangible capital ratio is the ratio or Federal savings association’s tier 1 of the Federal savings association’s capital to advanced approaches total core capital (tier 1 capital) to average risk-weighted assets. total assets as calculated under this subpart B. For purposes of this para- (3) Total capital ratio. The national graph (b)(5), the term ‘‘total assets’’ bank’s or Federal savings association’s means ‘‘total assets’’ as defined in part total capital ratio is the lower of: 6, subpart A of this chapter, subject to (i) The ratio of the national bank’s or subpart G of this part. Federal savings association’s total cap- (c) Advanced approaches and Category ital to standardized total risk-weighted III capital ratio calculations. An ad- assets; and vanced approaches national bank or (ii) The ratio of the national bank’s Federal savings association that has or Federal savings association’s ad- completed the parallel run process and vanced-approaches-adjusted total cap- received notification from the OCC ital to advanced approaches total risk- pursuant to § 3.121(d) must determine weighted assets. A national bank’s or its regulatory capital ratios as de- Federal savings association’s ad- scribed in paragraphs (c)(1) through (3) vanced-approaches-adjusted total cap- of this section. An advanced ap- ital is the national bank’s or Federal proaches national bank or Federal sav- savings association’s total capital after ings association must determine its being adjusted as follows: supplementary leverage ratio in ac- (A) An advanced approaches national cordance with paragraph (c)(4) of this section, beginning with the calendar bank or Federal savings association quarter immediately following the must deduct from its total capital any quarter in which the national bank or allowance for loan and lease losses or Federal savings association institution adjusted allowance for credit losses, as meets any of the criteria in § 3.100(b)(1). applicable, included in its tier 2 capital A Category III national bank or Fed- in accordance with § 3.20(d)(3); and eral savings association must deter- (B) An advanced approaches national mine its supplementary leverage ratio bank or Federal savings association

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must add to its total capital any eligi- (B)(1) For a national bank or Federal ble credit reserves that exceed the na- savings association that uses the cur- tional bank’s or Federal savings asso- rent exposure methodology under ciation’s total expected credit losses to § 3.34(b) for its standardized risk- the extent that the excess reserve weighted assets, the potential future amount does not exceed 0.6 percent of credit exposure (PFE) for each deriva- the national bank’s or Federal savings tive contract or each single-product association’s credit risk-weighted as- netting set of derivative contracts (in- sets. cluding a cleared transaction except as (4) Supplementary leverage ratio. (i) An provided in paragraph (c)(4)(ii)(I) of advanced approaches national bank’s this section and, at the discretion of or Federal savings association’s or a the national bank or Federal savings Category III national bank’s or Federal association, excluding a forward agree- savings association’s supplementary le- ment treated as a derivative contract verage ratio is the ratio of its tier 1 that is part of a repurchase or reverse capital to total leverage exposure, the repurchase or a securities borrowing or latter of which is calculated as the sum lending transaction that qualifies for of: sales treatment under GAAP), to which (A) The mean of the on-balance sheet the national bank or Federal savings assets calculated as of each day of the association is a counterparty as deter- reporting quarter; and mined under § 3.34, but without regard to § 3.34(c), provided that: (B) The mean of the off-balance sheet (i) A national bank or Federal sav- exposures calculated as of the last day ings association may choose to exclude of each of the most recent three the PFE of all credit derivatives or months, minus the applicable deduc- other similar instruments through tions under § 3.22(a), (c), and (d). which it provides credit protection (ii) For purposes of this part, total le- when calculating the PFE under § 3.34, verage exposure means the sum of the but without regard to § 3.34(c), provided items described in paragraphs that it does not adjust the net-to-gross (c)(4)(ii)(A) through (H) of this section, ratio (NGR); and as adjusted pursuant to paragraph (ii) A national bank or Federal sav- (c)(4)(ii)(I) for a clearing member na- ings association that chooses to ex- tional bank and Federal savings asso- clude the PFE of credit derivatives or ciation and paragraph (c)(4)(ii)(J) for a other similar instruments through custody bank: which it provides credit protection pur- (A) The balance sheet carrying value suant to paragraph (c)(4)(ii)(B)(1) of of all of the national bank or Federal this section must do so consistently savings association’s on-balance sheet over time for the calculation of the assets, plus the value of securities sold PFE for all such instruments; or under a repurchase transaction or a se- (2)(i) For a national bank or Federal curities lending transaction that quali- savings association that uses the fies for sales treatment under GAAP, standardized approach for counterparty less amounts deducted from tier 1 cap- credit risk under section § 3.132(c) for ital under § 3.22(a), (c), and (d), and less its standardized risk-weighted assets, the value of securities received in secu- the PFE for each netting set to which rity-for-security repo-style trans- the national bank or Federal savings actions, where the national bank or association is a counterparty (includ- Federal savings association acts as a ing cleared transactions except as pro- securities lender and includes the secu- vided in paragraph (c)(4)(ii)(I) of this rities received in its on-balance sheet section and, at the discretion of the na- assets but has not sold or re-hypoth- tional bank or Federal savings associa- ecated the securities received, and, for tion, excluding a forward agreement a national bank or Federal savings as- treated as a derivative contract that is sociation that uses the standardized part of a repurchase or reverse repur- approach for counterparty credit risk chase or a securities borrowing or lend- under § 3.132(c) for its standardized ing transaction that qualifies for sales risk-weighted assets, less the fair value treatment under GAAP), as determined of any derivative contracts; under § 3.132(c)(7), in which the term C

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in § 3.132(c)(7)(i) equals zero, and, for derivative contracts to which the na- any counterparty that is not a com- tional bank or Federal savings associa- mercial end-user, multiplied by 1.4. For tion is a counterparty, calculated ac- purposes of this paragraph cording to the following formula, and, (c)(4)(ii)(B)(2)(i), a national bank or for any counterparty that is not a com- Federal savings association may set mercial end-user, multiplied by 1.4: the value of the term C in § 3.132(c)(7)(i) Replacement Cost = max{V¥CVMr + equal to the amount of collateral post- CVM ;0} ed by a clearing member client of the p national bank or Federal savings asso- Where: ciation in connection with the client- V equals the fair value for each derivative facing derivative transactions within contract or each single-product netting the netting set; and set of derivative contracts (including a (ii) A national bank or Federal sav- cleared transaction except as provided in ings association may choose to exclude paragraph (c)(4)(ii)(I) of this section and, the PFE of all credit derivatives or at the discretion of the national bank or Federal savings association, excluding a other similar instruments through forward agreement treated as a deriva- which it provides credit protection tive contract that is part of a repurchase when calculating the PFE under or reverse repurchase or a securities bor- § 3.132(c), provided that it does so con- rowing or lending transaction that quali- sistently over time for the calculation fies for sales treatment under GAAP);

of the PFE for all such instruments; CVMr equals the amount of cash collateral (C)(1)(i) For a national bank or Fed- received from a counterparty to a deriva- eral savings association that uses the tive contract and that satisfies the concurrent exposure methodology under ditions in paragraphs (c)(4)(ii)(C)(3) § 3.34(b) for its standardized risk- through (7) of this section, or, in the case of a client-facing derivative transaction, weighted assets, the amount of cash the amount of collateral received from collateral that is received from a the clearing member client; and counterparty to a derivative contract CVMp equals the amount of cash collateral and that has offset the mark-to-fair that is posted to a counterparty to a de- value of the derivative asset, or cash rivative contract and that has not offset collateral that is posted to a the fair value of the derivative contract counterparty to a derivative contract and that satisfies the conditions in para- and that has reduced the national bank graphs (c)(4)(ii)(C)(3) through (7) of this or Federal savings association’s on-bal- section, or, in the case of a client-facing ance sheet assets, unless such cash col- derivative transaction, the amount of collateral posted to the clearing member lateral is all or part of variation mar- client; gin that satisfies the conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of (ii) Notwithstanding paragraph this section; and (c)(4)(ii)(C)(2)(i) of this section, where (ii) The variation margin is used to multiple netting sets are subject to a reduce the current credit exposure of single variation margin agreement, a the derivative contract, calculated as national bank or Federal savings asso- described in § 3.34(b), and not the PFE; ciation must apply the formula for re- and placement cost provided in (iii) For the purpose of the calcula- § 3.132(c)(10)(i), in which the term CMA tion of the NGR described in may only include cash collateral that § 3.34(b)(2)(ii)(B), variation margin de- satisfies the conditions in paragraphs scribed in paragraph (c)(4)(ii)(C)(1)(ii) of (c)(4)(ii)(C)(3) through (7) of this sec- this section may not reduce the net tion; and current credit exposure or the gross (iii) For purposes of paragraph current credit exposure; or (c)(4)(ii)(C)(2)(i), a national bank or (2)(i) For a national bank or Federal Federal savings association must treat savings association that uses the a derivative contract that references standardized approach for counterparty an index as if it were multiple deriva- credit risk under § 3.132(c) for its stand- tive contracts each referencing one ardized risk-weighted assets, the re- component of the index if the national placement cost of each derivative con- bank or Federal savings association tract or single product netting set of elected to treat the derivative contract

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as multiple derivative contracts under other similar instrument, through § 3.132(c)(5)(vi); which the national bank or Federal (3) For derivative contracts that are savings association provides credit pro- not cleared through a QCCP, the cash tection, provided that: collateral received by the recipient (1) The national bank or Federal sav- counterparty is not segregated (by law, ings association may reduce the effec- regulation, or an agreement with the tive notional principal amount of the counterparty); credit derivative by the amount of any (4) Variation margin is calculated reduction in the mark-to-fair value of and transferred on a daily basis based the credit derivative if the reduction is on the mark-to-fair value of the deriva- recognized in common equity tier 1 tive contract; capital; (5) The variation margin transferred (2) The national bank or Federal sav- under the derivative contract or the ings association may reduce the effec- governing rules of the CCP or QCCP for tive notional principal amount of the a cleared transaction is the full credit derivative by the effective no- amount that is necessary to fully ex- tional principal amount of a purchased tinguish the net current credit expo- credit derivative or other similar in- sure to the counterparty of the deriva- strument, provided that the remaining tive contracts, subject to the threshold maturity of the purchased credit deriv- and minimum transfer amounts appli- ative is equal to or greater than the re- cable to the counterparty under the maining maturity of the credit deriva- terms of the derivative contract or the tive through which the national bank governing rules for a cleared trans- or Federal savings association provides action; credit protection and that: (6) The variation margin is in the (i) With respect to a credit derivative form of cash in the same currency as that references a single exposure, the the currency of settlement set forth in reference exposure of the purchased the derivative contract, provided that credit derivative is to the same legal for the purposes of this paragraph entity and ranks pari passu with, or is (c)(4)(ii)(C)(6), currency of settlement junior to, the reference exposure of the means any currency for settlement credit derivative through which the na- specified in the governing qualifying tional bank or Federal savings associa- master netting agreement and the tion provides credit protection; or credit support annex to the qualifying (ii) With respect to a credit deriva- master netting agreement, or in the tive that references multiple expo- governing rules for a cleared trans- sures, the reference exposures of the action; and purchased credit derivative are to the (7) The derivative contract and the same legal entities and rank pari passu variation margin are governed by a with the reference exposures of the qualifying master netting agreement credit derivative through which the na- between the legal entities that are the tional bank or Federal savings associa- counterparties to the derivative con- tion provides credit protection, and the tract or by the governing rules for a level of seniority of the purchased cleared transaction, and the qualifying credit derivative ranks pari passu to master netting agreement or the gov- the level of seniority of the credit de- erning rules for a cleared transaction rivative through which the national must explicitly stipulate that the bank or Federal savings association counterparties agree to settle any pay- provides credit protection; ment obligations on a net basis, taking (iii) Where a national bank or Federal into account any variation margin re- savings association has reduced the ef- ceived or provided under the contract if fective notional amount of a credit de- a credit event involving either rivative through which the national counterparty occurs; bank or Federal savings association (D) The effective notional principal provides credit protection in accord- amount (that is, the apparent or stated ance with paragraph (c)(4)(ii)(D)(1) of notional principal amount multiplied this section, the national bank or Fed- by any multiplier in the derivative eral savings association must also re- contract) of a credit derivative, or duce the effective notional principal

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amount of a purchased credit deriva- (3) Under the governing agreements, tive used to offset the credit derivative the counterparties intend to settle net, through which the national bank or settle simultaneously, or settle accord- Federal savings association provides ing to a process that is the functional credit protection, by the amount of equivalent of net settlement, (that is, any increase in the mark-to-fair value the cash flows of the transactions are of the purchased credit derivative that equivalent, in effect, to a single net is recognized in common equity tier 1 amount on the settlement date), where capital; and both transactions are settled through (iv) Where the national bank or Fed- the same settlement system, the set- eral savings association purchases tlement arrangements are supported by credit protection through a total re- cash or intraday credit facilities in- turn swap and records the net pay- tended to ensure that settlement of ments received on a credit derivative both transactions will occur by the end through which the national bank or of the business day, and the settlement Federal savings association provides of the underlying securities does not credit protection in net income, but interfere with the net cash settlement; (F) The counterparty credit risk of a does not record offsetting deterioration repo-style transaction, including where in the mark-to-fair value of the credit the national bank or Federal savings derivative through which the national association acts as an agent for a repo- bank or Federal savings association style transaction and indemnifies the provides credit protection in net in- customer with respect to the perform- come (either through reductions in fair ance of the customer’s counterparty in value or by additions to reserves), the an amount limited to the difference be- national bank or Federal savings asso- tween the fair value of the security or ciation may not use the purchased cash its customer has lent and the fair credit protection to offset the effective value of the collateral the borrower has notional principal amount of the re- provided, calculated as follows: lated credit derivative through which (1) If the transaction is not subject to the national bank or Federal savings a qualifying master netting agreement, association provides credit protection; the counterparty credit risk (E*) for (E) Where a national bank or Federal transactions with a counterparty must savings association acting as a prin- be calculated on a transaction by cipal has more than one repo-style transaction basis, such that each transaction with the same transaction i is treated as its own net- counterparty and has offset the gross ting set, in accordance with the fol- value of receivables due from a lowing formula, where Ei is the fair counterparty under reverse repurchase value of the instruments, gold, or cash transactions by the gross value of that the national bank or Federal sav- payables under repurchase transactions ings association has lent, sold subject due to the same counterparty, the to repurchase, or provided as collateral gross value of receivables associated to the counterparty, and Ci is the fair with the repo-style transactions less value of the instruments, gold, or cash any on-balance sheet receivables that the national bank or Federal sav- amount associated with these repo- ings association has borrowed, pur- style transactions included under para- chased subject to resale, or received as graph (c)(4)(ii)(A) of this section, un- collateral from the counterparty: less the following criteria are met: Ei* = max {0, [Ei ¥ Ci]}; and (1) The offsetting transactions have (2) If the transaction is subject to a the same explicit final settlement date qualifying master netting agreement, under their governing agreements; the counterparty credit risk (E*) must (2) The right to offset the amount be calculated as the greater of zero and owed to the counterparty with the the total fair value of the instruments, amount owed by the counterparty is le- gold, or cash that the national bank or gally enforceable in the normal course Federal savings association has lent, of business and in the event of receiver- sold subject to repurchase or provided ship, insolvency, liquidation, or similar as collateral to a counterparty for all proceeding; and transactions included in the qualifying

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master netting agreement (SEi), less a derivative contract for purposes of the total fair value of the instruments, determining its total leverage expo- gold, or cash that the national bank or sure; Federal savings association borrowed, (3) A clearing member national bank purchased subject to resale or received or Federal savings association that as collateral from the counterparty for does not guarantee the performance of those transactions (SCi), in accordance a CCP with respect to a transaction with the following formula: cleared on behalf of a clearing member E* = max {0, [SEi ¥ SCi]} client may exclude its exposure to the (G) If a national bank or Federal sav- CCP for purposes of determining its ings association acting as an agent for total leverage exposure; a repo-style transaction provides a (4) A national bank or Federal sav- guarantee to a customer of the secu- ings association that is a clearing rity or cash its customer has lent or member may exclude from its total le- borrowed with respect to the perform- verage exposure the effective notional ance of the customer’s counterparty principal amount of credit protection and the guarantee is not limited to the sold through a credit derivative con- difference between the fair value of the tract, or other similar instrument, security or cash its customer has lent that it clears on behalf of a clearing and the fair value of the collateral the member client through a CCP as cal- borrower has provided, the amount of culated in accordance with part the guarantee that is greater than the (c)(4)(ii)(D); and difference between the fair value of the (5) Notwithstanding paragraphs security or cash its customer has lent (c)(4)(ii)(I)(1) through (3) of this sec- and the value of the collateral the bor- tion, a national bank or Federal sav- rower has provided; ings association may exclude from its (H) The credit equivalent amount of total leverage exposure a clearing all off-balance sheet exposures of the member’s exposure to a clearing mem- national bank or Federal savings asso- ber client for a derivative contract, if ciation, excluding repo-style trans- the clearing member client and the actions, repurchase or reverse repur- clearing member are affiliates and con- chase or securities borrowing or lend- solidated for financial reporting pur- ing transactions that qualify for sales poses on the national bank’s or Federal treatment under GAAP, and derivative savings association’s balance sheet. transactions, determined using the ap- (J) A custodial bank shall exclude plicable credit conversion factor under from its total leverage exposure the § 3.33(b), provided, however, that the lesser of: minimum credit conversion factor that (1) The amount of funds that the cus- may be assigned to an off-balance sheet tody bank has on deposit at a quali- exposure under this paragraph is 10 fying central bank; and percent; and (2) The amount of funds that the cus- (I) For a national bank or Federal tody bank’s clients have on deposit at savings association that is a clearing the custody bank that are linked to fi- member: duciary or custodial and safekeeping (1) A clearing member national bank accounts. For purposes of this para- or Federal savings association that graph (c)(4)(ii)(J), a deposit account is guarantees the performance of a clear- linked to a fiduciary or custodial and ing member client with respect to a safekeeping account if the deposit ac- cleared transaction must treat its ex- count is provided to a client that main- posure to the clearing member client tains a fiduciary or custodial and safe- as a derivative contract for purposes of keeping account with the custody determining its total leverage expo- bank, and the deposit account is used sure; to facilitate the administration of the (2) A clearing member national bank fiduciary or custody and safekeeping or Federal savings association that account. guarantees the performance of a CCP (5) Federal savings association tangible with respect to a transaction cleared capital ratio. A Federal savings associa- on behalf of a clearing member client tion’s tangible capital ratio is the ratio must treat its exposure to the CCP as of the Federal savings association’s

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core capital (tier 1 capital) to average (B) The average of the national total assets as calculated under this bank’s or Federal savings association’s subpart B. For purposes of this para- net income, calculated in accordance graph (c)(5), the term ‘‘total assets’’ with the instructions to the Call Re- means ‘‘total assets’’ as defined in part port, for the four calendar quarters 6, subpart A of this chapter, subject to preceding the current calendar quarter. subpart G of this part. (ii) Maximum payout ratio. The max- (d) Capital adequacy. (1) Notwith- imum payout ratio is the percentage of standing the minimum requirements in eligible retained income that a na- this part, a national bank or Federal tional bank or Federal savings associa- savings association must maintain cap- tion can pay out in the form of dis- ital commensurate with the level and tributions and discretionary bonus nature of all risks to which the na- payments during the current calendar tional bank or Federal savings associa- quarter. The maximum payout ratio is tion is exposed. The supervisory eval- based on the national bank’s or Federal uation of a national bank’s or Federal savings association’s capital conserva- savings association’s capital adequacy tion buffer, calculated as of the last is based on an individual assessment of day of the previous calendar quarter, numerous factors, including those list- as set forth in Table 1 to § 3.11. ed at this section (national banks), 12 CFR 167.3(c) (Federal savings associa- (iii) Maximum payout amount. A na- tions). tional bank’s or Federal savings asso- (2) A national bank or Federal sav- ciation’s maximum payout amount for ings association must have a process the current calendar quarter is equal for assessing its overall capital ade- to the national bank’s or Federal sav- quacy in relation to its risk profile and ings association’s eligible retained in- a comprehensive strategy for maintain- come, multiplied by the applicable ing an appropriate level of capital. maximum payout ratio, as set forth in Table 1 to § 3.11. [78 FR 62157, 62273, Oct. 11, 2013, as amended (iv) Private sector credit exposure. Pri- at 79 FR 57740, Sept. 26, 2014; 80 FR 41415, July 15, 2015; 84 FR 4238, Feb. 14, 2019; 84 FR vate sector credit exposure means an 35248, July 22, 2019; 84 FR 59264, Nov. 1, 2019; exposure to a company or an individual 84 FR 61792, Nov. 13, 2019; 85 FR 4401, Jan. 24, that is not an exposure to a sovereign, 2020; 85 FR 4577, Jan. 27, 2020; 85 FR 57959, the Bank for International Settle- Sept. 17, 2020] ments, the European Central Bank, the European Commission, the European § 3.11 Capital conservation buffer and countercyclical capital buffer Stability Mechanism, the European Fi- amount. nancial Stability Facility, the Inter- national Monetary Fund, a MDB, a (a) Capital conservation buffer—(1) PSE, or a GSE. Composition of the capital conservation buffer. The capital conservation buffer (3) Calculation of capital conservation is composed solely of common equity buffer. (i) A national bank’s or Federal tier 1 capital. savings association’s capital conserva- (2) Definitions. For purposes of this tion buffer is equal to the lowest of the section, the following definitions following ratios, calculated as of the apply: last day of the previous calendar quar- (i) Eligible retained income. The eligi- ter: ble retained income of a national bank (A) The national bank or Federal sav- or Federal savings association is the ings association’s common equity tier 1 greater of: capital ratio minus the national bank (A) The national bank’s or Federal or Federal savings association ’s min- savings association’s net income, cal- imum common equity tier 1 capital culated in accordance with the instruc- ratio requirement under § 3.10; tions to the Call Report, for the four (B) The national bank or Federal sav- calendar quarters preceding the cur- ings association’s tier 1 capital ratio rent calendar quarter, net of any dis- minus the national bank or Federal tributions and associated tax effects savings association’s minimum tier 1 not already reflected in net income; capital ratio requirement under § 3.10; and and

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(C) The national bank or Federal sav- section, is not subject to a maximum ings association’s total capital ratio payout amount under this section. minus the national bank or Federal (iii) Negative eligible retained income. savings association’s minimum total Except as provided in paragraph capital ratio requirement under § 3.10; (a)(4)(iv) of this section, a national or bank or Federal savings association (ii) Notwithstanding paragraphs may not make distributions or discre- (a)(3)(i)(A)–(C) of this section, if the na- tionary bonus payments during the tional bank’s or Federal savings asso- current calendar quarter if the na- ciation’s common equity tier 1, tier 1 tional bank’s or Federal savings asso- or total capital ratio is less than or ciation’s: equal to the national bank’s or Federal (A) Eligible retained income is nega- savings association’s minimum com- tive; and (B) Capital conservation buffer was mon equity tier 1, tier 1 or total cap- less than 2.5 percent as of the end of ital ratio requirement under § 3.10, re- the previous calendar quarter. spectively, the national bank’s or Fed- (iv) Prior approval. Notwithstanding eral savings association’s capital con- the limitations in paragraphs (a)(4)(i) servation buffer is zero. through (iii) of this section, the OCC (4) Limits on distributions and discre- may permit a national bank or Federal tionary bonus payments. (i) A national savings association to make a distribu- bank or Federal savings association tion or discretionary bonus payment shall not make distributions or discre- upon a request of the national bank or tionary bonus payments or create an Federal savings association, if the OCC obligation to make such distributions determines that the distribution or dis- or payments during the current cal- cretionary bonus payment would not endar quarter that, in the aggregate, be contrary to the purposes of this sec- exceed the maximum payout amount. tion, or to the safety and soundness of (ii) A national bank or Federal sav- the national bank or Federal savings ings association with a capital con- association. In making such a deter- servation buffer that is greater than 2.5 mination, the OCC will consider the na- percent plus 100 percent of its applica- ture and extent of the request and the ble countercyclical capital buffer, in particular circumstances giving rise to accordance with paragraph (b) of this the request.

TABLE 1 TO § 3.11—CALCULATION OF MAXIMUM PAYOUT AMOUNT

Capital conservation buffer Maximum payout ratio

Greater than 2.5 percent plus 100 percent of the national bank’s or Federal savings as- No payout ratio limitation applies. sociation’s applicable countercyclical capital buffer amount. Less than or equal to 2.5 percent plus 100 percent of the national bank’s or Federal sav- 60 percent. ings association’s applicable countercyclical capital buffer amount, and greater than 1.875 percent plus 75 percent of the national bank’s or Federal savings association’s applicable countercyclical capital buffer amount. Less than or equal to 1.875 percent plus 75 percent of the national bank’s or Federal 40 percent. savings association’s applicable countercyclical capital buffer amount, and greater than 1.25 percent plus 50 percent of the national bank’s or Federal savings association’s applicable countercyclical capital buffer amount. Less than or equal to 1.25 percent plus 50 percent of the national bank’s or Federal sav- 20 percent. ings association’s applicable countercyclical capital buffer amount, and greater than 0.625 percent plus 25 percent of the national bank’s or Federal savings association’s applicable countercyclical capital buffer amount. Less than or equal to 0.625 percent plus 25 percent of the national bank’s or Federal 0 percent. savings association’s applicable countercyclical capital buffer amount.

(v) Other limitations on distributions. (b) Countercyclical capital buffer Additional limitations on distributions amount—(1) General. An advanced ap- may apply to a national bank or Fed- proaches national bank or Federal sav- eral savings association under subparts ings association, and a Category III na- H and I of this part; 12 CFR 5.46, 12 CFR tional bank or Federal savings associa- part 5, subpart E; 12 CFR part 6. tion, must calculate a countercyclical

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capital buffer amount in accordance signed to a private sector credit expo- with paragraphs (b)(1)(i) through (iv) of sure a risk weight associated with a this section for purposes of deter- protection provider on a guarantee or mining its maximum payout ratio credit derivative, the location of the under Table 1 to this section. exposure is the national jurisdiction (i) Extension of capital conservation where the protection provider is lo- buffer. The countercyclical capital cated. buffer amount is an extension of the (C) The location of a securitization capital conservation buffer as de- exposure is the location of the under- scribed in paragraph (a) of this section. lying exposures, or, if the underlying (ii) Amount. An advanced approaches exposures are located in more than one national bank or Federal savings asso- national jurisdiction, the national ju- ciation, and a Category III national risdiction where the underlying expo- bank or Federal savings association, sures with the largest aggregate unpaid has a countercyclical capital buffer principal balance are located. For pur- amount determined by calculating the poses of this paragraph (b), the loca- weighted average of the counter- tion of an underlying exposure shall be cyclical capital buffer amounts estab- the location of the borrower, deter- lished for the national jurisdictions mined consistent with paragraph where the national bank’s or Federal (b)(1)(iv)(A) of this section. savings association’s private sector (2) Countercyclical capital buffer credit exposures are located, as speci- amount for credit exposures in the United fied in paragraphs (b)(2) and (3) of this States—(i) Initial countercyclical capital section. buffer amount with respect to credit expo- (iii) Weighting. The weight assigned sures in the United States. The initial to a jurisdiction’s countercyclical cap- countercyclical capital buffer amount ital buffer amount is calculated by di- in the United States is zero. viding the total risk-weighted assets (ii) Adjustment of the countercyclical for the national bank’s or Federal sav- capital buffer amount. The OCC will ad- ings association’s private sector credit just the countercyclical capital buffer exposures located in the jurisdiction by amount for credit exposures in the the total risk-weighted assets for all of United States in accordance with appli- the national bank’s or Federal savings cable law.10 association’s private sector credit ex- (iii) Range of countercyclical capital posures. The methodology a national buffer amount. The OCC will adjust the bank or Federal savings association countercyclical capital buffer amount uses for determining risk-weighted as- for credit exposures in the United sets for purposes of this paragraph (b) States between zero percent and 2.5 must be the methodology that deter- percent of risk-weighted assets. mines its risk-based capital ratios (iv) Adjustment determination. The under § 3.10. Notwithstanding the pre- OCC will base its decision to adjust the vious sentence, the risk-weighted asset countercyclical capital buffer amount amount for a private sector credit ex- under this section on a range of macro- posure that is a covered position under economic, financial, and supervisory subpart F of this part is its specific information indicating an increase in risk add-on as determined under § 3.210 systemic risk including, but not lim- multiplied by 12.5. ited to, the ratio of credit to gross do- (iv) Location. (A) Except as provided mestic product, a variety of asset in paragraphs (b)(1)(iv)(B) and prices, other factors indicative of rel- (b)(1)(iv)(C) of this section, the location ative credit and liquidity expansion or of a private sector credit exposure is contraction, funding spreads, credit the national jurisdiction where the condition surveys, indices based on borrower is located (that is, where it is credit default swap spreads, options incorporated, chartered, or similarly implied volatility, and measures of sys- established or, if the borrower is an in- temic risk. dividual, where the borrower resides). (B) If, in accordance with subparts D 10 The OCC expects that any adjustment or E of this part, the national bank or will be based on a determination made joint- Federal savings association has as- ly by the Board, OCC, and FDIC.

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(v) Effective date of adjusted counter- subject, if it has a leverage ratio great- cyclical capital buffer amount—(A) In- er than 9 percent. crease adjustment. A determination by (2) For purposes of this section, a the OCC under paragraph (b)(2)(ii) of qualifying community banking organi- this section to increase the counter- zation means a national bank or Fed- cyclical capital buffer amount will be eral savings association that is not an effective 12 months from the date of advanced approaches national bank or announcement, unless the OCC estab- Federal savings association and that lishes an earlier effective date and in- satisfies all of the following criteria: cludes a statement articulating the (i) Has a leverage ratio of greater reasons for the earlier effective date. than 9 percent; (B) Decrease adjustment. A determina- (ii) Has total consolidated assets of tion by the OCC to decrease the estab- less than $10 billion, calculated in ac- lished countercyclical capital buffer cordance with the reporting instruc- amount under paragraph (b)(2)(ii) of tions to the Call Report as of the end of this section will be effective on the day the most recent calendar quarter; following announcement of the final (iii) Has off-balance sheet exposures determination or the earliest date per- of 25 percent or less of its total consoli- missible under applicable law or regu- dated assets as of the end of the most lation, whichever is later. recent calendar quarter, calculated as (vi) Twelve month sunset. The counter- the sum of the notional amounts of the cyclical capital buffer amount will re- exposures listed in paragraphs turn to zero percent 12 months after (a)(2)(iii)(A) through (I) of this section, the effective date that the adjusted divided by total consolidated assets, countercyclical capital buffer amount each as of the end of the most recent is announced, unless the OCC an- calendar quarter: nounces a decision to maintain the ad- (A) The unused portion of commit- justed countercyclical capital buffer ments (except for unconditionally amount or adjust it again before the cancellable commitments); expiration of the 12-month period. (B) Self-liquidating, trade-related (3) Countercyclical capital buffer contingent items that arise from the amount for foreign jurisdictions. The OCC will adjust the countercyclical capital movement of goods; buffer amount for private sector credit (C) Transaction-related contingent exposures to reflect decisions made by items, including performance bonds, foreign jurisdictions consistent with bid bonds, warranties, and performance due process requirements described in standby letters of credit; paragraph (b)(2) of this section. (D) Sold credit protection through (1) Guarantees; and [78 FR 62157, 62273, Oct. 11, 2013, as amended (2) Credit derivatives; at 84 FR 35249, July 22, 2019; 84 FR 59265, Nov. 1, 2019; 85 FR 15915, Mar. 20, 2020] (E) Credit-enhancing representations and warranties; § 3.12 Community bank leverage ratio (F) Securities lent and borrowed, cal- framework. culated in accordance with the report- (a) Community bank leverage ratio ing instructions to the Call Report; framework. (1) Notwithstanding any (G) Financial standby letters of cred- other provision in this part, a quali- it; fying community banking organization (H) Forward agreements that are not that has made an election to use the derivative contracts; and community bank leverage ratio frame- (I) Off-balance sheet securitization work under paragraph (a)(3) of this sec- exposures; and tion shall be considered to have met (iv) Has total trading assets plus the minimum capital requirements trading liabilities, calculated in ac- under § 3.10, the capital ratio require- cordance with the reporting instruc- ments for the well capitalized capital tions to the Call Report of 5 percent or category under § 6.4(b)(1) of this chap- less of the national bank’s or Federal ter, and any other capital or leverage savings association’s total consolidated requirements to which the qualifying assets, each as of the end of the most community banking organization is recent calendar quarter.

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(3)(i) A qualifying community bank- the national bank or Federal savings ing organization may elect to use the association since December 31, 2019; the community bank leverage ratio frame- causes of this growth, including wheth- work if it makes an opt-in election er this growth occurred as a result of a under this paragraph (a)(3). merger or acquisition; whether such (ii) For purposes of this paragraph growth is likely to be temporary or (a)(3), a qualifying community banking permanent; whether the national bank organization makes an election to use or Federal savings association has be- the community bank leverage ratio come involved in any additional activi- framework by completing the applica- ties since December 31, 2019; and the ble reporting requirements of its Call type of assets held by the national Report. bank or Federal savings association. (iii)(A) A qualifying community The OCC will notify a national bank or banking organization that has elected Federal savings association of a deter- to use the community bank leverage mination under this paragraph. A na- ratio framework may opt out of the tional bank or Federal savings associa- community bank leverage ratio frame- tion may, not later than 30 days after work by completing the applicable the date of a determination by the risk-based and leverage ratio reporting OCC, inform the OCC, in writing, of requirements necessary to demonstrate why the national bank or Federal sav- compliance with § 3.10(a)(1) in its Call ings association should be eligible for Report or by otherwise providing this the temporary relief. The OCC will information to the OCC. make a final determination after re- (B) A qualifying community banking viewing any response. organization that opts out of the com- (b) Calculation of the leverage ratio. A munity bank leverage ratio framework qualifying community banking organi- pursuant to paragraph (a)(3)(iii)(A) of zation’s leverage ratio is calculated in this section must comply with accordance with § 3.10(b)(4), except that § 3.10(a)(1) immediately. a qualifying community banking orga- (4)(i) Temporary relief. From Decem- nization is not required to: ber 2, 2020 through December 31, 2021, (1) Make adjustments and deductions except as provided in paragraph from tier 2 capital for purposes of (a)(4)(ii) of this section, the total con- § 3.22(c); or solidated assets of a national bank or (2) Calculate and deduct from tier 1 Federal savings association for pur- capital an amount resulting from in- poses of paragraph (a)(2)(ii) of this sec- sufficient tier 2 capital under § 3.22(f). tion shall be the lesser of: (c) Treatment when ceasing to meet the (A) The total consolidated assets re- qualifying community banking organiza- ported by the national bank or Federal tion requirements. (1) Except as provided savings association in its Call Report in paragraphs (c)(5) and (6) of this sec- as of December 31, 2019; and tion, if a national bank or Federal sav- (B) The total consolidated assets of ings association ceases to meet the def- the national bank or Federal savings inition of a qualifying community association calculated in accordance banking organization, the national with the reporting instructions to the bank or Federal savings association Call Report as of the end of the most has two reporting periods under its recent calendar quarter. Call Report (grace period) to either (ii) Reservation of authority. The tem- satisfy the requirements to be a quali- porary relief provided under paragraph fying community banking organization (a)(4)(i) of this section does not apply or to comply with § 3.10(a)(1) and report to a national bank or Federal savings the required capital measures under association if the OCC determines that § 3.10(a)(1) on its Call Report. permitting the institution to deter- (2) The grace period begins as of the mine its assets in accordance with that end of the calendar quarter in which paragraph would not be commensurate the national bank or Federal savings with the risk posed by the institution. association ceases to satisfy the cri- When making this determination, the teria to be a qualifying community OCC will consider all relevant factors, banking organization provided in para- including the extent of asset growth of graph (a)(2) of this section. The grace

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period ends on the last day of the sec- which it reports a leverage ratio of 8 ond consecutive calendar quarter fol- percent or less. lowing the beginning of the grace pe- [84 FR 61792, Nov. 13, 2019, as amended at 85 riod. FR 77359, Dec. 2, 2020] (3) During the grace period, the national bank or Federal savings associa- §§ 3.13–3.19 [Reserved] tion continues to be treated as a qualifying community banking organization Subpart C—Definition of Capital for the purpose of this part and must continue calculating and reporting its SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, un- leverage ratio under this section unless less otherwise noted. the national bank or Federal savings association has opted out of using the § 3.20 Capital components and eligibility criteria for regulatory capital community bank leverage ratio frame- instruments. work under paragraph (a)(3) of this sec- (a) Regulatory capital components. A tion. national bank’s or Federal savings as- (4) During the grace period, the quali- sociation’s regulatory capital compo- fying community banking organization nents are: continues to be considered to have met (1) Common equity tier 1 capital; the minimum capital requirements (2) Additional tier 1 capital; and under § 3.10(a)(1), the capital ratio re- (3) Tier 2 capital. quirements for the well capitalized (b) Common equity tier 1 capital. Com- capital category under § 6.4(b)(1)(i)(A) mon equity tier 1 capital is the sum of through (D) of this chapter, and any the common equity tier 1 capital ele- other capital or leverage requirements ments in this paragraph (b), minus reg- to which the qualifying community ulatory adjustments and deductions in banking organization is subject, and § 3.22. The common equity tier 1 capital must continue calculating and report- elements are: ing its leverage ratio under this sec- (1) Any common stock instruments tion. (plus any related surplus) issued by the (5) Notwithstanding paragraphs (c)(1) national bank or Federal savings asso- through (4) of this section, a national ciation, net of treasury stock, and any capital instruments issued by mutual bank or Federal savings association banking organizations, that meet all that no longer meets the definition of a the following criteria: qualifying community banking organi- (i) The instrument is paid-in, issued zation as a result of a merger or acqui- directly by the national bank or Fed- sition has no grace period and imme- eral savings association, and represents diately ceases to be a qualifying com- the most subordinated claim in a re- munity banking organization. Such a ceivership, insolvency, liquidation, or national bank or Federal savings asso- similar proceeding of the national ciation must comply with the min- bank or Federal savings association; imum capital requirements under (ii) The holder of the instrument is § 3.10(a)(1) and must report the required entitled to a claim on the residual as- capital measures under § 3.10(a)(1) for sets of the national bank or Federal the quarter in which it ceases to be a savings association that is propor- qualifying community banking organi- tional with the holder’s share of the zation. national bank’s or Federal savings as- (6) Notwithstanding paragraphs (c)(1) sociation’s issued capital after all sen- through (4) of this section, a national ior claims have been satisfied in a re- bank or Federal savings association ceivership, insolvency, liquidation, or that has a leverage ratio of 8 percent or similar proceeding; less does not have a grace period and (iii) The instrument has no maturity date, can only be redeemed via discre- must comply with the minimum cap- tionary repurchases with the prior ap- ital requirements under § 3.10(a)(1) and proval of the OCC, and does not contain must report the required capital meas- any term or feature that creates an in- ures under § 3.10(a)(1) for the quarter in centive to redeem;

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(iv) The national bank or Federal cally enhances the seniority of the in- savings association did not create at strument; issuance of the instrument through (xii) The instrument has been issued any action or communication an expec- in accordance with applicable laws and tation that it will buy back, cancel, or regulations; and redeem the instrument, and the instru- (xiii) The instrument is reported on ment does not include any term or fea- the national bank’s or Federal savings ture that might give rise to such an ex- association’s regulatory financial pectation; statements separately from other cap- (v) Any cash dividend payments on ital instruments. the instrument are paid out of the na- (2) Retained earnings. tional bank’s or Federal savings asso- (3) Accumulated other comprehensive ciation’s net income or retained earn- income (AOCI) as reported under ings and are not subject to a limit im- GAAP.11 posed by the contractual terms governing the instrument. (4) Any common equity tier 1 minority interest, subject to the limitations (vi) The national bank or Federal savings association has full discretion in § 3.21. at all times to refrain from paying any (5) Notwithstanding the criteria for dividends and making any other dis- common stock instruments referenced tributions on the instrument without above, a national bank’s or Federal triggering an event of default, a re- savings association’s common stock quirement to make a payment-in-kind, issued and held in trust for the benefit or an imposition of any other restric- of its employees as part of an employee tions on the national bank or Federal stock ownership plan does not violate savings association; any of the criteria in paragraph (vii) Dividend payments and any (b)(1)(iii), paragraph (b)(1)(iv) or para- other distributions on the instrument graph (b)(1)(xi) of this section, provided may be paid only after all legal and that any repurchase of the stock is re- contractual obligations of the national quired solely by virtue of ERISA for an bank or Federal savings association instrument of a national bank or Fed- have been satisfied, including pay- eral savings association that is not ments due on more senior claims; publicly-traded. In addition, an instru- (viii) The holders of the instrument ment issued by a national bank or Fed- bear losses as they occur equally, pro- eral savings association to its em- portionately, and simultaneously with ployee stock ownership plan does not the holders of all other common stock violate the criterion in paragraph instruments before any losses are (b)(1)(x) of this section. borne by holders of claims on the na- (c) Additional tier 1 capital. Additional tional bank or Federal savings associa- tier 1 capital is the sum of additional tion with greater priority in a receiver- tier 1 capital elements and any related ship, insolvency, liquidation, or similar surplus, minus the regulatory adjust- proceeding; ments and deductions in § 3.22. Addi- (ix) The paid-in amount is classified tional tier 1 capital elements are: as equity under GAAP; (1) Instruments (plus any related sur- (x) The national bank or Federal sav- plus) that meet the following criteria: ings association, or an entity that the (i) The instrument is issued and paid- national bank or Federal savings asso- in; ciation controls, did not purchase or directly or indirectly fund the purchase (ii) The instrument is subordinated of the instrument; to depositors, general creditors, and (xi) The instrument is not secured, subordinated debt holders of the na- not covered by a guarantee of the national bank or Federal savings associa- tional bank or Federal savings association in a receivership, insolvency, liq- tion or of an affiliate of the national uidation, or similar proceeding; bank or Federal savings association, and is not subject to any other ar- 11 See § 3.22 for specific adjustments related rangement that legally or economi- to AOCI.

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(iii) The instrument is not secured, (vii) The national bank or Federal not covered by a guarantee of the na- savings association has full discretion tional bank or Federal savings associa- at all times to cancel dividends or tion or of an affiliate of the national other distributions on the instrument bank or Federal savings association, without triggering an event of default, and not subject to any other arrange- a requirement to make a payment-in- ment that legally or economically en- kind, or an imposition of other restric- hances the seniority of the instrument; tions on the national bank or Federal (iv) The instrument has no maturity savings association except in relation date and does not contain a dividend to any distributions to holders of com- step-up or any other term or feature mon stock or instruments that are pari that creates an incentive to redeem; passu with the instrument. and (viii) Any cash dividend payments on (v) If callable by its terms, the in- the instrument are paid out of the na- strument may be called by the national tional bank’s or Federal savings asso- bank or Federal savings association ciation’s net income or retained earn- only after a minimum of five years fol- ings. lowing issuance, except that the terms (ix) The instrument does not have a of the instrument may allow it to be credit-sensitive feature, such as a divi- called earlier than five years upon the dend rate that is reset periodically occurrence of a regulatory event that based in whole or in part on the na- precludes the instrument from being tional bank’s or Federal savings asso- included in additional tier 1 capital, a ciation’s credit quality, but may have tax event, or if the issuing entity is re- a dividend rate that is adjusted periodi- quired to register as an investment cally independent of the national company pursuant to the Investment bank’s or Federal savings association’s credit quality, in relation to general Company Act of 1940 (15 U.S.C. 80a–1 et market interest rates or similar ad- seq.). In addition: justments. (A) The national bank or Federal sav- (x) The paid-in amount is classified ings association must receive prior ap- as equity under GAAP. proval from the OCC to exercise a call (xi) The national bank or Federal option on the instrument. savings association, or an entity that (B) The national bank or Federal sav- the national bank or Federal savings ings association does not create at association controls, did not purchase issuance of the instrument, through or directly or indirectly fund the pur- any action or communication, an ex- chase of the instrument. pectation that the call option will be (xii) The instrument does not have exercised. any features that would limit or dis- (C) Prior to exercising the call op- courage additional issuance of capital tion, or immediately thereafter, the by the national bank or Federal sav- national bank or Federal savings asso- ings association, such as provisions ciation must either: Replace the in- that require the national bank or Fed- strument to be called with an equal eral savings association to compensate amount of instruments that meet the holders of the instrument if a new in- criteria under paragraph (b) of this sec- strument is issued at a lower price dur- tion or this paragraph (c); 12 or dem- ing a specified time frame. onstrate to the satisfaction of the OCC (xiii) If the instrument is not issued that following redemption, the na- directly by the national bank or Fed- tional bank or Federal savings associa- eral savings association or by a sub- tion will continue to hold capital com- sidiary of the national bank or Federal mensurate with its risk. savings association that is an oper- (vi) Redemption or repurchase of the ating entity, the only asset of the instrument requires prior approval issuing entity is its investment in the from the OCC. capital of the national bank or Federal savings association, and proceeds must 12 Replacement can be concurrent with re- be immediately available without limi- demption of existing additional tier 1 capital tation to the national bank or Federal instruments. savings association or to the national

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bank’s or Federal savings association’s paragraph (c)(1)(v) or paragraph top-tier holding company in a form (c)(1)(xi) of this section; and which meets or exceeds all of the other (ii) An instrument with terms that criteria for additional tier 1 capital in- provide that the instrument may be struments.13 called earlier than five years upon the (xiv) For an advanced approaches na- occurrence of a rating agency event tional bank or Federal savings associa- does not violate the criterion in para- tion, the governing agreement, offering graph (c)(1)(v) of this section provided circular, or prospectus of an instru- that the instrument was issued and in- ment issued after the date upon which cluded in a national bank’s or Federal the national bank or Federal savings savings association’s tier 1 capital association becomes subject to this prior to January 1, 2014, and that such part as set forth in § 3.1(f) must disclose instrument satisfies all other criteria that the holders of the instrument may under this § 3.20(c). be fully subordinated to interests held (d) Tier 2 Capital. Tier 2 capital is the by the U.S. government in the event sum of tier 2 capital elements and any that the national bank or Federal sav- related surplus, minus regulatory ad- ings association enters into a receiver- justments and deductions in § 3.22. Tier ship, insolvency, liquidation, or similar 2 capital elements are: proceeding. (1) Instruments (plus related surplus) (2) Tier 1 minority interest, subject that meet the following criteria: to the limitations in § 3.21, that is not (i) The instrument is issued and paid- included in the national bank’s or Fed- in; eral savings association’s common eq- (ii) The instrument is subordinated uity tier 1 capital. to depositors and general creditors of (3) Any and all instruments that the national bank or Federal savings qualified as tier 1 capital under the association; OCC’s general risk-based capital rules (iii) The instrument is not secured, not covered by a guarantee of the na- under appendix A to this part (national tional bank or Federal savings associa- banks), 12 CFR part 167 (Federal sav- tion or of an affiliate of the national ings associations) as then in effect, bank or Federal savings association, that were issued under the Small Busi- and not subject to any other arrange- ness Jobs Act of 2010 14 or prior to Octo- ment that legally or economically en- ber 4, 2010, under the Emergency Eco- hances the seniority of the instrument nomic Stabilization Act of 2008.15 in relation to more senior claims; (4) Notwithstanding the criteria for (iv) The instrument has a minimum additional tier 1 capital instruments original maturity of at least five years. referenced above: At the beginning of each of the last (i) An instrument issued by a na- five years of the life of the instrument, tional bank or Federal savings associa- the amount that is eligible to be in- tion and held in trust for the benefit of cluded in tier 2 capital is reduced by 20 its employees as part of an employee percent of the original amount of the stock ownership plan does not violate instrument (net of redemptions) and is any of the criteria in paragraph excluded from regulatory capital when (c)(1)(iii) of this section, provided that the remaining maturity is less than any repurchase is required solely by one year. In addition, the instrument virtue of ERISA for an instrument of a must not have any terms or features national bank or Federal savings asso- that require, or create significant in- ciation that is not publicly-traded. In centives for, the national bank or Fed- addition, an instrument issued by a na- eral savings association to redeem the tional bank or Federal savings associa- instrument prior to maturity; 16 and tion to its employee stock ownership (v) The instrument, by its terms, plan does not violate the criteria in may be called by the national bank or

13 De minimis assets related to the operation 16 An instrument that by its terms auto- of the issuing entity can be disregarded for matically converts into a tier 1 capital in- purposes of this criterion. strument prior to five years after issuance 14 Public Law 111–240; 124 Stat. 2504 (2010). complies with the five-year maturity re- 15 Public Law 110–343, 122 Stat. 3765 (2008). quirement of this criterion.

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Federal savings association only after (viii) The national bank or Federal a minimum of five years following savings association, or an entity that issuance, except that the terms of the the national bank or Federal savings instrument may allow it to be called association controls, has not purchased sooner upon the occurrence of an event and has not directly or indirectly fund- that would preclude the instrument ed the purchase of the instrument. from being included in tier 2 capital, a (ix) If the instrument is not issued di- tax event, or if the issuing entity is re- rectly by the national bank or Federal quired to register as an investment savings association or by a subsidiary company pursuant to the Investment of the national bank or Federal savings Company Act of 1940 (15 U.S.C. 80a–1 et association that is an operating entity, seq.). In addition: the only asset of the issuing entity is (A) The national bank or Federal sav- its investment in the capital of the na- ings association must receive the prior tional bank or Federal savings associa- approval of the OCC to exercise a call tion, and proceeds must be imme- option on the instrument. diately available without limitation to (B) The national bank or Federal sav- the national bank or Federal savings ings association does not create at association or the national bank’s or issuance, through action or commu- Federal savings association’s top-tier nication, an expectation the call option holding company in a form that meets will be exercised. or exceeds all the other criteria for tier (C) Prior to exercising the call op- 2 capital instruments under this section, or immediately thereafter, the tion.18 national bank or Federal savings asso- (x) Redemption of the instrument ciation must either: Replace any prior to maturity or repurchase re- amount called with an equivalent quires the prior approval of the OCC. amount of an instrument that meets (xi) For an advanced approaches na- the criteria for regulatory capital tional bank or Federal savings associa- under this section; 17 or demonstrate to tion, the governing agreement, offering the satisfaction of the OCC that fol- circular, or prospectus of an instru- lowing redemption, the national bank ment issued after the date on which or Federal savings association would the advanced approaches national bank continue to hold an amount of capital or Federal savings association becomes that is commensurate with its risk. subject to this part under § 3.1(f) must (vi) The holder of the instrument disclose that the holders of the instru- must have no contractual right to ac- ment may be fully subordinated to in- celerate payment of principal or inter- terests held by the U.S. government in est on the instrument, except in the the event that the national bank or event of a receivership, insolvency, liq- Federal savings association enters into uidation, or similar proceeding of the a receivership, insolvency, liquidation, national bank or Federal savings asso- or similar proceeding. ciation. (2) Total capital minority interest, (vii) The instrument has no credit- subject to the limitations set forth in sensitive feature, such as a dividend or § 3.21, that is not included in the na- interest rate that is reset periodically tional bank’s or Federal savings asso- based in whole or in part on the na- ciation’s tier 1 capital. tional bank’s or Federal savings asso- (3) ALLL or AACL, as applicable, up ciation’s credit standing, but may have to 1.25 percent of the national bank’s a dividend rate that is adjusted periodi- or Federal savings association’s stand- cally independent of the national ardized total risk-weighted assets not bank’s or Federal savings association’s including any amount of the ALLL or credit standing, in relation to general AACL, as applicable (and excluding in market interest rates or similar ad- the case of a market risk national justments. bank or Federal savings association,

17 A national bank or Federal savings asso- 18 A national bank or Federal savings association may replace tier 2 capital instru- ciation may disregard de minimis assets re- ments concurrent with the redemption of ex- lated to the operation of the issuing entity isting tier 2 capital instruments. for purposes of this criterion.

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its standardized market risk-weighted latory capital pursuant to paragraph assets). (e)(3) of this section. (4) Any instrument that qualified as (2) When considering whether a na- tier 2 capital under the OCC’s general tional bank or Federal savings associa- risk-based capital rules under appendix tion may include a regulatory capital A to this part, 12 CFR part 167 as then element in its common equity tier 1 in effect, that were issued under the capital, additional tier 1 capital, or Small Business Jobs Act of 2010,19 or tier 2 capital, the OCC will consult prior to October 4, 2010, under the with the Federal Deposit Insurance Emergency Economic Stabilization Act Corporation and Federal Reserve of 2008.20 Board. (5) For a national bank or Federal (3) After determining that a regu- savings association that makes an latory capital element may be included AOCI opt-out election (as defined in in a national bank’s or Federal savings paragraph (b)(2) of § 3.22), 45 percent of association’s common equity tier 1 cap- pretax net unrealized gains on avail- ital, additional tier 1 capital, or tier 2 able-for-sale preferred stock classified capital, the OCC will make its decision as an equity security under GAAP and publicly available, including a brief de- available-for-sale equity exposures. scription of the material terms of the (6) Notwithstanding the criteria for regulatory capital element and the ra- tier 2 capital instruments referenced tionale for the determination. above, an instrument with terms that [78 FR 62157, 62273, Oct. 11, 2013, as amended provide that the instrument may be at 84 FR 4238, Feb. 14, 2019; 84 FR 35249, July called earlier than five years upon the 22, 2019] occurrence of a rating agency event does not violate the criterion in para- § 3.21 Minority interest. graph (d)(1)(v) of this section provided (a)(1) Applicability. For purposes of that the instrument was issued and in- § 3.20, a national bank or Federal sav- cluded in a national bank’s or Federal ings association that is not an ad- savings association’s tier 1 or tier 2 vanced approaches national bank or capital prior to January 1, 2014, and Federal savings association is subject that such instrument satisfies all other to the minority interest limitations in criteria under this paragraph (d). this paragraph (a) if a consolidated (e) OCC approval of a capital element. subsidiary of the national bank or Fed- (1) A national bank or Federal savings eral savings association has issued reg- association must receive OCC prior ap- ulatory capital that is not owned by proval to include a capital element (as the national bank or Federal savings listed in this section) in its common association. equity tier 1 capital, additional tier 1 (2) Common equity tier 1 minority inter- capital, or tier 2 capital unless the ele- est includable in the common equity tier 1 ment: capital of the national bank or Federal (i) Was included in a national bank’s savings association. The amount of com- or Federal savings association’s tier 1 mon equity tier 1 minority interest capital or tier 2 capital prior to May 19, that a national bank or Federal sav- 2010 in accordance with the OCC’s risk- ings association may include in com- based capital rules that were effective mon equity tier 1 capital must be no as of that date and the underlying in- greater than 10 percent of the sum of strument may continue to be included all common equity tier 1 capital ele- under the criteria set forth in this sec- ments of the national bank or Federal tion; or savings association (not including the (ii) Is equivalent, in terms of capital common equity tier 1 minority interest quality and ability to absorb losses itself), less any common equity tier 1 with respect to all material terms, to a capital regulatory adjustments and de- regulatory capital element the OCC deductions in accordance with § 3.22(a) termined may be included in regu- and (b). (3) Tier 1 minority interest includable in 19 Public Law 111–240; 124 Stat. 2504 (2010). the tier 1 capital of the national bank or 20 Public Law 110–343, 122 Stat. 3765 (2008). Federal savings association. The amount

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of tier 1 minority interest that a na- (3) Common equity tier 1 minority inter- tional bank or Federal savings associa- est includable in the common equity tier 1 tion may include in tier 1 capital must capital of the national bank or Federal be no greater than 10 percent of the savings association. For each consoli- sum of all tier 1 capital elements of the dated subsidiary of an advanced ap- national bank or Federal savings asso- proaches national bank or Federal sav- ciation (not including the tier 1 minor- ings association, the amount of com- ity interest itself), less any tier 1 cap- mon equity tier 1 minority interest the ital regulatory adjustments and deduc- advanced approaches national bank or tions in accordance with § 3.22(a) and Federal savings association may in- (b). clude in common equity tier 1 capital (4) Total capital minority interest in- is equal to: cludable in the total capital of the na- (i) The common equity tier 1 minor- tional bank or Federal savings associa- ity interest of the subsidiary; minus tion. The amount of total capital mi- (ii) The percentage of the subsidi- nority interest that a national bank or ary’s common equity tier 1 capital that Federal savings association may in- is not owned by the advanced ap- clude in total capital must be no great- proaches national bank or Federal sav- er than 10 percent of the sum of all ings association, multiplied by the dif- total capital elements of the national ference between the common equity bank or Federal savings association tier 1 capital of the subsidiary and the (not including the total capital minor- lower of: ity interest itself), less any total cap- (A) The amount of common equity ital regulatory adjustments and deduc- tier 1 capital the subsidiary must hold, tions in accordance with § 3.22(a) and or would be required to hold pursuant (b). to this paragraph (b), to avoid restrictions on distributions and discre- (b)(1) Applicability. For purposes of tionary bonus payments under § 3.11 or § 3.20, an advanced approaches national equivalent standards established by the bank or Federal savings association is subsidiary’s home country supervisor; subject to the minority interest limita- or tions in this paragraph (b) if: (B)(1) The standardized total risk- (i) A consolidated subsidiary of the weighted assets of the advanced ap- advanced approaches national bank or proaches national bank or Federal sav- Federal savings association has issued ings association that relate to the sub- regulatory capital that is not owned by sidiary multiplied by the national bank or Federal savings (2) The common equity tier 1 capital association; and ratio the subsidiary must maintain to (ii) For each relevant regulatory cap- avoid restrictions on distributions and ital ratio of the consolidated sub- discretionary bonus payments under sidiary, the ratio exceeds the sum of § 3.11 or equivalent standards estab- the subsidiary’s minimum regulatory lished by the subsidiary’s home coun- capital requirements plus its capital try supervisor. conservation buffer. (4) Tier 1 minority interest includable in (2) Difference in capital adequacy the tier 1 capital of the advanced ap- standards at the subsidiary level. For proaches national bank or Federal sav- purposes of the minority interest cal- ings association. For each consolidated culations in this section, if the consoli- subsidiary of the advanced approaches dated subsidiary issuing the capital is national bank or Federal savings asso- not subject to capital adequacy stand- ciation, the amount of tier 1 minority ards similar to those of the advanced interest the advanced approaches na- approaches national bank or Federal tional bank or Federal savings associa- savings association, the advanced ap- tion may include in tier 1 capital is proaches national bank or Federal sav- equal to: ings association must assume that the (i) The tier 1 minority interest of the capital adequacy standards of the ad- subsidiary; minus vanced approaches national bank or (ii) The percentage of the subsidi- Federal savings association apply to ary’s tier 1 capital that is not owned by the subsidiary. the advanced approaches national bank

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or Federal savings association multi- tionary bonus payments under § 3.11 or plied by the difference between the tier equivalent standards established by the 1 capital of the subsidiary and the subsidiary’s home country supervisor. lower of: [84 FR 35249, July 22, 2019] (A) The amount of tier 1 capital the subsidiary must hold, or would be re- § 3.22 Regulatory capital adjustments quired to hold pursuant to this para- and deductions. graph (b), to avoid restrictions on dis- (a) Regulatory capital deductions from tributions and discretionary bonus common equity tier 1 capital. A national payments under § 3.11 or equivalent bank or Federal savings association standards established by the subsidi- must deduct from the sum of its com- ary’s home country supervisor, or mon equity tier 1 capital elements the (B)(1) The standardized total risk- items set forth in this paragraph (a): weighted assets of the advanced ap- (1)(i) Goodwill, net of associated de- proaches national bank or Federal sav- ferred tax liabilities (DTLs) in accord- ings association that relate to the sub- ance with paragraph (e) of this section; sidiary multiplied by and (2) The tier 1 capital ratio the sub- (ii) For an advanced approaches na- sidiary must maintain to avoid restric- tional bank or Federal savings associations on distributions and discretion, goodwill that is embedded in the tionary bonus payments under § 3.11 or valuation of a significant investment equivalent standards established by the in the capital of an unconsolidated fi- subsidiary’s home country supervisor. nancial institution in the form of com- (5) Total capital minority interest in- mon stock (and that is reflected in the cludable in the total capital of the na- consolidated financial statements of tional bank or Federal savings associa- the advanced approaches national bank tion. For each consolidated subsidiary or Federal savings association), in ac- of the advanced approaches national cordance with paragraph (d) of this sec- bank or Federal savings association, tion; the amount of total capital minority (2) Intangible assets, other than interest the advanced approaches na- MSAs, net of associated DTLs in ac- tional bank or Federal savings associa- cordance with paragraph (e) of this section may include in total capital is tion; equal to: (3) Deferred tax assets (DTAs) that (i) The total capital minority inter- arise from net operating loss and tax est of the subsidiary; minus credit carryforwards net of any related (ii) The percentage of the subsidi- valuation allowances and net of DTLs ary’s total capital that is not owned by in accordance with paragraph (e) of the advanced approaches national bank this section; or Federal savings association multi- (4) Any gain-on-sale in connection plied by the difference between the with a securitization exposure; total capital of the subsidiary and the (5)(i) Any defined benefit pension lower of: fund net asset, net of any associated (A) The amount of total capital the DTL in accordance with paragraph (e) subsidiary must hold, or would be re- of this section, held by a depository in- quired to hold pursuant to this para- stitution holding company. With the graph (b), to avoid restrictions on dis- prior approval of the OCC, this deduc- tributions and discretionary bonus tion is not required for any defined payments under § 3.11 or equivalent benefit pension fund net asset to the standards established by the subsidi- extent the depository institution hold- ary’s home country supervisor, or ing company has unrestricted and un- (B)(1) The standardized total risk- fettered access to the assets in that weighted assets of the advanced ap- fund. proaches national bank or Federal sav- (ii) For an insured depository institu- ings association that relate to the sub- tion, no deduction is required. sidiary multiplied by (iii) A national bank or Federal sav- (2) The total capital ratio the sub- ings association must risk weight any sidiary must maintain to avoid restric- portion of the defined benefit pension tions on distributions and discre- fund asset that is not deducted under

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paragraphs (a)(5)(i) or (a)(5)(ii) of this domestic depository institution, the section as if the national bank or Fed- OCC may, in its sole discretion upon eral savings association directly holds determining that the amount of com- a proportional ownership share of each mon equity tier 1 that would be re- exposure in the defined benefit pension quired would be higher if the assets and fund. liabilities of such subsidiary were con- (6) For an advanced approaches na- solidated with those of the parent Fed- tional bank or Federal savings associa- eral savings association than the tion that has completed the parallel amount that would be required if the run process and that has received noti- parent Federal savings association’s in- fication from the OCC pursuant to vestment were deducted pursuant to § 3.121(d), the amount of expected credit paragraphs (a)(8)(i) and (ii) of this sec- loss that exceeds its eligible credit re- tion, consolidate the assets and liabil- serves; and ities of that subsidiary with those of (7) With respect to a financial sub- the parent Federal savings association sidiary, the aggregate amount of the in calculating the capital adequacy of national bank’s or Federal savings as- the parent Federal savings association, sociation’s outstanding equity invest- regardless of whether the subsidiary ment, including retained earnings, in would otherwise be an includable sub- its financial subsidiaries (as defined in sidiary as defined in paragraph [12 CFR 5.39 (OCC); 12 CFR 208.77 (a)(8)(iv) of this section. (Board))]. A national bank or Federal (iv) For purposes of this section, the savings association must not consoli- term includable subsidiary means a date the assets and liabilities of a fi- subsidiary of a Federal savings associa- nancial subsidiary with those of the tion that: parent bank, and no other deduction is (A) Is engaged solely in activities not required under paragraph (c) of this impermissible for a national bank; section for investments in the capital (B) Is engaged in activities not per- instruments of financial subsidiaries. missible for a national bank, but only (8)(i) A Federal savings association if acting solely as agent for its cus- must deduct the aggregate amount of tomers and such agency position is its outstanding investments (both eq- clearly documented in the Federal sav- uity and debt) in, and extensions of ings association’s files; credit to, subsidiaries that are not in- (C) Is engaged solely in mortgage- cludable subsidiaries as defined in banking activities; paragraph (a)(8)(iv) of this section and may not consolidate the assets and li- (D)(1) Is itself an insured depository abilities of the subsidiary with those of institution or a company the sole in- the Federal savings association. Any vestment of which is an insured deposi- such deductions shall be deducted from tory institution; and assets and common equity tier 1 except (2) Was acquired by the parent Fed- as provided in paragraphs (a)(8)(ii) and eral savings association prior to May 1, (iii) of this section. 1989; or (ii) If a Federal savings association (E) Was a subsidiary of any Federal has any investments (both debt and eq- savings association existing as a Fed- uity) in, or extensions or credit to, one eral savings association on August 9, or more subsidiaries engaged in any ac- 1989: tivity that would not fall within the (1) That was chartered prior to Octo- scope of activities in which includable ber 15, 1982, as a savings bank or a co- subsidiaries as defined in paragraph operative bank under state law; or (a)(8)(iv) of this section may engage, it (2) That acquired its principal assets must deduct such investments and ex- from an association that was chartered tensions of credit from assets and, prior to October 15, 1982, as a savings thus, common equity tier 1 in accord- bank or a cooperative bank under state ance with paragraph (a)(8)(i) of this law. section. (b) Regulatory adjustments to common (iii) If a Federal savings association equity tier 1 capital. (1) A national bank holds a subsidiary (either directly or or Federal savings association must ad- through a subsidiary) that is itself a just the sum of common equity tier 1

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capital elements pursuant to the re- (B) Subtract any net unrealized quirements set forth in this paragraph losses on available-for-sale preferred (b). Such adjustments to common eq- stock classified as an equity security uity tier 1 capital must be made net of under GAAP and available-for-sale eq- the associated deferred tax effects. uity exposures; (i) A national bank or Federal sav- (C) Subtract any accumulated net ings association that makes an AOCI gains and add any accumulated net opt-out election (as defined in para- losses on cash flow hedges; graph (b)(2) of this section), must make (D) Subtract any amounts recorded the adjustments required under in AOCI attributed to defined benefit § 3.22(b)(2)(i). postretirement plans resulting from (ii) A national bank or Federal sav- the initial and subsequent application ings association that is an advanced of the relevant GAAP standards that approaches national bank or Federal pertain to such plans (excluding, at the savings association, and a national national bank’s or Federal savings as- bank or Federal savings association sociation’s option, the portion relating that has not made an AOCI opt-out to pension assets deducted under para- election (as defined in paragraph (b)(2) graph (a)(5) of this section); and of this section), must deduct any accu- (E) Subtract any net unrealized gains mulated net gains and add any accu- and add any net unrealized losses on mulated net losses on cash flow hedges held-to-maturity securities that are in- included in AOCI that relate to the cluded in AOCI. hedging of items that are not recog- (ii) A national bank or Federal sav- nized at fair value on the balance ings association that is not an ad- sheet. vanced approaches national bank or (iii) A national bank or Federal sav- Federal savings association must make ings association must deduct any net its AOCI opt-out election in the Call gain and add any net loss related to Report: changes in the fair value of liabilities (A) If the national bank or Federal that are due to changes in the national savings association is a Category III bank’s or Federal savings association’s national bank or Federal savings asso- own credit risk. An advanced ap- ciation, during the first reporting pe- proaches national bank or Federal sav- riod after the national bank or Federal ings association must deduct the dif- savings association meets the defini- ference between its credit spread pre- tion of a Category III national bank or mium and the risk-free rate for deriva- Federal savings association in § 3.2; or tives that are liabilities as part of this (B) If the national bank or Federal adjustment. savings association is not a Category (2) AOCI opt-out election. (i) A na- III national bank or Federal savings as- tional bank or Federal savings associa- sociation, during the first reporting pe- tion that is not an advanced ap- riod after the national bank or Federal proaches national bank or Federal sav- savings association is required to com- ings association may make a one-time ply with subpart A of this part as set election to opt out of the requirement forth in § 3.1(f). to include all components of AOCI (iii) With respect to a national bank (with the exception of accumulated net or Federal savings association that is gains and losses on cash flow hedges re- not an advanced approaches national lated to items that are not fair-valued bank or Federal savings association, on the balance sheet) in common eq- each of its subsidiary banking organi- uity tier 1 capital (AOCI opt-out elec- zations that is subject to regulatory tion). A national bank or Federal sav- capital requirements issued by the ings association that makes an AOCI Board of Governors of the Federal Re- opt-out election in accordance with serve, the Federal Deposit Insurance this paragraph (b)(2) must adjust com- Corporation, or the Office of the Comp- mon equity tier 1 capital as follows: troller of the Currency 21 must elect the (A) Subtract any net unrealized gains and add any net unrealized losses on 21 These rules include the regulatory cap- available-for-sale securities; ital requirements set forth at 12 CFR part 3

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same option as the national bank or ments 23—(1) Investment in the national Federal savings association pursuant bank’s or Federal savings association’s to this paragraph (b)(2). own capital instruments. A national (iv) With prior notice to the OCC, a bank or Federal savings association national bank or Federal savings asso- must deduct an investment in the na- ciation resulting from a merger, acqui- tional bank’s or Federal savings asso- sition, or purchase transaction and ciation’s own capital instruments as that is not an advanced approaches na- follows: tional bank or Federal savings associa- (i) A national bank or Federal sav- tion may change its AOCI opt-out elec- ings association must deduct an invest- tion in its Call Report filed for the first ment in the national bank’s or Federal reporting period after the date required savings association’s own common for such national bank or Federal sav- stock instruments from its common eq- ings association to comply with sub- uity tier 1 capital elements to the ex- part A of this part as set forth in § 3.1(f) tent such instruments are not excluded if: from regulatory capital under (A) Other than as set forth in para- § 3.20(b)(1); graph (b)(2)(iv)(C) of this section, the (ii) A national bank or Federal sav- merger, acquisition, or purchase trans- ings association must deduct an invest- action involved the acquisition or pur- ment in the national bank’s or Federal chase of all or substantially all of ei- savings association’s own additional ther the assets or voting stock of an- tier 1 capital instruments from its ad- other banking organization that is sub- ditional tier 1 capital elements; and ject to regulatory capital requirements (iii) A national bank or Federal sav- issued by the Board of Governors of the ings association must deduct an invest- Federal Reserve, the Federal Deposit ment in the national bank’s or Federal Insurance Corporation, or the Office of savings association’s own tier 2 capital the Comptroller of the Currency; 22 instruments from its tier 2 capital ele- (B) Prior to the merger, acquisition, ments. or purchase transaction, only one of (2) Corresponding deduction approach. the banking organizations involved in For purposes of subpart C of this part, the transaction made an AOCI opt-out the corresponding deduction approach election under this section; and is the methodology used for the deduc- (C) A national bank or Federal sav- tions from regulatory capital related ings association may, with the prior to reciprocal cross holdings (as de- approval of the OCC, change its AOCI scribed in paragraph (c)(3) of this sec- opt-out election under this paragraph tion), investments in the capital of un- (b) in the case of a merger, acquisition, consolidated financial institutions for or purchase transaction that meets the a national bank or Federal savings as- requirements set forth at paragraph sociation that is not an advanced ap- (b)(2)(iv)(B) of this section, but does proaches national bank or Federal sav- not meet the requirements of para- ings association (as described in paragraph (b)(2)(iv)(A). In making such a graph (c)(4) of this section), non-sig- determination, the OCC may consider nificant investments in the capital of the terms of the merger, acquisition, or unconsolidated financial institutions purchase transaction, as well as the ex- for an advanced approaches national tent of any changes to the risk profile, bank or Federal savings association (as complexity, and scope of operations of described in paragraph (c)(5) of this the national bank or Federal savings section), and non-common stock sig- association resulting from the merger, nificant investments in the capital of acquisition, or purchase transaction. unconsolidated financial institutions (c) Deductions from regulatory capital for an advanced approaches national related to investments in capital instru- bank or Federal savings association (as

(OCC); 12 CFR part 225 (Board); 12 CFR part 23 The national bank or Federal savings as- 325, and 12 CFR part 390 (FDIC). sociation must calculate amounts deducted 22 These rules include the regulatory cap- under paragraphs (c) through (f) of this sec- ital requirements set forth at 12 CFR part 3 tion after it calculates the amount of ALLL (OCC); 12 CFR part 225 (Board); 12 CFR part or AACL, as applicable, includable in tier 2 325, and 12 CFR part 390 (FDIC). capital under § 3.20(d)(3).

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described in paragraph (c)(6) of this defined in § 3.300(c)), the national bank section). Under the corresponding de- or Federal savings association must duction approach, a national bank or treat the instrument as: Federal savings association must make (A) An additional tier 1 capital in- deductions from the component of cap- strument if such instrument was in- ital for which the underlying instru- cluded in the issuer’s tier 1 capital ment would qualify if it were issued by prior to May 19, 2010; or the national bank or Federal savings (B) A tier 2 capital instrument if association itself, as described in para- such instrument was included in the graphs (c)(2)(i) through (iii) of this sec- issuer’s tier 2 capital (but not includ- tion. If the national bank or Federal able in tier 1 capital) prior to May 19, savings association does not have a suf- 2010. ficient amount of a specific component (3) Reciprocal cross holdings in the cap- of capital to effect the required deduc- ital of financial institutions. A national tion, the shortfall must be deducted ac- bank or Federal savings association cording to paragraph (f) of this section. must deduct investments in the capital (i) If an investment is in the form of of other financial institutions it holds an instrument issued by a financial in- reciprocally, where such reciprocal stitution that is not a regulated finan- cross holdings result from a formal or cial institution, the national bank or informal arrangement to swap, ex- Federal savings association must treat change, or otherwise intend to hold the instrument as: each other’s capital instruments, by (A) A common equity tier 1 capital applying the corresponding deduction instrument if it is common stock or approach. represents the most subordinated claim (4) Investments in the capital of uncon- in liquidation of the financial institu- solidated financial institutions. A nation; and tional bank or Federal savings associa- (B) An additional tier 1 capital in- tion that is not an advanced ap- strument if it is subordinated to all proaches national bank or Federal sav- creditors of the financial institution ings association must deduct its in- and is senior in liquidation only to vestments in the capital of unconsoli- common shareholders. dated financial institutions (as defined (ii) If an investment is in the form of in § 3.2) that exceed 25 percent of the an instrument issued by a regulated fi- sum of the national bank’s or Federal nancial institution and the instrument savings association’s common equity does not meet the criteria for common tier 1 capital elements minus all deduc- equity tier 1, additional tier 1 or tier 2 tions from and adjustments to common capital instruments under § 3.20, the equity tier 1 capital elements required national bank or Federal savings asso- under paragraphs (a) through (c)(3) of ciation must treat the instrument as: this section by applying the cor- (A) A common equity tier 1 capital responding deduction approach.24 The instrument if it is common stock in- deductions described in this section are cluded in GAAP equity or represents net of associated DTLs in accordance the most subordinated claim in liq- with paragraph (e) of this section. In uidation of the financial institution; addition, a national bank or Federal (B) An additional tier 1 capital in- savings association that underwrites a strument if it is included in GAAP eq- failed underwriting, with the prior uity, subordinated to all creditors of the financial institution, and senior in 24 With the prior written approval of the a receivership, insolvency, liquidation, OCC, for the period of time stipulated by the or similar proceeding only to common OCC, a national bank or Federal savings as- shareholders; and sociation that is not an advanced approaches (C) A tier 2 capital instrument if it is national bank or Federal savings association not included in GAAP equity but con- is not required to deduct an investment in sidered regulatory capital by the pri- the capital of an unconsolidated financial institution pursuant to this paragraph if the mary supervisor of the financial insti- financial institution is in distress and if such tution. investment is made for the purpose of pro- (iii) If an investment is in the form of viding financial support to the financial in- a non-qualifying capital instrument (as stitution, as determined by the OCC.

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written approval of the OCC, for the pe- extent the investment is related to the riod of time stipulated by the OCC, is failed underwriting.27 not required to deduct an investment (ii) The amount to be deducted under in the capital of an unconsolidated fi- this section from a specific capital nancial institution pursuant to this component is equal to: paragraph (c) to the extent the invest- (A) The advanced approaches na- ment is related to the failed under- tional bank’s or Federal savings asso- writing.25 ciation’s non-significant investments (5) Non-significant investments in the in the capital of unconsolidated finan- capital of unconsolidated financial insti- cial institutions exceeding the 10 per- tutions. (i) An advanced approaches na- cent threshold for non-significant in- tional bank or Federal savings associa- vestments, multiplied by tion must deduct its non-significant in- (B) The ratio of the advanced ap- vestments in the capital of unconsoli- proaches national bank’s or Federal dated financial institutions (as defined savings association’s non-significant in § 3.2) that, in the aggregate, exceed investments in the capital of uncon- 10 percent of the sum of the advanced solidated financial institutions in the approaches national bank’s or Federal form of such capital component to the savings association’s common equity advanced approaches national bank’s tier 1 capital elements minus all deduc- or Federal savings association’s total tions from and adjustments to common non-significant investments in uncon- equity tier 1 capital elements required solidated financial institutions. under paragraphs (a) through (c)(3) of (6) Significant investments in the cap- this section (the 10 percent threshold ital of unconsolidated financial institu- for non-significant investments) by ap- tions that are not in the form of common plying the corresponding deduction ap- stock. An advanced approaches national proach.26 The deductions described in bank or Federal savings association this section are net of associated DTLs must deduct its significant invest- in accordance with paragraph (e) of ments in the capital of unconsolidated this section. In addition, an advanced financial institutions that are not in approaches national bank or Federal the form of common stock by applying savings association that underwrites a the corresponding deduction ap- failed underwriting, with the prior proach.28 The deductions described in written approval of the OCC, for the pe- this section are net of associated DTLs riod of time stipulated by the OCC, is in accordance with paragraph (e) of not required to deduct a non-signifi- this section. In addition, with the prior cant investment in the capital of an written approval of the OCC, for the pe- unconsolidated financial institution riod of time stipulated by the OCC, an pursuant to this paragraph (c) to the advanced approaches national bank or

25 Any investments in the capital of uncon- 27 Any non-significant investments in the solidated financial institutions that do not capital of unconsolidated financial institu- exceed the 25 percent threshold for invest- tions that do not exceed the 10 percent ments in the capital of unconsolidated finan- threshold for non-significant investments cial institutions under this section must be under this section must be assigned the ap- assigned the appropriate risk weight under propriate risk weight under subparts D, E, or subparts D or F of this part, as applicable. F of this part, as applicable. 26 With the prior written approval of the 28 With prior written approval of the OCC, OCC, for the period of time stipulated by the for the period of time stipulated by the OCC, OCC, an advanced approaches national bank an advanced approaches national bank or or Federal savings association is not re- Federal savings association is not required quired to deduct a non-significant invest- to deduct a significant investment in the ment in the capital of an unconsolidated fi- capital instrument of an unconsolidated financial institution pursuant to this para- nancial institution in distress which is not graph if the financial institution is in dis- in the form of common stock pursuant to tress and if such investment is made for the this section if such investment is made for purpose of providing financial support to the the purpose of providing financial support to financial institution, as determined by the the financial institution as determined by OCC. the OCC.

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Federal savings association that under- member of a consolidated group for tax writes a failed underwriting is not re- purposes, the amount of DTAs that quired to deduct a significant invest- could be realized through net operating ment in the capital of an unconsoli- loss carrybacks may not exceed the dated financial institution pursuant to amount that the national bank or Fed- this paragraph (c) if such investment is eral savings association could reason- related to such failed underwriting. ably expect to have refunded by its par- (d) MSAs and certain DTAs subject to ent holding company. common equity tier 1 capital deduction (iii) The national bank or Federal thresholds. (1) A national bank or Fed- savings association must deduct from eral savings association that is not an common equity tier 1 capital elements advanced approaches national bank or the amount of MSAs net of associated Federal savings association must make DTLs, in accordance with paragraph (e) deductions from regulatory capital as of this section. described in this paragraph (d)(1). (iv) For purposes of calculating the (i) The national bank or Federal sav- amount of DTAs subject to deduction ings association must deduct from pursuant to paragraph (d)(1) of this sec- common equity tier 1 capital elements tion, a national bank or Federal sav- the amount of each of the items set ings association may exclude DTAs and forth in this paragraph (d)(1) that, indi- DTLs relating to adjustments made to vidually, exceeds 25 percent of the sum common equity tier 1 capital under of the national bank’s or Federal sav- paragraph (b) of this section. A na- ings association’s common equity tier 1 tional bank or Federal savings associa- capital elements, less adjustments to tion that elects to exclude DTAs relat- and deductions from common equity ing to adjustments under paragraph (b) tier 1 capital required under para- of this section also must exclude DTLs graphs (a) through (c)(3) of this section and must do so consistently in all fu- (the 25 percent common equity tier 1 ture calculations. A national bank or 29 capital deduction threshold). Federal savings association may (ii) The national bank or Federal sav- change its exclusion preference only ings association must deduct from after obtaining the prior approval of common equity tier 1 capital elements the OCC. the amount of DTAs arising from tem- (2) An advanced approaches national porary differences that the national bank or Federal savings association bank or Federal savings association must make deductions from regulatory could not realize through net operating capital as described in this paragraph loss carrybacks, net of any related (d)(2). valuation allowances and net of DTLs, (i) An advanced approaches national in accordance with paragraph (e) of bank or Federal savings association this section. A national bank or Fed- must deduct from common equity tier eral savings association is not required 1 capital elements the amount of each to deduct from the sum of its common of the items set forth in this paragraph equity tier 1 capital elements DTAs (d)(2) that, individually, exceeds 10 per- (net of any related valuation allow- cent of the sum of the advanced ap- ances and net of DTLs, in accordance proaches national bank’s or Federal with § 3.22(e)) arising from timing dif- savings association’s common equity ferences that the national bank or Fed- tier 1 capital elements, less adjust- eral savings association could realize through net operating loss carrybacks. ments to and deductions from common The national bank or Federal savings equity tier 1 capital required under association must risk weight these as- paragraphs (a) through (c) of this sec- sets at 100 percent. For a national bank tion (the 10 percent common equity or Federal savings association that is a tier 1 capital deduction threshold). (A) DTAs arising from temporary differences that the advanced approaches 29 The amount of the items in paragraph national bank or Federal savings asso- (d)(1) of this section that is not deducted from common equity tier 1 capital must be ciation could not realize through net included in the risk-weighted assets of the operating loss carrybacks, net of any national bank or Federal savings association related valuation allowances and net of and assigned a 250 percent risk weight. DTLs, in accordance with paragraph (e)

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of this section. An advanced ap- is not required to deduct a significant proaches national bank or Federal sav- investment in the capital of an uncon- ings association is not required to de- solidated financial institution in the duct from the sum of its common eq- form of common stock pursuant to this uity tier 1 capital elements DTAs (net paragraph (d)(2) if such investment is of any related valuation allowances related to such failed underwriting. and net of DTLs, in accordance with (ii) An advanced approaches national § 3.22(e)) arising from timing dif- bank or Federal savings association ferences that the advanced approaches must deduct from common equity tier national bank or Federal savings asso- 1 capital elements the items listed in ciation could realize through net oper- paragraph (d)(2)(i) of this section that ating loss carrybacks. The advanced are not deducted as a result of the ap- approaches national bank or Federal plication of the 10 percent common eq- savings association must risk weight uity tier 1 capital deduction threshold, these assets at 100 percent. For a na- and that, in aggregate, exceed 17.65 per- tional bank or Federal savings associa- cent of the sum of the advanced ap- tion that is a member of a consolidated proaches national bank’s or Federal group for tax purposes, the amount of savings association’s common equity DTAs that could be realized through tier 1 capital elements, minus adjust- net operating loss carrybacks may not ments to and deductions from common exceed the amount that the national equity tier 1 capital required under bank or Federal savings association paragraphs (a) through (c) of this sec- could reasonably expect to have re- tion, minus the items listed in para- funded by its parent holding company. graph (d)(2)(i) of this section (the 15 (B) MSAs net of associated DTLs, in percent common equity tier 1 capital accordance with paragraph (e) of this deduction threshold). Any goodwill section. that has been deducted under para- (C) Significant investments in the graph (a)(1) of this section can be ex- capital of unconsolidated financial included from the significant invest- stitutions in the form of common ments in the capital of unconsolidated stock, net of associated DTLs in ac- financial institutions in the form of 31 cordance with paragraph (e) of this sec- common stock. tion.30 Significant investments in the (iii) For purposes of calculating the capital of unconsolidated financial in- amount of DTAs subject to the 10 and stitutions in the form of common stock 15 percent common equity tier 1 capital subject to the 10 percent common eq- deduction thresholds, an advanced ap- uity tier 1 capital deduction threshold proaches national bank or Federal sav- may be reduced by any goodwill embed- ings association may exclude DTAs and DTLs relating to adjustments made to ded in the valuation of such invest- common equity tier 1 capital under ments deducted by the advanced ap- paragraph (b) of this section. An ad- proaches national bank or Federal sav- vanced approaches national bank or ings association pursuant to paragraph Federal savings association that elects (a)(1) of this section. In addition, with to exclude DTAs relating to adjust- the prior written approval of the OCC, ments under paragraph (b) of this sec- for the period of time stipulated by the tion also must exclude DTLs and must OCC, an advanced approaches national do so consistently in all future calcula- bank or Federal savings association tions. An advanced approaches na- that underwrites a failed underwriting tional bank or Federal savings association may change its exclusion pref- 30 With the prior written approval of the erence only after obtaining the prior OCC, for the period of time stipulated by the OCC, an advanced approaches national bank approval of the OCC. or Federal savings association is not required to deduct a significant investment in 31 The amount of the items in paragraph the capital instrument of an unconsolidated (d)(2) of this section that is not deducted financial institution in distress in the form from common equity tier 1 capital pursuant of common stock pursuant to this section if to this section must be included in the risk- such investment is made for the purpose of weighted assets of the advanced approaches providing financial support to the financial national bank or Federal savings association institution as determined by the OCC. and assigned a 250 percent risk weight.

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(e) Netting of DTLs against assets sub- (4) A national bank or Federal sav- ject to deduction. (1) Except as described ings association may offset DTLs em- in paragraph (e)(3) of this section, net- bedded in the carrying value of a lever- ting of DTLs against assets that are aged lease portfolio acquired in a busi- subject to deduction under this section ness combination that are not recog- is permitted, but not required, if the nized under GAAP against DTAs that following conditions are met: are subject to paragraph (d) of this sec- (i) The DTL is associated with the tion in accordance with this paragraph asset; and (e). (ii) The DTL would be extinguished if (5) A national bank or Federal sav- the associated asset becomes impaired ings association must net DTLs or is derecognized under GAAP. against assets subject to deduction (2) A DTL may only be netted against under this section in a consistent man- a single asset. ner from reporting period to reporting (3) For purposes of calculating the period. A national bank or Federal sav- amount of DTAs subject to the thresh- ings association may change its pref- old deduction in paragraph (d) of this erence regarding the manner in which section, the amount of DTAs that arise it nets DTLs against specific assets from net operating loss and tax credit subject to deduction under this section carryforwards, net of any related valu- only after obtaining the prior approval ation allowances, and of DTAs arising of the OCC. from temporary differences that the (f) Insufficient amounts of a specific national bank or Federal savings asso- regulatory capital component to effect de- ciation could not realize through net ductions. Under the corresponding de- operating loss carrybacks, net of any duction approach, if a national bank or related valuation allowances, may be Federal savings association does not offset by DTLs (that have not been net- have a sufficient amount of a specific ted against assets subject to deduction component of capital to effect the re- pursuant to paragraph (e)(1) of this sec- quired deduction after completing the tion) subject to the conditions set forth deductions required under paragraph in this paragraph (e). (d) of this section, the national bank or (i) Only the DTAs and DTLs that relate to taxes levied by the same tax- Federal savings association must de- ation authority and that are eligible duct the shortfall from the next higher for offsetting by that authority may be (that is, more subordinated) component offset for purposes of this deduction. of regulatory capital. Notwithstanding (ii) The amount of DTLs that the na- any other provision of this section, a tional bank or Federal savings associa- qualifying community banking organi- tion nets against DTAs that arise from zation (as defined in § 3.12) that has net operating loss and tax credit elected to use the community bank le- carryforwards, net of any related valu- verage ratio framework pursuant to ation allowances, and against DTAs § 3.12 is not required to deduct any arising from temporary differences shortfall of tier 2 capital from its addi- that the national bank or Federal sav- tional tier 1 capital or common equity ings association could not realize tier 1 capital. through net operating loss carrybacks, (g) Treatment of assets that are de- net of any related valuation allow- ducted. A national bank or Federal sav- ances, must be allocated in proportion ings association must exclude from to the amount of DTAs that arise from standardized total risk-weighted assets net operating loss and tax credit and, as applicable, advanced ap- carryforwards (net of any related valu- proaches total risk-weighted assets any ation allowances, but before any offset- item that is required to be deducted ting of DTLs) and of DTAs arising from from regulatory capital. temporary differences that the na- (h) Net long position. (1) For purposes tional bank or Federal savings associa- of calculating an investment in the nation could not realize through net oper- tional bank’s or Federal savings asso- ating loss carrybacks (net of any re- ciation’s own capital instrument and lated valuation allowances, but before an investment in the capital of an un- any offsetting of DTLs), respectively. consolidated financial institution

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under this section, the net long posi- ments in the capital of unconsolidated tion is the gross long position in the financial institutions. underlying instrument determined in (iv) For a synthetic exposure, the accordance with paragraph (h)(2) of amount of the national bank’s or Fed- this section, as adjusted to recognize a eral savings association’s loss on the short position in the same instrument exposure if the reference capital in- calculated in accordance with para- strument were to have a value of zero. graph (h)(3) of this section. (3) Adjustments to reflect a short posi- (2) Gross long position. The gross long tion. In order to adjust the gross long position is determined as follows: position to recognize a short position (i) For an equity exposure that is in the same instrument, the following held directly, the adjusted carrying criteria must be met: value as that term is defined in (i) The maturity of the short position § 3.51(b); must match the maturity of the long (ii) For an exposure that is held di- position, or the short position has a re- rectly and is not an equity exposure or sidual maturity of at least one year a securitization exposure, the exposure (maturity requirement); or amount as that term is defined in § 3.2; (ii) For a position that is a trading asset or trading liability (whether on- (iii) For an indirect exposure, the na- or off-balance sheet) as reported on the tional bank’s or Federal savings asso- national bank’s or Federal savings as- ciation’s carrying value of the invest- sociation’s Call Report, if the national ment in the investment fund, provided bank or Federal savings association that, alternatively: has a contractual right or obligation to (A) A national bank or Federal sav- sell the long position at a specific ings association may, with the prior point in time and the counterparty to approval of the Board, use a conserv- the contract has an obligation to pur- ative estimate of the amount of its in- chase the long position if the national vestment in the national bank’s or bank or Federal savings association ex- Federal savings association’s own cap- ercises its right to sell, this point in ital instruments or its investment in time may be treated as the maturity of the capital of an unconsolidated finan- the long position such that the matu- cial institution held through a position rity of the long position and short posi- in an index; or tion are deemed to match for purposes (B) A national bank or Federal sav- of the maturity requirement, even if ings association may calculate the the maturity of the short position is gross long position for investments in less than one year; and the national bank’s or Federal savings (iii) For an investment in the na- association’s own capital instruments tional bank’s or Federal savings asso- or investments in the capital of an un- ciation’s own capital instrument under consolidated financial institution by paragraph (c)(1) of this section or an multiplying the national bank’s or investment in the capital of an uncon- Federal savings association’s carrying solidated financial institution under value of its investment in the invest- paragraphs (c) and (d) of this section: ment fund by either: (A) A national bank or Federal sav- (1) The highest stated investment ings association may only net a short limit (in percent) for investments in position against a long position in an the national bank’s or Federal savings investment in the national bank’s or association’s own capital instruments Federal savings association’s own cap- or investments in the capital of uncon- ital instrument under paragraph (c) of solidated financial institutions as stat- this section if the short position in- ed in the prospectus, partnership agree- volves no counterparty credit risk. ment, or similar contract defining per- (B) A gross long position in an in- missible investments of the investment vestment in the national bank’s or fund; or Federal savings association’s own cap- (2) The investment fund’s actual ital instrument or an investment in holdings of investments in the national the capital of an unconsolidated finan- bank’s or Federal savings association’s cial institution resulting from a posi- own capital instruments or invest- tion in an index may be netted against

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a short position in the same index. RISK-WEIGHTED ASSETS FOR GENERAL Long and short positions in the same CREDIT RISK index without maturity dates are considered to have matching maturities. § 3.31 Mechanics for calculating risk- (C) A short position in an index that weighted assets for general credit is hedging a long cash or synthetic po- risk. sition in an investment in the national (a) General risk-weighting requirements. bank’s or Federal savings association’s A national bank or Federal savings as- own capital instrument or an invest- sociation must apply risk weights to ment in the capital of an unconsoli- its exposures as follows: dated financial institution can be de- composed to provide recognition of the (1) A national bank or Federal sav- hedge. More specifically, the portion of ings association must determine the the index that is composed of the same exposure amount of each on-balance underlying instrument that is being sheet exposure, each OTC derivative hedged may be used to offset the long contract, and each off-balance sheet position if both the long position being commitment, trade and transaction-re- hedged and the short position in the lated contingency, guarantee, repo- index are reported as a trading asset or style transaction, financial standby trading liability (whether on- or off- letter of credit, forward agreement, or balance sheet) on the national bank’s other similar transaction that is not: or Federal savings association’s Call (i) An unsettled transaction subject Report, and the hedge is deemed effec- to § 3.38; tive by the national bank’s or Federal (ii) A cleared transaction subject to savings association’s internal control § 3.35; processes, which have not been found (iii) A default fund contribution sub- to be inadequate by the OCC. ject to § 3.35; [78 FR 62157, 62273, Oct. 11, 2013, as amended (iv) A securitization exposure subject at 80 FR 41415, July 15, 2015; 84 FR 4238, Feb. to §§ 3.41 through 3.45; or 14, 2019; 84 FR 35250, July 22, 2019; 84 FR 59265, Nov. 1, 2019; 84 FR 61793, Nov. 13, 2019] (v) An equity exposure (other than an equity OTC derivative contract) sub- §§ 3.23–3.29 [Reserved] ject to §§ 3.51 through 3.53. (2) The national bank or Federal sav- Subpart D—Risk-Weighted ings association must multiply each Assets—Standardized Approach exposure amount by the risk weight appropriate to the exposure based on SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, un- the exposure type or counterparty, eli- less otherwise noted. gible guarantor, or financial collateral to determine the risk-weighted asset § 3.30 Applicability. amount for each exposure. (a) This subpart sets forth meth- (b) Total risk-weighted assets for odologies for determining risk-weight- general credit risk equals the sum of ed assets for purposes of the generally the risk-weighted asset amounts cal- applicable risk-based capital require- culated under this section. ments for all national banks or Federal savings associations. § 3.32 General risk weights. (b) Notwithstanding paragraph (a) of (a) Sovereign exposures—(1) Exposures this section, a market risk national to the U.S. government. (i) Notwith- bank or Federal savings association standing any other requirement in this must exclude from its calculation of risk-weighted assets under this subpart subpart, a national bank or Federal the risk-weighted asset amounts of all savings association must assign a zero covered positions, as defined in subpart percent risk weight to: F of this part (except foreign exchange (A) An exposure to the U.S. govern- positions that are not trading posi- ment, its central bank, or a U.S. gov- tions, OTC derivative positions, cleared ernment agency; and transactions, and unsettled transactions).

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(B) The portion of an exposure that is lent amount of liabilities in that cur- directly and unconditionally guaran- rency; and teed by the U.S. government, its cen- (iii) The risk weight is not lower tral bank, or a U.S. government agen- than the risk weight that the home cy. This includes a deposit or other ex- country supervisor allows national posure, or the portion of a deposit or banks or Federal savings associations other exposure, that is insured or oth- under its jurisdiction to assign to the erwise unconditionally guaranteed by same exposures to the sovereign. the FDIC or National Credit Union Ad- (4) Exposures to a non-OECD member ministration. sovereign with no CRC. Except as pro- (ii) A national bank or Federal sav- vided in paragraphs (a)(3), (a)(5) and ings association must assign a 20 per- (a)(6) of this section, a national bank cent risk weight to the portion of an or Federal savings association must as- exposure that is conditionally guaran- sign a 100 percent risk weight to an ex- teed by the U.S. government, its cen- posure to a sovereign if the sovereign tral bank, or a U.S. government agen- does not have a CRC. cy. This includes an exposure, or the (5) Exposures to an OECD member sov- portion of an exposure, that is condi- ereign with no CRC. Except as provided tionally guaranteed by the FDIC or Na- in paragraph (a)(6) of this section, a national Credit Union Administration. tional bank or Federal savings associa- (iii) A national bank or Federal sav- tion must assign a 0 percent risk ings association must assign a zero per- weight to an exposure to a sovereign cent risk weight to a Paycheck Protec- that is a member of the OECD if the tion Program covered loan as defined sovereign does not have a CRC. in section 7(a)(36) of the Small Business (6) Sovereign default. A national bank Act (15 U.S.C. 636(a)(36)). or Federal savings association must as- (2) Other sovereign exposures. In ac- sign a 150 percent risk weight to a sov- cordance with Table 1 to § 3.32, a na- ereign exposure immediately upon de- tional bank or Federal savings associa- termining that an event of sovereign tion must assign a risk weight to a sov- default has occurred, or if an event of ereign exposure based on the CRC ap- sovereign default has occurred during plicable to the sovereign or the the previous five years. sovereign’s OECD membership status if (b) Certain supranational entities and there is no CRC applicable to the sov- multilateral development banks (MDBs). ereign. A national bank or Federal savings association must assign a zero percent TABLE 1 TO § 3.32—RISK WEIGHTS FOR risk weight to an exposure to the Bank SOVEREIGN EXPOSURES for International Settlements, the Eu- Risk weight ropean Central Bank, the European (in percent) Commission, the International Mone- CRC: tary Fund, the European Stability 0–1 ...... 0 Mechanism, the European Financial 2 ...... 20 Stability Facility, or an MDB. 3 ...... 50 4–6 ...... 100 (c) Exposures to GSEs. (1) A national 7 ...... 150 bank or Federal savings association OECD Member with No CRC ...... 0 must assign a 20 percent risk weight to Non-OECD Member with No CRC ...... 100 Sovereign Default ...... 150 an exposure to a GSE other than an equity exposure or preferred stock. (3) Certain sovereign exposures. Not- (2) A national bank or Federal sav- withstanding paragraph (a)(2) of this ings association must assign a 100 per- section, a national bank or Federal cent risk weight to preferred stock savings association may assign to a issued by a GSE. sovereign exposure a risk weight that (d) Exposures to depository institutions, is lower than the applicable risk foreign banks, and credit unions—(1) Ex- weight in Table 1 to § 3.32 if: posures to U.S. depository institutions (i) The exposure is denominated in and credit unions. A national bank or the sovereign’s currency; Federal savings association must as- (ii) The national bank or Federal sav- sign a 20 percent risk weight to an ex- ings association has at least an equiva- posure to a depository institution or

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credit union that is organized under (v) A national bank or Federal sav- the laws of the United States or any ings association must assign a 150 per- state thereof, except as otherwise pro- cent risk weight to an exposure to a vided under paragraph (d)(3) of this sec- foreign bank immediately upon deter- tion. mining that an event of sovereign de- (2) Exposures to foreign banks. (i) Ex- fault has occurred in the bank’s home cept as otherwise provided under para- country, or if an event of sovereign de- graphs (d)(2)(iii), (d)(2)(v), and (d)(3) of fault has occurred in the foreign bank’s this section, a national bank or Fed- home country during the previous five eral savings association must assign a years. risk weight to an exposure to a foreign (3) A national bank or Federal sav- bank, in accordance with Table 2 to ings association must assign a 100 per- § 3.32, based on the CRC that cor- cent risk weight to an exposure to a fi- responds to the foreign bank’s home nancial institution if the exposure may country or the OECD membership sta- be included in that financial institu- tus of the foreign bank’s home country tion’s capital unless the exposure is: if there is no CRC applicable to the for- (i) An equity exposure; eign bank’s home country. (ii) A significant investment in the capital of an unconsolidated financial TABLE 2 TO § 3.32—RISK WEIGHTS FOR institution in the form of common EXPOSURES TO FOREIGN BANKS stock pursuant to § 3.22(d)(2)(i)(c); (iii) Deducted from regulatory cap- Risk weight (in percent) ital under § 3.22; or (iv) Subject to a 150 percent risk CRC: weight under paragraph (d)(2)(iv) or 0–1 ...... 20 Table 2 of paragraph (d)(2) of this sec- 2 ...... 50 tion. 3 ...... 100 4–7 ...... 150 (e) Exposures to public sector entities OECD Member with No CRC ...... 20 (PSEs)—(1) Exposures to U.S. PSEs. (i) A Non-OECD Member with No CRC ...... 100 national bank or Federal savings asso- Sovereign Default ...... 150 ciation must assign a 20 percent risk weight to a general obligation exposure (ii) A national bank or Federal sav- to a PSE that is organized under the ings association must assign a 20 per- laws of the United States or any state cent risk weight to an exposure to a or political subdivision thereof. foreign bank whose home country is a (ii) A national bank or Federal sav- member of the OECD and does not have ings association must assign a 50 per- a CRC. cent risk weight to a revenue obliga- (iii) A national bank or Federal sav- tion exposure to a PSE that is orga- ings association must assign a 20 per- nized under the laws of the United cent risk-weight to an exposure that is States or any state or political subdivi- a self-liquidating, trade-related contin- sion thereof. gent item that arises from the move- (2) Exposures to foreign PSEs. (i) Ex- ment of goods and that has a maturity cept as provided in paragraphs (e)(1) of three months or less to a foreign and (e)(3) of this section, a national bank whose home country has a CRC of bank or Federal savings association 0, 1, 2, or 3, or is an OECD member with must assign a risk weight to a general no CRC. obligation exposure to a PSE, in ac- (iv) A national bank or Federal sav- cordance with Table 3 to § 3.32, based on ings association must assign a 100 per- the CRC that corresponds to the PSE’s cent risk weight to an exposure to a home country or the OECD member- foreign bank whose home country is ship status of the PSE’s home country not a member of the OECD and does if there is no CRC applicable to the not have a CRC, with the exception of PSE’s home country. self-liquidating, trade-related contin- (ii) Except as provided in paragraphs gent items that arise from the move- (e)(1) and (e)(3) of this section, a na- ment of goods, and that have a matu- tional bank or Federal savings associa- rity of three months or less, which may tion must assign a risk weight to a rev- be assigned a 20 percent risk weight. enue obligation exposure to a PSE, in

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accordance with Table 4 to § 3.32, based eral savings association must assign a on the CRC that corresponds to the 100 percent risk weight to an exposure PSE’s home country; or the OECD to a PSE whose home country is not a membership status of the PSE’s home member of the OECD and does not have country if there is no CRC applicable a CRC. to the PSE’s home country. (6) A national bank or Federal sav- (3) A national bank or Federal savings association must assign a 150 per- ings association may assign a lower cent risk weight to a PSE exposure im- risk weight than would otherwise apply mediately upon determining that an under Tables 3 or 4 to § 3.32 to an expo- event of sovereign default has occurred sure to a foreign PSE if: in a PSE’s home country or if an event (i) The PSE’s home country super- of sovereign default has occurred in the visor allows banks under its jurisdic- PSE’s home country during the pre- tion to assign a lower risk weight to vious five years. such exposures; and (f) Corporate exposures. (1) A national (ii) The risk weight is not lower than bank or Federal savings association the risk weight that corresponds to the must assign a 100 percent risk weight PSE’s home country in accordance to all its corporate exposures, except as with Table 1 to § 3.32. provided in paragraphs (f)(2) and (f)(3) TABLE 3 TO § 3.32—RISK WEIGHTS FOR NON- of this section. U.S. PSE GENERAL OBLIGATIONS (2) A national bank or Federal savings association must assign a 2 per- Risk weight cent risk weight to an exposure to a (in percent) QCCP arising from the national bank CRC: or Federal savings association posting 0–1 ...... 20 cash collateral to the QCCP in connec- 2 ...... 50 3 ...... 100 tion with a cleared transaction that 4–7 ...... 150 meets the requirements of OECD Member with No CRC ...... 20 § 3.35(b)(3)(i)(A) and a 4 percent risk Non-OECD Member with No CRC ...... 100 Sovereign Default ...... 150 weight to an exposure to a QCCP arising from the national bank or Federal savings association posting cash collat- TABLE 4 TO § 3.32—RISK WEIGHTS FOR NON- eral to the QCCP in connection with a U.S. PSE REVENUE OBLIGATIONS cleared transaction that meets the re- Risk weight quirements of § 3.35(b)(3)(i)(B). (in percent) (3) A national bank or Federal sav- CRC: ings association must assign a 2 per- 0–1 ...... 50 cent risk weight to an exposure to a 2–3 ...... 100 4–7 ...... 150 QCCP arising from the national bank OECD Member with No CRC ...... 50 or Federal savings association posting Non-OECD Member with No CRC ...... 100 cash collateral to the QCCP in connec- Sovereign Default ...... 150 tion with a cleared transaction that (4) Exposures to PSEs from an OECD meets the requirements of § 3.35(c)(3)(i). member sovereign with no CRC. (i) A na- (g) Residential mortgage exposures. (1) tional bank or Federal savings associa- A national bank or Federal savings as- tion must assign a 20 percent risk sociation must assign a 50 percent risk weight to a general obligation exposure weight to a first-lien residential mort- to a PSE whose home country is an gage exposure that: OECD member sovereign with no CRC. (i) Is secured by a property that is ei- (ii) A national bank or Federal sav- ther owner-occupied or rented; ings association must assign a 50 per- (ii) Is made in accordance with pru- cent risk weight to a revenue obliga- dent underwriting standards, including tion exposure to a PSE whose home standards relating to the loan amount country is an OECD member sovereign as a percent of the appraised value of with no CRC. the property; (5) Exposures to PSEs whose home (iii) Is not 90 days or more past due country is not an OECD member sovereign or carried in nonaccrual status; and with no CRC. A national bank or Fed- (iv) Is not restructured or modified.

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(2) A national bank or Federal sav- weight to the collateralized portion of ings association must assign a 100 per- a past due exposure based on the risk cent risk weight to a first-lien residen- weight that applies under § 3.37 if the tial mortgage exposure that does not collateral meets the requirements of meet the criteria in paragraph (g)(1) of that section. this section, and to junior-lien residen- (l) Other assets. (1) A national bank or tial mortgage exposures. Federal savings association must as- (3) For the purpose of this paragraph sign a zero percent risk weight to cash (g), if a national bank or Federal sav- owned and held in all offices of the na- ings association holds the first-lien and tional bank or Federal savings associa- junior-lien(s) residential mortgage ex- tion or in transit; to gold bullion held posures, and no other party holds an in the national bank’s or Federal sav- intervening lien, the national bank or ings association’s own vaults or held in Federal savings association must com- another depository institution’s vaults bine the exposures and treat them as a on an allocated basis, to the extent the single first-lien residential mortgage gold bullion assets are offset by gold exposure. bullion liabilities; and to exposures (4) A loan modified or restructured that arise from the settlement of cash solely pursuant to the U.S. Treasury’s transactions (such as equities, fixed in- Home Affordable Mortgage Program is come, spot foreign exchange and spot not modified or restructured for pur- commodities) with a central poses of this section. counterparty where there is no as- (h) Pre-sold construction loans. A na- sumption of ongoing counterparty tional bank or Federal savings associa- credit risk by the central counterparty tion must assign a 50 percent risk after settlement of the trade and asso- weight to a pre-sold construction loan ciated default fund contributions. unless the purchase contract is can- (2) A national bank or Federal sav- celled, in which case a national bank or ings association must assign a 20 per- Federal savings association must as- cent risk weight to cash items in the sign a 100 percent risk weight. process of collection. (i) Statutory multifamily mortgages. A (3) A national bank or Federal sav- national bank or Federal savings asso- ings association must assign a 100 per- ciation must assign a 50 percent risk cent risk weight to DTAs arising from weight to a statutory multifamily temporary differences that the na- mortgage. tional bank or Federal savings associa- (j) High-volatility commercial real estate tion could realize through net oper- (HVCRE) exposures. A national bank or ating loss carrybacks. Federal savings association must as- (4) A national bank or Federal sav- sign a 150 percent risk weight to an ings association must assign a 250 per- HVCRE exposure. cent risk weight to the portion of each (k) Past due exposures. Except for an of the following items to the extent it exposure to a sovereign entity or a res- is not deducted from common equity idential mortgage exposure or a policy tier 1 capital pursuant to § 3.22(d): loan, if an exposure is 90 days or more (i) MSAs; and past due or on nonaccrual: (ii) DTAs arising from temporary dif- (1) A national bank or Federal sav- ferences that the national bank or Fed- ings association must assign a 150 per- eral savings association could not real- cent risk weight to the portion of the ize through net operating loss exposure that is not guaranteed or that carrybacks. is unsecured; (5) A national bank or Federal sav- (2) A national bank or Federal savings association must assign a 100 per- ings association may assign a risk cent risk weight to all assets not spe- weight to the guaranteed portion of a cifically assigned a different risk past due exposure based on the risk weight under this subpart and that are weight that applies under § 3.36 if the not deducted from tier 1 or tier 2 cap- guarantee or credit derivative meets ital pursuant to § 3.22. the requirements of that section; and (6) Notwithstanding the requirements (3) A national bank or Federal sav- of this section, a national bank or Fed- ings association may assign a risk eral savings association may assign an

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asset that is not included in one of the eral savings association must apply a categories provided in this section to zero percent CCF to the unused portion the risk weight category applicable of a commitment that is uncondition- under the capital rules applicable to ally cancelable by the national bank or bank holding companies and savings Federal savings association. and loan holding companies at 12 CFR (2) 20 percent CCF. A national bank or part 217, provided that all of the fol- Federal savings association must apply lowing conditions apply: a 20 percent CCF to the amount of: (i) The national bank or Federal sav- (i) Commitments with an original ings association is not authorized to maturity of one year or less that are hold the asset under applicable law not unconditionally cancelable by the other than debt previously contracted national bank or Federal savings asso- or similar authority; and ciation; and (ii) The risks associated with the (ii) Self-liquidating, trade-related asset are substantially similar to the contingent items that arise from the risks of assets that are otherwise as- movement of goods, with an original signed to a risk weight category of less maturity of one year or less. than 100 percent under this subpart. (3) 50 percent CCF. A national bank or [78 FR 62157, 62273, Oct. 11, 2013, as amended Federal savings association must apply at 84 FR 35254, July 22, 2019; 85 FR 4402, Jan. a 50 percent CCF to the amount of: 24, 2020; 85 FR 20393, Apr. 13, 2020; 85 FR 57959, (i) Commitments with an original Sept. 17, 2020] maturity of more than one year that are not unconditionally cancelable by § 3.33 Off-balance sheet exposures. the national bank or Federal savings (a) General. (1) A national bank or association; and Federal savings association must cal- (ii) Transaction-related contingent culate the exposure amount of an off- items, including performance bonds, balance sheet exposure using the credit bid bonds, warranties, and performance conversion factors (CCFs) in paragraph standby letters of credit. (b) of this section. (4) 100 percent CCF. A national bank (2) Where a national bank or Federal or Federal savings association must savings association commits to provide apply a 100 percent CCF to the amount a commitment, the national bank or of the following off-balance-sheet items Federal savings association may apply and other similar transactions: the lower of the two applicable CCFs. (i) Guarantees; (3) Where a national bank or Federal (ii) Repurchase agreements (the off- savings association provides a commit- balance sheet component of which ment structured as a syndication or equals the sum of the current fair val- participation, the national bank or ues of all positions the national bank Federal savings association is only re- or Federal savings association has sold quired to calculate the exposure subject to repurchase); amount for its pro rata share of the (iii) Credit-enhancing representa- commitment. tions and warranties that are not (4) Where a national bank or Federal securitization exposures; savings association provides a commit- (iv) Off-balance sheet securities lend- ment, enters into a repurchase agreeing transactions (the off-balance sheet ment, or provides a credit-enhancing component of which equals the sum of representation and warranty, and such the current fair values of all positions commitment, repurchase agreement, or the national bank or Federal savings credit-enhancing representation and association has lent under the trans- warranty is not a securitization expo- action); sure, the exposure amount shall be no (v) Off-balance sheet securities bor- greater than the maximum contractual rowing transactions (the off-balance amount of the commitment, repur- sheet component of which equals the chase agreement, or credit-enhancing sum of the current fair values of all representation and warranty, as appli- non-cash positions the national bank cable. or Federal savings association has (b) Credit conversion factors—(1) Zero posted as collateral under the trans- percent CCF. A national bank or Fed- action);

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(vi) Financial standby letters of cred- culate the exposure amount for all its it; and derivative contracts using SA–CCR in (vii) Forward agreements. § 3.132(c) for purposes of standardized total risk-weighted assets. An ad- § 3.34 Derivative contracts. vanced approaches national bank or (a) Exposure amount for derivative con- Federal savings association must apply tracts—(1) National bank or Federal sav- the treatment of cleared transactions ings association that is not an advanced under § 3.133 to its derivative contracts approaches national bank or Federal sav- that are cleared transactions and to all ings association. (i) A national bank or default fund contributions associated Federal savings association that is not with such derivative contracts for pur- an advanced approaches national bank poses of standardized total risk-weight- or Federal savings association must ed assets. use the current exposure methodology (b) Current exposure methodology expo- (CEM) described in paragraph (b) of sure amount—(1) Single OTC derivative this section to calculate the exposure contract. Except as modified by para- amount for all its OTC derivative con- graph (c) of this section, the exposure tracts, unless the national bank or amount for a single OTC derivative Federal savings association makes the contract that is not subject to a quali- election provided in paragraph (a)(1)(ii) fying master netting agreement is of this section. equal to the sum of the national bank’s (ii) A national bank or Federal sav- or Federal savings association’s cur- ings association that is not an ad- rent credit exposure and potential fu- vanced approaches national bank or ture credit exposure (PFE) on the OTC Federal savings association may elect derivative contract. to calculate the exposure amount for (i) Current credit exposure. The cur- all its OTC derivative contracts under rent credit exposure for a single OTC the standardized approach for derivative contract is the greater of counterparty credit risk (SA–CCR) in the fair value of the OTC derivative § 3.132(c) by notifying the OCC, rather contract or zero. than calculating the exposure amount (ii) PFE. (A) The PFE for a single for all its derivative contracts using OTC derivative contract, including an CEM. A national bank or Federal sav- OTC derivative contract with a nega- ings association that elects under this tive fair value, is calculated by multi- paragraph (a)(1)(ii) to calculate the ex- plying the notional principal amount posure amount for its OTC derivative of the OTC derivative contract by the contracts under SA–CCR must apply appropriate conversion factor in Table the treatment of cleared transactions 1 to this section. under § 3.133 to its derivative contracts (B) For purposes of calculating either that are cleared transactions and to all the PFE under this paragraph (b)(1)(ii) default fund contributions associated or the gross PFE under paragraph with such derivative contracts, rather (b)(2)(ii)(A) of this section for exchange than applying § 3.35. A national bank or rate contracts and other similar con- Federal savings association that is not tracts in which the notional principal an advanced approaches national bank amount is equivalent to the cash flows, or Federal savings association must notional principal amount is the net use the same methodology to calculate receipts to each party falling due on the exposure amount for all its deriva- each value date in each currency. tive contracts and, if a national bank (C) For an OTC derivative contract or Federal savings association has that does not fall within one of the elected to use SA–CCR under this para- specified categories in Table 1 to this graph (a)(1)(ii), the national bank or section, the PFE must be calculated Federal savings association may using the appropriate ‘‘other’’ conver- change its election only with prior ap- sion factor. proval of the OCC. (D) A national bank or Federal sav- (2) Advanced approaches national bank ings association must use an OTC de- or Federal savings association. An ad- rivative contract’s effective notional vanced approaches national bank or principal amount (that is, the apparent Federal savings association must cal- or stated notional principal amount

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multiplied by any multiplier in the (E) The PFE of the protection pro- OTC derivative contract) rather than vider of a credit derivative is capped at the apparent or stated notional prin- the net present value of the amount of cipal amount in calculating PFE. unpaid premiums.

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1 e contract with a remaining maturity of Equity ONTRACTS C (non- grade Credit ERIVATIVE asset) reference D investment-

3 ATRIX FOR M grade Credit asset) reference (investment ACTOR F Foreign exchange rate and gold ONVERSION § 3.34—C TO 1 ABLE T Interest rate Interest 2 Remaining maturity For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by number remaining For an OTC derivative contract that is structured such on specified dates any outstanding exposure settled and the term A national bank or Federal savings association must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a equal to five years ...... 0.005 0.05 0.05 0.10 0.08 0.07 0.12 1 2 3 One year or less...... years...... or 0.00 0.01 0.05 0.10 0.06 0.07 0.075 0.05 0.10 0.08 0.15 five 0.015 year than One Greater than one year and less or Greater value of the contract is zero, remaining maturity equals time until next reset date. For an interest rate derivativ greater than one year that meets these criteria, the minimum conversion factor is 0.005. erence asset is an outstanding unsecured long-term debt security without credit enhancement that investment grade. A nationa ciation must use the column labeled ‘‘Credit (non-investment-grade reference asset)’’ for all other credit derivatives. tract.

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(2) Multiple OTC derivative contracts value on a daily basis and subject to a subject to a qualifying master netting daily margin maintenance requirement agreement. Except as modified by para- by applying a risk weight to the graph (c) of this section, the exposure uncollateralized portion of the expo- amount for multiple OTC derivative sure, after adjusting the exposure contracts subject to a qualifying mas- amount calculated under paragraph ter netting agreement is equal to the (b)(1) or (2) of this section using the sum of the net current credit exposure collateral haircut approach in § 3.37(c). and the adjusted sum of the PFE The national bank or Federal savings amounts for all OTC derivative con- association must substitute the expo- tracts subject to the qualifying master sure amount calculated under para- netting agreement. graph (b)(1) or (2) of this section for SE (i) Net current credit exposure. The net in the equation in § 3.37(c)(2). current credit exposure is the greater of the net sum of all positive and nega- (d) Counterparty credit risk for credit tive fair values of the individual OTC derivatives—(1) Protection purchasers. A derivative contracts subject to the national bank or Federal savings asso- qualifying master netting agreement ciation that purchases a credit deriva- or zero. tive that is recognized under § 3.36 as a (ii) Adjusted sum of the PFE amounts. credit risk mitigant for an exposure The adjusted sum of the PFE amounts, that is not a covered position under Anet, is calculated as Anet = (0.4 × subpart F of this part is not required to Agross) + (0.6 × NGR × Agross), where: compute a separate counterparty cred- (A) Agross = the gross PFE (that is, it risk capital requirement under this the sum of the PFE amounts as deter- subpart provided that the national mined under paragraph (b)(1)(ii) of this bank or Federal savings association section for each individual derivative does so consistently for all such credit contract subject to the qualifying mas- derivatives. The national bank or Fed- ter netting agreement); and eral savings association must either in- (B) Net-to-gross Ratio (NGR) = the clude all or exclude all such credit de- ratio of the net current credit exposure rivatives that are subject to a quali- to the gross current credit exposure. In fying master netting agreement from calculating the NGR, the gross current any measure used to determine credit exposure equals the sum of the counterparty credit risk exposure to positive current credit exposures (as all relevant counterparties for risk- determined under paragraph (b)(1)(i) of based capital purposes. this section) of all individual derivative contracts subject to the qualifying (2) Protection providers. (i) A national master netting agreement. bank or Federal savings association (c) Recognition of credit risk mitigation that is the protection provider under a of collateralized OTC derivative contracts. credit derivative must treat the credit (1) A national bank or Federal savings derivative as an exposure to the under- association using CEM under para- lying reference asset. The national graph (b) of this section may recognize bank or Federal savings association is the credit risk mitigation benefits of not required to compute a financial collateral that secures an counterparty credit risk capital re- OTC derivative contract or multiple quirement for the credit derivative OTC derivative contracts subject to a under this subpart, provided that this qualifying master netting agreement treatment is applied consistently for (netting set) by using the simple ap- all such credit derivatives. The na- proach in § 3.37(b). tional bank or Federal savings associa- (2) As an alternative to the simple tion must either include all or exclude approach, a national bank or Federal all such credit derivatives that are sub- savings association using CEM under ject to a qualifying master netting paragraph (b) of this section may rec- agreement from any measure used to ognize the credit risk mitigation bene- determine counterparty credit risk ex- fits of financial collateral that secures posure. such a contract or netting set if the financial collateral is marked-to-fair

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(ii) The provisions of this paragraph Approach (SRWA) in § 3.52, the national (d)(2) apply to all relevant counterpar- bank or Federal savings association ties for risk-based capital purposes un- may choose not to hold risk-based cap- less the national bank or Federal sav- ital against the counterparty credit ings association is treating the credit risk of the equity derivative contract, derivative as a covered position under as long as it does so for all such con- subpart F of this part, in which case tracts. Where the equity derivative the national bank or Federal savings contracts are subject to a qualified association must compute a supple- master netting agreement, a national mental counterparty credit risk capital bank or Federal savings association requirement under this section. using the SRWA must either include (e) Counterparty credit risk for equity all or exclude all of the contracts from derivatives. (1) A national bank or Fed- any measure used to determine eral savings association must treat an counterparty credit risk exposure. equity derivative contract as an equity (f) Clearing member national bank’s or exposure and compute a risk-weighted Federal savings association’s exposure asset amount for the equity derivative amount. The exposure amount of a contract under §§ 3.51 through 3.53 (un- clearing member national bank or Fed- less the national bank or Federal sav- eral savings association using CEM ings association is treating the con- under paragraph (b) of this section for tract as a covered position under sub- a client-facing derivative transaction part F of this part). or netting set of client-facing deriva- (2) In addition, the national bank or tive transactions equals the exposure Federal savings association must also amount calculated according to para- calculate a risk-based capital require- graph (b)(1) or (2) of this section multi- ment for the counterparty credit risk plied by the scaling factor of the of an equity derivative contract under square root of 1⁄2 (which equals this section if the national bank or 0.707107). If the national bank or Fed- Federal savings association is treating eral savings association determines the contract as a covered position that a longer period is appropriate, the under subpart F of this part. national bank or Federal savings asso- (3) If the national bank or Federal ciation must use a larger scaling factor savings association risk weights the to adjust for a longer holding period as contract under the Simple Risk-Weight follows:

Where H = the holding period greater than or § 3.35 Cleared transactions. equal to five days. (a) General requirements—(1) Clearing Additionally, the OCC may require the member clients. A national bank or Fed- national bank or Federal savings asso- eral savings association that is a clear- ciation to set a longer holding period if ing member client must use the meth- the OCC determines that a longer pe- odologies described in paragraph (b) of riod is appropriate due to the nature, this section to calculate risk-weighted structure, or characteristics of the assets for a cleared transaction. transaction or is commensurate with (2) Clearing members. A national bank the risks associated with the trans- or Federal savings association that is a action. clearing member must use the meth- [85 FR 4402, Jan. 24, 2020] odologies described in paragraph (c) of this section to calculate its risk- weighted assets for a cleared transaction and paragraph (d) of this section

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to calculate its risk-weighted assets for (B) The fair value of the collateral its default fund contribution to a CCP. posted by the clearing member client (3) Alternate requirements. Notwith- national bank or Federal savings asso- standing any other provision of this ciation and held by the CCP, clearing section, an advanced approaches na- member, or custodian in a manner that tional bank or Federal savings associa- is not bankruptcy remote. tion or a national bank or Federal sav- (3) Cleared transaction risk weights. (i) ings association that is not an ad- For a cleared transaction with a QCCP, vanced approaches national bank or a clearing member client national Federal savings association and that bank or Federal savings association has elected to use SA–CCR under must apply a risk weight of: § 3.34(a)(1) must apply § 3.133 to its de- (A) 2 percent if the collateral posted rivative contracts that are cleared by the national bank or Federal sav- transactions rather than this section. ings association to the QCCP or clear- (b) Clearing member client national ing member is subject to an arrange- banks or Federal savings associations—(1) ment that prevents any losses to the Risk-weighted assets for cleared trans- clearing member client national bank actions. (i) To determine the risk- or Federal savings association due to weighted asset amount for a cleared the joint default or a concurrent insol- transaction, a national bank or Federal vency, liquidation, or receivership pro- savings association that is a clearing ceeding of the clearing member and member client must multiply the trade any other clearing member clients of exposure amount for the cleared trans- the clearing member; and the clearing action, calculated in accordance with member client national bank or Fed- paragraph (b)(2) of this section, by the eral savings association has conducted risk weight appropriate for the cleared sufficient legal review to conclude with transaction, determined in accordance a well-founded basis (and maintains sufficient written documentation of with paragraph (b)(3) of this section. that legal review) that in the event of (ii) A clearing member client na- a legal challenge (including one result- tional bank’s or Federal savings asso- ing from an event of default or from ciation’s total risk-weighted assets for liquidation, insolvency, or receivership cleared transactions is the sum of the proceedings) the relevant court and ad- risk-weighted asset amounts for all its ministrative authorities would find the cleared transactions. arrangements to be legal, valid, bind- (2) Trade exposure amount. (i) For a ing and enforceable under the law of cleared transaction that is either a de- the relevant jurisdictions; or rivative contract or a netting set of de- (B) 4 percent if the requirements of rivative contracts, the trade exposure § 3.35(b)(3)(A) are not met. amount equals: (ii) For a cleared transaction with a (A) The exposure amount for the de- CCP that is not a QCCP, a clearing rivative contract or netting set of de- member client national bank or Fed- rivative contracts, calculated using the eral savings association must apply the methodology used to calculate expo- risk weight appropriate for the CCP ac- sure amount for OTC derivative con- cording to this subpart D. tracts under § 3.34; plus (4) Collateral. (i) Notwithstanding any (B) The fair value of the collateral other requirements in this section, col- posted by the clearing member client lateral posted by a clearing member national bank or Federal savings asso- client national bank or Federal savings ciation and held by the CCP, clearing association that is held by a custodian member, or custodian in a manner that (in its capacity as custodian) in a man- is not bankruptcy remote. ner that is bankruptcy remote from (ii) For a cleared transaction that is the CCP, clearing member, and other a repo-style transaction or netting set clearing member clients of the clearing of repo-style transactions, the trade member, is not subject to a capital re- exposure amount equals: quirement under this section. (A) The exposure amount for the (ii) A clearing member client na- repo-style transaction calculated using tional bank or Federal savings associa- the methodologies under § 3.37(c); plus tion must calculate a risk-weighted

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asset amount for any collateral pro- a risk weight of 2 percent to the trade vided to a CCP, clearing member, or exposure amount for a cleared trans- custodian in connection with a cleared action with a QCCP. transaction in accordance with the re- (ii) For a cleared transaction with a quirements under this subpart D. CCP that is not a QCCP, a clearing (c) Clearing member national banks or member national bank or Federal sav- Federal savings associations—(1) Risk- ings association must apply the risk weighted assets for cleared transactions. weight appropriate for the CCP accord- (i) To determine the risk-weighted ing to this subpart D. asset amount for a cleared transaction, (iii) Notwithstanding paragraphs a clearing member national bank or (c)(3)(i) and (ii) of this section, a clear- Federal savings association must mul- ing member national bank or Federal tiply the trade exposure amount for savings association may apply a risk the cleared transaction, calculated in weight of zero percent to the trade ex- accordance with paragraph (c)(2) of this posure amount for a cleared trans- section, by the risk weight appropriate action with a CCP where the clearing for the cleared transaction, determined member national bank or Federal sav- in accordance with paragraph (c)(3) of ings association is acting as a financial this section. intermediary on behalf of a clearing (ii) A clearing member national member client, the transaction offsets bank’s or Federal savings association’s another transaction that satisfies the total risk-weighted assets for cleared requirements set forth in § 3.3(a), and transactions is the sum of the risk- the clearing member national bank or weighted asset amounts for all of its Federal savings association is not obli- cleared transactions. gated to reimburse the clearing mem- (2) Trade exposure amount. A clearing ber client in the event of the CCP de- member national bank or Federal sav- fault. ings association must calculate its (4) Collateral. (i) Notwithstanding any trade exposure amount for a cleared other requirement in this section, col- transaction as follows: lateral posted by a clearing member (i) For a cleared transaction that is national bank or Federal savings asso- either a derivative contract or a net- ciation that is held by a custodian in a ting set of derivative contracts, the manner that is bankruptcy remote trade exposure amount equals: from the CCP is not subject to a cap- (A) The exposure amount for the de- ital requirement under this section. rivative contract, calculated using the (ii) A clearing member national bank methodology to calculate exposure or Federal savings association must amount for OTC derivative contracts calculate a risk-weighted asset amount under § 3.34; plus for any collateral provided to a CCP, (B) The fair value of the collateral clearing member, or a custodian in posted by the clearing member na- connection with a cleared transaction tional bank or Federal savings associa- in accordance with requirements under tion and held by the CCP in a manner this subpart D. that is not bankruptcy remote. (d) Default fund contributions—(1) Gen- (ii) For a cleared transaction that is eral requirement. A clearing member na- a repo-style transaction or netting set tional bank or Federal savings associa- of repo-style transactions, trade expo- tion must determine the risk-weighted sure amount equals: asset amount for a default fund con- (A) The exposure amount for repo- tribution to a CCP at least quarterly, style transactions calculated using or more frequently if, in the opinion of methodologies under § 3.37(c); plus the national bank or Federal savings (B) The fair value of the collateral association or the OCC, there is a ma- posted by the clearing member na- terial change in the financial condition tional bank or Federal savings associa- of the CCP. tion and held by the CCP in a manner (2) Risk-weighted asset amount for de- that is not bankruptcy remote. fault fund contributions to non-qualifying (3) Cleared transaction risk weight. (i) CCPs. A clearing member national A clearing member national bank or bank’s or Federal savings association’s Federal savings association must apply risk-weighted asset amount for default

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fund contributions to CCPs that are Federal savings association’s risk- not QCCPs equals the sum of such de- weighted asset amount for default fund fault fund contributions multiplied by contributions to QCCPs equals the sum

1,250 percent, or an amount determined of its capital requirement, KCM for each by the OCC, based on factors such as QCCP, as calculated under the method- size, structure and membership charac- ology set forth in paragraphs (d)(3)(i) teristics of the CCP and riskiness of its through (iii) of this section (Method 1), transactions, in cases where such de- multiplied by 1,250 percent or in para- fault fund contributions may be unlim- graphs (d)(3)(iv) of this section (Method ited. 2). (3) Risk-weighted asset amount for default fund contributions to QCCPs. A (i) Method 1. The hypothetical capital clearing member national bank’s or requirement of a QCCP (KCCP) equals:

(A) EBRMi = the exposure amount for but has not yet received, and any col- each transaction cleared through the lateral that the QCCP has actually re- QCCP by clearing member i, calculated ceived from clearing member i;

in accordance with § 3.34 for OTC deriv- (C) IMi = the collateral posted as ini- ative contracts and § 3.37(c)(2) for repo- tial margin by clearing member i to style transactions, provided that: the QCCP;

(1) For purposes of this section, in (D) DFi = the funded portion of clear- calculating the exposure amount the ing member i’s default fund contribu- national bank or Federal savings asso- tion that will be applied to reduce the ciation may replace the formula pro- QCCP’s loss upon a default by clearing vided in § 3.34(a)(2)(ii) with the fol- member i; lowing: Anet = (0.15 × Agross) + (0.85 × (E) RW = 20 percent, except when the NGR × Agross); and OCC has determined that a higher risk (2) For option derivative contracts weight is more appropriate based on that are cleared transactions, the PFE the specific characteristics of the described in § 3.34(a)(1)(ii) must be ad- QCCP and its clearing members; and justed by multiplying the notional (F) Where a QCCP has provided its principal amount of the derivative con- KCCP, a national bank or Federal sav- tract by the appropriate conversion ings association must rely on such dis- factor in Table 1 to § 3.34 and the abso- closed figure instead of calculating lute value of the option’s delta, that is, KCCP under this paragraph (d), unless the ratio of the change in the value of the national bank or Federal savings the derivative contract to the cor- association determines that a more responding change in the price of the conservative figure is appropriate underlying asset. based on the nature, structure, or char- (3) For repo-style transactions, when acteristics of the QCCP. applying § 3.37(c)(2), the national bank (ii) For a national bank or Federal or Federal savings association must savings association that is a clearing use the methodology in § 3.37(c)(3); member of a QCCP with a default fund (B) VMi = any collateral posted by supported by funded commitments, clearing member i to the QCCP that it KCM equals: is entitled to receive from the QCCP,

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Subscripts 1 and 2 denote the clear- would be used to cover its losses before ing members with the two largest ANet clearing members’ default fund con- values. For purposes of this paragraph tributions are used to cover losses; (d), for derivatives A is defined in Net (D) DFCM = funded default fund con- § 3.34(a)(2)(ii) and for repo-style trans- tributions from all clearing members actions, ANet means the exposure and any other clearing member con- amount as defined in § 3.37(c)(2) using tributed financial resources that are the methodology in § 3.37(c)(3); available to absorb mutualized QCCP (B) N = the number of clearing mem- losses; bers in the QCCP; (E) DF = DFCCP + DFCM (that is, the (C) DFCCP = the QCCP’s own funds and other financial resources that total funded default fund contribution);

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Where: (B) For a national bank or Federal savings association that is a clearing (1) DFi = the national bank’s or Fed- eral savings association’s unfunded member of a QCCP with a default fund commitment to the default fund; supported by unfunded commitments and is unable to calculate KCM using (2) DFCM = the total of all clearing members’ unfunded commitment to the the methodology described in para- default fund; and graph (d)(3)(iii) of this section, KCM equals: (3) K*CM as defined in paragraph (d)(3)(ii) of this section.

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Where: (i) Credit risk is fully covered by an eligible guarantee or eligible credit de- (1) IMi = the national bank’s or Fed- eral savings association’s initial mar- rivative; or gin posted to the QCCP; (ii) Credit risk is covered on a pro rata basis (that is, on a basis in which (2) IMCM = the total of initial margin posted to the QCCP; and the national bank or Federal savings association and the protection provider (3)K*CM as defined in paragraph (d)(3)(ii) of this section. share losses proportionately) by an eli- (iv) Method 2. A clearing member na- gible guarantee or eligible credit deriv- tional bank’s or Federal savings asso- ative. ciation’s risk-weighted asset amount (3) Exposures on which there is a for its default fund contribution to a tranching of credit risk (reflecting at QCCP, RWADF, equals: least two different levels of seniority) generally are securitization exposures { } RWADF = Min 12.5 * DF; 0.18 * TE subject to §§ 3.41 through 3.45. Where: (4) If multiple eligible guarantees or eligible credit derivatives cover a sin- (A) TE = the national bank’s or Fed- gle exposure described in this section, a eral savings association’s trade expo- national bank or Federal savings asso- sure amount to the QCCP, calculated ciation may treat the hedged exposure according to section 35(c)(2); as multiple separate exposures each (B) DF = the funded portion of the covered by a single eligible guarantee national bank’s or Federal savings association’s default fund contribution to or eligible credit derivative and may the QCCP. calculate a separate risk-weighted asset amount for each separate expo- (4) Total risk-weighted assets for default fund contributions. Total risk-weighted sure as described in paragraph (c) of assets for default fund contributions is this section. the sum of a clearing member national (5) If a single eligible guarantee or el- bank’s or Federal savings association’s igible credit derivative covers multiple risk-weighted assets for all of its de- hedged exposures described in para- fault fund contributions to all CCPs of graph (a)(2) of this section, a national which the national bank or Federal bank or Federal savings association savings association is a clearing mem- must treat each hedged exposure as ber. covered by a separate eligible guarantee or eligible credit derivative and [78 FR 62157, 62273, Oct. 11, 2013, as amended must calculate a separate risk-weight- at 84 FR 35255, July 22, 2019; 85 FR 4404, Jan. 24, 2020] ed asset amount for each exposure as described in paragraph (c) of this sec- § 3.36 Guarantees and credit derivation. tives: substitution treatment. (b) Rules of recognition. (1) A national (a) Scope—(1) General. A national bank or Federal savings association bank or Federal savings association may only recognize the credit risk may recognize the credit risk mitiga- mitigation benefits of eligible guaran- tion benefits of an eligible guarantee tees and eligible credit derivatives. or eligible credit derivative by sub- (2) A national bank or Federal sav- stituting the risk weight associated ings association may only recognize with the protection provider for the the credit risk mitigation benefits of risk weight assigned to an exposure, as an eligible credit derivative to hedge provided under this section. an exposure that is different from the (2) This section applies to exposures credit derivative’s reference exposure for which: used for determining the derivative’s

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cash settlement value, deliverable obli- that of the unprotected portion of the gation, or occurrence of a credit event hedged exposure. if: (iii) The treatment provided in this (i) The reference exposure ranks pari section is applicable when the credit passu with, or is subordinated to, the risk of an exposure is covered on a par- hedged exposure; and tial pro rata basis and may be applica- (ii) The reference exposure and the ble when an adjustment is made to the hedged exposure are to the same legal effective notional amount of the guar- entity, and legally enforceable cross- antee or credit derivative under para- default or cross-acceleration clauses graphs (d), (e), or (f) of this section. are in place to ensure payments under (d) Maturity mismatch adjustment. (1) the credit derivative are triggered A national bank or Federal savings as- when the obligated party of the hedged sociation that recognizes an eligible exposure fails to pay under the terms guarantee or eligible credit derivative of the hedged exposure. in determining the risk-weighted asset (c) Substitution approach—(1) Full cov- amount for a hedged exposure must ad- erage. If an eligible guarantee or eligi- just the effective notional amount of ble credit derivative meets the condi- the credit risk mitigant to reflect any tions in paragraphs (a) and (b) of this maturity mismatch between the section and the protection amount (P) hedged exposure and the credit risk of the guarantee or credit derivative is mitigant. greater than or equal to the exposure (2) A maturity mismatch occurs amount of the hedged exposure, a na- when the residual maturity of a credit tional bank or Federal savings associa- risk mitigant is less than that of the tion may recognize the guarantee or hedged exposure(s). credit derivative in determining the (3) The residual maturity of a hedged risk-weighted asset amount for the exposure is the longest possible re- hedged exposure by substituting the maining time before the obligated risk weight applicable to the guarantor party of the hedged exposure is sched- or credit derivative protection provider uled to fulfil its obligation on the under this subpart D for the risk hedged exposure. If a credit risk weight assigned to the exposure. mitigant has embedded options that (2) Partial coverage. If an eligible may reduce its term, the national bank guarantee or eligible credit derivative or Federal savings association (protec- meets the conditions in paragraphs (a) tion purchaser) must use the shortest and (b) of this section and the protec- possible residual maturity for the cred- tion amount (P) of the guarantee or it risk mitigant. If a call is at the dis- credit derivative is less than the expo- cretion of the protection provider, the sure amount of the hedged exposure, residual maturity of the credit risk the national bank or Federal savings mitigant is at the first call date. If the association must treat the hedged ex- call is at the discretion of the national posure as two separate exposures (pro- bank or Federal savings association tected and unprotected) in order to rec- (protection purchaser), but the terms ognize the credit risk mitigation ben- of the arrangement at origination of efit of the guarantee or credit deriva- the credit risk mitigant contain a positive. tive incentive for the national bank or (i) The national bank or Federal sav- Federal savings association to call the ings association may calculate the transaction before contractual matu- risk-weighted asset amount for the rity, the remaining time to the first protected exposure under this subpart call date is the residual maturity of D, where the applicable risk weight is the credit risk mitigant. the risk weight applicable to the guar- (4) A credit risk mitigant with a ma- antor or credit derivative protection turity mismatch may be recognized provider. only if its original maturity is greater (ii) The national bank or Federal sav- than or equal to one year and its resid- ings association must calculate the ual maturity is greater than three risk-weighted asset amount for the un- months. protected exposure under this subpart (5) When a maturity mismatch exists, D, where the applicable risk weight is the national bank or Federal savings

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association must apply the following antee or eligible credit derivative that adjustment to reduce the effective no- is denominated in a currency different tional amount of the credit risk from that in which the hedged exposure mitigant: Pm = E × (t ¥ 0.25) / (T ¥ is denominated, the national bank or 0.25), where: Federal savings association must apply (i) Pm = effective notional amount of the following formula to the effective the credit risk mitigant, adjusted for notional amount of the guarantee or maturity mismatch; credit derivative: Pc = Pr × (1¥HFX), (ii) E = effective notional amount of where: the credit risk mitigant; (i) Pc = effective notional amount of (iii) t = the lesser of T or the residual the credit risk mitigant, adjusted for maturity of the credit risk mitigant, currency mismatch (and maturity mis- expressed in years; and match and lack of restructuring event, (iv) T = the lesser of five or the resid- if applicable); ual maturity of the hedged exposure, (ii) Pr = effective notional amount of expressed in years. the credit risk mitigant (adjusted for (e) Adjustment for credit derivatives maturity mismatch and lack of re- without restructuring as a credit event. If structuring event, if applicable); and a national bank or Federal savings association recognizes an eligible credit (iii) HFX = haircut appropriate for the derivative that does not include as a currency mismatch between the credit credit event a restructuring of the risk mitigant and the hedged exposure. hedged exposure involving forgiveness (2) A national bank or Federal sav- or postponement of principal, interest, ings association must set HFX equal to or fees that results in a credit loss eight percent unless it qualifies for the event (that is, a charge-off, specific use of and uses its own internal esti- provision, or other similar debit to the mates of foreign exchange volatility profit and loss account), the national based on a ten-business-day holding pe- bank or Federal savings association riod. A national bank or Federal sav- must apply the following adjustment ings association qualifies for the use of to reduce the effective notional its own internal estimates of foreign amount of the credit derivative: Pr = exchange volatility if it qualifies for Pm × 0.60, where: the use of its own-estimates haircuts in (1) Pr = effective notional amount of § 3.37(c)(4). the credit risk mitigant, adjusted for (3) A national bank or Federal sav- lack of restructuring event (and matu- ings association must adjust HFX cal- rity mismatch, if applicable); and culated in paragraph (f)(2) of this sec- (2) Pm = effective notional amount of tion upward if the national bank or the credit risk mitigant (adjusted for Federal savings association revalues maturity mismatch, if applicable). the guarantee or credit derivative less (f) Currency mismatch adjustment. (1) If frequently than once every 10 business a national bank or Federal savings as- days using the following square root of sociation recognizes an eligible guar- time formula:

[78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35255, July 22, 2019]

§ 3.37 Collateralized transactions. (i) The simple approach in paragraph (a) General. (1) To recognize the risk- (b) of this section for any exposure; or mitigating effects of financial collat- (ii) The collateral haircut approach eral, a national bank or Federal sav- in paragraph (c) of this section for ings association may use:

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repo-style transactions, eligible mar- withstanding paragraph (b)(2)(i) of this gin loans, collateralized derivative con- section: tracts, and single-product netting sets (i) A national bank or Federal sav- of such transactions. ings association may assign a zero per- (2) A national bank or Federal sav- cent risk weight to an exposure to an ings association may use any approach OTC derivative contract that is described in this section that is valid marked-to-market on a daily basis and for a particular type of exposure or subject to a daily margin maintenance transaction; however, it must use the requirement, to the extent the con- same approach for similar exposures or tract is collateralized by cash on de- transactions. posit. (b) The simple approach—(1) General (ii) A national bank or Federal sav- requirements. (i) A national bank or ings association may assign a 10 per- Federal savings association may recog- cent risk weight to an exposure to an nize the credit risk mitigation benefits OTC derivative contract that is of financial collateral that secures any marked-to-market daily and subject to exposure. a daily margin maintenance require- (ii) To qualify for the simple ap- ment, to the extent that the contract proach, the financial collateral must is collateralized by an exposure to a meet the following requirements: sovereign that qualifies for a zero percent risk weight under § 3.32. (A) The collateral must be subject to (iii) A national bank or Federal sav- a collateral agreement for at least the ings association may assign a zero per- life of the exposure; cent risk weight to the collateralized (B) The collateral must be revalued portion of an exposure where: at least every six months; and (A) The financial collateral is cash (C) The collateral (other than gold) on deposit; or and the exposure must be denominated (B) The financial collateral is an ex- in the same currency. posure to a sovereign that qualifies for (2) Risk weight substitution. (i) A na- a zero percent risk weight under § 3.32, tional bank or Federal savings associa- and the national bank or Federal sav- tion may apply a risk weight to the ings association has discounted the fair portion of an exposure that is secured value of the collateral by 20 percent. by the fair value of financial collateral (c) Collateral haircut approach—(1) (that meets the requirements of para- General. A national bank or Federal graph (b)(1) of this section) based on savings association may recognize the the risk weight assigned to the collat- credit risk mitigation benefits of finan- eral under this subpart D. For repur- cial collateral that secures an eligible chase agreements, reverse repurchase margin loan, repo-style transaction, agreements, and securities lending and collateralized derivative contract, or borrowing transactions, the collateral single-product netting set of such is the instruments, gold, and cash the transactions, and of any collateral that national bank or Federal savings asso- secures a repo-style transaction that is ciation has borrowed, purchased sub- included in the national bank’s or Fed- ject to resale, or taken as collateral eral savings association’s VaR-based from the counterparty under the trans- measure under subpart F of this part action. Except as provided in para- by using the collateral haircut ap- graph (b)(3) of this section, the risk proach in this section. A national bank weight assigned to the collateralized or Federal savings association may use portion of the exposure may not be less the standard supervisory haircuts in than 20 percent. paragraph (c)(3) of this section or, with (ii) A national bank or Federal sav- prior written approval of the OCC, its ings association must apply a risk own estimates of haircuts according to weight to the unsecured portion of the paragraph (c)(4) of this section. exposure based on the risk weight ap- (2) Exposure amount equation. A na- plicable to the exposure under this sub- tional bank or Federal savings associa- part. tion must determine the exposure (3) Exceptions to the 20 percent risk- amount for an eligible margin loan, weight floor and other requirements. Not- repo-style transaction, collateralized

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derivative contract, or a single-product same instrument or gold the national netting set of such transactions by set- bank or Federal savings association ting the exposure amount equal to max has borrowed, purchased subject to re- {0, [(SE ¥ SC) + S(Es × Hs) + S(Efx × sale, or taken as collateral from the Hfx)]}, where: counterparty); (i)(A) For eligible margin loans and (iv) Hs equals the market price vola- repo-style transactions and netting tility haircut appropriate to the in- sets thereof, SE equals the value of the strument or gold referenced in Es; exposure (the sum of the current fair (v) Efx equals the absolute value of values of all instruments, gold, and the net position of instruments and cash the national bank or Federal sav- cash in a currency that is different ings association has lent, sold subject from the settlement currency (where to repurchase, or posted as collateral the net position in a given currency to the counterparty under the trans- equals the sum of the current fair val- action (or netting set)); and ues of any instruments or cash in the (B) For collateralized derivative con- currency the national bank or Federal tracts and netting sets thereof, SE savings association has lent, sold sub- equals the exposure amount of the OTC derivative contract (or netting set) cal- ject to repurchase, or posted as collat- culated under § 3.34(b)(1) or (2). eral to the counterparty minus the sum of the current fair values of any (ii) SC equals the value of the collateral (the sum of the current fair values instruments or cash in the currency of all instruments, gold and cash the the national bank or Federal savings national bank or Federal savings asso- association has borrowed, purchased ciation has borrowed, purchased sub- subject to resale, or taken as collateral ject to resale, or taken as collateral from the counterparty); and from the counterparty under the trans- (vi) Hfx equals the haircut appro- action (or netting set)); priate to the mismatch between the (iii) Es equals the absolute value of currency referenced in Efx and the set- the net position in a given instrument tlement currency. or in gold (where the net position in (3) Standard supervisory haircuts. (i) A the instrument or gold equals the sum national bank or Federal savings asso- of the current fair values of the instru- ciation must use the haircuts for mar- ment or gold the national bank or Fed- ket price volatility (Hs) provided in eral savings association has lent, sold Table 1 to § 3.37, as adjusted in certain subject to repurchase, or posted as col- circumstances in accordance with the lateral to the counterparty minus the requirements of paragraphs (c)(3)(iii) sum of the current fair values of that and (iv) of this section.

TABLE 1 TO § 3.37—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1

Haircut (in percent) assigned based on: Investment Sovereign issuers risk Non-sovereign issuers risk grade Residual maturity weight under § 3.32 weight under § 3.32 securitization (in percent) 2 (in percent) exposures (in percent) Zero 20 or 50 100 20 50 100

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

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

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

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

Cash collateral held ...... Zero.

Other exposure types ...... 25.0 1 The market price volatility haircuts in Table 1 to § 3.37 are based on a 10 business-day holding period. 2 Includes a foreign PSE that receives a zero percent risk weight.

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(ii) For currency mismatches, a nation upward on the basis of a holding tional bank or Federal savings associa- period of twenty business days for the tion must use a haircut for foreign ex- following quarter except in the calcula- change rate volatility (Hfx) of 8.0 per- tion of the exposure amount for pur- cent, as adjusted in certain cir- poses of § 3.35. If a netting set contains cumstances under paragraphs (c)(3)(iii) one or more trades involving illiquid and (iv) of this section. collateral or an OTC derivative that (iii) For repo-style transactions and cannot be easily replaced, a national client-facing derivative transactions, a bank or Federal savings association national bank or Federal savings asso- must adjust the supervisory haircuts ciation may multiply the standard su- upward on the basis of a holding period pervisory haircuts provided in para- of twenty business days. If over the two graphs (c)(3)(i) and (ii) of this section previous quarters more than two mar- by the square root of 1⁄2 (which equals gin disputes on a netting set have oc- 0.707107). For client-facing derivative curred that lasted more than the hold- transactions, if a larger scaling factor ing period, then the national bank or is applied under § 3.34(f), the same fac- Federal savings association must ad- tor must be used to adjust the super- just the supervisory haircuts upward visory haircuts. for that netting set on the basis of a (iv) If the number of trades in a net- holding period that is at least two ting set exceeds 5,000 at any time dur- times the minimum holding period for ing a quarter, a national bank or Fed- that netting set. A national bank or eral savings association must adjust Federal savings association must ad- the supervisory haircuts provided in just the standard supervisory haircuts paragraphs (c)(3)(i) and (ii) of this sec- upward using the following formula:

(A) TM equals a holding period of OCC, a national bank or Federal sav- longer than 10 business days for eligi- ings association may calculate hair- ble margin loans and derivative con- cuts (Hs and Hfx) using its own inter- tracts other than client-facing deriva- nal estimates of the volatilities of mar- tive transactions or longer than 5 busi- ket prices and foreign exchange rates: ness days for repo-style transactions (i) To receive OCC approval to use its and client-facing derivative trans- own internal estimates, a national actions; bank or Federal savings association (B) HS equals the standard super- must satisfy the following minimum visory haircut; and standards: (C) T equals 10 business days for eli- S (A) A national bank or Federal sav- gible margin loans and derivative con- ings association must use a 99th per- tracts other than client-facing deriva- centile one-tailed confidence interval. tive transactions or 5 business days for repo-style transactions and client-fac- (B) The minimum holding period for ing derivative transactions. a repo-style transaction and client-fac- (v) If the instrument a national bank ing derivative transaction is five busi- or Federal savings association has lent, ness days and for an eligible margin sold subject to repurchase, or posted as loan and a derivative contract other collateral does not meet the definition than a client-facing derivative trans- of financial collateral, the national action is ten business days except for bank or Federal savings association transactions or netting sets for which must use a 25.0 percent haircut for paragraph (c)(4)(i)(C) of this section ap- market price volatility (Hs). plies. When a national bank or Federal (4) Own internal estimates for haircuts. savings association calculates an own- With the prior written approval of the estimates haircut on a TN-day holding 95

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period, which is different from the min- (HM) is calculated using the following imum holding period for the trans- square root of time formula: action type, the applicable haircut

(1) TM equals 5 for repo-style trans- cial stress used to calculate the na- actions and client-facing derivative tional bank’s or Federal savings asso- transactions and 10 for eligible margin ciation’s own internal estimates for loans and derivative contracts other haircuts under this section and must than client-facing derivative trans- be able to provide empirical support for actions; the period used. The national bank or (2) TN equals the holding period used Federal savings association must ob- by the national bank or Federal sav- tain the prior approval of the OCC for, ings association to derive HN; and and notify the OCC if the national (3) HN equals the haircut based on the bank or Federal savings association holding period TN. makes any material changes to, these (C) If the number of trades in a net- policies and procedures. ting set exceeds 5,000 at any time dur- (F) Nothing in this section prevents ing a quarter, a national bank or Fed- the OCC from requiring a national eral savings association must calculate bank or Federal savings association to the haircut using a minimum holding use a different period of significant fi- period of twenty business days for the nancial stress in the calculation of own following quarter except in the calcula- internal estimates for haircuts. tion of the exposure amount for pur- (G) A national bank or Federal sav- poses of § 3.35. If a netting set contains ings association must update its data one or more trades involving illiquid sets and calculate haircuts no less fre- collateral or an OTC derivative that quently than quarterly and must also cannot be easily replaced, a national reassess data sets and haircuts when- bank or Federal savings association ever market prices change materially. must calculate the haircut using a (ii) With respect to debt securities minimum holding period of twenty that are investment grade, a national business days. If over the two previous bank or Federal savings association quarters more than two margin dis- may calculate haircuts for categories putes on a netting set have occurred of securities. For a category of securi- that lasted more than the holding pe- ties, the national bank or Federal sav- riod, then the national bank or Federal ings association must calculate the savings association must calculate the haircut on the basis of internal vola- haircut for transactions in that netting tility estimates for securities in that set on the basis of a holding period category that are representative of the that is at least two times the minimum securities in that category that the na- holding period for that netting set. tional bank or Federal savings associa- (D) A national bank or Federal sav- tion has lent, sold subject to repur- ings association is required to cal- chase, posted as collateral, borrowed, culate its own internal estimates with purchased subject to resale, or taken as inputs calibrated to historical data collateral. In determining relevant cat- from a continuous 12-month period egories, the national bank or Federal that reflects a period of significant fi- savings association must at a min- nancial stress appropriate to the secu- imum take into account: rity or category of securities. (A) The type of issuer of the security; (E) A national bank or Federal sav- (B) The credit quality of the security; ings association must have policies and (C) The maturity of the security; and procedures that describe how it deter- (D) The interest rate sensitivity of mines the period of significant finan- the security.

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(iii) With respect to debt securities ment period for the transaction is that are not investment grade and eq- equal to or less than the market stand- uity securities, a national bank or Fed- ard for the instrument underlying the eral savings association must calculate transaction and equal to or less than a separate haircut for each individual five business days. security. (4) Positive current exposure of a na- (iv) Where an exposure or collateral tional bank or Federal savings associa- (whether in the form of cash or securi- tion for a transaction is the difference ties) is denominated in a currency that between the transaction value at the differs from the settlement currency, agreed settlement price and the cur- the national bank or Federal savings rent market price of the transaction, if association must calculate a separate the difference results in a credit expo- currency mismatch haircut for its net sure of the national bank or Federal position in each mismatched currency savings association to the based on estimated volatilities of for- counterparty. eign exchange rates between the mis- (b) Scope. This section applies to all matched currency and the settlement transactions involving securities, for- currency. eign exchange instruments, and com- (v) A national bank’s or Federal sav- modities that have a risk of delayed ings association’s own estimates of settlement or delivery. This section market price and foreign exchange rate does not apply to: volatilities may not take into account (1) Cleared transactions that are the correlations among securities and marked-to-market daily and subject to foreign exchange rates on either the daily receipt and payment of variation exposure or collateral side of a trans- margin; action (or netting set) or the correla- (2) Repo-style transactions, including tions among securities and foreign ex- unsettled repo-style transactions; change rates between the exposure and (3) One-way cash payments on OTC collateral sides of the transaction (or derivative contracts; or netting set). (4) Transactions with a contractual [78 FR 62157, 62273, Oct. 11, 2013, as amended settlement period that is longer than at 84 FR 35256, July 22, 2019; 85 FR 4404, Jan. the normal settlement period (which 24, 2020; 85 FR 57959, Sept. 17, 2020] are treated as OTC derivative contracts as provided in § 3.34). RISK-WEIGHTED ASSETS FOR UNSETTLED (c) System-wide failures. In the case of TRANSACTIONS a system-wide failure of a settlement, clearing system or central § 3.38 Unsettled transactions. counterparty, the OCC may waive risk- (a) Definitions. For purposes of this based capital requirements for unset- section: tled and failed transactions until the (1) Delivery-versus-payment (DvP) situation is rectified. transaction means a securities or com- (d) Delivery-versus-payment (DvP) and modities transaction in which the payment-versus-payment (PvP) trans- buyer is obligated to make payment actions. A national bank or Federal only if the seller has made delivery of savings association must hold risk- the securities or commodities and the based capital against any DvP or PvP seller is obligated to deliver the securi- transaction with a normal settlement ties or commodities only if the buyer period if the national bank’s or Federal has made payment. savings association’s counterparty has (2) Payment-versus-payment (PvP) not made delivery or payment within transaction means a foreign exchange five business days after the settlement transaction in which each date. The national bank or Federal sav- counterparty is obligated to make a ings association must determine its final transfer of one or more currencies risk-weighted asset amount for such a only if the other counterparty has transaction by multiplying the positive made a final transfer of one or more current exposure of the transaction for currencies. the national bank or Federal savings (3) A transaction has a normal settle- association by the appropriate risk ment period if the contractual settle- weight in Table 1 to § 3.38.

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TABLE 1 TO § 3.38—RISK WEIGHTS FOR amounts of all DvP, PvP, and non-DvP/ UNSETTLED DVP AND PVP TRANSACTIONS non-PvP transactions.

Risk weight to [78 FR 62157, 62273, Oct. 11, 2013, as amended Number of business be applied to at 84 FR 35256, July 22, 2019] days after positive current contractual exposure settlement date (in percent) §§ 3.39–3.40 [Reserved]

From 5 to 15 ...... 100.0 RISK-WEIGHTED ASSETS FOR From 16 to 30 ...... 625.0 SECURITIZATION EXPOSURES From 31 to 45 ...... 937.5 46 or more ...... 1,250.0 § 3.41 Operational requirements for securitization exposures. (e) Non-DvP/non-PvP (non-delivery- (a) Operational criteria for traditional versus-payment/non-payment-versus-pay- securitizations. A national bank or Fed- ment) transactions. (1) A national bank eral savings association that transfers or Federal savings association must exposures it has originated or pur- hold risk-based capital against any chased to a securitization SPE or other non-DvP/non-PvP transaction with a third party in connection with a tradi- normal settlement period if the national securitization may exclude the tional bank or Federal savings associa- exposures from the calculation of its tion has delivered cash, securities, risk-weighted assets only if each condi- commodities, or currencies to its tion in this section is satisfied. A na- counterparty but has not received its tional bank or Federal savings associa- corresponding deliverables by the end tion that meets these conditions must of the same business day. The national hold risk-based capital against any bank or Federal savings association credit risk it retains in connection must continue to hold risk-based cap- with the securitization. A national ital against the transaction until the bank or Federal savings association national bank or Federal savings asso- that fails to meet these conditions ciation has received its corresponding must hold risk-based capital against deliverables. the transferred exposures as if they had (2) From the business day after the not been securitized and must deduct national bank or Federal savings asso- from common equity tier 1 capital any ciation has made its delivery until five after-tax gain-on-sale resulting from business days after the counterparty the transaction. The conditions are: delivery is due, the national bank or (1) The exposures are not reported on Federal savings association must cal- the national bank’s or Federal savings culate the risk-weighted asset amount association’s consolidated balance sheet under GAAP; for the transaction by treating the cur- (2) The national bank or Federal sav- rent fair value of the deliverables owed ings association has transferred to one to the national bank or Federal savings or more third parties credit risk associ- association as an exposure to the ated with the underlying exposures; counterparty and using the applicable (3) Any clean-up calls relating to the counterparty risk weight under this securitization are eligible clean-up subpart D. calls; and (3) If the national bank or Federal (4) The securitization does not: savings association has not received its (i) Include one or more underlying deliverables by the fifth business day exposures in which the borrower is per- after counterparty delivery was due, mitted to vary the drawn amount with- the national bank or Federal savings in an agreed limit under a line of cred- association must assign a 1,250 percent it; and risk weight to the current fair value of (ii) Contain an early amortization the deliverables owed to the national provision. bank or Federal savings association. (b) Operational criteria for synthetic (f) Total risk-weighted assets for unset- securitizations. For synthetic tled transactions. Total risk-weighted securitizations, a national bank or assets for unsettled transactions is the Federal savings association may recog- sum of the risk-weighted asset nize for risk-based capital purposes the

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use of a credit risk mitigant to hedge Federal savings association after the underlying exposures only if each con- inception of the securitization; dition in this paragraph (b) is satisfied. (3) The national bank or Federal sav- A national bank or Federal savings as- ings association obtains a well-rea- sociation that meets these conditions soned opinion from legal counsel that must hold risk-based capital against confirms the enforceability of the cred- any credit risk of the exposures it re- it risk mitigant in all relevant juris- tains in connection with the synthetic dictions; and securitization. A national bank or Fed- (4) Any clean-up calls relating to the eral savings association that fails to securitization are eligible clean-up meet these conditions or chooses not to calls. recognize the credit risk mitigant for (c) Due diligence requirements for purposes of this section must instead securitization exposures. (1) Except for hold risk-based capital against the un- exposures that are deducted from com- derlying exposures as if they had not mon equity tier 1 capital and exposures been synthetically securitized. The subject to § 3.42(h), if a national bank conditions are: or Federal savings association is un- (1) The credit risk mitigant is: able to demonstrate to the satisfaction (i) Financial collateral; of the OCC a comprehensive under- (ii) A guarantee that meets all cri- standing of the features of a teria as set forth in the definition of securitization exposure that would ma- ‘‘eligible guarantee’’ in § 3.2, except for terially affect the performance of the the criteria in paragraph (3) of that exposure, the national bank or Federal definition; or savings association must assign the (iii) A credit derivative that meets securitization exposure a risk weight of all criteria as set forth in the defini- 1,250 percent. The national bank’s or tion of ‘‘eligible credit derivative’’ in Federal savings association’s analysis § 3.2, except for the criteria in para- must be commensurate with the com- graph (3) of the definition of ‘‘eligible plexity of the securitization exposure guarantee’’ in § 3.2. and the materiality of the exposure in (2) The national bank or Federal sav- relation to its capital. ings association transfers credit risk (2) A national bank or Federal sav- associated with the underlying expo- ings association must demonstrate its sures to one or more third parties, and comprehensive understanding of a the terms and conditions in the credit securitization exposure under para- risk mitigants employed do not include graph (c)(1) of this section, for each provisions that: securitization exposure by: (i) Allow for the termination of the (i) Conducting an analysis of the risk credit protection due to deterioration characteristics of a securitization ex- in the credit quality of the underlying posure prior to acquiring the exposure, exposures; and documenting such analysis within (ii) Require the national bank or Fed- three business days after acquiring the eral savings association to alter or re- exposure, considering: place the underlying exposures to im- (A) Structural features of the prove the credit quality of the under- securitization that would materially lying exposures; impact the performance of the expo- (iii) Increase the national bank’s or sure, for example, the contractual cash Federal savings association’s cost of flow waterfall, waterfall-related trig- credit protection in response to dete- gers, credit enhancements, liquidity rioration in the credit quality of the enhancements, fair value triggers, the underlying exposures; performance of organizations that serv- (iv) Increase the yield payable to par- ice the exposure, and deal-specific defi- ties other than the national bank or nitions of default; Federal savings association in response (B) Relevant information regarding to a deterioration in the credit quality the performance of the underlying of the underlying exposures; or credit exposure(s), for example, the (v) Provide for increases in a retained percentage of loans 30, 60, and 90 days first loss position or credit enhance- past due; default rates; prepayment ment provided by the national bank or rates; loans in foreclosure; property

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types; occupancy; average credit score securitization exposures, except as pro- or other measures of creditworthiness; vided in paragraphs (a)(1), (a)(3), and average LTV ratio; and industry and (a)(4) of this section. geographic diversification data on the (3) If a securitization exposure does underlying exposure(s); not require deduction under paragraph (C) Relevant market data of the (a)(1) of this section and the national securitization, for example, bid-ask bank or Federal savings association spread, most recent sales price and his- cannot, or chooses not to apply the toric price volatility, trading volume, SSFA or the gross-up approach to the implied market rating, and size, depth exposure, the national bank or Federal and concentration level of the market savings association must assign a risk for the securitization; and weight to the exposure as described in (D) For resecuritization exposures, § 3.44. performance information on the under- (4) If a securitization exposure is a lying securitization exposures, for ex- derivative contract (other than protec- ample, the issuer name and credit qual- tion provided by a national bank or ity, and the characteristics and per- Federal savings association in the form formance of the exposures underlying of a credit derivative) that has a first the securitization exposures; and priority claim on the cash flows from (ii) On an on-going basis (no less fre- the underlying exposures (notwith- quently than quarterly), evaluating, standing amounts due under interest reviewing, and updating as appropriate rate or currency derivative contracts, the analysis required under paragraph fees due, or other similar payments), a (c)(1) of this section for each national bank or Federal savings asso- securitization exposure. ciation may choose to set the risk- weighted asset amount of the exposure § 3.42 Risk-weighted assets for equal to the amount of the exposure as securitization exposures. determined in paragraph (c) of this sec- (a) Securitization risk weight ap- tion. proaches. Except as provided elsewhere (b) Total risk-weighted assets for in this section or in § 3.41: securitization exposures. A national (1) A national bank or Federal sav- bank’s or Federal savings association’s ings association must deduct from total risk-weighted assets for common equity tier 1 capital any after- securitization exposures equals the tax gain-on-sale resulting from a sum of the risk-weighted asset amount securitization and apply a 1,250 percent for securitization exposures that the risk weight to the portion of a CEIO national bank or Federal savings asso- that does not constitute after-tax gain- ciation risk weights under §§ 3.41(c), on-sale. 3.42(a)(1), and 3.43, 3.44, or § 3.45, and (2) If a securitization exposure does paragraphs (e) through (j) of this sec- not require deduction under paragraph tion, as applicable. (a)(1) of this section, a national bank (c) Exposure amount of a securitization or Federal savings association may as- exposure—(1) On-balance sheet sign a risk weight to the securitization securitization exposures. The exposure exposure using the simplified super- amount of an on-balance sheet visory formula approach (SSFA) in ac- securitization exposure (excluding an cordance with §§ 3.43(a) through 3.43(d) available-for-sale or held-to-maturity and subject to the limitation under security where the national bank or paragraph (e) of this section. Alter- Federal savings association has made natively, a national bank or Federal an AOCI opt-out election under savings association that is not subject § 3.22(b)(2), a repo-style transaction, eli- to subpart F of this part may assign a gible margin loan, OTC derivative con- risk weight to the securitization expo- tract, or cleared transaction) is equal sure using the gross-up approach in ac- to the carrying value of the exposure. cordance with § 3.43(e), provided, how- (2) On-balance sheet securitization ex- ever, that such national bank or Fed- posures held by a national bank or Fed- eral savings association must apply ei- eral savings association that has made an ther the SSFA or the gross-up ap- AOCI opt-out election. The exposure proach consistently across all of its amount of an on-balance sheet

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securitization exposure that is an sures that provide duplicative coverage available-for-sale or held-to-maturity to the underlying exposures of a security held by a national bank or securitization (such as when a national Federal savings association that has bank or Federal savings association made an AOCI opt-out election under provides a program-wide credit en- § 3.22(b)(2) is the national bank’s or hancement and multiple pool-specific Federal savings association’s carrying liquidity facilities to an ABCP pro- value (including net accrued but un- gram), the national bank or Federal paid interest and fees), less any net un- savings association is not required to realized gains on the exposure and plus hold duplicative risk-based capital any net unrealized losses on the expo- against the overlapping position. In- sure. stead, the national bank or Federal (3) Off-balance sheet securitization ex- savings association may apply to the posures. (i) Except as provided in para- overlapping position the applicable graph (j) of this section, the exposure risk-based capital treatment that re- amount of an off-balance sheet sults in the highest risk-based capital securitization exposure that is not a requirement. repo-style transaction, eligible margin (e) Implicit support. If a national bank loan, cleared transaction (other than a or Federal savings association provides credit derivative), or an OTC derivative support to a securitization in excess of contract (other than a credit deriva- the national bank’s or Federal savings tive) is the notional amount of the ex- association’s contractual obligation to posure. For an off-balance sheet provide credit support to the securitization exposure to an ABCP securitization (implicit support): program, such as an eligible ABCP li- (1) The national bank or Federal sav- quidity facility, the notional amount ings association must include in risk- may be reduced to the maximum po- weighted assets all of the underlying tential amount that the national bank exposures associated with the or Federal savings association could be securitization as if the exposures had required to fund given the ABCP pro- not been securitized and must deduct gram’s current underlying assets (cal- from common equity tier 1 capital any culated without regard to the current after-tax gain-on-sale resulting from credit quality of those assets). the securitization; and (ii) A national bank or Federal savings association must determine the (2) The national bank or Federal sav- exposure amount of an eligible ABCP ings association must disclose publicly: liquidity facility for which the SSFA (i) That it has provided implicit sup- does not apply by multiplying the no- port to the securitization; and tional amount of the exposure by a (ii) The risk-based capital impact to CCF of 50 percent. the national bank or Federal savings (iii) A national bank or Federal sav- association of providing such implicit ings association must determine the support. exposure amount of an eligible ABCP (f) Undrawn portion of a servicer cash liquidity facility for which the SSFA advance facility. (1) Notwithstanding applies by multiplying the notional any other provision of this subpart, a amount of the exposure by a CCF of 100 national bank or Federal savings asso- percent. ciation that is a servicer under an eli- (4) Repo-style transactions, eligible mar- gible servicer cash advance facility is gin loans, and derivative contracts. The not required to hold risk-based capital exposure amount of a securitization ex- against potential future cash advance posure that is a repo-style transaction, payments that it may be required to eligible margin loan, or derivative con- provide under the contract governing tract (other than a credit derivative) is the facility. the exposure amount of the transaction (2) For a national bank or Federal as calculated under § 3.34 or § 3.37, as savings association that acts as a applicable. servicer, the exposure amount for a (d) Overlapping exposures. If a na- servicer cash advance facility that is tional bank or Federal savings associa- not an eligible servicer cash advance tion has multiple securitization expo- facility is equal to the amount of all

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potential future cash advance pay- tional bank’s or Federal savings asso- ments that the national bank or Fed- ciation’s total capital. eral savings association may be con- (3) If a national bank or Federal sav- tractually required to provide during ings association ceases to be well cap- the subsequent 12 month period under italized under 12 CFR 6.4 or exceeds the the contract governing the facility. 15 percent capital limitation provided (g) Interest-only mortgage-backed secu- in paragraph (h)(2) of this section, the rities. Regardless of any other provi- capital treatment under paragraph sions in this subpart, the risk weight (h)(1) of this section will continue to for a non-credit-enhancing interest- apply to any transfers of small-busi- only mortgage-backed security may ness obligations with retained contrac- not be less than 100 percent. tual exposure that occurred during the (h) Small-business loans and leases on time that the national bank or Federal personal property transferred with re- savings association was well capital- tained contractual exposure. (1) Regard- ized and did not exceed the capital less of any other provision of this sub- limit. part, a national bank or Federal sav- (4) The risk-based capital ratios of ings association that has transferred the national bank or Federal savings small-business loans and leases on per- association must be calculated without sonal property (small-business obliga- regard to the capital treatment for tions) with recourse must include in transfers of small-business obligations risk-weighted assets only its contrac- specified in paragraph (h)(1) of this sec- tual exposure to the small-business ob- tion for purposes of: ligations if all the following conditions (i) Determining whether a national are met: bank or Federal savings association is (i) The transaction must be treated adequately capitalized, undercapital- as a sale under GAAP. ized, significantly undercapitalized, or (ii) The national bank or Federal sav- critically undercapitalized under the ings association establishes and main- OCC’s prompt corrective action regula- tains, pursuant to GAAP, a non-capital reserve sufficient to meet the national tions; and bank’s or Federal savings association’s (ii) Reclassifying a well-capitalized reasonably estimated liability under national bank or Federal savings asso- the contractual obligation. ciation to adequately capitalized and (iii) The small-business obligations requiring an adequately capitalized na- are to businesses that meet the criteria tional bank or Federal savings associa- for a small-business concern estab- tion to comply with certain mandatory lished by the Small Business Adminis- or discretionary supervisory actions as tration under section 3(a) of the Small if the national bank or Federal savings Business Act (15 U.S.C. 632 et seq.). association were in the next lower (iv) The national bank or Federal prompt-corrective-action category. savings association is well capitalized, (i) Nth-to-default credit derivatives—(1) as defined in 12 CFR 6.4. For purposes Protection provider. A national bank or of determining whether a national Federal savings association may assign bank or Federal savings association is a risk weight using the SSFA in § 3.43 well capitalized for purposes of this to an nth-to-default credit derivative in paragraph (h), the national bank’s or accordance with this paragraph (i). A Federal savings association’s capital national bank or Federal savings asso- ratios must be calculated without re- ciation must determine its exposure in gard to the capital treatment for trans- the nth-to-default credit derivative as fers of small-business obligations under the largest notional amount of all the this paragraph (h). underlying exposures. (2) The total outstanding amount of (2) For purposes of determining the contractual exposure retained by a na- risk weight for an nth-to-default credit tional bank or Federal savings associa- derivative using the SSFA, the nation on transfers of small-business obli- tional bank or Federal savings associa- gations receiving the capital treatment tion must calculate the attachment specified in paragraph (h)(1) of this sec- point and detachment point of its expo- tion cannot exceed 15 percent of the na- sure as follows:

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(i) The attachment point (parameter tains credit protection on a group of A) is the ratio of the sum of the no- underlying exposures through a nth-to- tional amounts of all underlying expo- default credit derivative that meets sures that are subordinated to the na- the rules of recognition of § 3.36(b) tional bank’s or Federal savings asso- (other than a first-to-default credit de- ciation’s exposure to the total notional rivative) may recognize the credit risk amount of all underlying exposures. mitigation benefits of the derivative The ratio is expressed as a decimal only if: value between zero and one. In the case (1) The national bank or Federal sav- of a first-to-default credit derivative, ings association also has obtained cred- there are no underlying exposures that it protection on the same underlying are subordinated to the national bank’s exposures in the form of first-through- or Federal savings association’s expo- (n-1)-to-default credit derivatives; or sure. In the case of a second-or-subse- (2) If n-1 of the underlying exposures quent-to-default credit derivative, the have already defaulted. smallest (n-1) notional amounts of the (B) If a national bank or Federal sav- underlying exposure(s) are subordi- ings association satisfies the require- nated to the national bank’s or Federal ments of paragraph (i)(4)(ii)(A) of this savings association’s exposure. section, the national bank or Federal (ii) The detachment point (parameter savings association must determine its D) equals the sum of parameter A plus risk-based capital requirement for the the ratio of the notional amount of the underlying exposures as if the national national bank’s or Federal savings as- bank or Federal savings association sociation’s exposure in the nth-to-de- had only synthetically securitized the fault credit derivative to the total no- underlying exposure with the nth small- tional amount of all underlying expo- est risk-weighted asset amount and sures. The ratio is expressed as a dec- had obtained no credit risk mitigant on imal value between zero and one. the other underlying exposures. (3) A national bank or Federal savings association that does not use the (C) A national bank or Federal sav- SSFA to determine a risk weight for ings association must calculate a risk- its nth-to-default credit derivative must based capital requirement for assign a risk weight of 1,250 percent to counterparty credit risk according to the exposure. § 3.34 for a nth-to-default credit deriva- (4) Protection purchaser—(i) First-to- tive that does not meet the rules of default credit derivatives. A national recognition of § 3.36(b). bank or Federal savings association (j) Guarantees and credit derivatives that obtains credit protection on a other than nth-to-default credit deriva- group of underlying exposures through tives—(1) Protection provider. For a guar- a first-to-default credit derivative that antee or credit derivative (other than meets the rules of recognition of an nth-to-default credit derivative) pro- § 3.36(b) must determine its risk-based vided by a national bank or Federal capital requirement for the underlying savings association that covers the full exposures as if the national bank or amount or a pro rata share of a Federal savings association syn- securitization exposure’s principal and thetically securitized the underlying interest, the national bank or Federal exposure with the smallest risk- savings association must risk weight weighted asset amount and had ob- the guarantee or credit derivative as if tained no credit risk mitigant on the it holds the portion of the reference ex- other underlying exposures. A national posure covered by the guarantee or bank or Federal savings association credit derivative. must calculate a risk-based capital re- (2) Protection purchaser. (i) A national quirement for counterparty credit risk bank or Federal savings association according to § 3.34 for a first-to-default that purchases a guarantee or OTC credit derivative that does not meet credit derivative (other than an nth-to- the rules of recognition of § 3.36(b). default credit derivative) that is recog- (ii) Second-or-subsequent-to-default nized under § 3.45 as a credit risk credit derivatives. (A) A national bank mitigant (including via collateral rec- or Federal savings association that ob- ognized under § 3.37) is not required to

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compute a separate counterparty cred- scribed in paragraph (b) of this section it risk capital requirement under § 3.31, must assign a risk weight of 1,250 per- in accordance with 34(c). cent to the exposure. (ii) If a national bank or Federal sav- (b) SSFA parameters. To calculate the ings association cannot, or chooses not risk weight for a securitization expo- to, recognize a purchased credit deriva- sure using the SSFA, a national bank tive as a credit risk mitigant under or Federal savings association must § 3.45, the national bank or Federal sav- have accurate information on the fol- ings association must determine the lowing five inputs to the SSFA calcula- exposure amount of the credit derivative under § 3.34. tion: (A) If the national bank or Federal (1) KG is the weighted-average (with savings association purchases credit unpaid principal used as the weight for protection from a counterparty that is each exposure) total capital require- not a securitization SPE, the national ment of the underlying exposures cal- bank or Federal savings association culated using this subpart. KG is ex- must determine the risk weight for the pressed as a decimal value between exposure according to this subpart D. zero and one (that is, an average risk (B) If the national bank or Federal weight of 100 percent represents a value savings association purchases the cred- of KG equal to 0.08). it protection from a counterparty that (2) Parameter W is expressed as a is a securitization SPE, the national decimal value between zero and one. bank or Federal savings association Parameter W is the ratio of the sum of must determine the risk weight for the the dollar amounts of any underlying exposure according to section § 3.42, in- exposures of the securitization that cluding § 3.42(a)(4) for a credit deriva- meet any of the criteria as set forth in tive that has a first priority claim on paragraphs (b)(2)(i) through (vi) of this the cash flows from the underlying ex- section to the balance, measured in posures of the securitization SPE (not- dollars, of underlying exposures: withstanding amounts due under interest rate or currency derivative con- (i) Ninety days or more past due; tracts, fees due, or other similar pay- (ii) Subject to a bankruptcy or insol- ments). vency proceeding; (iii) In the process of foreclosure; [78 FR 62157, 62273, Oct. 11, 2013, as amended (iv) Held as real estate owned; at 84 FR 35256, July 22, 2019] (v) Has contractually deferred pay- § 3.43 Simplified supervisory formula ments for 90 days or more, other than approach (SSFA) and the gross-up principal or interest payments deferred approach. on: (a) General requirements for the SSFA. (A) Federally-guaranteed student To use the SSFA to determine the risk loans, in accordance with the terms of weight for a securitization exposure, a those guarantee programs; or national bank or Federal savings asso- (B) Consumer loans, including non- ciation must have data that enables it federally-guaranteed student loans, to assign accurately the parameters de- provided that such payments are described in paragraph (b) of this section. ferred pursuant to provisions included Data used to assign the parameters de- in the contract at the time funds are scribed in paragraph (b) of this section disbursed that provide for period(s) of must be the most currently available deferral that are not initiated based on data; if the contracts governing the un- changes in the creditworthiness of the derlying exposures of the securitization require payments on a monthly or borrower; or quarterly basis, the data used to assign (vi) Is in default. the parameters described in paragraph (3) Parameter A is the attachment (b) of this section must be no more point for the exposure, which rep- than 91 calendar days old. A national resents the threshold at which credit bank or Federal savings association losses will first be allocated to the ex- that does not have the appropriate posure. Except as provided in § 3.42(i) data to assign the parameters de-

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th for n -to-default credit derivatives, pa- (c) Mechanics of the SSFA. KG and W rameter A equals the ratio of the cur- are used to calculate KA, the aug- rent dollar amount of underlying expo- mented value of KG, which reflects the sures that are subordinated to the ex- observed credit quality of the under- posure of the national bank or Federal lying exposures. KA is defined in para- savings association to the current dol- graph (d) of this section. The values of lar amount of underlying exposures. parameters A and D, relative to KA de- Any reserve account funded by the ac- termine the risk weight assigned to a cumulated cash flows from the under- securitization exposure as described in lying exposures that is subordinated to paragraph (d) of this section. The risk the national bank’s or Federal savings weight assigned to a securitization ex- association’s securitization exposure may be included in the calculation of posure, or portion of a securitization parameter A to the extent that cash is exposure, as appropriate, is the larger present in the account. Parameter A is of the risk weight determined in ac- expressed as a decimal value between cordance with this paragraph (c) or zero and one. paragraph (d) of this section and a risk (4) Parameter D is the detachment weight of 20 percent. point for the exposure, which rep- (1) When the detachment point, pa- resents the threshold at which credit rameter D, for a securitization expo-

losses of principal allocated to the ex- sure is less than or equal to KA, the exposure would result in a total loss of posure must be assigned a risk weight principal. Except as provided in section of 1,250 percent. 42(i) for nth-to-default credit deriva- (2) When the attachment point, pa- tives, parameter D equals parameter A rameter A, for a securitization expo- plus the ratio of the current dollar sure is greater than or equal to K , the amount of the securitization exposures A national bank or Federal savings asso- that are pari passu with the exposure ciation must calculate the risk weight (that is, have equal seniority with respect to credit risk) to the current dol- in accordance with paragraph (d) of lar amount of the underlying expo- this section. sures. Parameter D is expressed as a (3) When A is less than KA and D is decimal value between zero and one. greater than KA, the risk weight is a (5) A supervisory calibration param- weighted-average of 1,250 percent and eter, p, is equal to 0.5 for securitization 1,250 percent times KSSFA calculated in exposures that are not resecuritization accordance with paragraph (d) of this exposures and equal to 1.5 for section. For the purpose of this weight- resecuritization exposures. ed-average calculation:

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(e) Gross-up approach—(1) Applica- erwise provided for certain bility. A national bank or Federal sav- securitization exposures in §§ 3.44 and ings association that is not subject to 3.45. subpart F of this part may apply the (2) To use the gross-up approach, a gross-up approach set forth in this sec- national bank or Federal savings asso- tion instead of the SSFA to determine ciation must calculate the following the risk weight of its securitization ex- four inputs: posures, provided that it applies the (i) Pro rata share, which is the par gross-up approach to all of its value of the national bank’s or Federal securitization exposures, except as oth-

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savings association’s securitization ex- quidity facility by multiplying the exposure as a percent of the par value of posure amount by the highest risk the tranche in which the securitization weight applicable to any of the indi- exposure resides; vidual underlying exposures covered by (ii) Enhanced amount, which is the the facility. par value of tranches that are more (c) A securitization exposure in a sec- senior to the tranche in which the na- ond loss position or better to an ABCP tional bank’s or Federal savings asso- program—(1) Risk weighting. A national ciation’s securitization resides; bank or Federal savings association (iii) Exposure amount of the national may determine the risk-weighted asset bank’s or Federal savings association’s amount of a securitization exposure securitization exposure calculated that is in a second loss position or bet- under § 3.42(c); and ter to an ABCP program that meets (iv) Risk weight, which is the weight- the requirements of paragraph (c)(2) of ed-average risk weight of underlying this section by multiplying the expo- exposures of the securitization as cal- sure amount by the higher of the fol- culated under this subpart. lowing risk weights: (3) Credit equivalent amount. The credit equivalent amount of a (i) 100 percent; and securitization exposure under this sec- (ii) The highest risk weight application equals the sum of: ble to any of the individual underlying (i) The exposure amount of the na- exposures of the ABCP program. tional bank’s or Federal savings asso- (2) Requirements. (i) The exposure is ciation’s securitization exposure; and not an eligible ABCP liquidity facility; (ii) The pro rata share multiplied by (ii) The exposure must be economi- the enhanced amount, each calculated cally in a second loss position or bet- in accordance with paragraph (e)(2) of ter, and the first loss position must this section. provide significant credit protection to (4) Risk-weighted assets. To calculate the second loss position; risk-weighted assets for a (iii) The exposure qualifies as invest- securitization exposure under the ment grade; and gross-up approach, a national bank or (iv) The national bank or Federal Federal savings association must apply savings association holding the expo- the risk weight required under para- sure must not retain or provide protec- graph (e)(2) of this section to the credit tion to the first loss position. equivalent amount calculated in paragraph (e)(3) of this section. § 3.45 Recognition of credit risk (f) Limitations. Notwithstanding any mitigants for securitization expo- other provision of this section, a na- sures. tional bank or Federal savings associa- (a) General. (1) An originating nation must assign a risk weight of not tional bank or Federal savings associa- less than 20 percent to a securitization tion that has obtained a credit risk exposure. mitigant to hedge its exposure to a § 3.44 Securitization exposures to synthetic or traditional securitization which the SSFA and gross-up ap- that satisfies the operational criteria proach do not apply. provided in § 3.41 may recognize the (a) General requirement. A national credit risk mitigant under § 3.36 or bank or Federal savings association § 3.37, but only as provided in this sec- must assign a 1,250 percent risk weight tion. to all securitization exposures to which (2) An investing national bank or the national bank or Federal savings Federal savings association that has association does not apply the SSFA or obtained a credit risk mitigant to the gross-up approach under § 3.43, ex- hedge a securitization exposure may cept as set forth in this section. recognize the credit risk mitigant (b) Eligible ABCP liquidity facilities. A under § 3.36 or § 3.37, but only as pro- national bank or Federal savings asso- vided in this section. ciation may determine the risk-weight- (b) Mismatches. A national bank or ed asset amount of an eligible ABCP li- Federal savings association must make

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any applicable adjustment to the pro- utable to the stable value protection as tection amount of an eligible guaran exposure to the provider of the pro- antee or credit derivative as required tection and the remaining portion of in § 3.36(d), (e), and (f) for any hedged the carrying value of its separate ac- securitization exposure. In the context count as an equity exposure to an in- of a synthetic securitization, when an vestment fund. eligible guarantee or eligible credit de- (iii) A national bank or Federal sav- rivative covers multiple hedged expo- ings association that provides stable sures that have different residual ma- value protection must treat the expo- turities, the national bank or Federal sure as an equity derivative with an savings association must use the long- adjusted carrying value determined as est residual maturity of any of the the sum of paragraphs (b)(1) and (3) of hedged exposures as the residual matu- this section. rity of all hedged exposures. (b) Adjusted carrying value. For pur- §§ 3.46–3.50 [Reserved] poses of §§ 3.51 through 3.53, the adjusted carrying value of an equity ex- RISK-WEIGHTED ASSETS FOR EQUITY posure is: EXPOSURES (1) For the on-balance sheet component of an equity exposure (other than § 3.51 Introduction and exposure an equity exposure that is classified as measurement. available-for-sale where the national (a) General. (1) To calculate its risk- bank or Federal savings association weighted asset amounts for equity ex- has made an AOCI opt-out election posures that are not equity exposures under § 3.22(b)(2)), the national bank’s to an investment fund, a national bank or Federal savings association’s car- or Federal savings association must rying value of the exposure; use the Simple Risk-Weight Approach (2) For the on-balance sheet compo- (SRWA) provided in 3.52. A national nent of an equity exposure that is clas- bank or Federal savings association sified as available-for-sale where the must use the look-through approaches national bank or Federal savings asso- provided in § 3.53 to calculate its risk- ciation has made an AOCI opt-out elec- weighted asset amounts for equity ex- tion under § 3.22(b)(2), the national posures to investment funds. bank’s or Federal savings association’s (2) A national bank or Federal sav- carrying value of the exposure less any ings association must treat an investment in a separate account (as defined net unrealized gains on the exposure in § 3.2) as if it were an equity exposure that are reflected in such carrying to an investment fund as provided in value but excluded from the national § 3.53. bank’s or Federal savings association’s (3) Stable value protection. (i) Stable regulatory capital components; value protection means a contract (3) For the off-balance sheet compo- where the provider of the contract is nent of an equity exposure that is not obligated to pay: an equity commitment, the effective (A) The policy owner of a separate notional principal amount of the expo- account an amount equal to the short- sure, the size of which is equivalent to fall between the fair value and cost a hypothetical on-balance sheet posi- basis of the separate account when the tion in the underlying equity instru- policy owner of the separate account ment that would evidence the same surrenders the policy; or change in fair value (measured in dol- (B) The beneficiary of the contract lars) given a small change in the price an amount equal to the shortfall be- of the underlying equity instrument, tween the fair value and book value of minus the adjusted carrying value of a specified portfolio of assets. the on-balance sheet component of the (ii) A national bank or Federal sav- exposure as calculated in paragraph ings association that purchases stable (b)(1) of this section; and value protection on its investment in a (4) For a commitment to acquire an separate account must treat the por- equity exposure (an equity commit- tion of the carrying value of its investment), the effective notional principal ment in the separate account attrib- amount of the exposure is multiplied

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by the following conversion factors (3) 100 percent risk weight equity expo- (CFs): sures. The equity exposures set forth in (i) Conditional equity commitments this paragraph (b)(3) must be assigned with an original maturity of one year a 100 percent risk weight. or less receive a CF of 20 percent. (i) Community development equity expo- (ii) Conditional equity commitments sures. An equity exposure that qualifies with an original maturity of over one as a community development invest- year receive a CF of 50 percent. ment under section 24 (Eleventh) of the (iii) Unconditional equity commit- National Bank Act, excluding equity ments receive a CF of 100 percent. exposures to an unconsolidated small business investment company and eq- § 3.52 Simple risk-weight approach uity exposures held through a consoli- (SRWA). dated small business investment com- (a) General. Under the SRWA, a na- pany described in section 302 of the tional bank’s or Federal savings asso- Small Business Investment Act. ciation’s total risk-weighted assets for (ii) Effective portion of hedge pairs. equity exposures equals the sum of the The effective portion of a hedge pair. risk-weighted asset amounts for each (iii) Non-significant equity exposures. of the national bank’s or Federal sav- Equity exposures, excluding significant ings association’s individual equity ex- investments in the capital of an uncon- posures (other than equity exposures to solidated financial institution in the an investment fund) as determined form of common stock and exposures under this section and the risk-weight- to an investment firm that would meet ed asset amounts for each of the na- the definition of a traditional tional bank’s or Federal savings asso- securitization were it not for the appli- ciation’s individual equity exposures to cation of paragraph (8) of that defini- an investment fund as determined tion in § 3.2 and has greater than imma- under § 3.53. terial leverage, to the extent that the (b) SRWA computation for individual aggregate adjusted carrying value of equity exposures. A national bank or the exposures does not exceed 10 per- Federal savings association must de- cent of the national bank’s or Federal termine the risk-weighted asset savings association’s total capital. amount for an individual equity expo- (A) To compute the aggregate ad- sure (other than an equity exposure to justed carrying value of a national an investment fund) by multiplying the bank’s or Federal savings association’s adjusted carrying value of the equity equity exposures for purposes of this exposure or the effective portion and section, the national bank or Federal ineffective portion of a hedge pair (as savings association may exclude equity defined in paragraph (c) of this section) exposures described in paragraphs by the lowest applicable risk weight in (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this paragraph (b). this section, the equity exposure in a (1) Zero percent risk weight equity expo- hedge pair with the smaller adjusted sures. An equity exposure to a sov- carrying value, and a proportion of ereign, the Bank for International Set- each equity exposure to an investment tlements, the European Central Bank, fund equal to the proportion of the as- the European Commission, the Inter- sets of the investment fund that are national Monetary Fund, the European not equity exposures or that meet the Stability Mechanism, the European Fi- criterion of paragraph (b)(3)(i) of this nancial Stability Facility, an MDB, section. If a national bank or Federal and any other entity whose credit ex- savings association does not know the posures receive a zero percent risk actual holdings of the investment fund, weight under § 3.32 may be assigned a the national bank or Federal savings zero percent risk weight. association may calculate the propor- (2) 20 percent risk weight equity expo- tion of the assets of the fund that are sures. An equity exposure to a PSE, not equity exposures based on the Federal Home Loan Bank or the Fed- terms of the prospectus, partnership eral Agricultural Mortgage Corpora- agreement, or similar contract that de- tion (Farmer Mac) must be assigned a fines the fund’s permissible invest- 20 percent risk weight. ments. If the sum of the investment

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limits for all exposure classes within (i) Would meet the definition of a the fund exceeds 100 percent, the na- traditional securitization were it not tional bank or Federal savings associa- for the application of paragraph (8) of tion must assume for purposes of this that definition; and section that the investment fund in- (ii) Has greater than immaterial le- vests to the maximum extent possible verage. in equity exposures. (c) Hedge transactions—(1) Hedge pair. (B) When determining which of a na- A hedge pair is two equity exposures tional bank’s or Federal savings asso- that form an effective hedge so long as ciation’s equity exposures qualify for a each equity exposure is publicly traded 100 percent risk weight under this para- or has a return that is primarily based graph (b), a national bank or Federal on a publicly traded equity exposure. savings association first must include (2) Effective hedge. Two equity expo- equity exposures to unconsolidated sures form an effective hedge if the ex- small business investment companies posures either have the same remain- or held through consolidated small ing maturity or each has a remaining business investment companies de- maturity of at least three months; the scribed in section 302 of the Small hedge relationship is formally docu- Business Investment Act, then must mented in a prospective manner (that include publicly traded equity expo- is, before the national bank or Federal sures (including those held indirectly savings association acquires at least through investment funds), and then one of the equity exposures); the docu- must include non-publicly traded eq- mentation specifies the measure of ef- uity exposures (including those held in- fectiveness (E) the national bank or directly through investment funds). Federal savings association will use for the hedge relationship throughout the (4) 250 percent risk weight equity expo- life of the transaction; and the hedge sures. Significant investments in the relationship has an E greater than or capital of unconsolidated financial in- equal to 0.8. A national bank or Fed- stitutions in the form of common stock eral savings association must measure that are not deducted from capital pur- E at least quarterly and must use one suant to § 3.22(d)(2) are assigned a 250 of three alternative measures of E as percent risk weight. set forth in this paragraph (c). (5) 300 percent risk weight equity expo- (i) Under the dollar-offset method of sures. A publicly traded equity expo- measuring effectiveness, the national sure (other than an equity exposure de- bank or Federal savings association scribed in paragraph (b)(7) of this sec- must determine the ratio of value tion and including the ineffective por- change (RVC). The RVC is the ratio of tion of a hedge pair) must be assigned the cumulative sum of the changes in a 300 percent risk weight. value of one equity exposure to the cu- (6) 400 percent risk weight equity expo- mulative sum of the changes in the sures. An equity exposure (other than value of the other equity exposure. If an equity exposure described in para- RVC is positive, the hedge is not effec- graph (b)(7)) of this section that is not tive and E equals 0. If RVC is negative publicly traded must be assigned a 400 and greater than or equal to ¥1 (that percent risk weight. is, between zero and ¥1), then E equals (7) 600 percent risk weight equity expo- the absolute value of RVC. If RVC is sures. An equity exposure to an invest- negative and less than ¥1, then E ment firm must be assigned a 600 per- equals 2 plus RVC. cent risk weight, provided that the in- (ii) Under the variability-reduction vestment firm: method of measuring effectiveness:

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(iii) Under the regression method of may be assigned to an equity exposure measuring effectiveness, E equals the under this section is 20 percent. coefficient of determination of a re- (2) The risk-weighted asset amount of gression in which the change in value an equity exposure to an investment of one exposure in a hedge pair is the fund that meets the requirements for a dependent variable and the change in community development equity expo- value of the other exposure in a hedge sure in § 3.52(b)(3)(i) is its adjusted car- pair is the independent variable. How- rying value. ever, if the estimated regression coeffi- (3) If an equity exposure to an invest- cient is positive, then E equals zero. ment fund is part of a hedge pair and (3) The effective portion of a hedge the national bank or Federal savings pair is E multiplied by the greater of association does not use the full look- the adjusted carrying values of the eq- through approach, the national bank or uity exposures forming a hedge pair. Federal savings association must use (4) The ineffective portion of a hedge the ineffective portion of the hedge pair is (1–E) multiplied by the greater pair as determined under § 3.52(c) as the of the adjusted carrying values of the adjusted carrying value for the equity equity exposures forming a hedge pair. exposure to the investment fund. The [78 FR 62157, 62273, Oct. 11, 2013, as amended risk-weighted asset amount of the ef- at 84 FR 35256, July 22, 2019] fective portion of the hedge pair is equal to its adjusted carrying value. § 3.53 Equity exposures to investment (b) Full look-through approach. A na- funds. tional bank or Federal savings associa- (a) Available approaches. (1) Unless tion that is able to calculate a risk- the exposure meets the requirements weighted asset amount for its propor- for a community development equity tional ownership share of each expo- exposure under § 3.52(b)(3)(i), a national sure held by the investment fund (as bank or Federal savings association calculated under this subpart as if the must determine the risk-weighted proportional ownership share of the ad- asset amount of an equity exposure to justed carrying value of each exposure an investment fund under the full look- were held directly by the national bank through approach described in para- or Federal savings association) may set graph (b) of this section, the simple the risk-weighted asset amount of the modified look-through approach de- national bank’s or Federal savings as- scribed in paragraph (c) of this section, sociation’s exposure to the fund equal or the alterative modified look- to the product of: through approach described paragraph (1) The aggregate risk-weighted asset (d) of this section, provided, however, amounts of the exposures held by the that the minimum risk weight that fund as if they were held directly by

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the national bank or Federal savings tion must use the highest applicable association; and risk weight. A national bank or Fed- (2) The national bank’s or Federal eral savings association may exclude savings association’s proportional own- derivative contracts held by the fund ership share of the fund. that are used for hedging rather than (c) Simple modified look-through ap- for speculative purposes and do not proach. Under the simple modified constitute a material portion of the look-through approach, the risk- fund’s exposures. weighted asset amount for a national bank’s or Federal savings association’s §§ 3.54–3.60 [Reserved] equity exposure to an investment fund equals the adjusted carrying value of DISCLOSURES the equity exposure multiplied by the highest risk weight that applies to any § 3.61 Purpose and scope. exposure the fund is permitted to hold Sections 3.61 through 3.63 of this sub- under the prospectus, partnership part establish public disclosure re- agreement, or similar agreement that quirements related to the capital re- defines the fund’s permissible invest- quirements described in subpart B of ments (excluding derivative contracts this part for a national bank or Federal that are used for hedging rather than savings association with total consoli- speculative purposes and that do not constitute a material portion of the dated assets of $50 billion or more as fund’s exposures). reported on the national bank’s or Fed- (d) Alternative modified look-through eral savings association’s most recent approach. Under the alternative modi- year-end Call Report that is not an ad- fied look-through approach, a national vanced approaches national bank or bank or Federal savings association Federal savings association making may assign the adjusted carrying value public disclosures pursuant to § 3.172. of an equity exposure to an investment An advanced approaches national bank fund on a pro rata basis to different or Federal savings association that has risk weight categories under this sub- not received approval from the OCC to part based on the investment limits in exit parallel run pursuant to § 3.121(d) the fund’s prospectus, partnership is subject to the disclosure require- agreement, or similar contract that de- ments described in §§ 3.62 and 3.63. A fines the fund’s permissible invest- national bank or Federal savings asso- ments. The risk-weighted asset amount ciation with total consolidated assets for the national bank’s or Federal sav- of $50 billion or more as reported on ings association’s equity exposure to the national bank’s or Federal savings the investment fund equals the sum of association’s most recent year-end Call each portion of the adjusted carrying Report that is not an advanced ap- value assigned to an exposure type proaches national bank or Federal sav- multiplied by the applicable risk ings association making public disclo- weight under this subpart. If the sum sures subject to § 3.172 must comply of the investment limits for all expo- with § 3.62 unless it is a consolidated sure types within the fund exceeds 100 percent, the national bank or Federal subsidiary of a bank holding company, savings association must assume that savings and loan holding company, or the fund invests to the maximum ex- depository institution that is subject tent permitted under its investment to the disclosure requirements of § 3.62 limits in the exposure type with the or a subsidiary of a non-U.S. banking highest applicable risk weight under organization that is subject to com- this subpart and continues to make in- parable public disclosure requirements vestments in order of the exposure type in its home jurisdiction. For purposes with the next highest applicable risk of this section, total consolidated as- weight under this subpart until the sets are determined based on the aver- maximum total investment level is age of the national bank’s or Federal reached. If more than one exposure savings association’s total consolidated type applies to an exposure, the na- assets in the four most recent quarters tional bank or Federal savings associa- as reported on the Call Report or the

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average of the national bank or Fed- tive internal control structure over fi- eral savings association’s total consoli- nancial reporting, including the disclo- dated assets in the most recent con- sures required by this subpart, and secutive quarters as reported quarterly must ensure that appropriate review of on the national bank’s or Federal sav- the disclosures takes place. One or ings association’s Call Report if the na- more senior officers of the national tional bank or Federal savings associa- bank or Federal savings association tion has not filed such a report for each must attest that the disclosures meet of the most recent four quarters. the requirements of this subpart. [84 FR 35256, July 22, 2019] (c) If a national bank or Federal savings association described in § 3.61 con- § 3.62 Disclosure requirements. cludes that specific commercial or fi- (a) A national bank or Federal sav- nancial information that it would oth- ings association described in § 3.61 must erwise be required to disclose under provide timely public disclosures each this section would be exempt from dis- calendar quarter of the information in closure by the OCC under the Freedom the applicable tables in § 3.63. If a sig- of Information Act (5 U.S.C. 552), then nificant change occurs, such that the the national bank or Federal savings most recent reported amounts are no association is not required to disclose longer reflective of the national bank’s that specific information pursuant to or Federal savings association’s capital this section, but must disclose more adequacy and risk profile, then a brief general information about the subject discussion of this change and its likely matter of the requirement, together impact must be disclosed as soon as with the fact that, and the reason why, practicable thereafter. Qualitative dis- the specific items of information have closures that typically do not change not been disclosed. each quarter (for example, a general summary of the national bank’s or § 3.63 Disclosures by national banks or Federal savings association’s risk man- Federal savings associations de- agement objectives and policies, re- scribed in § 3.61. porting system, and definitions) may (a) Except as provided in § 3.62, a na- be disclosed annually after the end of tional bank or Federal savings associa- the fourth calendar quarter, provided tion described in § 3.61 must make the that any significant changes are dis- disclosures described in Tables 1 closed in the interim. The national through 10 of this section. The national bank’s or Federal savings association’s bank or Federal savings association management may provide all of the must make these disclosures publicly disclosures required by §§ 3.61 through available for each of the last three 3.63 in one place on the national bank’s years (that is, twelve quarters) or such or Federal savings association’s public shorter period beginning on January 1, Web site or may provide the disclosures 2015. in more than one public financial report or other regulatory reports, pro- (b) A national bank or Federal sav- vided that the national bank or Fed- ings association must publicly disclose eral savings association publicly pro- each quarter the following: vides a summary table specifically in- (1) Common equity tier 1 capital, ad- dicating the location(s) of all such dis- ditional tier 1 capital, tier 2 capital, closures. tier 1 and total capital ratios, includ- (b) A national bank or Federal saving the regulatory capital elements ings association described in § 3.61 must and all the regulatory adjustments and have a formal disclosure policy ap- deductions needed to calculate the nu- proved by the board of directors that merator of such ratios; addresses its approach for determining (2) Total risk-weighted assets, includ- the disclosures it makes. The policy ing the different regulatory adjust- must address the associated internal ments and deductions needed to cal- controls and disclosure controls and culate total risk-weighted assets; procedures. The board of directors and (3) Regulatory capital ratios during senior management are responsible for any transition periods, including a de- establishing and maintaining an effec- scription of all the regulatory capital

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elements and all regulatory adjust- § 3.172(d) is subject to the supple- ments and deductions needed to cal- mentary leverage ratio disclosure re- culate the numerator and denominator quirement at § 3.173(a)(2). of each capital ratio during any transi- (e) A Category III national bank or tion period; and Federal savings association that is re- (4) A reconciliation of regulatory quired to calculate a countercyclical capital elements as they relate to its capital buffer pursuant to § 3.11 is sub- balance sheet in any audited consoli- ject to the disclosure requirement at dated financial statements. Table 4 to § 3.173, ‘‘Capital Conserva- (c) [Reserved] tion and Countercyclical Capital Buff- (d) A Category III national bank or Federal savings association that is re- ers,’’ and not to the disclosure require- quired to publicly disclose its supple- ment at Table 4 to this section, ‘‘Cap- mentary leverage ratio pursuant to ital Conservation Buffer.’’

TABLE 1 TO § 3.63—SCOPE OF APPLICATION

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

TABLE 2 TO § 3.63—CAPITAL STRUCTURE

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

TABLE 3 TO § 3.63—CAPITAL ADEQUACY

Qualitative (a) A summary discussion of the national bank’s or Federal savings associa- disclosures. tion’s approach to assessing the adequacy of its capital to support current and future activities. Quantitative (b) Risk-weighted assets for: disclosures.

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TABLE 3 TO § 3.63—CAPITAL ADEQUACY—Continued (1) Exposures to sovereign entities; (2) Exposures to certain supranational entities and MDBs; (3) Exposures to depository institutions, foreign banks, and credit unions; (4) Exposures to PSEs; (5) Corporate exposures; (6) Residential mortgage exposures; (7) Statutory multifamily mortgages and pre-sold construction loans; (8) HVCRE exposures; (9) Past due loans; (10) Other assets; (11) Cleared transactions; (12) Default fund contributions; (13) Unsettled transactions; (14) Securitization exposures; and (15) Equity exposures. (c) Standardized market risk-weighted assets as calculated under subpart F of this part. (d) Common equity tier 1, tier 1 and total risk-based capital ratios: (1) For the top consolidated group; and (2) For each depository institution subsidiary. (e) Total standardized risk-weighted assets.

TABLE 4 TO § 3.63—CAPITAL CONSERVATION BUFFER

Quantitative Disclosures ...... (a) ...... At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the capital conservation buffer as described under § 3.11. (b) ...... At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the eligible retained income of the national bank or Federal savings association, as described under § 3.11. (c) ...... At least quarterly, the national bank or Federal savings association must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer framework described under § 3.11, including the maximum payout amount for the quarter.

(c) General qualitative disclosure re- management function; the scope and quirement. For each separate risk area nature of risk reporting and/or meas- described in Tables 5 through 10, the urement systems; policies for hedging national bank or Federal savings asso- and/or mitigating risk and strategies ciation must describe its risk manage- and processes for monitoring the con- ment objectives and policies, including: tinuing effectiveness of hedges/ Strategies and processes; the structure mitigants. and organization of the relevant risk

TABLE 5 TO § 3.63 1—CREDIT RISK: GENERAL DISCLOSURES

Qualitative Disclosures ...... (a) ...... The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6), including the: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes); (5) Description of the methodology that the national bank or Federal savings association uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and

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TABLE 5 TO § 3.63 1—CREDIT RISK: GENERAL DISCLOSURES—Continued (7) Discussion of the national bank’s or Federal savings association’s credit risk management policy. Quantitative Disclosures ...... (b) ...... Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, national banks or Federal savings associations could use categories similar to that used for financial statement purposes. Such categories might include, for instance (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; (2) Debt securities; and (3) OTC derivatives.2 (c) ...... Geographic distribution of exposures, categorized in significant areas by major types of credit exposure.3 (d) ...... Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) ...... By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the national bank’s or Federal savings association’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. (f) ...... Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area,5 further categorized as required by GAAP. (g) ...... Reconciliation of changes in ALLL or AACL, as applicable.6 (h) ...... Remaining contractual maturity delineation (for example, one year or less) of the whole portfolio, categorized by credit exposure. 1 Table 5 does not cover equity exposures, which should be reported in Table 9. 2 See, for example, ASC Topic 815–10 and 210, as they may be amended from time to time. 3 Geographical areas may consist of individual countries, groups of countries, or regions within countries. A national bank or Federal savings association might choose to define the geographical areas based on the way the national bank’s or Federal savings association’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified. 4 A national bank or Federal savings association is encouraged also to provide an analysis of the aging of past-due loans. 5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately. 6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge- offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.

TABLE 6 TO § 3.63—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK-RELATED EXPOSURES

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TABLE 6 TO § 3.63—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK-RELATED EXPOSURES—Continued (c) ...... Notional amount of purchased and sold credit derivatives, segregated between use for the national bank’s or Federal savings association’s own credit portfolio and in its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. 1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc. 2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.

TABLE 7 TO § 3.63—CREDIT RISK MITIGATION 12

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

TABLE 8 TO § 3.63—SECURITIZATION

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

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TABLE 8 TO § 3.63—SECURITIZATION—Continued (2) Affiliated entities: (i) That the national bank or Federal savings association manages or advises; and (ii) That invest either in the securitization exposures that the national bank or Federal savings association has securitized or in securitization SPEs that the national bank or Federal savings association sponsors.3 (c) Summary of the national bank’s or Federal savings association’s accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings; (2) Recognition of gain-on-sale; (3) Methods and key assumptions applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the national bank or Federal savings association to provide financial support for securitized assets. (d) An explanation of significant changes to any quantitative information since the last reporting period. Quantitative (e) The total outstanding exposures securitized by the national bank or Fed- Disclosures. eral savings association in securitizations that meet the operational criteria provided in § 3.41 (categorized into traditional and synthetic securitizations), by exposure type, separately for securitizations of third-party exposures for which the bank acts only as sponsor.4 (f) For exposures securitized by the national bank or Federal savings association in securitizations that meet the operational criteria in § 3.41: (1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 and (2) Losses recognized by the national bank or Federal savings association during the current period categorized by exposure type.6 (g) The total amount of outstanding exposures intended to be securitized categorized by exposure type. (h) Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i)(1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g., SSFA); and (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital; and (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. (j) Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. (k) Aggregate amount of resecuritization exposures retained or purchased categorized according to:

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TABLE 8 TO § 3.63—SECURITIZATION—Continued (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name.

1 The national bank or Federal savings association should describe the structure of resecuritizations in which it participates; this description should be provided for the main categories of resecuritization products in which the national bank or Federal savings association is active. 2 For example, these roles may include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider. 3 Such affiliated entities may include, for example, money market funds, to be listed individually, and personal and private trusts, to be noted collectively. 4 ‘‘Exposures securitized’’ include underlying exposures originated by the national bank or Federal savings association, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the national bank’s or Federal savings association’s balance sheet and underlying exposures acquired by the national bank or Federal savings association from third-party entities) in which the originating bank does not retain any securitization exposure should be shown separately but need only be reported for the year of inception. National banks and Federal savings associations are required to disclose exposures regardless of whether there is a capital charge under this part. 5 Include credit-related other than temporary impairment (OTTI). 6 For example, charge-offs/allowances (if the assets remain on the national bank’s or Federal savings association’s balance sheet) or credit-related OTTI of interest-only strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the national bank or Federal savings association with respect to securitized assets.

TABLE 9 TO § 3.63—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART

Qualitative Disclosures ...... (a) ...... The general qualitative disclosure requirement with respect to equity risk for equities not subject to subpart F of this part, including: (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity holdings not subject to subpart F of this part. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative Disclosures ...... (b) ...... Value disclosed on the balance sheet of investments, as well as the fair value of those investments; for securities that are publicly traded, a comparison to publicly-quoted share values where the share price is materially different from fair value. (c) ...... The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non publicly traded. (d) ...... The cumulative realized gains (losses) arising from sales and liq- uidations in the reporting period. (e) ...... (1) Total unrealized gains (losses).1 (2) Total latent revaluation gains (losses).2 (3) Any amounts of the above included in tier 1 or tier 2 capital. (f) ...... Capital requirements categorized by appropriate equity groupings, consistent with the national bank’s or Federal savings association’s methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding regulatory capital requirements.

1 Unrealized gains (losses) recognized on the balance sheet but not through earnings. 2 Unrealized gains (losses) not recognized either on the balance sheet or through earnings.

TABLE 10 TO § 3.63—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES

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

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(d) A Category III national bank or calculate its risk-based capital require- Federal savings association that is re- ments; quired to publicly disclose its supple- (iv) Is a subsidiary of a bank holding mentary leverage ratio pursuant to company or savings and loan holding § 3.172(d) is subject to the supple- company that uses the advanced ap- mentary leverage ratio disclosure re- proaches pursuant to subpart E of 12 quirement at § 3.173(a)(2). CFR part 217 to calculate its risk-based (e) A Category III national bank or capital requirements; or Federal savings association that is re- (v) Elects to use this subpart to cal- quired to calculate a countercyclical culate its risk-based capital require- capital buffer pursuant to § 3.11 is sub- ments. ject to the disclosure requirement at (2) A market risk national bank or Table 4 to § 3.173, ‘‘Capital Conserva- Federal savings association must ex- tion and Countercyclical Capital Buff- clude from its calculation of risk- ers,’’ and not to the disclosure require- weighted assets under this subpart the ment at Table 4 to this section, ‘‘Cap- risk-weighted asset amounts of all cov- ital Conservation Buffer.’’ ered positions, as defined in subpart F [78 FR 62157, 62273, Oct. 11, 2013, as amended of this part (except foreign exchange at 84 FR 4238, Feb. 14, 2019; 84 FR 35256, July positions that are not trading posi- 22, 2019; 84 FR 59265, Nov. 1, 2019] tions, over-the-counter derivative positions, cleared transactions, and unset- §§ 3.64–3.99 [Reserved] tled transactions). (c) Principle of conservatism. Notwith- Subpart E—Risk-Weighted Assets— standing the requirements of this sub- Internal Ratings-Based and part, a national bank or Federal sav- Advanced Measurement Ap- ings association may choose not to proaches apply a provision of this subpart to one or more exposures provided that: SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, un- (1) The national bank or Federal sav- less otherwise noted. ings association can demonstrate on an ongoing basis to the satisfaction of the § 3.100 Purpose, applicability, and OCC that not applying the provision principle of conservatism. would, in all circumstances, unambig- (a) Purpose. This subpart E estab- uously generate a risk-based capital re- lishes: quirement for each such exposure (1) Minimum qualifying criteria for greater than that which would other- national banks or Federal savings asso- wise be required under this subpart; ciations using institution-specific in- (2) The national bank or Federal sav- ternal risk measurement and manage- ings association appropriately manages ment processes for calculating risk- the risk of each such exposure; based capital requirements; and (3) The national bank or Federal sav- (2) Methodologies for such national ings association notifies the OCC in banks or Federal savings associations writing prior to applying this principle to calculate their total risk-weighted to each such exposure; and assets. (4) The exposures to which the na- (b) Applicability. (1) This subpart ap- tional bank or Federal savings associa- plies to a national bank or Federal sav- tion applies this principle are not, in ings association that: the aggregate, material to the national (i) Is a subsidiary of a global system- bank or Federal savings association. ically important BHC, as identified pursuant to 12 CFR 217.402; [78 FR 62157, 62273, Oct. 11, 2013, as amended (ii) Is a Category II national bank or at 80 FR 41415, July 15, 2015; 84 FR 59265, Nov. Federal savings association; 1, 2019] (iii) Is a subsidiary of a depository institution that uses the advanced ap- § 3.101 Definitions. proaches pursuant to this subpart (a) Terms that are set forth in § 3.2 (OCC), 12 CFR part 217, subpart E and used in this subpart have the defi- (Board), or 12 CFR part 324 (FDIC), to nitions assigned thereto in § 3.2.

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(b) For the purposes of this subpart, sure(s)) to another party (the protec- the following terms are defined as fol- tion provider) for a certain period of lows: time. Advanced internal ratings-based (IRB) Credit valuation adjustment (CVA) systems means an advanced approaches means the fair value adjustment to re- national bank’s or Federal savings as- flect counterparty credit risk in valu- sociation’s internal risk rating and ation of OTC derivative contracts. segmentation system; risk parameter Default—For the purposes of calcu- quantification system; data manage- lating capital requirements under this ment and maintenance system; and subpart: control, oversight, and validation sys- (1) Retail. (i) A retail exposure of a tem for credit risk of wholesale and re- national bank or Federal savings asso- tail exposures. ciation is in default if: Advanced systems means an advanced approaches national bank’s or Federal (A) The exposure is 180 days past due, savings association’s advanced IRB in the case of a residential mortgage systems, operational risk management exposure or revolving exposure; processes, operational risk data and as- (B) The exposure is 120 days past due, sessment systems, operational risk in the case of retail exposures that are quantification systems, and, to the ex- not residential mortgage exposures or tent used by the national bank or Fed- revolving exposures; or eral savings association, the internal (C) The national bank or Federal sav- models methodology, advanced CVA ings association has taken a full or approach, double default excessive cor- partial charge-off, write-down of prin- relation detection process, and internal cipal, or material negative fair value models approach (IMA) for equity expo- adjustment of principal on the exposures. sure for credit-related reasons. Backtesting means the comparison of (ii) Notwithstanding paragraph (1)(i) a national bank’s or Federal savings of this definition, for a retail exposure association’s internal estimates with held by a non-U.S. subsidiary of the na- actual outcomes during a sample pe- tional bank or Federal savings associa- riod not used in model development. In tion that is subject to an internal rat- this context, backtesting is one form of ings-based approach to capital ade- out-of-sample testing. quacy consistent with the Basel Com- Benchmarking means the comparison mittee on Banking Supervision’s of a national bank’s or Federal savings ‘‘International Convergence of Capital association’s internal estimates with Measurement and Capital Standards: A relevant internal and external data or Revised Framework’’ in a non-U.S. ju- with estimates based on other esti- risdiction, the national bank or Fed- mation techniques. eral savings association may elect to Bond option contract means a bond op- use the definition of default that is tion, bond future, or any other instru- used in that jurisdiction, provided that ment linked to a bond that gives rise the national bank or Federal savings to similar counterparty credit risk. association has obtained prior approval Business environment and internal con- from the OCC to use the definition of trol factors means the indicators of a default in that jurisdiction. national bank’s or Federal savings association’s operational risk profile that (iii) A retail exposure in default re- reflect a current and forward-looking mains in default until the national assessment of the national bank’s or bank or Federal savings association Federal savings association’s under- has reasonable assurance of repayment lying business risk factors and internal and performance for all contractual control environment. principal and interest payments on the Credit default swap (CDS) means a fi- exposure. nancial contract executed under stand- (2) Wholesale. (i) A national bank’s or ard industry documentation that al- Federal savings association’s wholesale lows one party (the protection pur- obligor is in default if: chaser) to transfer the credit risk of (A) The national bank or Federal sav- one or more exposures (reference expo- ings association determines that the

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obligor is unlikely to pay its credit ob- contracts subject to a qualifying mas- ligations to the national bank or Fed- ter netting agreement for which the eral savings association in full, with- national bank or Federal savings asso- out recourse by the national bank or ciation does not apply the internal Federal savings association to actions models approach in section 132(d), the such as realizing collateral (if held); or weighted-average remaining maturity (B) The obligor is past due more than (measured in years, whole or frac- 90 days on any material credit obliga- tional) of the individual transactions tion(s) to the national bank or Federal subject to the qualifying master net- savings association.29 ting agreement, with the weight of (ii) An obligor in default remains in each individual transaction set equal default until the national bank or Fed- to the notional amount of the trans- eral savings association has reasonable action. assurance of repayment and perform- (3) For repo-style transactions, eligi- ance for all contractual principal and ble margin loans, and OTC derivative interest payments on all exposures of contracts for which the national bank the national bank or Federal savings or Federal savings association applies association to the obligor (other than the internal models approach in exposures that have been fully written- § 3.132(d), the value determined in down or charged-off). § 3.132(d)(4). Dependence means a measure of the association among operational losses Eligible double default guarantor, with across and within units of measure. respect to a guarantee or credit deriva- Economic downturn conditions means, tive obtained by a national bank or with respect to an exposure held by the Federal savings association, means: national bank or Federal savings asso- (1) U.S.-based entities. A depository in- ciation, those conditions in which the stitution, a bank holding company, a aggregate default rates for that expo- savings and loan holding company, or a sure’s wholesale or retail exposure sub- securities broker or dealer registered category (or subdivision of such sub- with the SEC under the Securities Ex- category selected by the national bank change Act, if at the time the guar- or Federal savings association) in the antee is issued or anytime thereafter, exposure’s national jurisdiction (or has issued and outstanding an unse- subdivision of such jurisdiction secured debt security without credit en- lected by the national bank or Federal hancement that is investment grade. savings association) are significantly (2) Non-U.S.-based entities. A foreign higher than average. bank, or a non-U.S.-based securities Effective maturity (M) of a wholesale firm if the national bank or Federal exposure means: savings association demonstrates that (1) For wholesale exposures other the guarantor is subject to consoli- than repo-style transactions, eligible dated supervision and regulation com- margin loans, and OTC derivative con- parable to that imposed on U.S. deposi- tracts described in paragraph (2) or (3) tory institutions, or securities broker- of this definition: dealers) if at the time the guarantee is (i) The weighted-average remaining issued or anytime thereafter, has maturity (measured in years, whole or issued and outstanding an unsecured fractional) of the expected contractual debt security without credit enhance- cash flows from the exposure, using the ment that is investment grade. undiscounted amounts of the cash Eligible operational risk offsets means flows as weights; or amounts, not to exceed expected oper- (ii) The nominal remaining maturity ational loss, that: (measured in years, whole or fractional) of the exposure. (1) Are generated by internal busi- (2) For repo-style transactions, eligi- ness practices to absorb highly predict- ble margin loans, and OTC derivative able and reasonably stable operational losses, including reserves calculated consistent with GAAP; and 29 Overdrafts are past due once the obligor has breached an advised limit or been ad- (2) Are available to cover expected vised of a limit smaller than the current out- operational losses with a high degree of standing balance. certainty over a one-year horizon.

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Eligible purchased wholesale exposure OTC derivative contract, a repo-style means a purchased wholesale exposure transaction or eligible margin loan for that: which the national bank or Federal (1) The national bank or Federal sav- savings association determines EAD ings association or securitization SPE under § 3.132, a cleared transaction, or purchased from an unaffiliated seller default fund contribution), EAD means and did not directly or indirectly origi- the national bank’s or Federal savings nate; association’s carrying value (including (2) Was generated on an arm’s-length net accrued but unpaid interest and basis between the seller and the obligor fees) for the exposure or segment less (intercompany accounts receivable and any allocated transfer risk reserve for receivables subject to contra-accounts the exposure or segment. between firms that buy and sell to each (2) For the off-balance sheet compo- other do not satisfy this criterion); nent of a wholesale exposure or seg- (3) Provides the national bank or ment of retail exposures (other than an Federal savings association or OTC derivative contract, a repo-style securitization SPE with a claim on all transaction or eligible margin loan for proceeds from the exposure or a pro which the national bank or Federal rata interest in the proceeds from the savings association determines EAD exposure; under § 3.132, cleared transaction, or de- (4) Has an M of less than one year; fault fund contribution) in the form of and a loan commitment, line of credit, (5) When consolidated by obligor, trade-related letter of credit, or trans- does not represent a concentrated ex- action-related contingency, EAD posure relative to the portfolio of pur- means the national bank’s or Federal chased wholesale exposures. savings association’s best estimate of Expected exposure (EE) means the ex- net additions to the outstanding pected value of the probability dis- amount owed the national bank or Fed- tribution of non-negative credit risk eral savings association, including esti- exposures to a counterparty at any mated future additional draws of prin- specified future date before the matu- cipal and accrued but unpaid interest rity date of the longest term trans- and fees, that are likely to occur over action in the netting set. Any negative a one-year horizon assuming the whole- fair values in the probability distribu- sale exposure or the retail exposures in tion of fair values to a counterparty at the segment were to go into default. a specified future date are set to zero This estimate of net additions must re- to convert the probability distribution flect what would be expected during of fair values to the probability dis- economic downturn conditions. For the tribution of credit risk exposures. purposes of this definition: Expected operational loss (EOL) means the expected value of the distribution (i) Trade-related letters of credit are of potential aggregate operational short-term, self-liquidating instru- losses, as generated by the national ments that are used to finance the bank’s or Federal savings association’s movement of goods and are operational risk quantification system collateralized by the underlying goods. using a one-year horizon. (ii) Transaction-related contin- Expected positive exposure (EPE) gencies relate to a particular trans- means the weighted average over time action and include, among other of expected (non-negative) exposures to things, performance bonds and per- a counterparty where the weights are formance-based letters of credit. the proportion of the time interval (3) For the off-balance sheet compo- that an individual expected exposure nent of a wholesale exposure or seg- represents. When calculating risk- ment of retail exposures (other than an based capital requirements, the aver- OTC derivative contract, a repo-style age is taken over a one-year horizon. transaction, or eligible margin loan for Exposure at default (EAD) means: which the national bank or Federal (1) For the on-balance sheet compo- savings association determines EAD nent of a wholesale exposure or seg- under § 3.132, cleared transaction, or de- ment of retail exposures (other than an fault fund contribution) in the form of

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anything other than a loan commit- pect to incur if the obligor (or a typical ment, line of credit, trade-related let- obligor in the loss severity grade as- ter of credit, or transaction-related signed by the national bank or Federal contingency, EAD means the notional savings association to the exposure) amount of the exposure or segment. were to default within a one-year hori- (4) EAD for OTC derivative contracts zon during economic downturn condi- is calculated as described in § 3.132. A tions. national bank or Federal savings asso- (2) For a segment of retail exposures, ciation also may determine EAD for the greatest of: repo-style transactions and eligible (i) Zero; margin loans as described in § 3.132. (ii) The national bank’s or Federal Exposure category means any of the savings association’s empirically based wholesale, retail, securitization, or eq- best estimate of the long-run default- uity exposure categories. weighted average economic loss, per External operational loss event data dollar of EAD, the national bank or means, with respect to a national bank Federal savings association would ex- or Federal savings association, gross pect to incur if the exposures in the operational loss amounts, dates, recov- segment were to default within a one- eries, and relevant causal information year horizon over a mix of economic for operational loss events occurring at conditions, including economic down- organizations other than the national turn conditions; or bank or Federal savings association. (iii) The national bank’s or Federal IMM exposure means a repo-style savings association’s empirically based transaction, eligible margin loan, or best estimate of the economic loss, per OTC derivative for which a national dollar of EAD, the national bank or bank or Federal savings association Federal savings association would ex- calculates its EAD using the internal pect to incur if the exposures in the models methodology of § 3.132(d). segment were to default within a one- Internal operational loss event data year horizon during economic down- means, with respect to a national bank turn conditions. or Federal savings association, gross (3) The economic loss on an exposure operational loss amounts, dates, recov- in the event of default is all material eries, and relevant causal information credit-related losses on the exposure for operational loss events occurring at (including accrued but unpaid interest the national bank or Federal savings or fees, losses on the sale of collateral, association. direct workout costs, and an appro- Loss given default (LGD) means: priate allocation of indirect workout (1) For a wholesale exposure, the costs). Where positive or negative cash greatest of: flows on a wholesale exposure to a de- (i) Zero; faulted obligor or a defaulted retail ex- (ii) The national bank’s or Federal posure (including proceeds from the savings association’s empirically based sale of collateral, workout costs, addi- best estimate of the long-run default- tional extensions of credit to facilitate weighted average economic loss, per repayment of the exposure, and draw- dollar of EAD, the national bank or downs of unused credit lines) occur Federal savings association would ex- after the date of default, the economic pect to incur if the obligor (or a typical loss must reflect the net present value obligor in the loss severity grade as- of cash flows as of the default date signed by the national bank or Federal using a discount rate appropriate to savings association to the exposure) the risk of the defaulted exposure. were to default within a one-year hori- Obligor means the legal entity or nat- zon over a mix of economic conditions, ural person contractually obligated on including economic downturn condi- a wholesale exposure, except that a na- tions; or tional bank or Federal savings associa- (iii) The national bank’s or Federal tion may treat the following exposures savings association’s empirically based as having separate obligors: best estimate of the economic loss, per (1) Exposures to the same legal enti- dollar of EAD, the national bank or ty or natural person denominated in Federal savings association would ex- different currencies;

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(2)(i) An income-producing real es- losses are to be treated as credit risk tate exposure for which all or substan- losses. tially all of the repayment of the expo- (3) Employment practices and work- sure is reliant on the cash flows of the place safety, which means the oper- real estate serving as collateral for the ational loss event type category that exposure; the national bank or Federal comprises operational losses resulting savings association, in economic sub- from an act inconsistent with employ- stance, does not have recourse to the ment, health, or safety laws or agree- borrower beyond the real estate collat- ments, payment of personal injury eral; and no cross-default or cross-ac- claims, or payment arising from celeration clauses are in place other diversity- and discrimination-type than clauses obtained solely out of an events. abundance of caution; and (4) Clients, products, and business (ii) Other credit exposures to the practices, which means the operational same legal entity or natural person; loss event type category that com- and prises operational losses resulting from (3)(i) A wholesale exposure author- the nature or design of a product or ized under section 364 of the U.S. Bank- from an unintentional or negligent ruptcy Code (11 U.S.C. 364) to a legal failure to meet a professional obliga- entity or natural person who is a debt- tion to specific clients (including fidu- or-in-possession for purposes of Chap- ciary and suitability requirements). ter 11 of the Bankruptcy Code; and (5) Damage to physical assets, which (ii) Other credit exposures to the means the operational loss event type same legal entity or natural person. category that comprises operational Operational loss means a loss (exclud- losses resulting from the loss of or ing insurance or tax effects) resulting damage to physical assets from natural from an operational loss event. Oper- disaster or other events. ational loss includes all expenses asso- (6) Business disruption and system ciated with an operational loss event failures, which means the operational except for opportunity costs, forgone loss event type category that com- revenue, and costs related to risk management and control enhancements im- prises operational losses resulting from plemented to prevent future oper- disruption of business or system fail- ational losses. ures. Operational loss event means an event (7) Execution, delivery, and process that results in loss and is associated management, which means the oper- with any of the following seven operational loss event type category that ational loss event type categories: comprises operational losses resulting (1) Internal fraud, which means the from failed transaction processing or operational loss event type category process management or losses arising that comprises operational losses re- from relations with trade counterpar- sulting from an act involving at least ties and vendors. one internal party of a type intended Operational risk means the risk of loss to defraud, misappropriate property, or resulting from inadequate or failed in- circumvent regulations, the law, or ternal processes, people, and systems company policy excluding diversity- or from external events (including and discrimination-type events. legal risk but excluding strategic and (2) External fraud, which means the reputational risk). operational loss event type category Operational risk exposure means the that comprises operational losses re- 99.9th percentile of the distribution of sulting from an act by a third party of potential aggregate operational losses, a type intended to defraud, misappro- as generated by the national bank’s or priate property, or circumvent the law. Federal savings association’s oper- Retail credit card losses arising from ational risk quantification system over non-contractual, third-party-initiated a one-year horizon (and not incor- fraud (for example, identity theft) are porating eligible operational risk off- external fraud operational losses. All sets or qualifying operational risk other third-party-initiated credit mitigants).

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Other retail exposure means an expo- counterparty’s default, provided that sure (other than a securitization expo- the underlying financial transactions sure, an equity exposure, a residential are OTC derivative contracts, eligible mortgage exposure, a pre-sold con- margin loans, or repo-style trans- struction loan, a qualifying revolving actions. In order to treat an agreement exposure, or the residual value portion as a qualifying cross-product master of a lease exposure) that is managed as netting agreement for purposes of this part of a segment of exposures with ho- subpart, a national bank or Federal mogeneous risk characteristics, not on savings association must comply with an individual-exposure basis, and is ei- the requirements of § 3.3(c) of this part ther: with respect to that agreement. (1) An exposure to an individual for Qualifying revolving exposure (QRE) non-business purposes; or (2) An exposure to an individual or means an exposure (other than a company for business purposes if the securitization exposure or equity expo- national bank’s or Federal savings assure) to an individual that is managed sociation’s consolidated business credit as part of a segment of exposures with exposure to the individual or company homogeneous risk characteristics, not is $1 million or less. on an individual-exposure basis, and: Probability of default (PD) means: (1) Is revolving (that is, the amount (1) For a wholesale exposure to a non- outstanding fluctuates, determined defaulted obligor, the national bank’s largely by a borrower’s decision to bor- or Federal savings association’s em- row and repay up to a pre-established pirically based best estimate of the maximum amount, except for an out- long-run average one-year default rate standing amount that the borrower is for the rating grade assigned by the na- required to pay in full every month); tional bank or Federal savings associa- (2) Is unsecured and unconditionally tion to the obligor, capturing the aver- cancelable by the national bank or age default experience for obligors in Federal savings association to the full- the rating grade over a mix of eco- est extent permitted by Federal law; nomic conditions (including economic and downturn conditions) sufficient to pro- (3)(i) Has a maximum contractual ex- vide a reasonable estimate of the aver- posure amount (drawn plus undrawn) of age one-year default rate over the economic cycle for the rating grade. up to $100,000; or (2) For a segment of non-defaulted re- (ii) With respect to a product with an tail exposures, the national bank’s or outstanding amount that the borrower Federal savings association’s empiri- is required to pay in full every month, cally based best estimate of the long- the total outstanding amount does not run average one-year default rate for in practice exceed $100,000. the exposures in the segment, cap- (4) A segment of exposures that con- turing the average default experience tains one or more exposures that fails for exposures in the segment over a to meet paragraph (3)(ii) of this defini- mix of economic conditions (including tion must be treated as a segment of economic downturn conditions) suffi- other retail exposures for the 24 month cient to provide a reasonable estimate period following the month in which of the average one-year default rate the total outstanding amount of one or over the economic cycle for the seg- more exposures individually exceeds ment. $100,000. (3) For a wholesale exposure to a de- Retail exposure means a residential faulted obligor or segment of defaulted mortgage exposure, a qualifying re- retail exposures, 100 percent. volving exposure, or an other retail ex- Qualifying cross-product master netting posure. agreement means a qualifying master netting agreement that provides for Retail exposure subcategory means the termination and close-out netting residential mortgage exposure, quali- across multiple types of financial fying revolving exposure, or other re- transactions or qualifying master net- tail exposure subcategory. ting agreements in the event of a

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Risk parameter means a variable used Wholesale exposure means a credit ex- in determining risk-based capital re- posure to a company, natural person, quirements for wholesale and retail ex- sovereign, or governmental entity posures, specifically probability of de- (other than a securitization exposure, fault (PD), loss given default (LGD), retail exposure, pre-sold construction exposure at default (EAD), or effective loan, or equity exposure). maturity (M). Wholesale exposure subcategory means Scenario analysis means a systematic the HVCRE or non-HVCRE wholesale process of obtaining expert opinions exposure subcategory. from business managers and risk management experts to derive reasoned as- QUALIFICATION sessments of the likelihood and loss impact of plausible high-severity oper- § 3.121 Qualification process. ational losses. Scenario analysis may (a) Timing. (1) A national bank or include the well-reasoned evaluation Federal savings association that is de- and use of external operational loss scribed in § 3.100(b)(1)(i) through (iv) event data, adjusted as appropriate to must adopt a written implementation ensure relevance to a national bank’s plan no later than six months after the or Federal savings association’s oper- date the national bank or Federal sav- ational risk profile and control struc- ings association meets a criterion in ture. that section. The implementation plan Total wholesale and retail risk-weighted must incorporate an explicit start date assets means the sum of: no later than 36 months after the date (1) Risk-weighted assets for whole- the national bank or Federal savings sale exposures that are not IMM expo- association meets at least one criterion sures, cleared transactions, or default under § 3.100(b)(1)(i) through (iv). The fund contributions to non-defaulted ob- OCC may extend the start date. ligors and segments of non-defaulted (2) A national bank or Federal sav- retail exposures; ings association that elects to be sub- (2) Risk-weighted assets for whole- ject to this appendix under sale exposures to defaulted obligors § 3.100(b)(1)(v) must adopt a written im- and segments of defaulted retail expo- plementation plan. sures; (b) Implementation plan. (1) The na- (3) Risk-weighted assets for assets tional bank’s or Federal savings asso- not defined by an exposure category; ciation’s implementation plan must (4) Risk-weighted assets for non-ma- address in detail how the national bank terial portfolios of exposures; or Federal savings association com- (5) Risk-weighted assets for IMM ex- plies, or plans to comply, with the posures (as determined in § 3.132(d)); qualification requirements in § 3.122. (6) Risk-weighted assets for cleared The national bank or Federal savings transactions and risk-weighted assets association also must maintain a com- for default fund contributions (as de- prehensive and sound planning and termined in § 3.133); and governance process to oversee the im- (7) Risk-weighted assets for unsettled plementation efforts described in the transactions (as determined in § 3.136). plan. At a minimum, the plan must: Unexpected operational loss (UOL) (i) Comprehensively address the qual- means the difference between the na- ification requirements in § 3.122 for the tional bank’s or Federal savings asso- national bank or Federal savings association’s operational risk exposure and ciation and each consolidated sub- the national bank’s or Federal savings sidiary (U.S. and foreign-based) of the association’s expected operational loss. national bank or Federal savings asso- Unit of measure means the level (for ciation with respect to all portfolios example, organizational unit or oper- and exposures of the national bank or ational loss event type) at which the Federal savings association and each of national bank’s or Federal savings as- its consolidated subsidiaries; sociation’s operational risk quantifica- (ii) Justify and support any proposed tion system generates a separate dis- temporary or permanent exclusion of tribution of potential operational business lines, portfolios, or exposures losses. from the application of the advanced

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approaches in this subpart (which busi- part and following adoption of the im- ness lines, portfolios, and exposures plementation plan, the national bank must be, in the aggregate, immaterial or Federal savings association must to the national bank or Federal savings conduct a satisfactory parallel run. A association); satisfactory parallel run is a period of (iii) Include the national bank’s or no less than four consecutive calendar Federal savings association’s self-as- quarters during which the national sessment of: bank or Federal savings association (A) The national bank’s or Federal complies with the qualification re- savings association’s current status in quirements in § 3.122 to the satisfaction meeting the qualification requirements of the OCC. During the parallel run, in § 3.122; and the national bank or Federal savings (B) The consistency of the national association must report to the OCC on bank’s or Federal savings association’s a calendar quarterly basis its risk- current practices with the OCC’s super- based capital ratios determined in ac- visory guidance on the qualification re- cordance with § 3.10(b)(1) through (3) quirements; and § 3.10 (c)(1) through (3). During this (iv) Based on the national bank’s or Federal savings association’s self-as- period, the national bank’s or Federal sessment, identify and describe the savings association’s minimum risk- areas in which the national bank or based capital ratios are determined as Federal savings association proposes to set forth in subpart D of this part. undertake additional work to comply (d) Approval to calculate risk-based with the qualification requirements in capital requirements under this subpart. § 3.122 or to improve the consistency of The OCC will notify the national bank the national bank’s or Federal savings or Federal savings association of the association’s current practices with date that the national bank or Federal the OCC’s supervisory guidance on the savings association must begin to use qualification requirements (gap anal- this subpart for purposes of § 3.10 if the ysis); OCC determines that: (v) Describe what specific actions the (1) The national bank or Federal sav- national bank or Federal savings asso- ings association fully complies with all ciation will take to address the areas the qualification requirements in identified in the gap analysis required § 3.122; by paragraph (b)(1)(iv) of this section; (2) The national bank or Federal sav- (vi) Identify objective, measurable ings association has conducted a satis- milestones, including delivery dates factory parallel run under paragraph and a date when the national bank’s or (c) of this section; and Federal savings association’s imple- (3) The national bank or Federal sav- mentation of the methodologies de- ings association has an adequate proc- scribed in this subpart will be fully ess to ensure ongoing compliance with operational; the qualification requirements in (vii) Describe resources that have § 3.122. been budgeted and are available to im- plement the plan; and § 3.122 Qualification requirements. (viii) Receive approval of the national bank’s or Federal savings asso- (a) Process and systems requirements. ciation’s board of directors. (1) A national bank or Federal savings (2) The national bank or Federal sav- association must have a rigorous proc- ings association must submit the im- ess for assessing its overall capital ade- plementation plan, together with a quacy in relation to its risk profile and copy of the minutes of the board of di- a comprehensive strategy for maintain- rectors’ approval, to the OCC at least ing an appropriate level of capital. 60 days before the national bank or (2) The systems and processes used by Federal savings association proposes to a national bank or Federal savings as- begin its parallel run, unless the OCC sociation for risk-based capital pur- waives prior notice. poses under this subpart must be con- (c) Parallel run. Before determining sistent with the national bank’s or its risk-weighted assets under this sub- Federal savings association’s internal

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risk management processes and man- (iii) In assigning ratings to wholesale agement information reporting sys- obligors and exposures, including loss tems. severity ratings grades to wholesale ex- (3) Each national bank or Federal posures, and assigning retail exposures savings association must have an ap- to retail segments, a national bank or propriate infrastructure with risk Federal savings association must use measurement and management proc- all relevant and material information esses that meet the qualification re- and ensure that the information is cur- quirements of this section and are ap- rent. propriate given the national bank’s or (iv) When assigning an obligor to a Federal savings association’s size and PD rating or retail exposure to a PD level of complexity. Regardless of segment, a national bank or Federal whether the systems and models that savings association must assess the ob- generate the risk parameters necessary ligor or retail borrower’s ability and for calculating a national bank’s or willingness to contractually perform, Federal savings association’s risk- taking a conservative view of projected based capital requirements are located information. at any affiliate of the national bank or (2) For wholesale exposures: Federal savings association, the na- (i) A national bank or Federal sav- tional bank or Federal savings associa- ings association must have an internal tion itself must ensure that the risk risk rating system that accurately and parameters and reference data used to reliably assigns each obligor to a single rating grade (reflecting the obligor’s determine its risk-based capital re- likelihood of default). A national bank quirements are representative of long or Federal savings association may run experience with respect to its own elect, however, not to assign to a rat- credit risk and operational risk expo- ing grade an obligor to whom the na- sures. tional bank or Federal savings associa- (b) Risk rating and segmentation sys- tion extends credit based solely on the tems for wholesale and retail exposures. financial strength of a guarantor, pro- (1)(i) A national bank or Federal sav- vided that all of the national bank’s or ings association must have an internal Federal savings association’s exposures risk rating and segmentation system to the obligor are fully covered by eli- that accurately, reliably, and meaning- gible guarantees, the national bank or fully differentiates among degrees of Federal savings association applies the credit risk for the national bank’s or PD substitution approach in § 3.134(c)(1) Federal savings association’s wholesale to all exposures to that obligor, and and retail exposures. When assigning the national bank or Federal savings an internal risk rating, a national association immediately assigns the bank or Federal savings association obligor to a rating grade if a guarantee may consider a third-party assessment can no longer be recognized under this of credit risk, provided that the na- part. The national bank’s or Federal tional bank’s or Federal savings asso- savings association’s wholesale obligor ciation’s internal risk rating assign- rating system must have at least seven ment does not rely solely on the exter- discrete rating grades for non-de- nal assessment. faulted obligors and at least one rating (ii) If a national bank or Federal sav- grade for defaulted obligors. ings association uses multiple rating or (ii) Unless the national bank or Fed- segmentation systems, the national eral savings association has chosen to bank’s or Federal savings association’s directly assign LGD estimates to each rationale for assigning an obligor or wholesale exposure, the national bank exposure to a particular system must or Federal savings association must be documented and applied in a manner have an internal risk rating system that best reflects the obligor’s or expo- that accurately and reliably assigns sure’s level of risk. A national bank or each wholesale exposure to a loss se- Federal savings association must not verity rating grade (reflecting the na- inappropriately allocate obligors or ex- tional bank’s or Federal savings asso- posures across systems to minimize ciation’s estimate of the LGD of the regulatory capital requirements. exposure). A national bank or Federal

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savings association employing loss se- (5) The national bank’s or Federal verity rating grades must have a suffi- savings association’s internal risk rat- ciently granular loss severity grading ing system for wholesale exposures system to avoid grouping together ex- must provide for the review and update posures with widely ranging LGDs. (as appropriate) of each obligor rating (iii) A national bank or Federal sav- and (if applicable) each loss severity ings association must have an effective rating whenever the national bank or process to obtain and update in a time- Federal savings association obtains rel- ly manner relevant and material infor- evant and material information on the mation on obligor and exposure charac- obligor or exposure that affects PD, teristics that affect PD, LGD and EAD. LGD and EAD, but no less frequently (3) For retail exposures: than annually. (i) A national bank or Federal sav- (c) Quantification of risk parameters for ings association must have an internal wholesale and retail exposures. (1) The system that groups retail exposures national bank or Federal savings asso- into the appropriate retail exposure ciation must have a comprehensive subcategory and groups the retail expo- risk parameter quantification process sures in each retail exposure sub- that produces accurate, timely, and re- category into separate segments with liable estimates of the risk parameters homogeneous risk characteristics that on a consistent basis for the national provide a meaningful differentiation of bank’s or Federal savings association’s risk. The national bank’s or Federal wholesale and retail exposures. savings association’s system must (2) A national bank’s or Federal sav- identify and group in separate seg- ings association’s estimates of PD, ments by subcategories exposures iden- LGD, and EAD must incorporate all tified in § 3.131(c)(2)(ii) and (iii). relevant, material, and available data (ii) A national bank or Federal sav- that is reflective of the national bank’s ings association must have an internal or Federal savings association’s actual system that captures all relevant expo- wholesale and retail exposures and of sure risk characteristics, including sufficient quality to support the deter- borrower credit score, product and col- mination of risk-based capital require- lateral types, as well as exposure delin- ments for the exposures. In particular, quencies, and must consider cross-col- the population of exposures in the data lateral provisions, where present. used for estimation purposes, the lend- (iii) The national bank or Federal ing standards in use when the data savings association must review and, if were generated, and other relevant appropriate, update assignments of in- characteristics, should closely match dividual retail exposures to segments or be comparable to the national and the loss characteristics and delin- bank’s or Federal savings association’s quency status of each identified risk exposures and standards. In addition, a segment. These reviews must occur national bank or Federal savings asso- whenever the national bank or Federal ciation must: savings association receives new mate- (i) Demonstrate that its estimates rial information, but generally no less are representative of long run experi- frequently than quarterly, and, in all ence, including periods of economic cases, at least annually. downturn conditions, whether internal (4) The national bank’s or Federal or external data are used; savings association’s internal risk rat- (ii) Take into account any changes in ing policy for wholesale exposures lending practice or the process for pur- must describe the national bank’s or suing recoveries over the observation Federal savings association’s rating period; philosophy (that is, must describe how (iii) Promptly reflect technical ad- wholesale obligor rating assignments vances, new data, and other informa- are affected by the national bank’s or tion as they become available; Federal savings association’s choice of (iv) Demonstrate that the data used the range of economic, business, and to estimate risk parameters support industry conditions that are considered the accuracy and robustness of those in the obligor rating process). estimates; and

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(v) Demonstrate that its estimation least five years of exposure amount technique performs well in out-of-sam- data. If the national bank or Federal ple tests whenever possible. savings association has relevant and (3) The national bank’s or Federal material reference data that span a savings association’s risk parameter longer period of time than the min- quantification process must produce imum time periods specified above, the appropriately conservative risk param- national bank or Federal savings asso- eter estimates where the national bank ciation must incorporate such data in or Federal savings association has limits estimates, provided that it does not ited relevant data, and any adjust- place undue weight on periods of favor- ments that are part of the quantifica- able or benign economic conditions rel- tion process must not result in a pat- ative to periods of economic downturn tern of bias toward lower risk param- conditions. eter estimates. (7) Default, loss severity, and expo- (4) The national bank’s or Federal sure amount data must include periods savings association’s risk parameter estimation process should not rely on of economic downturn conditions, or the possibility of U.S. government fi- the national bank or Federal savings nancial assistance, except for the fi- association must adjust its estimates nancial assistance that the U.S. gov- of risk parameters to compensate for ernment has a legally binding commit- the lack of data from periods of eco- ment to provide. nomic downturn conditions. (5) The national bank or Federal sav- (8) The national bank’s or Federal ings association must be able to dem- savings association’s PD, LGD, and onstrate which variables have been EAD estimates must be based on the found to be statistically significant definition of default in § 3.101. with regard to EAD. The national (9) If a national bank or Federal sav- bank’s or Federal savings association’s ings association uses internal data ob- EAD estimates must reflect its specific tained prior to becoming subject to policies and strategies with regard to this subpart E or external data to ar- account management, including ac- rive at PD, LGD, or EAD estimates, the count monitoring and payment proc- national bank or Federal savings asso- essing, and its ability and willingness ciation must demonstrate to the OCC to prevent further drawdowns in cir- that the national bank or Federal sav- cumstances short of payment default. ings association has made appropriate The national bank or Federal savings adjustments if necessary to be con- association must have adequate sys- sistent with the definition of default in tems and procedures in place to mon- § 3.101. Internal data obtained after the itor current outstanding amounts national bank or Federal savings asso- against committed lines, and changes ciation becomes subject to this subpart in outstanding amounts per obligor and E must be consistent with the defini- obligor rating grade and per retail seg- tion of default in § 3.101. ment. The national bank or Federal savings association must be able to (10) The national bank or Federal monitor outstanding amounts on a savings association must review and daily basis. update (as appropriate) its risk param- (6) At a minimum, PD estimates for eters and its risk parameter quantifica- wholesale obligors and retail segments tion process at least annually. must be based on at least five years of (11) The national bank or Federal default data. LGD estimates for whole- savings association must, at least an- sale exposures must be based on at nually, conduct a comprehensive re- least seven years of loss severity data, view and analysis of reference data to and LGD estimates for retail segments determine relevance of the reference must be based on at least five years of data to the national bank’s or Federal loss severity data. EAD estimates for savings association’s exposures, qual- wholesale exposures must be based on ity of reference data to support PD, at least seven years of exposure LGD, and EAD estimates, and consist- amount data, and EAD estimates for ency of reference data to the definition retail segments must be based on at of default in § 3.101.

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(d) Counterparty credit risk model. A ciation’s operational risk data and as- national bank or Federal savings asso- sessment systems must: ciation must obtain the prior written (i) Be structured in a manner con- approval of the OCC under § 3.132 to use sistent with the national bank’s or the internal models methodology for Federal savings association’s current counterparty credit risk and the ad- business activities, risk profile, tech- vanced CVA approach for the CVA cap- nological processes, and risk manage- ital requirement. ment processes; and (e) Double default treatment. A na- (ii) Include credible, transparent, sys- tional bank or Federal savings associa- tematic, and verifiable processes that tion must obtain the prior written ap- incorporate the following elements on proval of the OCC under § 3.135 to use an ongoing basis: the double default treatment. (A) Internal operational loss event data. (f) Equity exposures model. A national The national bank or Federal savings bank or Federal savings association association must have a systematic must obtain the prior written approval process for capturing and using inter- of the OCC under § 3.153 to use the in- nal operational loss event data in its ternal models approach for equity ex- operational risk data and assessment posures. systems. (g) Operational risk. (1) Operational (1) The national bank’s or Federal risk management processes. A national savings association’s operational risk bank or Federal savings association data and assessment systems must in- must: clude a historical observation period of (i) Have an operational risk manage- at least five years for internal oper- ment function that: ational loss event data (or such shorter (A) Is independent of business line period approved by the OCC to address management; and transitional situations, such as inte- (B) Is responsible for designing, im- grating a new business line). plementing, and overseeing the na- (2) The national bank or Federal sav- tional bank’s or Federal savings asso- ings association must be able to map ciation’s operational risk data and as- its internal operational loss event data sessment systems, operational risk into the seven operational loss event quantification systems, and related type categories. processes; (3) The national bank or Federal sav- (ii) Have and document a process ings association may refrain from col- (which must capture business environ- lecting internal operational loss event ment and internal control factors af- data for individual operational losses fecting the national bank’s or Federal below established dollar threshold savings association’s operational risk amounts if the national bank or Fed- profile) to identify, measure, monitor, eral savings association can dem- and control operational risk in the na- onstrate to the satisfaction of the OCC tional bank’s or Federal savings asso- that the thresholds are reasonable, do ciation’s products, activities, proc- not exclude important internal oper- esses, and systems; and ational loss event data, and permit the (iii) Report operational risk expo- national bank or Federal savings asso- sures, operational loss events, and ciation to capture substantially all the other relevant operational risk infor- dollar value of the national bank’s or mation to business unit management, Federal savings association’s oper- senior management, and the board of ational losses. directors (or a designated committee of (B) External operational loss event the board). data. The national bank or Federal sav- (2) Operational risk data and assess- ings association must have a system- ment systems. A national bank or Fed- atic process for determining its meth- eral savings association must have odologies for incorporating external operational risk data and assessment operational loss event data into its systems that capture operational risks operational risk data and assessment to which the national bank or Federal systems. savings association is exposed. The na- (C) Scenario analysis. The national tional bank’s or Federal savings asso- bank or Federal savings association

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must have a systematic process for de- risk exposure estimates across units of termining its methodologies for incor- measure to calculate its total oper- porating scenario analysis into its ational risk exposure; and operational risk data and assessment (E) Must be reviewed and updated (as systems. appropriate) whenever the national (D) Business environment and internal bank or Federal savings association be- control factors. The national bank or comes aware of information that may Federal savings association must in- have a material effect on the national corporate business environment and in- bank’s or Federal savings association’s ternal control factors into its oper- estimate of operational risk exposure, ational risk data and assessment sys- but the review and update must occur tems. The national bank or Federal no less frequently than annually. savings association must also periodi- (ii) With the prior written approval cally compare the results of its prior of the OCC, a national bank or Federal business environment and internal con- savings association may generate an trol factor assessments against its ac- estimate of its operational risk expo- tual operational losses incurred in the sure using an alternative approach to intervening period. that specified in paragraph (g)(3)(i) of (3) Operational risk quantification sys- this section. A national bank or Fed- tems. (i) The national bank’s or Federal eral savings association proposing to savings association’s operational risk use such an alternative operational quantification systems: risk quantification system must sub- (A) Must generate estimates of the mit a proposal to the OCC. In deter- national bank’s or Federal savings as- mining whether to approve a national sociation’s operational risk exposure bank’s or Federal savings association’s using its operational risk data and as- proposal to use an alternative oper- sessment systems; ational risk quantification system, the (B) Must employ a unit of measure OCC will consider the following prin- that is appropriate for the national ciples: bank’s or Federal savings association’s (A) Use of the alternative operational range of business activities and the va- risk quantification system will be al- riety of operational loss events to lowed only on an exception basis, con- which it is exposed, and that does not sidering the size, complexity, and risk combine business activities or oper- profile of the national bank or Federal ational loss events with demonstrably savings association; different risk profiles within the same (B) The national bank or Federal sav- loss distribution; ings association must demonstrate (C) Must include a credible, trans- that its estimate of its operational risk parent, systematic, and verifiable ap- exposure generated under the alter- proach for weighting each of the four native operational risk quantification elements, described in paragraph system is appropriate and can be sup- (g)(2)(ii) of this section, that a national ported empirically; and bank or Federal savings association is (C) A national bank or Federal sav- required to incorporate into its oper- ings association must not use an allo- ational risk data and assessment sys- cation of operational risk capital re- tems; quirements that includes entities other (D) May use internal estimates of de- than depository institutions or the pendence among operational losses benefits of diversification across enti- across and within units of measure if ties. the national bank or Federal savings (h) Data management and maintenance. association can demonstrate to the sat- (1) A national bank or Federal savings isfaction of the OCC that its process for association must have data manage- estimating dependence is sound, robust ment and maintenance systems that to a variety of scenarios, and imple- adequately support all aspects of its mented with integrity, and allows for advanced systems and the timely and uncertainty surrounding the estimates. accurate reporting of risk-based cap- If the national bank or Federal savings ital requirements. association has not made such a dem- (2) A national bank or Federal sav- onstration, it must sum operational ings association must retain data using

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an electronic format that allows time- (5) The national bank or Federal sav- ly retrieval of data for analysis, valida- ings association must have an internal tion, reporting, and disclosure pur- audit function or equivalent function poses. that is independent of business-line (3) A national bank or Federal sav- management that at least annually: ings association must retain sufficient (i) Reviews the national bank’s or data elements related to key risk driv- Federal savings association’s advanced ers to permit adequate monitoring, val- systems and associated operations, in- idation, and refinement of its advanced cluding the operations of its credit systems. function and estimations of PD, LGD, (i) Control, oversight, and validation and EAD; mechanisms. (1) The national bank’s or (ii) Assesses the effectiveness of the Federal savings association’s senior controls supporting the national management must ensure that all com- bank’s or Federal savings association’s ponents of the national bank’s or Fed- advanced systems; and eral savings association’s advanced (iii) Documents and reports its find- systems function effectively and com- ings to the national bank’s or Federal ply with the qualification requirements savings association’s board of directors in this section. (or a committee thereof). (6) The national bank or Federal sav- (2) The national bank’s or Federal ings association must periodically savings association’s board of directors stress test its advanced systems. The (or a designated committee of the stress testing must include a consider- board) must at least annually review ation of how economic cycles, espe- the effectiveness of, and approve, the cially downturns, affect risk-based cap- national bank’s or Federal savings as- ital requirements (including migration sociation’s advanced systems. across rating grades and segments and (3) A national bank or Federal sav- the credit risk mitigation benefits of ings association must have an effective double default treatment). system of controls and oversight that: (j) Documentation. The national bank (i) Ensures ongoing compliance with or Federal savings association must the qualification requirements in this adequately document all material as- section; pects of its advanced systems. (ii) Maintains the integrity, reli- [78 FR 62157, 62273, Oct. 11, 2013, as amended ability, and accuracy of the national at 80 FR 41415, July 15, 2015] bank’s or Federal savings association’s advanced systems; and § 3.123 Ongoing qualification. (iii) Includes adequate governance (a) Changes to advanced systems. A na- and project management processes. tional bank or Federal savings associa- (4) The national bank or Federal sav- tion must meet all the qualification re- ings association must validate, on an quirements in § 3.122 on an ongoing ongoing basis, its advanced systems. basis. A national bank or Federal sav- The national bank’s or Federal savings ings association must notify the OCC association’s validation process must when the national bank or Federal sav- be independent of the advanced sys- ings association makes any change to tems’ development, implementation, an advanced system that would result and operation, or the validation proc- in a material change in the national ess must be subjected to an inde- bank’s or Federal savings association’s pendent review of its adequacy and ef- advanced approaches total risk-weight- fectiveness. Validation must include: ed asset amount for an exposure type (i) An evaluation of the conceptual or when the national bank or Federal soundness of (including developmental savings association makes any signifi- evidence supporting) the advanced sys- cant change to its modeling assump- tems; tions. (ii) An ongoing monitoring process (b) Failure to comply with qualification that includes verification of processes requirements. (1) If the OCC determines and benchmarking; and that a national bank or Federal sav- (iii) An outcomes analysis process ings association that uses this subpart that includes backtesting. and that has conducted a satisfactory

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parallel run fails to comply with the quired company’s risk-weighted assets. qualification requirements in § 3.122, All general allowances of the merged the OCC will notify the national bank or acquired company must be excluded or Federal savings association in writ- from the national bank’s or Federal ing of the national bank’s or Federal savings association’s eligible credit re- savings association’s failure to comply. serves. In addition, the risk-weighted (2) The national bank or Federal sav- assets of the merged or acquired com- ings association must establish and pany are not included in the national submit a plan satisfactory to the OCC bank’s or Federal savings association’s to return to compliance with the quali- credit-risk-weighted assets but are in- fication requirements. cluded in total risk-weighted assets. If (3) In addition, if the OCC determines a national bank or Federal savings as- that the national bank’s or Federal sociation relies on this paragraph (a), savings association’s advanced ap- the national bank or Federal savings proaches total risk-weighted assets are association must disclose publicly the not commensurate with the national amounts of risk-weighted assets and bank’s or Federal savings association’s qualifying capital calculated under credit, market, operational, or other this subpart for the acquiring national risks, the OCC may require such a na- bank or Federal savings association tional bank or Federal savings associa- and under subpart D of this part for the tion to calculate its advanced ap- acquired company. proaches total risk-weighted assets (b) Mergers and acquisitions of compa- with any modifications provided by the nies with advanced systems. (1) If a na- OCC. tional bank or Federal savings associa- § 3.124 Merger and acquisition transition merges with or acquires a com- tional arrangements. pany that calculates its risk-based cap- (a) Mergers and acquisitions of compa- ital requirements using advanced sys- nies without advanced systems. If a na- tems, the national bank or Federal sav- tional bank or Federal savings associa- ings association may use the acquired tion merges with or acquires a com- company’s advanced systems to deter- pany that does not calculate its risk- mine total risk-weighted assets for the based capital requirements using ad- merged or acquired company’s expo- vanced systems, the national bank or sures for up to 24 months after the cal- Federal savings association may use endar quarter during which the acqui- subpart D of this part to determine the sition or merger consummates. The risk-weighted asset amounts for the OCC may extend this transition period merged or acquired company’s expo- for up to an additional 12 months. sures for up to 24 months after the cal- Within 90 days of consummating the endar quarter during which the merger merger or acquisition, the national or acquisition consummates. The OCC bank or Federal savings association may extend this transition period for must submit to the OCC an implemen- up to an additional 12 months. Within tation plan for using its advanced sys- 90 days of consummating the merger or tems for the merged or acquired com- acquisition, the national bank or Fed- pany. eral savings association must submit (2) If the acquiring national bank or to the OCC an implementation plan for Federal savings association is not sub- using its advanced systems for the ac- ject to the advanced approaches in this quired company. During the period in subpart at the time of acquisition or which subpart D of this part applies to merger, during the period when subpart the merged or acquired company, any D of this part applies to the acquiring ALLL or AACL, as applicable, net of national bank or Federal savings asso- allocated transfer risk reserves estab- ciation, the ALLL or AACL, as applica- lished pursuant to 12 U.S.C. 3904, asso- ble associated with the exposures of ciated with the merged or acquired the merged or acquired company may company’s exposures may be included not be directly included in tier 2 cap- in the acquiring national bank’s or ital. Rather, any excess eligible credit Federal savings association’s tier 2 reserves associated with the merged or capital up to 1.25 percent of the ac- acquired company’s exposures may be

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included in the national bank’s or Fed- folio of exposures described in para- eral savings association’s tier 2 capital graph (e)(4) of this section. up to 0.6 percent of the credit-risk- (c) Phase 2—Assignment of wholesale weighted assets associated with those obligors and exposures to rating grades exposures. and retail exposures to segments—(1) As- signment of wholesale obligors and expo- [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 4238, Feb. 14, 2019] sures to rating grades. (i) The national bank or Federal savings association §§ 3.125–3.130 [Reserved] must assign each obligor of a wholesale exposure to a single obligor rating RISK-WEIGHTED ASSETS FOR GENERAL grade and must assign each wholesale CREDIT RISK exposure to which it does not directly assign an LGD estimate to a loss sever- § 3.131 Mechanics for calculating total ity rating grade. wholesale and retail risk-weighted (ii) The national bank or Federal sav- assets. ings association must identify which of (a) Overview. A national bank or Fed- its wholesale obligors are in default. eral savings association must calculate (2) Segmentation of retail exposures. (i) its total wholesale and retail risk- The national bank or Federal savings weighted asset amount in four distinct association must group the retail expo- phases: sures in each retail subcategory into (1) Phase 1—categorization of expo- segments that have homogeneous risk sures; characteristics. (2) Phase 2—assignment of wholesale (ii) The national bank or Federal sav- obligors and exposures to rating grades ings association must identify which of and segmentation of retail exposures; its retail exposures are in default. The (3) Phase 3—assignment of risk pa- national bank or Federal savings asso- rameters to wholesale exposures and ciation must segment defaulted retail segments of retail exposures; and exposures separately from non-de- (4) Phase 4—calculation of risk- faulted retail exposures. weighted asset amounts. (iii) If the national bank or Federal (b) Phase 1—Categorization. The na- savings association determines the tional bank or Federal savings associa- EAD for eligible margin loans using tion must determine which of its expo- the approach in § 3.132(b), the national sures are wholesale exposures, retail bank or Federal savings association exposures, securitization exposures, or must identify which of its retail expo- equity exposures. The national bank or sures are eligible margin loans for Federal savings association must cat- which the national bank or Federal egorize each retail exposure as a resi- savings association uses this EAD ap- dential mortgage exposure, a QRE, or proach and must segment such eligible an other retail exposure. The national margin loans separately from other re- bank or Federal savings association tail exposures. must identify which wholesale expo- (3) Eligible purchased wholesale exposures are HVCRE exposures, sovereign sures. A national bank or Federal sav- exposures, OTC derivative contracts, ings association may group its eligible repo-style transactions, eligible mar- purchased wholesale exposures into gin loans, eligible purchased wholesale segments that have homogeneous risk exposures, cleared transactions, default characteristics. A national bank or fund contributions, unsettled trans- Federal savings association must use actions to which § 3.136 applies, and eli- the wholesale exposure formula in gible guarantees or eligible credit de- Table 1 of this section to determine the rivatives that are used as credit risk risk-based capital requirement for each mitigants. The national bank or Fed- segment of eligible purchased whole- eral savings association must identify sale exposures. any on-balance sheet asset that does (d) Phase 3—Assignment of risk param- not meet the definition of a wholesale, eters to wholesale exposures and segments retail, equity, or securitization expo- of retail exposures—(1) Quantification sure, as well as any non-material port- process. Subject to the limitations in

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this paragraph (d), the national bank vided by EAD. The estimated ECL or Federal savings association must: must be calculated for the exposures (i) Associate a PD with each whole- without regard to any assumption of sale obligor rating grade; recourse or guarantees from the seller (ii) Associate an LGD with each or other parties. wholesale loss severity rating grade or (5) Credit risk mitigation: credit deriva- assign an LGD to each wholesale expo- tives, guarantees, and collateral. (i) A na- sure; tional bank or Federal savings associa- (iii) Assign an EAD and M to each tion may take into account the risk re- wholesale exposure; and ducing effects of eligible guarantees (iv) Assign a PD, LGD, and EAD to and eligible credit derivatives in sup- each segment of retail exposures. port of a wholesale exposure by apply- (2) Floor on PD assignment. The PD for ing the PD substitution or LGD adjust- each wholesale obligor or retail segment treatment to the exposure as pro- ment may not be less than 0.03 percent, vided in § 3.134 or, if applicable, apply- except for exposures to or directly and unconditionally guaranteed by a sov- ing double default treatment to the ex- ereign entity, the Bank for Inter- posure as provided in § 3.135. A national national Settlements, the Inter- bank or Federal savings association national Monetary Fund, the European may decide separately for each whole- Commission, the European Central sale exposure that qualifies for the Bank, the European Stability Mecha- double default treatment under § 3.135 nism, the European Financial Stability whether to apply the double default Facility, or a multilateral development treatment or to use the PD substi- bank, to which the national bank or tution or LGD adjustment treatment Federal savings association assigns a without recognizing double default ef- rating grade associated with a PD of fects. less than 0.03 percent. (ii) A national bank or Federal sav- (3) Floor on LGD estimation. The LGD ings association may take into account for each segment of residential mort- the risk reducing effects of guarantees gage exposures may not be less than 10 and credit derivatives in support of re- percent, except for segments of resi- tail exposures in a segment when quan- dential mortgage exposures for which tifying the PD and LGD of the seg- all or substantially all of the principal ment. In doing so, a national bank or of each exposure is either: Federal savings association must con- (i) Directly and unconditionally sider all relevant available informa- guaranteed by the full faith and credit tion. of a sovereign entity; or (iii) Except as provided in paragraph (ii) Guaranteed by a contingent obli- (d)(6) of this section, a national bank gation of the U.S. government or its or Federal savings association may agencies, the enforceability of which is take into account the risk reducing ef- dependent upon some affirmative ac- fects of collateral in support of a tion on the part of the beneficiary of wholesale exposure when quantifying the guarantee or a third party (for example, meeting servicing require- the LGD of the exposure, and may take ments). into account the risk reducing effects (4) Eligible purchased wholesale expo- of collateral in support of retail exposures. A national bank or Federal sav- sures when quantifying the PD and ings association must assign a PD, LGD of the segment. In order to do so, LGD, EAD, and M to each segment of a national bank or Federal savings as- eligible purchased wholesale exposures. sociation must have established inter- If the national bank or Federal savings nal requirements for collateral man- association can estimate ECL (but not agement, legal certainty, and risk PD or LGD) for a segment of eligible management processes. purchased wholesale exposures, the na- (6) EAD for OTC derivative contracts, tional bank or Federal savings associa- repo-style transactions, and eligible mar- tion must assume that the LGD of the gin loans. A national bank or Federal segment equals 100 percent and that savings association must calculate its the PD of the segment equals ECL di- EAD for an OTC derivative contract as

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provided in § 3.132 (c) and (d). A na- (8) EAD for exposures to certain central tional bank or Federal savings associa- counterparties. A national bank or Fed- tion may take into account the risk-re- eral savings association may attribute ducing effects of financial collateral in an EAD of zero to exposures that arise support of a repo-style transaction or from the settlement of cash trans- eligible margin loan and of any collat- actions (such as equities, fixed income, eral in support of a repo-style trans- spot foreign exchange, and spot com- action that is included in the national modities) with a central counterparty bank’s or Federal savings association’s where there is no assumption of ongo- VaR-based measure under subpart F of ing counterparty credit risk by the this part through an adjustment to central counterparty after settlement EAD as provided in § 3.132(b) and (d). A of the trade and associated default fund national bank or Federal savings asso- contributions. ciation that takes collateral into ac- (e) Phase 4—Calculation of risk-weight- count through such an adjustment to ed assets—(1) Non-defaulted exposures. (i) EAD under § 3.132 may not reflect such A national bank or Federal savings as- collateral in LGD. sociation must calculate the dollar (7) Effective maturity. An exposure’s M risk-based capital requirement for each must be no greater than five years and of its wholesale exposures to a non-de- no less than one year, except that an faulted obligor (except for eligible exposure’s M must be no less than one guarantees and eligible credit derivatives that hedge another wholesale ex- day if the exposure is a trade related posure, IMM exposures, cleared trans- letter of credit, or if the exposure has actions, default fund contributions, un- an original maturity of less than one settled transactions, and exposures to year and is not part of a national which the national bank or Federal bank’s or Federal savings association’s savings association applies the double ongoing financing of the obligor. An default treatment in § 3.135) and seg- exposure is not part of a national ments of non-defaulted retail exposures bank’s or Federal savings association’s by inserting the assigned risk param- ongoing financing of the obligor if the eters for the wholesale obligor and ex- national bank or Federal savings asso- posure or retail segment into the ap- ciation: propriate risk-based capital formula (i) Has a legal and practical ability specified in Table 1 and multiplying not to renew or roll over the exposure the output of the formula (K) by the in the event of credit deterioration of EAD of the exposure or segment. Alter- the obligor; natively, a national bank or Federal (ii) Makes an independent credit de- savings association may apply a 300 cision at the inception of the exposure percent risk weight to the EAD of an and at every renewal or roll over; and eligible margin loan if the national (iii) Has no substantial commercial bank or Federal savings association is incentive to continue its credit rela- not able to meet the OCC’s require- tionship with the obligor in the event ments for estimation of PD and LGD of credit deterioration of the obligor. for the margin loan.

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(ii) The sum of all the dollar risk- U.S. government guarantee: The dollar based capital requirements for each risk-based capital requirement for each wholesale exposure to a non-defaulted wholesale exposure not covered by an obligor and segment of non-defaulted eligible guarantee from the U.S. gov- retail exposures calculated in para- ernment to a defaulted obligor and graph (e)(1)(i) of this section and in each segment of defaulted retail expo- § 3.135(e) equals the total dollar risk- sures not covered by an eligible guar- based capital requirement for those ex- antee from the U.S. government equals posures and segments. 0.08 multiplied by the EAD of the expo- (iii) The aggregate risk-weighted sure or segment. asset amount for wholesale exposures (ii) Covered by an eligible U.S. govern- to non-defaulted obligors and segments ment guarantee: The dollar risk-based of non-defaulted retail exposures capital requirement for each wholesale equals the total dollar risk-based cap- exposure to a defaulted obligor covered ital requirement in paragraph (e)(1)(ii) by an eligible guarantee from the U.S. of this section multiplied by 12.5. government and each segment of de- (2) Wholesale exposures to defaulted ob- faulted retail exposures covered by an ligors and segments of defaulted retail ex- eligible guarantee from the U.S. gov- posures—(i) Not covered by an eligible ernment equals the sum of:

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(A) The sum of the EAD of the por- (iii) A national bank or Federal sav- tion of each wholesale exposure to a de- ings association must assign a risk- faulted obligor covered by an eligible weighted asset amount equal to 50 per- guarantee from the U.S. government cent of the carrying value to a pre-sold plus the EAD of the portion of each construction loan unless the purchase segment of defaulted retail exposures contract is cancelled, in which case a that is covered by an eligible guarantee national bank or Federal savings asso- from the U.S. government and the re- ciation must assign a risk-weighted sulting sum is multiplied by 0.016, and asset amount equal to a 100 percent of (B) The sum of the EAD of the por- the carrying value of the pre-sold con- tion of each wholesale exposure to a de- struction loan. faulted obligor not covered by an eligi- (iv) The risk-weighted asset amount ble guarantee from the U.S. govern- for the residual value of a retail lease ment plus the EAD of the portion of exposure equals such residual value. each segment of defaulted retail expo- (v) The risk-weighted asset amount sures that is not covered by an eligible for DTAs arising from temporary dif- guarantee from the U.S. government ferences that the national bank or Fed- and the resulting sum is multiplied by eral savings association could realize 0.08. through net operating loss carrybacks (iii) The sum of all the dollar risk- equals the carrying value, netted in ac- based capital requirements for each cordance with § 3.22. wholesale exposure to a defaulted obli- (vi) The risk-weighted asset amount gor and each segment of defaulted re- for MSAs, DTAs arising from tem- tail exposures calculated in paragraph porary timing differences that the na- (e)(2)(i) of this section plus the dollar tional bank or Federal savings associa- risk-based capital requirements each tion could not realize through net oper- wholesale exposure to a defaulted obli- ating loss carrybacks, and significant gor and for each segment of defaulted investments in the capital of uncon- retail exposures calculated in para- solidated financial institutions in the graph (e)(2)(ii) of this section equals form of common stock that are not de- the total dollar risk-based capital re- ducted pursuant to § 3.22(d) equals the quirement for those exposures and seg- amount not subject to deduction multi- ments. plied by 250 percent. (iv) The aggregate risk-weighted (vii) The risk-weighted asset amount asset amount for wholesale exposures for any other on-balance-sheet asset to defaulted obligors and segments of that does not meet the definition of a defaulted retail exposures equals the wholesale, retail, securitization, IMM, total dollar risk-based capital require- or equity exposure, cleared trans- ment calculated in paragraph (e)(2)(iii) action, or default fund contribution of this section multiplied by 12.5. and is not subject to deduction under (3) Assets not included in a defined ex- § 3.22(a), (c), or (d) equals the carrying posure category. (i) A national bank or value of the asset. Federal savings association may assign (viii) The risk-weighted asset amount a risk-weighted asset amount of zero to for a Paycheck Protection Program cash owned and held in all offices of covered loan as defined in section the national bank or Federal savings 7(a)(36) of the Small Business Act (15 association or in transit and for gold U.S.C. 636(a)(36)) equals zero. bullion held in the national bank’s or (4) Non-material portfolios of exposures. Federal savings association’s own The risk-weighted asset amount of a vaults, or held in another national portfolio of exposures for which the na- bank’s or Federal savings association’s tional bank or Federal savings associa- vaults on an allocated basis, to the ex- tion has demonstrated to the OCC’s tent the gold bullion assets are offset satisfaction that the portfolio (when by gold bullion liabilities. combined with all other portfolios of (ii) A national bank or Federal sav- exposures that the national bank or ings association must assign a risk- Federal savings association seeks to weighted asset amount equal to 20 per- treat under this paragraph (e)) is not cent of the carrying value of cash material to the national bank or Fed- items in the process of collection. eral savings association is the sum of

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the carrying values of on-balance sheet netting agreement. To estimate EAD exposures plus the notional amounts of for qualifying cross-product master off-balance sheet exposures in the port- netting agreements, a national bank or folio. For purposes of this paragraph Federal savings association may only (e)(4), the notional amount of an OTC use the internal models methodology derivative contract that is not a credit in paragraph (d) of this section. derivative is the EAD of the derivative (4) A national bank or Federal sav- as calculated in § 3.132. ings association must also use the [78 FR 62157, 62273, Oct. 11, 2013, as amended methodology in paragraph (e) of this at 80 FR 41416, July 15, 2015; 84 FR 35258, July section to calculate the risk-weighted 22, 2019; 85 FR 20393, Apr. 13, 2020] asset amounts for CVA for OTC derivatives. § 3.132 Counterparty credit risk of (b) EAD for eligible margin loans and repo-style transactions, eligible repo-style transactions—(1) General. A margin loans, and OTC derivative national bank or Federal savings asso- contracts. ciation may recognize the credit risk (a) Methodologies for collateral recogni- mitigation benefits of financial collat- tion. (1) Instead of an LGD estimation eral that secures an eligible margin methodology, a national bank or Fed- loan, repo-style transaction, or single- eral savings association may use the product netting set of such trans- following methodologies to recognize actions by factoring the collateral into the benefits of financial collateral in its LGD estimates for the exposure. Al- mitigating the counterparty credit risk ternatively, a national bank or Federal of repo-style transactions, eligible savings association may estimate an margin loans, collateralized OTC deriv- unsecured LGD for the exposure, as ative contracts and single product net- well as for any repo-style transaction ting sets of such transactions, and to that is included in the national bank’s recognize the benefits of any collateral or Federal savings association’s VaR- in mitigating the counterparty credit based measure under subpart F of this risk of repo-style transactions that are part, and determine the EAD of the ex- included in a national bank’s or Fed- posure using: eral savings association’s VaR-based (i) The collateral haircut approach measure under subpart F of this part: described in paragraph (b)(2) of this (i) The collateral haircut approach section; set forth in paragraph (b)(2) of this sec- (ii) For netting sets only, the simple tion; VaR methodology described in para- (ii) The internal models methodology graph (b)(3) of this section; or set forth in paragraph (d) of this sec- (iii) The internal models method- tion; and ology described in paragraph (d) of this (iii) For single product netting sets section. of repo-style transactions and eligible margin loans, the simple VaR method- (2) Collateral haircut approach—(i) ology set forth in paragraph (b)(3) of EAD equation. A national bank or Fed- this section. eral savings association may determine (2) A national bank or Federal sav- EAD for an eligible margin loan, repo- ings association may use any combina- style transaction, or netting set by set- tion of the three methodologies for col- ting EAD equal to max

lateral recognition; however, it must {0, [(SE ¥ SC) + S(Es × Hs) + S(Efx × use the same methodology for trans- Hfx)]}, actions in the same category. (3) A national bank or Federal sav- where: ings association must use the method- (A) SE equals the value of the expo- ology in paragraph (c) of this section, sure (the sum of the current fair values or with prior written approval of the of all instruments, gold, and cash the OCC, the internal model methodology national bank or Federal savings asso- in paragraph (d) of this section, to cal- ciation has lent, sold subject to repur- culate EAD for an OTC derivative con- chase, or posted as collateral to the tract or a set of OTC derivative con- counterparty under the transaction (or tracts subject to a qualifying master netting set));

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(B) SC equals the value of the collat- from the settlement currency (where eral (the sum of the current fair values the net position in a given currency of all instruments, gold, and cash the equals the sum of the current fair val- national bank or Federal savings asso- ues of any instruments or cash in the ciation has borrowed, purchased sub- currency the national bank or Federal ject to resale, or taken as collateral savings association has lent, sold sub- from the counterparty under the trans- ject to repurchase, or posted as collat- action (or netting set)); eral to the counterparty minus the (C) Es equals the absolute value of sum of the current fair values of any the net position in a given instrument instruments or cash in the currency or in gold (where the net position in a the national bank or Federal savings given instrument or in gold equals the association has borrowed, purchased sum of the current fair values of the in- subject to resale, or taken as collateral strument or gold the national bank or from the counterparty); and Federal savings association has lent, (F) H equals the haircut appropriate sold subject to repurchase, or posted as fx collateral to the counterparty minus to the mismatch between the currency the sum of the current fair values of referenced in Efx and the settlement that same instrument or gold the na- currency. tional bank or Federal savings associa- (ii) Standard supervisory haircuts. (A) tion has borrowed, purchased subject Under the standard supervisory hair- to resale, or taken as collateral from cuts approach: the counterparty); (1) A national bank or Federal sav- (D) Hs equals the market price vola- ings association must use the haircuts tility haircut appropriate to the infor market price volatility (Hs) in strument or gold referenced in Es; Table 1 to § 3.132, as adjusted in certain (E) Efx equals the absolute value of circumstances as provided in para- the net position of instruments and graphs (b)(2)(ii)(A)(3) and (4) of this sec- cash in a currency that is different tion;

TABLE 1 TO § 3.132—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1

Haircut (in percent) assigned based on: Investment Sovereign issuers risk Non-sovereign issuers risk grade Residual maturity weight under § 3.32 2 weight under § 3.32 securitization (in percent) (in percent) exposures (in percent) Zero 20 or 50 100 20 50 100

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

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

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

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

Cash collateral held ...... Zero

Other exposure types ...... 25.0 1 The market price volatility haircuts in Table 1 to § 3.132 are based on a 10 business-day holding period. 2 Includes a foreign PSE that receives a zero percent risk weight.

(2) For currency mismatches, a na- cumstances as provided in paragraphs tional bank or Federal savings associa- (b)(2)(ii)(A)(3) and (4) of this section. tion must use a haircut for foreign ex- (3) For repo-style transactions and change rate volatility (Hfx) of 8 per- client-facing derivative transactions, a cent, as adjusted in certain cir-

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national bank or Federal savings asso- is at least two times the minimum ciation may multiply the supervisory holding period for that netting set. haircuts provided in paragraphs (5)(i) A national bank or Federal sav- (b)(2)(ii)(A)(1) and (2) of this section by ings association must adjust the super- the square root of 1⁄2 (which equals visory haircuts upward on the basis of 0.707107). If the national bank or Fed- a holding period longer than ten busi- eral savings association determines ness days for collateral associated with that a longer holding period is appro- derivative contracts (five business days priate for client-facing derivative for client-facing derivative contracts) transactions, then it must use a larger using the formula provided in para- scaling factor to adjust for the longer graph (b)(2)(ii)(A)(6) of this section holding period pursuant to paragraph where the conditions in this paragraph (b)(2)(ii)(A)(6) of this section. (b)(2)(ii)(A)(5)(i) apply. For collateral (4) A national bank or Federal sav- associated with a derivative contract ings association must adjust the super- that is within a netting set that is visory haircuts upward on the basis of composed of more than 5,000 derivative a holding period longer than ten busi- contracts that are not cleared trans- ness days (for eligible margin loans) or actions, a national bank or Federal five business days (for repo-style trans- savings association must use a min- actions), using the formula provided in imum holding period of twenty busi- paragraph (b)(2)(ii)(A)(6) of this section ness days. If a netting set contains one where the conditions in this paragraph (b)(2)(ii)(A)(4) apply. If the number of or more trades involving illiquid col- trades in a netting set exceeds 5,000 at lateral or a derivative contract that any time during a quarter, a national cannot be easily replaced, a national bank or Federal savings association bank or Federal savings association must adjust the supervisory haircuts must use a minimum holding period of upward on the basis of a minimum twenty business days. holding period of twenty business days (ii) Notwithstanding paragraph for the following quarter (except when (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) a national bank or Federal savings as- of this section, for collateral associ- sociation is calculating EAD for a ated with a derivative contract in a cleared transaction under § 3.133). If a netting set under which more than two netting set contains one or more trades margin disputes that lasted longer involving illiquid collateral, a national than the holding period occurred dur- bank or Federal savings association ing the previous two quarters, the min- must adjust the supervisory haircuts imum holding period is twice the upward on the basis of a minimum amount provided under paragraph holding period of twenty business days. (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) If over the two previous quarters more of this section. than two margin disputes on a netting (6) A national bank or Federal sav- set have occurred that lasted longer ings association must adjust the stand- than the holding period, then the na- ard supervisory haircuts upward, pur- tional bank or Federal savings associa- suant to the adjustments provided in tion must adjust the supervisory hair- paragraphs (b)(2)(ii)(A)(3) through (5) of cuts upward for that netting set on the this section, using the following for- basis of a minimum holding period that mula:

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Where: savings association may calculate hair-

TM equals a holding period of longer than 10 cuts (Hs and Hfx) using its own internal business days for eligible margin loans estimates of the volatilities of market and derivative contracts other than cli- prices and foreign exchange rates. ent-facing derivative transactions or (A) To receive OCC approval to use longer than 5 business days for repo-style its own internal estimates, a national transactions and client-facing derivative transactions; bank or Federal savings association must satisfy the following minimum HS equals the standard supervisory haircut; and quantitative standards: TS equals 10 business days for eligible margin (1) A national bank or Federal sav- loans and derivative contracts other ings association must use a 99th per- than client-facing derivative trans- centile one-tailed confidence interval. actions or 5 business days for repo-style (2) The minimum holding period for a transactions and client-facing derivative repo-style transaction is five business transactions. days and for an eligible margin loan is (7) If the instrument a national bank ten business days except for trans- or Federal savings association has lent, actions or netting sets for which para- sold subject to repurchase, or posted as graph (b)(2)(iii)(A)(3) of this section ap- collateral does not meet the definition plies. When a national bank or Federal of financial collateral, the national savings association calculates an own- bank or Federal savings association estimates haircut on a TN-day holding must use a 25.0 percent haircut for period, which is different from the min- market price volatility (HS). imum holding period for the trans- (iii) Own internal estimates for hair- action type, the applicable haircut cuts. With the prior written approval of (HM) is calculated using the following the OCC, a national bank or Federal square root of time formula:

(i) TM equals 5 for repo-style trans- previous quarters more than two mar- actions and 10 for eligible margin gin disputes on a netting set have oc- loans; curred that lasted more than the hold- (ii) TN equals the holding period used ing period, then the national bank or by the national bank or Federal sav- Federal savings association must cal- ings association to derive HN; and culate the haircut for transactions in (iii) HN equals the haircut based on that netting set on the basis of a hold- the holding period TN ing period that is at least two times (3) If the number of trades in a net- the minimum holding period for that ting set exceeds 5,000 at any time dur- netting set. ing a quarter, a national bank or Fed- (4) A national bank or Federal sav- eral savings association must calculate ings association is required to cal- the haircut using a minimum holding culate its own internal estimates with period of twenty business days for the inputs calibrated to historical data following quarter (except when a na- from a continuous 12-month period tional bank or Federal savings associa- that reflects a period of significant fi- tion is calculating EAD for a cleared nancial stress appropriate to the secu- transaction under § 3.133). If a netting rity or category of securities. set contains one or more trades involv- (5) A national bank or Federal saving illiquid collateral or an OTC deriv- ings association must have policies and ative that cannot be easily replaced, a procedures that describe how it deter- national bank or Federal savings asso- mines the period of significant finan- ciation must calculate the haircut cial stress used to calculate the na- using a minimum holding period of tional bank’s or Federal savings asso- twenty business days. If over the two ciation’s own internal estimates for

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haircuts under this section and must based on estimated volatilities of for- be able to provide empirical support for eign exchange rates between the mis- the period used. The national bank or matched currency and the settlement Federal savings association must ob- currency. tain the prior approval of the OCC for, (E) A national bank’s or Federal sav- and notify the OCC if the national ings association’s own estimates of bank or Federal savings association market price and foreign exchange rate makes any material changes to, these volatilities may not take into account policies and procedures. the correlations among securities and (6) Nothing in this section prevents foreign exchange rates on either the the OCC from requiring a national exposure or collateral side of a trans- bank or Federal savings association to action (or netting set) or the correla- use a different period of significant fi- tions among securities and foreign ex- nancial stress in the calculation of own change rates between the exposure and internal estimates for haircuts. collateral sides of the transaction (or (7) A national bank or Federal sav- netting set). ings association must update its data (3) Simple VaR methodology. With the sets and calculate haircuts no less fre- prior written approval of the OCC, a quently than quarterly and must also national bank or Federal savings asso- reassess data sets and haircuts when- ciation may estimate EAD for a net- ever market prices change materially. ting set using a VaR model that meets (B) With respect to debt securities the requirements in paragraph that are investment grade, a national (b)(3)(iii) of this section. In such event, bank or Federal savings association the national bank or Federal savings may calculate haircuts for categories association must set EAD equal to max of securities. For a category of securi- {0, [(SE ¥ SC) + PFE]}, where: ties, the national bank or Federal sav- (i) SE equals the value of the expo- ings association must calculate the sure (the sum of the current fair values haircut on the basis of internal vola- of all instruments, gold, and cash the tility estimates for securities in that national bank or Federal savings asso- category that are representative of the ciation has lent, sold subject to repur- securities in that category that the na- chase, or posted as collateral to the tional bank or Federal savings associa- counterparty under the netting set); tion has lent, sold subject to repur- (ii) SC equals the value of the collat- chase, posted as collateral, borrowed, eral (the sum of the current fair values purchased subject to resale, or taken as of all instruments, gold, and cash the collateral. In determining relevant cat- national bank or Federal savings asso- egories, the national bank or Federal ciation has borrowed, purchased sub- savings association must at a min- ject to resale, or taken as collateral imum take into account: from the counterparty under the net- (1) The type of issuer of the security; ting set); and (2) The credit quality of the security; (iii) PFE (potential future exposure) (3) The maturity of the security; and equals the national bank’s or Federal (4) The interest rate sensitivity of savings association’s empirically based the security. best estimate of the 99th percentile, (C) With respect to debt securities one-tailed confidence interval for an that are not investment grade and eq- increase in the value of (SE ¥ SC) over uity securities, a national bank or Fed- a five-business-day holding period for eral savings association must calculate repo-style transactions, or over a ten- a separate haircut for each individual business-day holding period for eligible security. margin loans except for netting sets for (D) Where an exposure or collateral which paragraph (b)(3)(iv) of this sec- (whether in the form of cash or securi- tion applies using a minimum one-year ties) is denominated in a currency that historical observation period of price differs from the settlement currency, data representing the instruments that the national bank or Federal savings the national bank or Federal savings association must calculate a separate association has lent, sold subject to re- currency mismatch haircut for its net purchase, posted as collateral, bor- position in each mismatched currency rowed, purchased subject to resale, or

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taken as collateral. The national bank include any adjustments to common or Federal savings association must equity tier 1 capital attributable to validate its VaR model by establishing changes in the fair value of the na- and maintaining a rigorous and regular tional bank’s or Federal savings asso- backtesting regime. ciation’s liabilities that are due to (iv) If the number of trades in a net- changes in its own credit risk since the ting set exceeds 5,000 at any time dur- inception of the transaction with the ing a quarter, a national bank or Fed- counterparty. eral savings association must use a (2) Definitions. For purposes of this twenty-business-day holding period for paragraph (c) of this section, the fol- the following quarter (except when a lowing definitions apply: national bank or Federal savings asso- (i) End date means the last date of ciation is calculating EAD for a the period referenced by an interest cleared transaction under § 3.133). If a rate or credit derivative contract or, if netting set contains one or more trades the derivative contract references an- involving illiquid collateral, a national other instrument, by the underlying bank or Federal savings association instrument, except as otherwise pro- must use a twenty-business-day hold- vided in paragraph (c) of this section. ing period. If over the two previous (ii) Start date means the first date of quarters more than two margin dis- the period referenced by an interest putes on a netting set have occurred rate or credit derivative contract or, if that lasted more than the holding pe- the derivative contract references the riod, then the national bank or Federal value of another instrument, by under- savings association must set its PFE lying instrument, except as otherwise for that netting set equal to an esti- provided in paragraph (c) of this sec- mate over a holding period that is at tion. least two times the minimum holding (iii) Hedging set means: period for that netting set. (A) With respect to interest rate de- (c) EAD for derivative contracts—(1) rivative contracts, all such contracts Options for determining EAD. A national within a netting set that reference the bank or Federal savings association same reference currency; must determine the EAD for a derivative contract using the standardized (B) With respect to exchange rate de- approach for counterparty credit risk rivative contracts, all such contracts (SA–CCR) under paragraph (c)(5) of this within a netting set that reference the section or using the internal models same currency pair; methodology described in paragraph (d) (C) With respect to credit derivative of this section. If a national bank or contract, all such contracts within a Federal savings association elects to netting set; use SA–CCR for one or more derivative (D) With respect to equity derivative contracts, the exposure amount deter- contracts, all such contracts within a mined under SA–CCR is the EAD for netting set; the derivative contract or derivative (E) With respect to a commodity de- contracts. A national bank or Federal rivative contract, all such contracts savings association must use the same within a netting set that reference one methodology to calculate the exposure of the following commodity categories: amount for all its derivative contracts Energy, metal, agricultural, or other and may change its election only with commodities; prior approval of the OCC. A national (F) With respect to basis derivative bank or Federal savings association contracts, all such contracts within a may reduce the EAD calculated accord- netting set that reference the same ing to paragraph (c)(5) of this section pair of risk factors and are denomi- by the credit valuation adjustment nated in the same currency; or that the national bank or Federal sav- (G) With respect to volatility deriva- ings association has recognized in its tive contracts, all such contracts with- balance sheet valuation of any deriva- in a netting set that reference one of tive contracts in the netting set. For interest rate, exchange rate, credit, eq- purposes of this paragraph (c)(1), the uity, or commodity risk factors, sepa- credit valuation adjustment does not rated according to the requirements

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under paragraphs (c)(2)(iii)(A) through (4) Equity derivatives. A national bank (E) of this section. or Federal savings association must (H) If the risk of a derivative con- treat an equity derivative contract as tract materially depends on more than an equity exposure and compute a risk- one of interest rate, exchange rate, weighted asset amount for the equity credit, equity, or commodity risk fac- derivative contract under §§ 3.151–3.155 tors, the OCC may require a national (unless the national bank or Federal bank or Federal savings association to savings association is treating the con- include the derivative contract in each tract as a covered position under sub- appropriate hedging set under para- part F of this part). In addition, if the graphs (c)(2)(iii)(A) through (E) of this national bank or Federal savings asso- section. ciation is treating the contract as a (3) Credit derivatives. Notwithstanding covered position under subpart F of paragraphs (c)(1) and (c)(2) of this sec- this part, and under certain other cir- tion: cumstances described in § 3.155, the na- (i) A national bank or Federal sav- tional bank or Federal savings associa- ings association that purchases a cred- tion must also calculate a risk-based it derivative that is recognized under capital requirement for the § 3.134 or § 3.135 as a credit risk counterparty credit risk of an equity mitigant for an exposure that is not a derivative contract under this section. covered position under subpart F of (5) Exposure amount. (i) The exposure this part is not required to calculate a amount of a netting set, as calculated separate counterparty credit risk cap- under paragraph (c) of this section, is ital requirement under this section so equal to 1.4 multiplied by the sum of long as the national bank or Federal the replacement cost of the netting set, savings association does so consist- as calculated under paragraph (c)(6) of ently for all such credit derivatives and this section, and the potential future either includes or excludes all such exposure of the netting set, as cal- credit derivatives that are subject to a culated under paragraph (c)(7) of this master netting agreement from any section. measure used to determine (ii) Notwithstanding the require- counterparty credit risk exposure to all relevant counterparties for risk- ments of paragraph (c)(5)(i) of this sec- based capital purposes. tion, the exposure amount of a netting (ii) A national bank or Federal sav- set subject to a variation margin ings association that is the protection agreement, excluding a netting set provider in a credit derivative must that is subject to a variation margin treat the credit derivative as a whole- agreement under which the sale exposure to the reference obligor counterparty to the variation margin and is not required to calculate a agreement is not required to post vari- counterparty credit risk capital re- ation margin, is equal to the lesser of quirement for the credit derivative the exposure amount of the netting set under this section, so long as it does so calculated under paragraph (c)(5)(i) of consistently for all such credit deriva- this section and the exposure amount tives and either includes all or excludes of the netting set calculated as if the all such credit derivatives that are sub- netting set were not subject to a vari- ject to a master netting agreement ation margin agreement. from any measure used to determine (iii) Notwithstanding the require- counterparty credit risk exposure to ments of paragraph (c)(5)(i) of this sec- all relevant counterparties for risk- tion, the exposure amount of a netting based capital purposes (unless the na- set that consists of only sold options in tional bank or Federal savings associa- which the premiums have been fully tion is treating the credit derivative as paid by the counterparty to the options a covered position under subpart F of and where the options are not subject this part, in which case the national to a variation margin agreement is bank or Federal savings association zero. must calculate a supplemental (iv) Notwithstanding the require- counterparty credit risk capital re- ments of paragraph (c)(5)(i) of this sec- quirement under this section). tion, the exposure amount of a netting

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set in which the counterparty is a com- of the derivative contracts within the mercial end-user is equal to the sum of netting set less the sum of the net replacement cost, as calculated under independent collateral amount and the paragraph (c)(6) of this section, and the variation margin amount applicable to potential future exposure of the net- such derivative contracts; ting set, as calculated under paragraph (B) The sum of the variation margin (c)(7) of this section. threshold and the minimum transfer (v) For purposes of the exposure amount applicable to the derivative amount calculated under paragraph contracts within the netting set less (c)(5)(i) of this section and all calcula- the net independent collateral amount tions that are part of that exposure applicable to such derivative contracts; amount, a national bank or Federal or savings association may elect, at the netting set level, to treat a derivative (C) Zero. contract that is a cleared transaction (ii) Netting sets not subject to a vari- that is not subject to a variation mar- ation margin agreement under which the gin agreement as one that is subject to counterparty must post variation margin. a variation margin agreement, if the The replacement cost of a netting set derivative contract is subject to a re- that is not subject to a variation mar- quirement that the counterparties gin agreement under which the make daily cash payments to each counterparty must post variation mar- other to account for changes in the fair gin to the national bank or Federal value of the derivative contract and to savings association is the greater of: reduce the net position of the contract (A) The sum of the fair values (after to zero. If a national bank or Federal excluding any valuation adjustments) savings association makes an election of the derivative contracts within the under this paragraph (c)(5)(v) for one netting set less the sum of the net derivative contract, it must treat all independent collateral amount and var- other derivative contracts within the iation margin amount applicable to same netting set that are eligible for such derivative contracts; or an election under this paragraph (B) Zero. (c)(5)(v) as derivative contracts that are subject to a variation margin (iii) Multiple netting sets subject to a agreement. single variation margin agreement. Not- (vi) For purposes of the exposure withstanding paragraphs (c)(6)(i) and amount calculated under paragraph (ii) of this section, the replacement (c)(5)(i) of this section and all calcula- cost for multiple netting sets subject tions that are part of that exposure to a single variation margin agreement amount, a national bank or Federal must be calculated according to para- savings association may elect to treat graph (c)(10)(i) of this section. a credit derivative contract, equity de- (iv) Netting set subject to multiple vari- rivative contract, or commodity derivation margin agreements or a hybrid net- ative contract that references an index ting set. Notwithstanding paragraphs as if it were multiple derivative con- (c)(6)(i) and (ii) of this section, the re- tracts each referencing one component placement cost for a netting set sub- of the index. ject to multiple variation margin (6) Replacement cost of a netting set— agreements or a hybrid netting set (i) Netting set subject to a variation mar- must be calculated according to para- gin agreement under which the graph (c)(11)(i) of this section. counterparty must post variation margin. (7) Potential future exposure of a net- The replacement cost of a netting set ting set. The potential future exposure subject to a variation margin agree- of a netting set is the product of the ment, excluding a netting set that is subject to a variation margin agree- PFE multiplier and the aggregated ment under which the counterparty is amount. not required to post variation margin, (i) PFE multiplier. The PFE multiplier is the greater of: is calculated according to the following (A) The sum of the fair values (after formula: excluding any valuation adjustments)

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Where: agreement must be calculated accord- V is the sum of the fair values (after excluding to paragraph (c)(10)(ii) of this sec- ing any valuation adjustments) of the de- tion. rivative contracts within the netting set; (iv) Netting set subject to multiple vari- C is the sum of the net independent collat- ation margin agreements or a hybrid net- eral amount and the variation margin ting set. Notwithstanding paragraphs amount applicable to the derivative con- (c)(7)(i) and (ii) of this section and tracts within the netting set; and when calculating the potential future A is the aggregated amount of the netting set. exposure for purposes of total leverage exposure under § 3.10(c)(4)(ii)(B), the po- (ii) Aggregated amount. The aggre- tential future exposure for a netting gated amount is the sum of all hedging set subject to multiple variation mar- set amounts, as calculated under para- gin agreements or a hybrid netting set graph (c)(8) of this section, within a must be calculated according to para- netting set. graph (c)(11)(ii) of this section. (iii) Multiple netting sets subject to a (8) Hedging set amount—(i) Interest single variation margin agreement. Not- rate derivative contracts. To calculate withstanding paragraphs (c)(7)(i) and the hedging set amount of an interest (ii) of this section and when calcu- rate derivative contract hedging set, a lating the potential future exposure for national bank or Federal savings asso- purposes of total leverage exposure ciation may use either of the formulas under § 3.10(c)(4)(ii)(B), the potential fu- provided in paragraphs (c)(8)(i)(A) and ture exposure for multiple netting sets (B) of this section: subject to a single variation margin (A) Formula 1 is as follows:

IR (B) Formula 2 is as follows: AddOnTB3 is the sum of the adjusted deriva- Hedging set amount = |AddOn IR|+ tive contract amounts, as calculated TB1 under paragraph (c)(9) of this section, |AddOn IR| + |AddOn IR|. TB2 TB3 within the hedging set with an end date Where in paragraphs (c)(8)(i)(A) and (B) of of more than five years from the present this section: date. IR AddOnTB1 is the sum of the adjusted deriva- (ii) Exchange rate derivative contracts. tive contract amounts, as calculated under paragraph (c)(9) of this section, For an exchange rate derivative con- within the hedging set with an end date tract hedging set, the hedging set of less than one year from the present amount equals the absolute value of date; the sum of the adjusted derivative con- IR AddOnTB2 is the sum of the adjusted deriva- tract amounts, as calculated under tive contract amounts, as calculated paragraph (c)(9) of this section, within under paragraph (c)(9) of this section, within the hedging set with an end date the hedging set. of one to five years from the present (iii) Credit derivative contracts and eq- date; and uity derivative contracts. The hedging

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set amount of a credit derivative con- set is calculated according to the fol- tract hedging set or equity derivative lowing formula: contract hedging set within a netting

Where: rk equals the applicable supervisory correla- k is each reference entity within the hedging tion factor, as provided in Table 3 to this set. section. K is the number of reference entities within the hedging set. (iv) Commodity derivative contracts. AddOn(Refk) equals the sum of the adjusted The hedging set amount of a com- derivative contract amounts, as deter- modity derivative contract hedging set mined under paragraph (c)(9) of this sec- within a netting set is calculated action, for all derivative contracts within cording to the following formula: the hedging set that reference reference entity k.

Where: or Federal savings association must k is each commodity type within the hedging calculate such hedging set amounts set. using one of the formulas under para- K is the number of commodity types within graphs (c)(8)(i) through (iv) of this sec- the hedging set. tion that corresponds to the primary AddOn(Typek) equals the sum of the adjusted derivative contract amounts, as deter- risk factor of the hedging set being cal- mined under paragraph (c)(9) of this sec- culated. tion, for all derivative contracts within (9) Adjusted derivative contract the hedging set that reference reference amount—(i) Summary. To calculate the commodity type k. adjusted derivative contract amount of r equals the applicable supervisory correlation factor, as provided in Table 3 to this a derivative contract, a national bank section. or Federal savings association must determine the adjusted notional amount (v) Basis derivative contracts and vola- of derivative contract, pursuant to tility derivative contracts. Notwith- paragraph (c)(9)(ii) of this section, and standing paragraphs (c)(8)(i) through (iv) of this section, a national bank or multiply the adjusted notional amount Federal savings association must cal- by each of the supervisory delta adjust- culate a separate hedging set amount ment, pursuant to paragraph (c)(9)(iii) for each basis derivative contract hedg- of this section, the maturity factor, ing set and each volatility derivative pursuant to paragraph (c)(9)(iv) of this contract hedging set. A national bank section, and the applicable supervisory

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factor, as provided in Table 3 to this the product of the notional amount of section. the derivative contract, as measured in (ii) Adjusted notional amount. (A)(1) U.S. dollars using the exchange rate on For an interest rate derivative con- the date of the calculation, and the su- tract or a credit derivative contract, pervisory duration, as calculated by the adjusted notional amount equals the following formula:

Where: multiple exchanges of principal, the S is the number of business days from the national bank or Federal savings asso- present day until the start date of the de- ciation must set the adjusted notional rivative contract, or zero if the start amount of the derivative contract date has already passed; and equal to the notional amount of the de- E is the number of business days from the present day until the end date of the derivative contract multiplied by the rivative contract. number of exchanges of principal under the derivative contract. (2) For purposes of paragraph (C)(1) For an equity derivative con- (c)(9)(ii)(A)(1) of this section: tract or a commodity derivative con- (i) For an interest rate derivative tract, the adjusted notional amount is contract or credit derivative contract the product of the fair value of one that is a variable notional swap, the unit of the reference instrument under- notional amount is equal to the time- lying the derivative contract and the weighted average of the contractual number of such units referenced by the notional amounts of such a swap over derivative contract. the remaining life of the swap; and (ii) For an interest rate derivative (2) Notwithstanding paragraph contract or a credit derivative contract (c)(9)(ii)(C)(1) of this section, when cal- that is a leveraged swap, in which the culating the adjusted notional amount notional amount of all legs of the de- for an equity derivative contract or a rivative contract are divided by a fac- commodity derivative contract that is tor and all rates of the derivative con- a volatility derivative contract, the na- tract are multiplied by the same fac- tional bank or Federal savings associa- tor, the notional amount is equal to tion must replace the unit price with the notional amount of an equivalent the underlying volatility referenced by unleveraged swap. the volatility derivative contract and (B)(1) For an exchange rate deriva- replace the number of units with the tive contract, the adjusted notional notional amount of the volatility de- amount is the notional amount of the rivative contract. non-U.S. denominated currency leg of (iii) Supervisory delta adjustments. (A) the derivative contract, as measured in For a derivative contract that is not an U.S. dollars using the exchange rate on option contract or collateralized debt the date of the calculation. If both legs obligation tranche, the supervisory of the exchange rate derivative con- delta adjustment is 1 if the fair value tract are denominated in currencies of the derivative contract increases other than U.S. dollars, the adjusted when the value of the primary risk fac- notional amount of the derivative con- tor increases and ¥1 if the fair value of tract is the largest leg of the derivative the derivative contract decreases when contract, as measured in U.S. dollars the value of the primary risk factor in- using the exchange rate on the date of creases. the calculation. (B)(1) For a derivative contract that (2) Notwithstanding paragraph is an option contract, the supervisory (c)(9)(ii)(B)(1) of this section, for an ex- delta adjustment is determined by the change rate derivative contract with following formulas, as applicable:

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(2) As used in the formulas in Table 2 same currency. To determine the value to this section: of λ for a given currency, a national (i) F is the standard normal cumu- bank or Federal savings association lative distribution function; must find the lowest value L of P and (ii) P equals the current fair value of K of all interest rate options in a given the instrument or risk factor, as appli- currency that the national bank or cable, underlying the option; Federal savings association has with (iii) K equals the strike price of the all counterparties. Then, λ is set ac- option; cording to this formula: λ = max{¥L + (iv) T equals the number of business 0.1%, 0}; and days until the latest contractual exer- (vi) s equals the supervisory option cise date of the option; volatility, as provided in Table 3 to of (v) λ equals zero for all derivative this section. contracts except interest rate options (C)(1) For a derivative contract that for the currencies where interest rates is a collateralized debt obligation have negative values. The same value tranche, the supervisory delta adjust- of λ must be used for all interest rate ment is determined by the following options that are denominated in the formula:

(2) As used in the formula in para- (ii) D is the detachment point, which graph (c)(9)(iii)(C)(1) of this section: equals one minus the ratio of the no- (i) A is the attachment point, which tional amounts of all underlying expo- equals the ratio of the notional sures that are senior to the national amounts of all underlying exposures bank’s or Federal savings association’s that are subordinated to the national exposure to the total notional amount bank’s or Federal savings association’s of all underlying exposures, expressed exposure to the total notional amount of all underlying exposures, expressed that are subordinated to the national bank’s as a decimal value between zero and or Federal savings association’s exposure. In 30 the case of a second-or-subsequent-to-default one; credit derivative, the smallest (n¥1) notional amounts of the underlying exposures 30 In the case of a first-to-default credit de- are subordinated to the national bank’s or rivative, there are no underlying exposures Federal savings association’s exposure.

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as a decimal value between zero and (iv) Maturity factor. (A)(1) The matu- one; and rity factor of a derivative contract (iii) The resulting amount is des- that is subject to a variation margin ignated with a positive sign if the agreement, excluding derivative con- collateralized debt obligation tranche tracts that are subject to a variation was purchased by the national bank or margin agreement under which the Federal savings association and is des- counterparty is not required to post ignated with a negative sign if the variation margin, is determined by the collateralized debt obligation tranche following formula: was sold by the national bank or Fed- eral savings association.

Where MPOR refers to the period from the that are not cleared transactions, or a most recent exchange of collateral covering netting set that contains one or more a netting set of derivative contracts with a trades involving illiquid collateral or a defaulting counterparty until the derivative contracts are closed out and the resulting derivative contract that cannot be eas- market risk is re-hedged. ily replaced, MPOR cannot be less than twenty business days. (2) Notwithstanding paragraph (3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) of this section: (c)(9)(iv)(A)(1) and (2) of this section, (i) For a derivative contract that is not a client-facing derivative trans- for a netting set subject to more than action, MPOR cannot be less than ten two outstanding disputes over margin business days plus the periodicity of re- that lasted longer than the MPOR over margining expressed in business days the previous two quarters, the applica- minus one business day; ble floor is twice the amount provided (ii) For a derivative contract that is in paragraphs (c)(9)(iv)(A)(1) and (2) of a client-facing derivative transaction, this section. MPOR cannot be less than five business (B) The maturity factor of a deriva- days plus the periodicity of re-mar- tive contract that is not subject to a gining expressed in business days variation margin agreement, or deriva- minus one business day; and tive contracts under which the (iii) For a derivative contract that is counterparty is not required to post within a netting set that is composed variation margin, is determined by the of more than 5,000 derivative contracts following formula:

Where M equals the greater of 10 business ation margin agreement as one that is days and the remaining maturity of the con- subject to a variation margin agree- tract, as measured in business days. ment, the national bank or Federal (C) For purposes of paragraph savings association must treat the de- (c)(9)(iv) of this section, if a national rivative contract as subject to a vari- bank or Federal savings association ation margin agreement with maturity has elected pursuant to paragraph factor as determined according to (c)(5)(v) of this section to treat a deriv- (c)(9)(iv)(A) of this section, and daily ative contract that is a cleared trans- settlement does not change the end action that is not subject to a vari-

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date of the period referenced by the de- the counterparty must post variation rivative contract. margin, calculated according to the (v) Derivative contract as multiple effec- following formula:

tive derivative contracts. A national Replacement Cost = max{SNS max{VNS; 0} bank or Federal savings association ¥ max{CMA; 0}; 0} + max{SNS min{VNS; must separate a derivative contract 0} ¥ min{CMA; 0}; 0} into separate derivative contracts, according to the following rules: Where: (A) For an option where the NS is each netting set subject to the vari- counterparty pays a predetermined ation margin agreement MA. VNS is the sum of the fair values (after ex- amount if the value of the underlying cluding any valuation adjustments) of asset is above or below the strike price the derivative contracts within the net- and nothing otherwise (binary option), ting set NS. the option must be treated as two sepa- CMA is the sum of the net independent collat- rate options. For purposes of paragraph eral amount and the variation margin (c)(9)(iii)(B) of this section, a binary amount applicable to the derivative con- option with strike K must be rep- tracts within the netting sets subject to resented as the combination of one the single variation margin agreement. bought European option and one sold (ii) Calculating potential future expo- European option of the same type as sure. Notwithstanding paragraph (c)(5) the original option (put or call) with of this section, a national bank or Fed- the strikes set equal to 0.95 * K and 1.05 eral savings association shall assign a * K so that the payoff of the binary op- single potential future exposure to tion is reproduced exactly outside the multiple netting sets that are subject region between the two strikes. The ab- to a single variation margin agreement solute value of the sum of the adjusted under which the counterparty must derivative contract amounts of the post variation margin equal to the sum bought and sold options is capped at of the potential future exposure of each the payoff amount of the binary op- such netting set, each calculated action. cording to paragraph (c)(7) of this sec- (B) For a derivative contract that tion as if such nettings sets were not can be represented as a combination of subject to a variation margin agree- standard option payoffs (such as collar, ment. butterfly spread, calendar spread, (11) Netting set subject to multiple vari- straddle, and strangle), a national bank ation margin agreements or a hybrid net- or Federal savings association must ting set—(i) Calculating replacement cost. treat each standard option component To calculate replacement cost for ei- as a separate derivative contract. ther a netting set subject to multiple (C) For a derivative contract that in- variation margin agreements under cludes multiple-payment options, (such which the counterparty to each vari- as interest rate caps and floors), a na- ation margin agreement must post var- tional bank or Federal savings associa- iation margin, or a netting set com- tion may represent each payment op- posed of at least one derivative con- tion as a combination of effective sin- tract subject to variation margin gle-payment options (such as interest agreement under which the rate caplets and floorlets). counterparty must post variation mar- (D) A national bank or Federal sav- gin and at least one derivative contract ings association may not decompose that is not subject to such a variation linear derivative contracts (such as margin agreement, the calculation for swaps) into components. replacement cost is provided under (10) Multiple netting sets subject to a paragraph (c)(6)(i) of this section, ex- single variation margin agreement—(i) cept that the variation margin thresh- Calculating replacement cost. Notwith- old equals the sum of the variation standing paragraph (c)(6) of this sec- margin thresholds of all variation mar- tion, a national bank or Federal sav- gin agreements within the netting set ings association shall assign a single and the minimum transfer amount replacement cost to multiple netting equals the sum of the minimum trans- sets that are subject to a single vari- fer amounts of all the variation margin ation margin agreement under which agreements within the netting set.

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(ii) Calculating potential future expo- set must be divided into sub-netting sure. (A) To calculate potential future sets as follows: exposure for a netting set subject to (1) All derivative contracts within multiple variation margin agreements the netting set that are not subject to under which the counterparty to each a variation margin agreement or that variation margin agreement must post are subject to a variation margin variation margin, or a netting set com- agreement under which the posed of at least one derivative con- counterparty is not required to post tract subject to variation margin variation margin form a single sub-net- agreement under which the ting set. The aggregated amount for counterparty to the derivative contract must post variation margin and this sub-netting set is calculated as if at least one derivative contract that is the netting set is not subject to a vari- not subject to such a variation margin ation margin agreement. agreement, a national bank or Federal (2) All derivative contracts within savings association must divide the the netting set that are subject to vari- netting set into sub-netting sets (as de- ation margin agreements in which the scribed in paragraph (c)(11)(ii)(B) of counterparty must post variation mar- this section) and calculate the aggre- gin and that share the same value of gated amount for each sub-netting set. the MPOR form a single sub-netting The aggregated amount for the netting set. The aggregated amount for this set is calculated as the sum of the ag- sub-netting set is calculated as if the gregated amounts for the sub-netting netting set is subject to a variation sets. The multiplier is calculated for margin agreement, using the MPOR the entire netting set. value shared by the derivative con- (B) For purposes of paragraph tracts within the netting set. (c)(11)(ii)(A) of this section, the netting

TABLE 3 TO § 3.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS

Supervisory Supervisory Supervisory option correlation 1 Asset class Category Type volatility factor factor (percent) (percent) (percent)

Interest rate ...... N/A ...... N/A ...... 50 N/A 0.50 Exchange rate ...... N/A ...... N/A ...... 15 N/A 4.0 Credit, single name ...... Investment grade ...... N/A ...... 100 50 0.46 Speculative grade ...... N/A ...... 100 50 1.3 Sub-speculative grade N/A ...... 100 50 6.0 Credit, index ...... Investment Grade ...... N/A ...... 80 80 0.38 Speculative Grade ...... N/A ...... 80 80 1.06 Equity, single name ...... N/A ...... N/A ...... 120 50 32 Equity, index ...... N/A ...... N/A ...... 75 80 20 Commodity ...... Energy ...... Electricity ...... 150 40 40 Other ...... 70 40 18 Metals ...... N/A ...... 70 40 18 Agricultural ...... N/A ...... 70 40 18 Other ...... N/A ...... 70 40 18 1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table 3, and the applicable supervisory factor for volatility derivative contract hedging sets is equal to 5 times the supervisory factor provided in this Table 3.

(d) Internal models methodology. (1)(i) uct netting sets thereof, and for repo- With prior written approval from the style transactions and single-product OCC, a national bank or Federal sav- netting sets thereof. ings association may use the internal (ii) A national bank or Federal sav- models methodology in this paragraph ings association that uses the internal (d) to determine EAD for counterparty models methodology for a particular credit risk for derivative contracts transaction type (derivative contracts, (collateralized or uncollateralized) and eligible margin loans, or repo-style single-product netting sets thereof, for transactions) must use the internal eligible margin loans and single-prod-

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models methodology for all trans- unstressed) for each netting set as fol- actions of that transaction type. A na- lows:

tional bank or Federal savings associa- (i) EADunstressed is calculated using an tion may choose to use the internal EE estimate based on the most recent models methodology for one or two of data meeting the requirements of para- these three types of exposures and not graph (d)(3)(vii) of this section;

the other types. (ii) EADstressed is calculated using an (iii) A national bank or Federal sav- EE estimate based on a historical pe- ings association may also use the in- riod that includes a period of stress to ternal models methodology for deriva- the credit default spreads of the native contracts, eligible margin loans, tional bank’s or Federal savings asso- and repo-style transactions subject to ciation’s counterparties according to a qualifying cross-product netting paragraph (d)(3)(viii) of this section; agreement if: (iii) The national bank or Federal (A) The national bank or Federal sav- savings association must use its inter- ings association effectively integrates nal model’s probability distribution for the risk mitigating effects of cross- changes in the fair value of a netting product netting into its risk manage- set that are attributable to changes in ment and other information tech- market variables to determine EE; and nology systems; and (iv) Under the internal models meth- (B) The national bank or Federal sav- odology, EAD = Max (0, a × effective ings association obtains the prior writ- EPE ¥ CVA), or, subject to the prior ten approval of the OCC. written approval of OCC as provided in (iv) A national bank or Federal sav- paragraph (d)(10) of this section, a ings association that uses the internal more conservative measure of EAD. models methodology for a transaction (A) CVA equals the credit valuation type must receive approval from the adjustment that the national bank or OCC to cease using the methodology Federal savings association has recog- for that transaction type or to make a nized in its balance sheet valuation of material change to its internal model. any OTC derivative contracts in the (2) Risk-weighted assets using IMM. netting set. For purposes of this para- Under the IMM, a national bank or graph (d), CVA does not include any ad- Federal savings association uses an in- justments to common equity tier 1 cap- ternal model to estimate the expected ital attributable to changes in the fair exposure (EE) for a netting set and value of the national bank’s or Federal then calculates EAD based on that EE. savings association’s liabilities that A national bank or Federal savings as- are due to changes in its own credit sociation must calculate two EEs and risk since the inception of the trans- two EADs (one stressed and one action with the counterparty.

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(C) a = 1.4 except as provided in para- to the satisfaction of the OCC that it graph (d)(6) of this section, or when the has been using for at least one year an OCC has determined that the national internal model that broadly meets the bank or Federal savings association following minimum standards, with must set a higher based on the national which the national bank or Federal bank’s or Federal savings association’s savings association must maintain specific characteristics of counterparty compliance: credit risk or model performance. (i) The model must have the systems (v) A national bank or Federal sav- capability to estimate the expected ex- ings association may include financial posure to the counterparty on a daily collateral currently posted by the basis (but is not expected to estimate counterparty as collateral (but may or report expected exposure on a daily not include other forms of collateral) basis); when calculating EE. (ii) The model must estimate ex- (vi) If a national bank or Federal sav- pected exposure at enough future dates ings association hedges some or all of to reflect accurately all the future cash the counterparty credit risk associated flows of contracts in the netting set; with a netting set using an eligible (iii) The model must account for the credit derivative, the national bank or possible non-normality of the exposure Federal savings association may take distribution, where appropriate; the reduction in exposure to the (iv) The national bank or Federal counterparty into account when estimating EE. If the national bank or savings association must measure, Federal savings association recognizes monitor, and control current this reduction in exposure to the counterparty exposure and the expo- counterparty in its estimate of EE, it sure to the counterparty over the must also use its internal model to es- whole life of all contracts in the net- timate a separate EAD for the national ting set; bank’s or Federal savings association’s (v) The national bank or Federal sav- exposure to the protection provider of ings association must be able to meas- the credit derivative. ure and manage current exposures (3) Prior approval relating to EAD cal- gross and net of collateral held, where culation. To obtain OCC approval to appropriate. The national bank or Fed- calculate the distributions of exposures eral savings association must estimate upon which the EAD calculation is expected exposures for OTC derivative based, the national bank or Federal contracts both with and without the ef- savings association must demonstrate fect of collateral agreements;

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(vi) The national bank or Federal ess for using benchmark portfolios that savings association must have proce- are vulnerable to the same risk factors dures to identify, monitor, and control as the national bank’s or Federal sav- wrong-way risk throughout the life of ings association’s portfolio. The OCC an exposure. The procedures must in- may require the national bank or Fed- clude stress testing and scenario anal- eral savings association to modify its ysis; stress calibration to better reflect ac- (vii) The model must use current tual historic losses of the portfolio; market data to compute current expo- (ix) A national bank or Federal sav- sures. The national bank or Federal ings association must subject its inter- savings association must estimate nal model to an initial validation and model parameters using historical data annual model review process. The from the most recent three-year period model review should consider whether and update the data quarterly or more the inputs and risk factors, as well as frequently if market conditions war- the model outputs, are appropriate. As rant. The national bank or Federal sav- part of the model review process, the ings association should consider using national bank or Federal savings asso- model parameters based on forward- ciation must have a backtesting pro- looking measures, where appropriate; gram for its model that includes a (viii) When estimating model param- process by which unacceptable model eters based on a stress period, the national bank or Federal savings associa- performance will be determined and tion must use at least three years of remedied; historical data that include a period of (x) A national bank or Federal sav- stress to the credit default spreads of ings association must have policies for the national bank’s or Federal savings the measurement, management and association’s counterparties. The na- control of collateral and margin tional bank or Federal savings associa- amounts; and tion must review the data set and up- (xi) A national bank or Federal sav- date the data as necessary, particu- ings association must have a com- larly for any material changes in its prehensive stress testing program that counterparties. The national bank or captures all credit exposures to Federal savings association must dem- counterparties, and incorporates stress onstrate, at least quarterly, and main- testing of principal market risk factors tain documentation of such demonstra- and creditworthiness of counterparties. tion, that the stress period coincides (4) Calculating the maturity of expo- with increased CDS or other credit sures. (i) If the remaining maturity of spreads of the national bank’s or Fed- the exposure or the longest-dated con- eral savings association’s counterpar- tract in the netting set is greater than ties. The national bank or Federal sav- one year, the national bank or Federal ings association must have procedures savings association must set M for the to evaluate the effectiveness of its exposure or netting set equal to the stress calibration that include a proc- lower of five years or M(EPE), where:

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(ii) If the remaining maturity of the level of modeling sophistication to exposure or the longest-dated contract model EPE with collateral agreements in the netting set is one year or less, can set effective EPE for a the national bank or Federal savings collateralized netting set equal to the association must set M for the expo- lesser of: sure or netting set equal to one year, (A) An add-on that reflects the poten- except as provided in § 3.131(d)(7). tial increase in exposure of the netting (iii) Alternatively, a national bank or set over the margin period of risk, plus Federal savings association that uses the larger of: an internal model to calculate a one- (1) The current exposure of the net- sided credit valuation adjustment may ting set reflecting all collateral held or use the effective credit duration esti- posted by the national bank or Federal mated by the model as M(EPE) in place savings association excluding any col- of the formula in paragraph (d)(4)(i) of lateral called or in dispute; or this section. (2) The largest net exposure including (5) Effects of collateral agreements on all collateral held or posted under the EAD. A national bank or Federal sav- margin agreement that would not trig- ings association may capture the effect ger a collateral call. For purposes of on EAD of a collateral agreement that this section, the add-on is computed as requires receipt of collateral when ex- the expected increase in the netting posure to the counterparty increases, set’s exposure over the margin period but may not capture the effect on EAD of risk (set in accordance with para- of a collateral agreement that requires graph (d)(5)(iii) of this section); or receipt of collateral when counterparty credit quality deteriorates. Two meth- (B) Effective EPE without a collat- ods are available to capture the effect eral agreement plus any collateral the of a collateral agreement, as set forth national bank or Federal savings asso- in paragraphs (d)(5)(i) and (ii) of this ciation posts to the counterparty that section: exceeds the required margin amount. (i) With prior written approval from (iii) For purposes of this part, includ- the OCC, a national bank or Federal ing paragraphs (d)(5)(i) and (ii) of this savings association may include the ef- section, the margin period of risk for a fect of a collateral agreement within netting set subject to a collateral its internal model used to calculate agreement is: EAD. The national bank or Federal (A) Five business days for repo-style savings association may set EAD equal transactions subject to daily remar- to the expected exposure at the end of gining and daily marking-to-market, the margin period of risk. The margin and ten business days for other trans- period of risk means, with respect to a actions when liquid financial collateral netting set subject to a collateral is posted under a daily margin mainte- agreement, the time period from the nance requirement, or most recent exchange of collateral (B) Twenty business days if the num- with a counterparty until the next re- ber of trades in a netting set exceeds quired exchange of collateral, plus the 5,000 at any time during the previous period of time required to sell and real- quarter (except if the national bank or ize the proceeds of the least liquid col- Federal savings association is calcu- lateral that can be delivered under the lating EAD for a cleared transaction terms of the collateral agreement and, under § 3.133) or contains one or more where applicable, the period of time re- trades involving illiquid collateral or quired to re-hedge the resulting mar- any derivative contract that cannot be ket risk upon the default of the easily replaced. If over the two pre- counterparty. The minimum margin vious quarters more than two margin period of risk is set according to para- disputes on a netting set have occurred graph (d)(5)(iii) of this section; or that lasted more than the margin pe- (ii) As an alternative to paragraph riod of risk, then the national bank or (d)(5)(i) of this section, a national bank Federal savings association must use a or Federal savings association that can margin period of risk for that netting model EPE without collateral agree- set that is at least two times the min- ments but cannot achieve the higher imum margin period of risk for that

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netting set. If the periodicity of the re- (B) Volatilities and correlations of ceipt of collateral is N-days, the min- market risk factors used in the joint imum margin period of risk is the min- simulation, which must be related to imum margin period of risk under this the credit risk factor used in the sim- paragraph (d) plus N minus 1. This pe- ulation to reflect potential increases in riod should be extended to cover any volatility or correlation in an eco- impediments to prompt re-hedging of nomic downturn, where appropriate; any market risk. and (C) Five business days for an OTC de- (C) The granularity of exposures rivative contract or netting set of OTC (that is, the effect of a concentration derivative contracts where the na- in the proportion of each counter- tional bank or Federal savings associa- party’s exposure that is driven by a tion is either acting as a financial particular risk factor). intermediary and enters into an offset- (ii) The national bank or Federal sav- ting transaction with a CCP or where the national bank or Federal savings ings association must assess the poten- association provides a guarantee to the tial model uncertainty in its estimates CCP on the performance of the client. of alpha. A national bank or Federal savings as- (iii) The national bank or Federal sociation must use a longer holding pe- savings association must calculate the riod if the national bank or Federal numerator and denominator of alpha in savings association determines that a a consistent fashion with respect to longer period is appropriate. Addition- modeling methodology, parameter ally, the OCC may require the national specifications, and portfolio composi- bank or Federal savings association to tion. set a longer holding period if the OCC (iv) The national bank or Federal determines that a longer period is ap- savings association must review and propriate due to the nature, structure, adjust as appropriate its estimates of or characteristics of the transaction or the numerator and denominator of is commensurate with the risks associ- alpha on at least a quarterly basis and ated with the transaction. more frequently when the composition (6) Own estimate of alpha. With prior of the portfolio varies over time. written approval of the OCC, a national (7) Risk-based capital requirements for bank or Federal savings association transactions with specific wrong-way risk. may calculate alpha as the ratio of eco- A national bank or Federal savings as- nomic capital from a full simulation of sociation must determine if a repo- counterparty exposure across counter- style transaction, eligible margin loan, parties that incorporates a joint sim- bond option, or equity derivative con- ulation of market and credit risk fac- tract or purchased credit derivative to tors (numerator) and economic capital which the national bank or Federal based on EPE (denominator), subject to savings association applies the internal a floor of 1.2. For purposes of this cal- models methodology under this para- culation, economic capital is the unex- graph (d) has specific wrong-way risk. pected losses for all counterparty credit risks measured at a 99.9 percent con- If a transaction has specific wrong-way fidence level over a one-year horizon. risk, the national bank or Federal sav- To receive approval, the national bank ings association must treat the trans- or Federal savings association must action as its own netting set and ex- meet the following minimum standards clude it from the model described in to the satisfaction of the OCC: § 3.132(d)(2) and instead calculate the (i) The national bank’s or Federal risk-based capital requirement for the savings association’s own estimate of transaction as follows: alpha must capture in the numerator (i) For an equity derivative contract, the effects of: by multiplying: (A) The material sources of (A) K, calculated using the appro- stochastic dependency of distributions priate risk-based capital formula speci- of fair values of transactions or port- fied in Table 1 of § 3.131 using the PD of folios of transactions across counter- the counterparty and LGD equal to 100 parties; percent, by

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(B) The maximum amount the nation, and a national bank’s or Federal tional bank or Federal savings associa- savings association’s risk-based capital tion could lose on the equity deriva- requirement for repo-style transactions tive. and eligible margin loans with specific (ii) For a purchased credit derivative wrong-way risk as calculated under by multiplying: paragraph (d)(7)(iv) of this section, (A) K, calculated using the appro- multiplied by 12.5. priate risk-based capital formula speci- (9) Risk-weighted assets for IMM expo- fied in Table 1 of § 3.131 using the PD of sures. (i) The national bank or Federal the counterparty and LGD equal to 100 savings association must insert the as- percent, by signed risk parameters for each (B) The fair value of the reference counterparty and netting set into the asset of the credit derivative. appropriate formula specified in Table (iii) For a bond option, by multi- 1 of § 3.131 and multiply the output of plying: the formula by the EADunstressed of the (A) K, calculated using the appro- netting set to obtain the unstressed priate risk-based capital formula speci- capital requirement for each netting fied in Table 1 of § 3.131 using the PD of set. A national bank or Federal savings the counterparty and LGD equal to 100 association that uses an advanced CVA percent, by approach that captures migrations in (B) The smaller of the notional credit spreads under paragraph (e)(3) of amount of the underlying reference this section must set the maturity ad- asset and the maximum potential loss justment (b) in the formula equal to under the bond option contract. zero. The sum of the unstressed capital (iv) For a repo-style transaction or requirement calculated for each net- eligible margin loan by multiplying: ting set equals Kunstressed. (A) K, calculated using the appro- (ii) The national bank or Federal sav- priate risk-based capital formula speci- ings association must insert the as- fied in Table 1 of § 3.131 using the PD of signed risk parameters for each whole- the counterparty and LGD equal to 100 sale obligor and netting set into the percent, by appropriate formula specified in Table (B) The EAD of the transaction de- 1 of § 3.131 and multiply the output of termined according to the EAD equa- the formula by the EADstressed of the tion in § 3.132(b)(2), substituting the es- netting set to obtain the stressed cap- timated value of the collateral assum- ital requirement for each netting set. A ing a default of the counterparty for national bank or Federal savings asso- the value of the collateral in Sc of the ciation that uses an advanced CVA ap- equation. proach that captures migrations in (8) Risk-weighted asset amount for IMM credit spreads under paragraph (e)(6) of exposures with specific wrong-way risk. this section must set the maturity ad- The aggregate risk-weighted asset justment (b) in the formula equal to amount for IMM exposures with spe- zero. The sum of the stressed capital cific wrong-way risk is the sum of a na- requirement calculated for each net- tional bank’s or Federal savings asso- ting set equals Kstressed. ciation’s risk-based capital require- (iii) The national bank’s or Federal ment for purchased credit derivatives savings association’s dollar risk-based that are not bond options with specific capital requirement under the internal wrong-way risk as calculated under models methodology equals the larger paragraph (d)(7)(ii) of this section, a of Kunstressed and Kstressed. A national national bank’s or Federal savings as- bank’s or Federal savings association’s sociation’s risk-based capital require- risk-weighted assets amount for IMM ment for equity derivatives with spe- exposures is equal to the capital re- cific wrong-way risk as calculated quirement multiplied by 12.5, plus risk- under paragraph (d)(7)(i) of this sec- weighted assets for IMM exposures tion, a national bank’s or Federal sav- with specific wrong-way risk in para- ings association’s risk-based capital re- graph (d)(8) of this section and those in quirement for bond options with spe- paragraph (d)(10) of this section. cific wrong-way risk as calculated (10) Other measures of counterparty ex- under paragraph (d)(7)(iii) of this sec- posure. (i) With prior written approval

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of the OCC, a national bank or Federal risk-weighted asset amounts for a class savings association may set EAD equal of counterparties using the advanced to a measure of counterparty credit CVA approach must continue to use risk exposure, such as peak EAD, that that approach for that class of counter- is more conservative than an alpha of parties until it notifies the OCC in 1.4 times the larger of EPEunstressed and writing that the national bank or Fed- EPEstressed for every counterparty whose eral savings association expects to EAD will be measured under the alter- begin calculating its CVA risk-weight- native measure of counterparty expo- ed asset amount using the simple CVA sure. The national bank or Federal sav- approach. Such notice must include an ings association must demonstrate the explanation of the national bank’s or conservatism of the measure of Federal savings association’s rationale counterparty credit risk exposure used and the date upon which the national for EAD. With respect to paragraph bank or Federal savings association (d)(10)(i) of this section: will begin to calculate its CVA risk- (A) For material portfolios of new weighted asset amount using the sim- OTC derivative products, the national ple CVA approach. bank or Federal savings association (2) Market risk national banks or Fed- may assume that the standardized ap- eral savings associations. Notwith- proach for counterparty credit risk standing the prior approval require- pursuant to paragraph (c) of this sec- ment in paragraph (e)(1) of this section, tion meets the conservatism require- a market risk national bank or Federal ment of this section for a period not to savings association may calculate its exceed 180 days. CVA risk-weighted asset amount using (B) For immaterial portfolios of OTC the advanced CVA approach if the na- derivative contracts, the national bank tional bank or Federal savings associa- or Federal savings association gen- tion has OCC approval to: erally may assume that the standard- (i) Determine EAD for OTC deriva- ized approach for counterparty credit tive contracts using the internal mod- risk pursuant to paragraph (c) of this els methodology described in para- section meets the conservatism re- graph (d) of this section; and quirement of this section. (ii) Determine its specific risk add-on (ii) To calculate risk-weighted assets for debt positions issued by the for purposes of the approach in para- counterparty using a specific risk graph (d)(10)(i) of this section, the na- model described in § 3.207(b). tional bank or Federal savings associa- (3) Recognition of hedges. (i) A nation must insert the assigned risk pa- tional bank or Federal savings associa- rameters for each counterparty and tion may recognize a single name CDS, netting set into the appropriate for- single name contingent CDS, any other mula specified in Table 1 of § 3.131, mul- equivalent hedging instrument that tiply the output of the formula by the references the counterparty directly, EAD for the exposure as specified and index credit default swaps (CDSind) above, and multiply by 12.5. as a CVA hedge under paragraph (e) Credit valuation adjustment (CVA) (e)(5)(ii) of this section or paragraph risk-weighted assets—(1) In general. With (e)(6) of this section, provided that the respect to its OTC derivative contracts, position is managed as a CVA hedge in a national bank or Federal savings as- accordance with the national bank’s or sociation must calculate a CVA risk- Federal savings association’s hedging weighted asset amount for its portfolio policies. of OTC derivative transactions that are (ii) A national bank or Federal sav- subject to the CVA capital requirement ings association shall not recognize as using the simple CVA approach de- a CVA hedge any tranched or nth-to-described in paragraph (e)(5) of this sec- fault credit derivative. tion or, with prior written approval of (4) Total CVA risk-weighted assets. the OCC, the advanced CVA approach Total CVA risk-weighted assets is the described in paragraph (e)(6) of this CVA capital requirement, KCVA, cal- section. A national bank or Federal culated for a national bank’s or Fed- savings association that receives prior eral savings association’s entire port- OCC approval to calculate its CVA folio of OTC derivative counterparties

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that are subject to the CVA capital re- requirement, KCVA, is calculated ac- quirement, multiplied by 12.5. cording to the following formula: (5) Simple CVA approach. (i) Under the simple CVA approach, the CVA capital

(A) wi = the weight applicable to risk for counterparty i multiplied by counterparty i under Table 4 to this (1-exp(¥0.05 × Mind))/(0.05 × Mind) section; (H) wind = the weight applicable to the (B) Mi = the EAD-weighted average of CDSind based on the average weight of the effective maturity of each netting the underlying reference names that set with counterparty i (where each comprise the index under Table 4 to netting set’s effective maturity can be this section. no less than one year.) (ii) The national bank or Federal sav- total (C) EADi = the sum of the EAD for ings association may treat the notional all netting sets of OTC derivative con- amount of the index attributable to a tracts with counterparty i calculated counterparty as a single name hedge of using the standardized approach for counterparty i (Bi,) when calculating counterparty credit risk methodology KCVA, and subtract the notional described in paragraph (c) of this sec- amount of Bi from the notional amount tion or the internal models method- of the CDSind. A national bank or Fed- ology described in paragraph (d) of this eral savings association must treat the section. When the national bank or CDSind hedge with the notional amount Federal savings association calculates reduced by Bi as a CVA hedge. EAD under paragraph (c) of this section, such EAD may be adjusted for TABLE 4 TO § 3.132—ASSIGNMENT OF total purposes of calculating EADi by mul- COUNTERPARTY WEIGHT tiplying EAD by (1-exp(¥0.05 × Mi))/ × Internal PD Weight wi (0.05 Mi), where ‘‘exp’’ is the expo- (in percent) (in percent) nential function. When the national bank or Federal savings association 0.00–0.07 ...... 0.70 calculates EAD under paragraph (d) of >0.070–0.15 ...... 0.80 total >0.15–0.40 ...... 1.00 this section, EADi equals EADunstressed. >0.40–2.00 ...... 2.00 hedge (D) Mi = the notional weighted av- >2.00–6.00 ...... 3.00 erage maturity of the hedge instru- >6.00 ...... 10.00 ment. (E) Bi = the sum of the notional (6) Advanced CVA approach. (i) A na- amounts of any purchased single name tional bank or Federal savings associa- CDS referencing counterparty i that is tion may use the VaR model that it used to hedge CVA risk to uses to determine specific risk under counterparty i multiplied by (1- § 3.207(b) or another VaR model that hedge hedge exp(¥0.05 × Mi ))/(0.05 × Mi ). meets the quantitative requirements of (F) Mind = the maturity of the CDSind §§ 3.205(b) and 3.207(b)(1) to calculate its or the notional weighted average matu- CVA capital requirement for a rity of any CDSind purchased to hedge counterparty by modeling the impact CVA risk of counterparty i. of changes in the counterparties’ credit (G) Bind = the notional amount of one spreads, together with any recognized or more CDSind purchased to hedge CVA CVA hedges, on the CVA for the 164

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counterparties, subject to the following in paragraph (c) of this section accord- requirements: ing to paragraph (e)(6)(viii) of this sec- (A) The VaR model must incorporate tion; and only changes in the counterparties’ (C) A national bank or Federal sav- credit spreads, not changes in other ings association must have the systems risk factors. The VaR model does not capability to calculate the CVA capital need to capture jump-to-default risk; requirement for a counterparty on a (B) A national bank or Federal sav- daily basis (but is not required to cal- ings association that qualifies to use culate the CVA capital requirement on the advanced CVA approach must in- a daily basis). clude in that approach any immaterial (ii) Under the advanced CVA ap- OTC derivative portfolios for which it proach, the CVA capital requirement, uses the standardized approach for KCVA, is calculated according to the fol- counterparty credit risk methodology lowing formulas:

Where gion of the counterparty are available to determine LGD , a national bank (A) ti = the time of the i-th revalu- MKT or Federal savings association may use ation time bucket starting from t0 = 0. a conservative estimate when deter- (B) tT = the longest contractual maturity across the OTC derivative con- mining LGDMKT, subject to approval by tracts with the counterparty. the OCC. (C) s = the CDS spread for the (E) EEi = the sum of the expected ex- i posures for all netting sets with the counterparty at tenor ti used to calculate the CVA for the counterparty. If counterparty at revaluation time ti, a CDS spread is not available, the na- calculated according to paragraphs tional bank or Federal savings associa- (e)(6)(iv)(A) and (e)(6)(v)(A) of this section must use a proxy spread based on tion. the credit quality, industry and region (F) Di = the risk-free discount factor of the counterparty. at time ti, where D0 = 1. (G) Exp is the exponential function. (D) LGDMKT = the loss given default of the counterparty based on the spread (H) The subscript j refers either to a of a publicly traded debt instrument of stressed or an unstressed calibration as the counterparty, or, where a publicly described in paragraphs (e)(6)(iv) and traded debt instrument spread is not (v) of this section. available, a proxy spread based on the (iii) Notwithstanding paragraphs credit quality, industry, and region of (e)(6)(i) and (e)(6)(ii) of this section, a the counterparty. Where no market in- national bank or Federal savings asso- formation and no reliable proxy based ciation must use the formulas in para- on the credit quality, industry, and re- graphs (e)(6)(iii)(A) or (e)(6)(iii)(B) of

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this section to calculate credit spread tenors, the national bank or Federal sensitivities if its VaR model is not savings association must calculate based on full repricing. each credit spread sensitivity accord- (A) If the VaR model is based on ing to the following formula: credit spread sensitivities for specific

(iv) To calculate the CVAUnstressed the calculation of the CVAStressed meas- measure for purposes of paragraph ure. (e)(6)(ii) of this section, the national (vi) If a national bank or Federal sav- bank or Federal savings association ings association captures the effect of a must: collateral agreement on EAD using the (A) Use the EEi calculated using the method described in paragraph (d)(5)(ii) calibration of paragraph (d)(3)(vii) of of this section, for purposes of para- this section, except as provided in graph (e)(6)(ii) of this section, the na- § 3.132(e)(6)(vi), and tional bank or Federal savings associa- (B) Use the historical observation pe- tion must calculate EEi using the riod required under § 3.205(b)(2). method in paragraph (d)(5)(ii) of this (v) To calculate the CVAStressed meas- section and keep that EE constant ure for purposes of paragraph (e)(6)(ii) with the maturity equal to the max- of this section, the national bank or imum of: Federal savings association must: (A) Half of the longest maturity of a (A) Use the EEi calculated using the transaction in the netting set, and stress calibration in paragraph (B) The notional weighted average (d)(3)(viii) of this section except as pro- maturity of all transactions in the net- vided in paragraph (e)(6)(vi) of this sec- ting set. tion. (vii) For purposes of paragraph (e)(6) (B) Calibrate VaR model inputs to of this section, the national bank’s or historical data from the most severe Federal savings association’s VaR twelve-month stress period contained model must capture the basis between within the three-year stress period the spreads of any CDSind that is used used to calculate EEi. The OCC may re- as the hedging instrument and the quire a national bank or Federal sav- hedged counterparty exposure over var- ings association to use a different pe- ious time periods, including benign and riod of significant financial stress in stressed environments. If the VaR

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model does not capture that basis, the cleared transactions is the sum of the national bank or Federal savings asso- risk-weighted asset amounts for all of ciation must reflect only 50 percent of its cleared transactions. the notional amount of the CDSind (2) Trade exposure amount. (i) For a hedge in the VaR model. cleared transaction that is a derivative (viii) If a national bank or Federal contract or a netting set of derivative savings association uses the standard- contracts, trade exposure amount ized approach for counterparty credit equals the EAD for the derivative con- risk pursuant to paragraph (c) of this tract or netting set of derivative con- section to calculate the EAD for any tracts calculated using the method- immaterial portfolios of OTC deriva- ology used to calculate EAD for derivative contracts, the national bank or tive contracts set forth in § 3.132(c) or Federal savings association must use (d), plus the fair value of the collateral that EAD as a constant EE in the for- posted by the clearing member client mula for the calculation of CVA with national bank or Federal savings asso- the maturity equal to the maximum of: ciation and held by the CCP or a clear- (A) Half of the longest maturity of a ing member in a manner that is not transaction in the netting set; and bankruptcy remote. When the national (B) The notional weighted average bank or Federal savings association maturity of all transactions in the net- calculates EAD for the cleared trans- ting set. action using the methodology in [78 FR 62157, 62273, Oct. 11, 2013, as amended § 3.132(d), EAD equals EADunstressed. at 80 FR 41417, July 15, 2015; 85 FR 4405, Jan. (ii) For a cleared transaction that is 24, 2020; 85 FR 57959, Sept. 17, 2020] a repo-style transaction or netting set of repo-style transactions, trade expo- § 3.133 Cleared transactions. sure amount equals the EAD for the (a) General requirements—(1) Clearing repo-style transaction calculated using member clients. A national bank or Fed- the methodology set forth in eral savings association that is a clear- § 3.132(b)(2) or (3) or (d), plus the fair ing member client must use the meth- value of the collateral posted by the odologies described in paragraph (b) of clearing member client national bank this section to calculate risk-weighted or Federal savings association and held assets for a cleared transaction. by the CCP or a clearing member in a (2) Clearing members. A national bank manner that is not bankruptcy remote. or Federal savings association that is a When the national bank or Federal sav- clearing member must use the meth- ings association calculates EAD for the odologies described in paragraph (c) of cleared transaction under § 3.132(d), this section to calculate its risk- EAD equals EADunstressed. weighted assets for a cleared trans- (3) Cleared transaction risk weights. (i) action and paragraph (d) of this section For a cleared transaction with a QCCP, to calculate its risk-weighted assets for a clearing member client national its default fund contribution to a CCP. bank or Federal savings association (b) Clearing member client national must apply a risk weight of: banks or Federal savings associations—(1) (A) 2 percent if the collateral posted Risk-weighted assets for cleared trans- by the national bank or Federal sav- actions. (i) To determine the risk- ings association to the QCCP or clear- weighted asset amount for a cleared ing member is subject to an arrange- transaction, a national bank or Federal ment that prevents any loss to the savings association that is a clearing clearing member client national bank member client must multiply the trade or Federal savings association due to exposure amount for the cleared trans- the joint default or a concurrent insol- action, calculated in accordance with vency, liquidation, or receivership pro- paragraph (b)(2) of this section, by the ceeding of the clearing member and risk weight appropriate for the cleared any other clearing member clients of transaction, determined in accordance the clearing member; and the clearing with paragraph (b)(3) of this section. member client national bank or Fed- (ii) A clearing member client na- eral savings association has conducted tional bank’s or Federal savings asso- sufficient legal review to conclude with ciation’s total risk-weighted assets for a well-founded basis (and maintains

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sufficient written documentation of (2) Trade exposure amount. A clearing that legal review) that in the event of member national bank or Federal sav- a legal challenge (including one result- ings association must calculate its ing from an event of default or from trade exposure amount for a cleared liquidation, insolvency, or receivership transaction as follows: proceedings) the relevant court and ad- (i) For a cleared transaction that is a ministrative authorities would find the derivative contract or a netting set of arrangements to be legal, valid, bind- derivative contracts, trade exposure ing, and enforceable under the law of amount equals the EAD calculated the relevant jurisdictions. using the methodology used to cal- (B) 4 percent, if the requirements of culate EAD for derivative contracts set paragraph (b)(3)(i)(A) of this section forth in § 3.132(c) or (d), plus the fair are not met. value of the collateral posted by the (ii) For a cleared transaction with a clearing member national bank or Fed- CCP that is not a QCCP, a clearing eral savings association and held by member client national bank or Fed- the CCP in a manner that is not bank- eral savings association must apply the ruptcy remote. When the clearing risk weight applicable to the CCP member national bank or Federal sav- under subpart D of this part. ings association calculates EAD for the (4) Collateral. (i) Notwithstanding any cleared transaction using the method- other requirement of this section, col- ology in § 3.132(d), EAD equals lateral posted by a clearing member EADunstressed. client national bank or Federal savings (ii) For a cleared transaction that is association that is held by a custodian a repo-style transaction or netting set (in its capacity as a custodian) in a of repo-style transactions, trade expo- manner that is bankruptcy remote sure amount equals the EAD calculated from the CCP, clearing member, and under § 3.132(b)(2) or (3) or (d), plus the other clearing member clients of the fair value of the collateral posted by clearing member, is not subject to a the clearing member national bank or capital requirement under this section. Federal savings association and held by (ii) A clearing member client na- the CCP in a manner that is not bank- tional bank or Federal savings associa- ruptcy remote. When the clearing tion must calculate a risk-weighted member national bank or Federal sav- asset amount for any collateral pro- ings association calculates EAD for the vided to a CCP, clearing member or a cleared transaction under § 3.132(d), custodian in connection with a cleared EAD equals EADunstressed. transaction in accordance with require- (3) Cleared transaction risk weights. (i) ments under subparts E or F of this A clearing member national bank or part, as applicable. Federal savings association must apply (c) Clearing member national bank or a risk weight of 2 percent to the trade Federal savings association—(1) Risk- exposure amount for a cleared trans- weighted assets for cleared transactions. action with a QCCP. (i) To determine the risk-weighted (ii) For a cleared transaction with a asset amount for a cleared transaction, CCP that is not a QCCP, a clearing a clearing member national bank or member national bank or Federal sav- Federal savings association must mul- ings association must apply the risk tiply the trade exposure amount for weight applicable to the CCP according the cleared transaction, calculated in to subpart D of this part. accordance with paragraph (c)(2) of this (iii) Notwithstanding paragraphs section by the risk weight appropriate (c)(3)(i) and (ii) of this section, a clear- for the cleared transaction, determined ing member national bank or Federal in accordance with paragraph (c)(3) of savings association may apply a risk this section. weight of zero percent to the trade ex- (ii) A clearing member national posure amount for a cleared trans- bank’s or Federal savings association’s action with a QCCP where the clearing total risk-weighted assets for cleared member national bank or Federal sav- transactions is the sum of the risk- ings association is acting as a financial weighted asset amounts for all of its intermediary on behalf of a clearing cleared transactions. member client, the transaction offsets

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another transaction that satisfies the association or the OCC, there is a ma- requirements set forth in § 3.3(a), and terial change in the financial condition the clearing member national bank or of the CCP. Federal savings association is not obli- (2) Risk-weighted asset amount for de- gated to reimburse the clearing mem- fault fund contributions to nonqualifying ber client in the event of the QCCP de- CCPs. A clearing member national fault. bank’s or Federal savings association’s (4) Collateral. (i) Notwithstanding any risk-weighted asset amount for default other requirement of this section, col- fund contributions to CCPs that are lateral posted by a clearing member not QCCPs equals the sum of such de- national bank or Federal savings asso- fault fund contributions multiplied by ciation that is held by a custodian (in 1,250 percent, or an amount determined its capacity as a custodian) in a man- by the OCC, based on factors such as ner that is bankruptcy remote from size, structure, and membership char- the CCP, clearing member, and other acteristics of the CCP and riskiness of clearing member clients of the clearing its transactions, in cases where such member, is not subject to a capital re- default fund contributions may be un- quirement under this section. limited. (ii) A clearing member national bank or Federal savings association must (3) Risk-weighted asset amount for de- calculate a risk-weighted asset amount fault fund contributions to QCCPs. A for any collateral provided to a CCP, clearing member national bank’s or clearing member or a custodian in con- Federal savings association’s risk- nection with a cleared transaction in weighted asset amount for default fund accordance with requirements under contributions to QCCPs equals the sum subparts E or F of this part, as applica- of its capital requirement, KCM for each ble QCCP, as calculated under the method- (d) Default fund contributions—(1) Gen- ology set forth in paragraph (d)(4) of eral requirement. A clearing member na- this section, multiplied by 12.5. tional bank or Federal savings associa- (4) Capital requirement for default fund tion must determine the risk-weighted contributions to a QCCP. A clearing asset amount for a default fund con- member national bank’s or Federal tribution to a CCP at least quarterly, savings association’s capital require- or more frequently if, in the opinion of ment for its default fund contribution the national bank or Federal savings to a QCCP (KCM) is equal to:

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(5) Hypothetical capital requirement of transactions determined under para- a QCCP. Where a QCCP has provided its graph (d)(6)(iii) of this section. KCCP, a national bank or Federal sav- (ii) With respect to any derivative ings association must rely on such dis- contracts between the QCCP and the closed figure instead of calculating clearing member that are cleared KCCP under this paragraph (d)(5), unless transactions and any guarantees that the national bank or Federal savings the clearing member has provided to association determines that a more the QCCP with respect to performance conservative figure is appropriate of a clearing member client on a deriv- based on the nature, structure, or char- ative contract, the EAD is equal to the acteristics of the QCCP. The hypo- exposure amount of the QCCP to the thetical capital requirement of a QCCP clearing member for all such derivative (KCCP), as determined by the national bank or Federal savings association, is contracts and guarantees of derivative equal to: contracts calculated under SA–CCR in § 3.132(c) (or, with respect to a QCCP lo- K = S EAD * 1.6 percent CCP CMi i cated outside the United States, under Where: a substantially identical methodology CMi is each clearing member of the QCCP; in effect in the jurisdiction) using a and value of 10 business days for purposes EADi is the exposure amount of the QCCP to of § 3.132(c)(9)(iv); less the value of all each clearing member of the QCCP, as determined under paragraph (d)(6) of this collateral held by the QCCP posted by section. the clearing member or a client of the clearing member in connection with a (6) EAD of a QCCP to a clearing mem- derivative contract for which the clear- ber. (i) The EAD of a QCCP to a clearing member has provided a guarantee ing member is equal to the sum of the EAD for derivative contracts deter- to the QCCP and the amount of the mined under paragraph (d)(6)(ii) of this prefunded default fund contribution of section and the EAD for repo-style the clearing member to the QCCP.

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(iii) With respect to any repo-style and to § 3.132(c)(5) for derivative con- transactions between the QCCP and a tracts. clearing member that are cleared (vi) Notwithstanding any other provi- transactions, EAD is equal to: sion of paragraph (d) of this section, with the prior approval of the OCC, a EADi = max{EBRMi¥IMi¥DFi; 0} national bank or Federal savings asso- Where: ciation may determine the risk-weight- EBRMi is the exposure amount of the QCCP ed asset amount for a default fund con- to each clearing member for all repo- tribution to a QCCP according to style transactions between the QCCP and § 3.35(d)(3)(ii). the clearing member, as determined under § 3.132(b)(2) and without recogni- [78 FR 62157, 62273, Oct. 11, 2013, as amended tion of the initial margin collateral post- at 80 FR 41417, July 15, 2015; 84 FR 35258, July ed by the clearing member to the QCCP 22, 2019; 85 FR 4411, Jan. 24, 2020; 85 FR 57960, with respect to the repo-style trans- Sept. 17, 2020] actions or the prefunded default fund contribution of the clearing member in- § 3.134 Guarantees and credit deriva- stitution to the QCCP; tives: PD substitution and LGD ad- IMi is the initial margin collateral posted justment approaches. by each clearing member to the QCCP with (a) Scope. (1) This section applies to respect to the repo-style transactions; and wholesale exposures for which: DFi is the prefunded default fund contribution of each clearing member to the QCCP (i) Credit risk is fully covered by an that is not already deducted in paragraph eligible guarantee or eligible credit de- (d)(6)(ii) of this section. rivative; or (iv) EAD must be calculated sepa- (ii) Credit risk is covered on a pro rately for each clearing member’s sub- rata basis (that is, on a basis in which client accounts and sub-house account the national bank or Federal savings (i.e., for the clearing member’s propri- association and the protection provider etary activities). If the clearing mem- share losses proportionately) by an eli- ber’s collateral and its client’s collat- gible guarantee or eligible credit deriv- eral are held in the same default fund ative. contribution account, then the EAD of (2) Wholesale exposures on which that account is the sum of the EAD for there is a tranching of credit risk (re- the client-related transactions within flecting at least two different levels of the account and the EAD of the house- seniority) are securitization exposures related transactions within the ac- subject to §§ 3.141 through 3.145. count. For purposes of determining (3) A national bank or Federal sav- such EADs, the independent collateral ings association may elect to recognize of the clearing member and its client the credit risk mitigation benefits of must be allocated in proportion to the an eligible guarantee or eligible credit respective total amount of independent derivative covering an exposure de- collateral posted by the clearing mem- scribed in paragraph (a)(1) of this sec- ber to the QCCP. tion by using the PD substitution ap- (v) If any account or sub-account proach or the LGD adjustment ap- contains both derivative contracts and proach in paragraph (c) of this section repo-style transactions, the EAD of or, if the transaction qualifies, using that account is the sum of the EAD for the double default treatment in § 3.135. the derivative contracts within the ac- A national bank’s or Federal savings count and the EAD of the repo-style association’s PD and LGD for the transactions within the account. If hedged exposure may not be lower than independent collateral is held for an the PD and LGD floors described in account containing both derivative § 3.131(d)(2) and (d)(3). contracts and repo-style transactions, (4) If multiple eligible guarantees or then such collateral must be allocated eligible credit derivatives cover a sin- to the derivative contracts and repo- gle exposure described in paragraph style transactions in proportion to the (a)(1) of this section, a national bank respective product specific exposure or Federal savings association may amounts, calculated, excluding the ef- treat the hedged exposure as multiple fects of collateral, according to separate exposures each covered by a § 3.132(b) for repo-style transactions single eligible guarantee or eligible

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credit derivative and may calculate a may recognize the guarantee or credit separate risk-based capital require- derivative in determining the national ment for each separate exposure as de- bank’s or Federal savings association’s scribed in paragraph (a)(3) of this sec- risk-based capital requirement for the tion. hedged exposure by substituting the (5) If a single eligible guarantee or el- PD associated with the rating grade of igible credit derivative covers multiple the protection provider for the PD as- hedged wholesale exposures described sociated with the rating grade of the in paragraph (a)(1) of this section, a na- obligor in the risk-based capital for- tional bank or Federal savings associa- mula applicable to the guarantee or tion must treat each hedged exposure credit derivative in Table 1 of § 3.131 as covered by a separate eligible guar- and using the appropriate LGD as de- antee or eligible credit derivative and scribed in paragraph (c)(1)(iii) of this must calculate a separate risk-based section. If the national bank or Federal capital requirement for each exposure savings association determines that as described in paragraph (a)(3) of this full substitution of the protection pro- section. vider’s PD leads to an inappropriate de- (6) A national bank or Federal sav- gree of risk mitigation, the national ings association must use the same bank or Federal savings association risk parameters for calculating ECL as may substitute a higher PD than that it uses for calculating the risk-based of the protection provider. capital requirement for the exposure. (ii) Partial coverage. If an eligible (b) Rules of recognition. (1) A national guarantee or eligible credit derivative bank or Federal savings association meets the conditions in paragraphs (a) may only recognize the credit risk and (b) of this section and P of the mitigation benefits of eligible guaran- guarantee or credit derivative is less tees and eligible credit derivatives. than the EAD of the hedged exposure, (2) A national bank or Federal sav- the national bank or Federal savings ings association may only recognize association must treat the hedged ex- the credit risk mitigation benefits of posure as two separate exposures (pro- an eligible credit derivative to hedge tected and unprotected) in order to rec- an exposure that is different from the ognize the credit risk mitigation ben- credit derivative’s reference exposure efit of the guarantee or credit deriva- used for determining the derivative’s tive. cash settlement value, deliverable obli- (A) The national bank or Federal sav- gation, or occurrence of a credit event ings association must calculate its if: risk-based capital requirement for the (i) The reference exposure ranks pari protected exposure under § 3.131, where passu (that is, equally) with or is junior PD is the protection provider’s PD, to the hedged exposure; and LGD is determined under paragraph (ii) The reference exposure and the (c)(1)(iii) of this section, and EAD is P. hedged exposure are exposures to the If the national bank or Federal savings same legal entity, and legally enforce- association determines that full substi- able cross-default or cross-acceleration tution leads to an inappropriate degree clauses are in place to assure payments of risk mitigation, the national bank under the credit derivative are trig- or Federal savings association may use gered when the obligor fails to pay a higher PD than that of the protection under the terms of the hedged expo- provider. sure. (B) The national bank or Federal sav- (c) Risk parameters for hedged expo- ings association must calculate its sures—(1) PD substitution approach—(i) risk-based capital requirement for the Full coverage. If an eligible guarantee unprotected exposure under § 3.131, or eligible credit derivative meets the where PD is the obligor’s PD, LGD is conditions in paragraphs (a) and (b) of the hedged exposure’s LGD (not ad- this section and the protection amount justed to reflect the guarantee or cred- (P) of the guarantee or credit deriva- it derivative), and EAD is the EAD of tive is greater than or equal to the the original hedged exposure minus P. EAD of the hedged exposure, a national (C) The treatment in paragraph bank or Federal savings association (c)(1)(ii) of this section is applicable

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when the credit risk of a wholesale ex- separate exposures (protected and un- posure is covered on a partial pro rata protected) in order to recognize the basis or when an adjustment is made to credit risk mitigation benefit of the the effective notional amount of the guarantee or credit derivative. guarantee or credit derivative under (A) The national bank’s or Federal paragraphs (d), (e), or (f) of this sec- savings association’s risk-based capital tion. requirement for the protected exposure (iii) LGD of hedged exposures. The would be the greater of: LGD of a hedged exposure under the (1) The risk-based capital require- PD substitution approach is equal to: ment for the protected exposure as cal- (A) The lower of the LGD of the culated under § 3.131, with the LGD of hedged exposure (not adjusted to re- the exposure adjusted to reflect the flect the guarantee or credit deriva- guarantee or credit derivative and EAD tive) and the LGD of the guarantee or set equal to P; or credit derivative, if the guarantee or (2) The risk-based capital require- credit derivative provides the national ment for a direct exposure to the guar- bank or Federal savings association antor as calculated under § 3.131, using with the option to receive immediate the PD for the protection provider, the payout upon triggering the protection; LGD for the guarantee or credit deriva- or tive, and an EAD set equal to P. (B) The LGD of the guarantee or (B) The national bank or Federal sav- credit derivative, if the guarantee or ings association must calculate its credit derivative does not provide the national bank or Federal savings asso- risk-based capital requirement for the ciation with the option to receive im- unprotected exposure under § 3.131, mediate payout upon triggering the where PD is the obligor’s PD, LGD is protection. the hedged exposure’s LGD (not ad- (2) LGD adjustment approach—(i) Full justed to reflect the guarantee or cred- coverage. If an eligible guarantee or eli- it derivative), and EAD is the EAD of gible credit derivative meets the condi- the original hedged exposure minus P. tions in paragraphs (a) and (b) of this (3) M of hedged exposures. For pur- section and the protection amount (P) poses of this paragraph (c), the M of of the guarantee or credit derivative is the hedged exposure is the same as the greater than or equal to the EAD of the M of the exposure if it were unhedged. hedged exposure, the national bank’s (d) Maturity mismatch. (1) A national or Federal savings association’s risk- bank or Federal savings association based capital requirement for the that recognizes an eligible guarantee hedged exposure is the greater of: or eligible credit derivative in deter- (A) The risk-based capital require- mining its risk-based capital requirement for the exposure as calculated ment for a hedged exposure must ad- under § 3.131, with the LGD of the expo- just the effective notional amount of sure adjusted to reflect the guarantee the credit risk mitigant to reflect any or credit derivative; or maturity mismatch between the (B) The risk-based capital require- hedged exposure and the credit risk ment for a direct exposure to the pro- mitigant. tection provider as calculated under (2) A maturity mismatch occurs § 3.131, using the PD for the protection when the residual maturity of a credit provider, the LGD for the guarantee or risk mitigant is less than that of the credit derivative, and an EAD equal to hedged exposure(s). the EAD of the hedged exposure. (3) The residual maturity of a hedged (ii) Partial coverage. If an eligible exposure is the longest possible re- guarantee or eligible credit derivative maining time before the obligor is meets the conditions in paragraphs (a) scheduled to fulfil its obligation on the and (b) of this section and the protec- exposure. If a credit risk mitigant has tion amount (P) of the guarantee or embedded options that may reduce its credit derivative is less than the EAD term, the national bank or Federal sav- of the hedged exposure, the national ings association (protection purchaser) bank or Federal savings association must use the shortest possible residual must treat the hedged exposure as two maturity for the credit risk mitigant.

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If a call is at the discretion of the pro- savings association must apply the fol- tection provider, the residual maturity lowing adjustment to the effective no- of the credit risk mitigant is at the tional amount of the credit derivative: first call date. If the call is at the dis- × cretion of the national bank or Federal Pr = Pm 0.60, savings association (protection pur- where: chaser), but the terms of the arrangement at origination of the credit risk (1) Pr = effective notional amount of mitigant contain a positive incentive the credit risk mitigant, adjusted for for the national bank or Federal sav- lack of restructuring event (and matu- ings association to call the transaction rity mismatch, if applicable); and before contractual maturity, the re- (2) Pm = effective notional amount of maining time to the first call date is the credit risk mitigant adjusted for the residual maturity of the credit risk maturity mismatch (if applicable). mitigant.31 (f) Currency mismatch. (1) If a national (4) A credit risk mitigant with a ma- bank or Federal savings association turity mismatch may be recognized recognizes an eligible guarantee or eli- only if its original maturity is greater gible credit derivative that is denomi- than or equal to one year and its resid- nated in a currency different from that ual maturity is greater than three in which the hedged exposure is de- months. nominated, the national bank or Fed- (5) When a maturity mismatch exists, eral savings association must apply the the national bank or Federal savings association must apply the following following formula to the effective no- adjustment to the effective notional tional amount of the guarantee or amount of the credit risk mitigant: credit derivative: P = P (1 ¥ H ), Pm = E × (t ¥ 0.25)/(T ¥ 0.25), c rx FX where: where:

(i) Pm = effective notional amount of (i) Pc = effective notional amount of the credit risk mitigant, adjusted for the credit risk mitigant, adjusted for maturity mismatch; currency mismatch (and maturity mis- (ii) E = effective notional amount of match and lack of restructuring event, the credit risk mitigant; if applicable); (iii) t = the lesser of T or the residual (ii) Pr = effective notional amount of maturity of the credit risk mitigant, the credit risk mitigant (adjusted for expressed in years; and maturity mismatch and lack of re- (iv) T = the lesser of five or the resid- structuring event, if applicable); and ual maturity of the hedged exposure, (iii) H = haircut appropriate for the expressed in years. FX currency mismatch between the credit (e) Credit derivatives without restructuring as a credit event. If a national risk mitigant and the hedged exposure. bank or Federal savings association (2) A national bank or Federal sav- recognizes an eligible credit derivative ings association must set HFX equal to that does not include as a credit event 8 percent unless it qualifies for the use a restructuring of the hedged exposure of and uses its own internal estimates involving forgiveness or postponement of foreign exchange volatility based on of principal, interest, or fees that re- a ten-business-day holding period and sults in a credit loss event (that is, a daily marking-to-market and remar- charge-off, specific provision, or other gining. A national bank or Federal sav- similar debit to the profit and loss ac- ings association qualifies for the use of count), the national bank or Federal its own internal estimates of foreign exchange volatility if it qualifies for: 31 For example, where there is a step-up in (i) The own-estimates haircuts in cost in conjunction with a call feature or § 3.132(b)(2)(iii); where the effective cost of protection in- (ii) The simple VaR methodology in creases over time even if credit quality remains the same or improves, the residual § 3.132(b)(3); or maturity of the credit risk mitigant will be (iii) The internal models method- the remaining time to the first call. ology in § 3.132(d).

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(3) A national bank or Federal sav- (6) The national bank or Federal savings association must adjust HFX cal- ings association has implemented a culated in paragraph (f)(2) of this sec- process (which has received the prior, tion upward if the national bank or written approval of the OCC) to detect Federal savings association revalues excessive correlation between the cred- the guarantee or credit derivative less itworthiness of the obligor of the frequently than once every ten busi- hedged exposure and the protection ness days using the square root of time provider. If excessive correlation is formula provided in present, the national bank or Federal § 3.132(b)(2)(iii)(A)(2). savings association may not use the [78 FR 62157, 62273, Oct. 11, 2013, as amended double default treatment for the at 85 FR 4405, Jan. 24, 2020] hedged exposure. (b) Full coverage. If a transaction § 3.135 Guarantees and credit deriva- meets the criteria in paragraph (a) of tives: double default treatment. this section and the protection amount (a) Eligibility and operational criteria (P) of the guarantee or credit deriva- for double default treatment. A national tive is at least equal to the EAD of the bank or Federal savings association hedged exposure, the national bank or may recognize the credit risk mitiga- Federal savings association may deter- tion benefits of a guarantee or credit mine its risk-weighted asset amount derivative covering an exposure de- for the hedged exposure under para- scribed in § 3.134(a)(1) by applying the graph (e) of this section. double default treatment in this sec- (c) Partial coverage. If a transaction tion if all the following criteria are meets the criteria in paragraph (a) of satisfied: this section and the protection amount (1) The hedged exposure is fully cov- (P) of the guarantee or credit deriva- ered or covered on a pro rata basis by: tive is less than the EAD of the hedged (i) An eligible guarantee issued by an exposure, the national bank or Federal eligible double default guarantor; or savings association must treat the (ii) An eligible credit derivative that hedged exposure as two separate expo- meets the requirements of § 3.134(b)(2) sures (protected and unprotected) in and that is issued by an eligible double order to recognize double default treat- default guarantor. ment on the protected portion of the (2) The guarantee or credit derivative exposure: is: (1) For the protected exposure, the (i) An uncollateralized guarantee or national bank or Federal savings asso- uncollateralized credit derivative (for ciation must set EAD equal to P and example, a credit default swap) that calculate its risk-weighted asset provides protection with respect to a amount as provided in paragraph (e) of single reference obligor; or this section; and (ii) An nth-to-default credit derivative (2) For the unprotected exposure, the (subject to the requirements of national bank or Federal savings asso- § 3.142(m). ciation must set EAD equal to the EAD (3) The hedged exposure is a whole- of the original exposure minus P and sale exposure (other than a sovereign then calculate its risk-weighted asset exposure). amount as provided in § 3.131. (4) The obligor of the hedged expo- (d) Mismatches. For any hedged exposure is not: sure to which a national bank or Fed- (i) An eligible double default guar- eral savings association applies double antor or an affiliate of an eligible dou- default treatment under this part, the ble default guarantor; or national bank or Federal savings asso- (ii) An affiliate of the guarantor. ciation must make applicable adjust- (5) The national bank or Federal sav- ments to the protection amount as re- ings association does not recognize any quired in § 3.134(d), (e), and (f). credit risk mitigation benefits of the (e) The double default dollar risk-based guarantee or credit derivative for the capital requirement. The dollar risk- hedged exposure other than through based capital requirement for a hedged application of the double default treat- exposure to which a national bank or ment as provided in this section. Federal savings association has applied

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double default treatment is KDD multi- KDD = Ko × (0.15 + 160 × PDg), plied by the EAD of the exposure. KDD is calculated according to the following Where: formula: (1)

(2) PDg = PD of the protection pro- (2) Payment-versus-payment (PvP) vider. transaction means a foreign exchange (3) PDo = PD of the obligor of the transaction in which each hedged exposure. counterparty is obligated to make a (4) LGDg = final transfer of one or more currencies (i) The lower of the LGD of the only if the other counterparty has hedged exposure (not adjusted to re- made a final transfer of one or more flect the guarantee or credit deriva- currencies. tive) and the LGD of the guarantee or (3) A transaction has a normal settle- credit derivative, if the guarantee or ment period if the contractual settle- credit derivative provides the national ment period for the transaction is bank or Federal savings association equal to or less than the market stand- with the option to receive immediate ard for the instrument underlying the payout on triggering the protection; or transaction and equal to or less than (ii) The LGD of the guarantee or five business days. credit derivative, if the guarantee or (4) The positive current exposure of a credit derivative does not provide the national bank or Federal savings asso- national bank or Federal savings association for a transaction is the dif- ciation with the option to receive im- ference between the transaction value mediate payout on triggering the pro- at the agreed settlement price and the tection; and current market price of the trans- (5) ros (asset value correlation of the obligor) is calculated according to the action, if the difference results in a appropriate formula for (R) provided in credit exposure of the national bank or Federal savings association to the Table 1 in § 3.131, with PD equal to PDo. (6) b (maturity adjustment coeffi- counterparty. cient) is calculated according to the (b) Scope. This section applies to all formula for b provided in Table 1 in transactions involving securities, for- § 3.131, with PD equal to the lesser of eign exchange instruments, and commodities that have a risk of delayed PDo and PDg; and (7) M (maturity) is the effective ma- settlement or delivery. This section turity of the guarantee or credit deriv- does not apply to: ative, which may not be less than one (1) Cleared transactions that are sub- year or greater than five years. ject to daily marking-to-market and daily receipt and payment of variation § 3.136 Unsettled transactions. margin; (a) Definitions. For purposes of this (2) Repo-style transactions, including section: unsettled repo-style transactions (1) Delivery-versus-payment (DvP) (which are addressed in §§ 3.131 and 132); transaction means a securities or com- (3) One-way cash payments on OTC modities transaction in which the derivative contracts (which are ad- buyer is obligated to make payment dressed in §§ 3. 131 and 132); or only if the seller has made delivery of (4) Transactions with a contractual the securities or commodities and the settlement period that is longer than seller is obligated to deliver the securi- the normal settlement period (which ties or commodities only if the buyer are treated as OTC derivative contracts has made payment. and addressed in §§ 3.131 and 132).

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(c) System-wide failures. In the case of business days after the counterparty a system-wide failure of a settlement delivery is due, the national bank or or clearing system, or a central Federal savings association must cal- counterparty, the OCC may waive risk- culate its risk-based capital require- based capital requirements for unset- ment for the transaction by treating tled and failed transactions until the the current fair value of the situation is rectified. deliverables owed to the national bank (d) Delivery-versus-payment (DvP) and or Federal savings association as a payment-versus-payment (PvP) trans- wholesale exposure. actions. A national bank or Federal (i) A national bank or Federal sav- savings association must hold risk- ings association may use a 45 percent based capital against any DvP or PvP LGD for the transaction rather than transaction with a normal settlement estimating LGD for the transaction period if the national bank’s or Federal provided the national bank or Federal savings association’s counterparty has savings association uses the 45 percent not made delivery or payment within LGD for all transactions described in five business days after the settlement paragraphs (e)(1) and (2) of this section. date. The national bank or Federal sav- (ii) A national bank or Federal savings association must determine its ings association may use a 100 percent risk-weighted asset amount for such a risk weight for the transaction pro- transaction by multiplying the positive vided the national bank or Federal sav- current exposure of the transaction for ings association uses this risk weight the national bank or Federal savings for all transactions described in para- association by the appropriate risk graphs (e)(1) and (2) of this section. weight in Table 1 to § 3.136. (3) If the national bank or Federal savings association has not received its TABLE 1 TO § 3.136—RISK WEIGHTS FOR deliverables by the fifth business day UNSETTLED DVP AND PVP TRANSACTIONS after the counterparty delivery was Risk weight to due, the national bank or Federal sav- be applied to Number of business days after contractual positive ings association must apply a 1,250 per- settlement date current cent risk weight to the current fair exposure (in percent) value of the deliverables owed to the national bank or Federal savings asso- From 5 to 15 ...... 100 ciation. From 16 to 30 ...... 625 From 31 to 45 ...... 937.5 (f) Total risk-weighted assets for unset- 46 or more ...... 1,250 tled transactions. Total risk-weighted assets for unsettled transactions is the (e) Non-DvP/non-PvP (non-delivery- sum of the risk-weighted asset versus-payment/non-payment-versus-pay- amounts of all DvP, PvP, and non-DvP/ ment) transactions. (1) A national bank non-PvP transactions. or Federal savings association must hold risk-based capital against any [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41417, July 15, 2015] non-DvP/non-PvP transaction with a normal settlement period if the na- §§ 3.137–3.140 [Reserved] tional bank or Federal savings association has delivered cash, securities, RISK-WEIGHTED ASSETS FOR commodities, or currencies to its SECURITIZATION EXPOSURES counterparty but has not received its corresponding deliverables by the end § 3.141 Operational criteria for recog- of the same business day. The national nizing the transfer of risk. bank or Federal savings association (a) Operational criteria for traditional must continue to hold risk-based cap- securitizations. A national bank or Fed- ital against the transaction until the eral savings association that transfers national bank or Federal savings asso- exposures it has originated or pur- ciation has received its corresponding chased to a securitization SPE or other deliverables. third party in connection with a tradi- (2) From the business day after the tional securitization may exclude the national bank or Federal savings asso- exposures from the calculation of its ciation has made its delivery until five risk-weighted assets only if each of the

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conditions in this paragraph (a) is sat- (ii) A guarantee that meets all of the isfied. A national bank or Federal sav- requirements of an eligible guarantee ings association that meets these con- in § 3.2 except for paragraph (3) of the ditions must hold risk-based capital definition; or against any securitization exposures it (iii) A credit derivative that meets retains in connection with the all of the requirements of an eligible securitization. A national bank or Fed- credit derivative except for paragraph eral savings association that fails to (3) of the definition of eligible guar- meet these conditions must hold risk- antee in § 3.2. based capital against the transferred (2) The national bank or Federal sav- exposures as if they had not been ings association transfers credit risk securitized and must deduct from com- associated with the underlying expo- mon equity tier 1 capital any after-tax sures to third parties, and the terms gain-on-sale resulting from the trans- and conditions in the credit risk action. The conditions are: mitigants employed do not include pro- (1) The exposures are not reported on visions that: the national bank’s or Federal savings (i) Allow for the termination of the association’s consolidated balance credit protection due to deterioration sheet under GAAP; in the credit quality of the underlying (2) The national bank or Federal sav- exposures; ings association has transferred to one (ii) Require the national bank or Fed- or more third parties credit risk associ- eral savings association to alter or re- ated with the underlying exposures; place the underlying exposures to im- (3) Any clean-up calls relating to the prove the credit quality of the under- securitization are eligible clean-up lying exposures; calls; and (4) The securitization does not: (iii) Increase the national bank’s or (i) Include one or more underlying Federal savings association’s cost of exposures in which the borrower is per- credit protection in response to dete- mitted to vary the drawn amount with- rioration in the credit quality of the in an agreed limit under a line of cred- underlying exposures; it; and (iv) Increase the yield payable to par- (ii) Contain an early amortization ties other than the national bank or provision. Federal savings association in response (b) Operational criteria for synthetic to a deterioration in the credit quality securitizations. For synthetic of the underlying exposures; or securitizations, a national bank or (v) Provide for increases in a retained Federal savings association may recog- first loss position or credit enhance- nize for risk-based capital purposes ment provided by the national bank or under this subpart the use of a credit Federal savings association after the risk mitigant to hedge underlying ex- inception of the securitization; posures only if each of the conditions (3) The national bank or Federal sav- in this paragraph (b) is satisfied. A na- ings association obtains a well-rea- tional bank or Federal savings associa- soned opinion from legal counsel that tion that meets these conditions must confirms the enforceability of the cred- hold risk-based capital against any it risk mitigant in all relevant juris- credit risk of the exposures it retains dictions; and in connection with the synthetic (4) Any clean-up calls relating to the securitization. A national bank or Fed- securitization are eligible clean-up eral savings association that fails to calls. meet these conditions or chooses not to (c) Due diligence requirements for recognize the credit risk mitigant for securitization exposures. (1) Except for purposes of this section must hold risk- exposures that are deducted from com- based capital under this subpart mon equity tier 1 capital and exposures against the underlying exposures as if subject to § 3.142(k), if a national bank they had not been synthetically or Federal savings association is un- securitized. The conditions are: able to demonstrate to the satisfaction (1) The credit risk mitigant is: of the OCC a comprehensive under- (i) Financial collateral; or standing of the features of a

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securitization exposure that would ma- (ii) On an on-going basis (no less fre- terially affect the performance of the quently than quarterly), evaluating, exposure, the national bank or Federal reviewing, and updating as appropriate savings association must assign a 1,250 the analysis required under this sec- percent risk weight to the tion for each securitization exposure. securitization exposure. The national bank’s or Federal savings association’s § 3.142 Risk-weighted assets for analysis must be commensurate with securitization exposures. the complexity of the securitization (a) Hierarchy of approaches. Except as exposure and the materiality of the po- provided elsewhere in this section and sition in relation to regulatory capital in § 3.141: according to this part. (1) A national bank or Federal sav- (2) A national bank or Federal savings association must deduct from ings association must demonstrate its common equity tier 1 capital any after- comprehensive understanding of a tax gain-on-sale resulting from a securitization exposure under para- securitization and must apply a 1,250 graph (c)(1) of this section, for each percent risk weight to the portion of securitization exposure by: any CEIO that does not constitute (i) Conducting an analysis of the risk after tax gain-on-sale; characteristics of a securitization ex- (2) If a securitization exposure does posure prior to acquiring the exposure not require deduction or a 1,250 percent and document such analysis within risk weight under paragraph (a)(1) of three business days after acquiring the this section, the national bank or Fed- exposure, considering: eral savings association must apply the (A) Structural features of the supervisory formula approach in § 3.143 securitization that would materially to the exposure if the national bank or impact the performance of the expo- Federal savings association and the ex- sure, for example, the contractual cash posure qualify for the supervisory for- flow waterfall, waterfall-related trig- mula approach according to § 3.143(a); gers, credit enhancements, liquidity (3) If a securitization exposure does enhancements, fair value triggers, the not require deduction or a 1,250 percent performance of organizations that serv- risk weight under paragraph (a)(1) of ice the position, and deal-specific defi- this section and does not qualify for nitions of default; the supervisory formula approach, the (B) Relevant information regarding national bank or Federal savings asso- the performance of the underlying ciation may apply the simplified super- credit exposure(s), for example, the visory formula approach under § 3.144; percentage of loans 30, 60, and 90 days (4) If a securitization exposure does past due; default rates; prepayment not require deduction or a 1,250 percent rates; loans in foreclosure; property risk weight under paragraph (a)(1) of types; occupancy; average credit score this section, does not qualify for the or other measures of creditworthiness; supervisory formula approach in § 3.143, average loan-to-value ratio; and indus- and the national bank or Federal sav- try and geographic diversification data ings association does not apply the on the underlying exposure(s); simplified supervisory formula ap- (C) Relevant market data of the proach in § 3.144, the national bank or securitization, for example, bid-ask Federal savings association must apply spreads, most recent sales price and a 1,250 percent risk weight to the expo- historical price volatility, trading vol- sure; and ume, implied market rating, and size, (5) If a securitization exposure is a depth and concentration level of the derivative contract (other than protec- market for the securitization; and tion provided by a national bank or (D) For resecuritization exposures, Federal savings association in the form performance information on the under- of a credit derivative) that has a first lying securitization exposures, for ex- priority claim on the cash flows from ample, the issuer name and credit qual- the underlying exposures (notwith- ity, and the characteristics and per- standing amounts due under interest formance of the exposures underlying rate or currency derivative contracts, the securitization exposures; and fees due, or other similar payments), a

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national bank or Federal savings asso- securitization exposure that is not an ciation may choose to set the risk- OTC derivative contract (other than a weighted asset amount of the exposure credit derivative), repo-style trans- equal to the amount of the exposure as action, eligible margin loan, or cleared determined in paragraph (e) of this sec- transaction (other than a credit derivation rather than apply the hierarchy of tive) is the notional amount of the ex- approaches described in paragraphs posure. For an off-balance-sheet (a)(1) through (4) of this section. securitization exposure to an ABCP (b) Total risk-weighted assets for program, such as an eligible ABCP li- securitization exposures. A national quidity facility, the notional amount bank’s or Federal savings association’s may be reduced to the maximum po- total risk-weighted assets for tential amount that the national bank securitization exposures is equal to the or Federal savings association could be sum of its risk-weighted assets cal- required to fund given the ABCP pro- culated using §§ 3.141 through 146. gram’s current underlying assets (cal- (c) Deductions. A national bank or culated without regard to the current Federal savings association may cal- credit quality of those assets). culate any deduction from common eq- (3) The exposure amount of a uity tier 1 capital for a securitization securitization exposure that is a repo- exposure net of any DTLs associated style transaction, eligible margin loan, with the securitization exposure. or OTC derivative contract (other than (d) Maximum risk-based capital require- a credit derivative) or cleared trans- ment. Except as provided in § 3.141(c), action (other than a credit derivative) unless one or more underlying expo- is the EAD of the exposure as cal- sures does not meet the definition of a culated in § 3.132 or § 3.133. wholesale, retail, securitization, or eq- (f) Overlapping exposures. If a national uity exposure, the total risk-based cap- bank or Federal savings association ital requirement for all securitization has multiple securitization exposures exposures held by a single national that provide duplicative coverage of bank or Federal savings association as- the underlying exposures of a sociated with a single securitization securitization (such as when a national (excluding any risk-based capital requirements that relate to the national bank or Federal savings association bank’s or Federal savings association’s provides a program-wide credit en- gain-on-sale or CEIOs associated with hancement and multiple pool-specific the securitization) may not exceed the liquidity facilities to an ABCP pro- sum of: gram), the national bank or Federal (1) The national bank’s or Federal savings association is not required to savings association’s total risk-based hold duplicative risk-based capital capital requirement for the underlying against the overlapping position. In- exposures calculated under this sub- stead, the national bank or Federal part as if the national bank or Federal savings association may assign to the savings association directly held the overlapping securitization exposure the underlying exposures; and applicable risk-based capital treatment (2) The total ECL of the underlying under this subpart that results in the exposures calculated under this sub- highest risk-based capital requirement. part. (g) Securitizations of non-IRB expo- (e) Exposure amount of a securitization sures. Except as provided in § 3.141(c), if exposure. (1) The exposure amount of an a national bank or Federal savings as- on-balance sheet securitization expo- sociation has a securitization exposure sure that is not a repo-style trans- where any underlying exposure is not a action, eligible margin loan, OTC de- wholesale exposure, retail exposure, rivative contract, or cleared trans- securitization exposure, or equity expo- action is the national bank’s or Fed- sure, the national bank or Federal sav- eral savings association’s carrying ings association: value. (1) Must deduct from common equity (2) Except as provided in paragraph tier 1 capital any after-tax gain-on-sale (m) of this section, the exposure resulting from the securitization and amount of an off-balance sheet apply a 1,250 percent risk weight to the

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portion of any CEIO that does not con- servicer, the exposure amount for a stitute gain-on-sale, if the national servicer cash advance facility that is bank or Federal savings association is not an eligible servicer cash advance an originating national bank or Fed- facility is equal to the amount of all eral savings association; potential future cash advance pay- (2) May apply the simplified super- ments that the national bank or Fed- visory formula approach in § 3.144 to eral savings association may be con- the exposure, if the securitization ex- tractually required to provide during posure does not require deduction or a the subsequent 12 month period under 1,250 percent risk weight under para- the contract governing the facility. graph (g)(1) of this section; (j) Interest-only mortgage-backed secu- (3) Must assign a 1,250 percent risk rities. Regardless of any other provi- weight to the exposure if the sions in this part, the risk weight for a securitization exposure does not re- non-credit-enhancing interest-only quire deduction or a 1,250 percent risk mortgage-backed security may not be weight under paragraph (g)(1) of this less than 100 percent. section, does not qualify for the super- (k) Small-business loans and leases on visory formula approach in § 3.143, and personal property transferred with re- the national bank or Federal savings course. (1) Notwithstanding any other association does not apply the sim- provisions of this subpart E, a national plified supervisory formula approach in bank or Federal savings association § 3.144 to the exposure. that has transferred small-business (h) Implicit support. If a national bank loans and leases on personal property or Federal savings association provides (small-business obligations) with re- support to a securitization in excess of course must include in risk-weighted the national bank’s or Federal savings assets only the contractual amount of association’s contractual obligation to retained recourse if all the following provide credit support to the conditions are met: securitization (implicit support): (i) The transaction is a sale under (1) The national bank or Federal savings association must calculate a risk- GAAP. weighted asset amount for underlying (ii) The national bank or Federal sav- exposures associated with the ings association establishes and main- securitization as if the exposures had tains, pursuant to GAAP, a non-capital not been securitized and must deduct reserve sufficient to meet the national from common equity tier 1 capital any bank’s or Federal savings association’s after-tax gain-on-sale resulting from reasonably estimated liability under the securitization; and the recourse arrangement. (2) The national bank or Federal sav- (iii) The loans and leases are to busi- ings association must disclose publicly: nesses that meet the criteria for a (i) That it has provided implicit sup- small-business concern established by port to the securitization; and the Small Business Administration (ii) The regulatory capital impact to under section 3(a) of the Small Busi- the national bank or Federal savings ness Act (15 U.S.C. 632 et seq.); and association of providing such implicit (iv) The national bank or Federal support. savings association is well-capitalized, (i) Undrawn portion of a servicer cash as defined in 12 CFR 6.4. For purposes advance facility. (1) Notwithstanding of determining whether a national any other provision of this subpart, a bank or Federal savings association is national bank or Federal savings asso- well capitalized for purposes of this ciation that is a servicer under an eli- paragraph (k), the national bank’s or gible servicer cash advance facility is Federal savings association’s capital not required to hold risk-based capital ratios must be calculated without re- against potential future cash advance gard to the capital treatment for trans- payments that it may be required to fers of small-business obligations with provide under the contract governing recourse specified in paragraph (k)(1) of the facility. this section. (2) For a national bank or Federal (2) The total outstanding amount of savings association that acts as a recourse retained by a national bank or

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Federal savings association on trans- SFA to calculate the risk weight for its fers of small-business obligations sub- exposure in an nth-to-default credit de- ject to paragraph (k)(1) of this section rivative, parameter A must be set cannot exceed 15 percent of the na- equal to the credit enhancement level tional bank’s or Federal savings asso- (L) input to the SFA formula. In the ciation’s total capital. case of a first-to-default credit deriva- (3) If a national bank or Federal sav- tive, there are no underlying exposures ings association ceases to be well cap- that are subordinated to the national italized or exceeds the 15 percent cap- bank’s or Federal savings association’s ital limitation in paragraph (k)(2) of exposure. In the case of a second-or- this section, the preferential capital subsequent-to-default credit deriva- treatment specified in paragraph (k)(1) tive, the smallest (n-1) risk-weighted of this section will continue to apply to asset amounts of the underlying expo- any transfers of small-business obliga- sure(s) are subordinated to the na- tions with recourse that occurred dur- tional bank’s or Federal savings asso- ing the time that the national bank or ciation’s exposure. Federal savings association was well (ii) The detachment point (parameter capitalized and did not exceed the cap- D) equals the sum of parameter A plus ital limit. the ratio of the notional amount of the (4) The risk-based capital ratios of a national bank’s or Federal savings as- national bank or Federal savings asso- sociation’s exposure in the nth-to-de- ciation must be calculated without re- fault credit derivative to the total no- gard to the capital treatment for trans- tional amount of all underlying expo- fers of small-business obligations with sures. For purposes of the SSFA, pa- recourse specified in paragraph (k)(1) of rameter W is expressed as a decimal this section. value between zero and one. For pur- (l) Nth-to-default credit derivatives—(1) poses of the SFA, parameter D must be Protection provider. A national bank or set to equal L plus the thickness of Federal savings association must de- tranche T input to the SFA formula. termine a risk weight using the supervisory formula approach (SFA) pursu- (3) A national bank or Federal sav- ant to § 3.143 or the simplified super- ings association that does not use the visory formula approach (SSFA) pursu- SFA or the SSFA to determine a risk th ant to § 3.144 for an nth-to-default credit weight for its exposure in an n -to-de- derivative in accordance with this fault credit derivative must assign a paragraph (l). In the case of credit pro- risk weight of 1,250 percent to the expo- tection sold, a national bank or Fed- sure. eral savings association must deter- (4) Protection purchaser—(i) First-to- mine its exposure in the nth-to-default default credit derivatives. A national credit derivative as the largest no- bank or Federal savings association tional amount of all the underlying ex- that obtains credit protection on a posures. group of underlying exposures through (2) For purposes of determining the a first-to-default credit derivative that risk weight for an nth-to-default credit meets the rules of recognition of derivative using the SFA or the SSFA, § 3.134(b) must determine its risk-based the national bank or Federal savings capital requirement under this subpart association must calculate the attach- for the underlying exposures as if the ment point and detachment point of its national bank or Federal savings asso- exposure as follows: ciation synthetically securitized the (i) The attachment point (parameter underlying exposure with the lowest A) is the ratio of the sum of the no- risk-based capital requirement and had tional amounts of all underlying expo- obtained no credit risk mitigant on the sures that are subordinated to the na- other underlying exposures. A national tional bank’s or Federal savings asso- bank or Federal savings association ciation’s exposure to the total notional must calculate a risk-based capital re- amount of all underlying exposures. quirement for counterparty credit risk For purposes of the SSFA, parameter A according to § 3.132 for a first-to-default is expressed as a decimal value between credit derivative that does not meet zero and one. For purposes of using the the rules of recognition of § 3.134(b).

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(ii) Second-or-subsequent-to-default quired to compute a separate credit derivatives. (A) A national bank counterparty credit risk capital re- or Federal savings association that ob- quirement under § 3.131 in accordance tains credit protection on a group of with § 3.132(c)(3). underlying exposures through a nth-to- (ii) If a national bank or Federal sav- default credit derivative that meets ings association cannot, or chooses not the rules of recognition of § 3.134(b) to, recognize a purchased credit deriva- (other than a first-to-default credit de- tive as a credit risk mitigant under rivative) may recognize the credit risk § 3.145, the national bank or Federal mitigation benefits of the derivative savings association must determine the only if: exposure amount of the credit deriva- (1) The national bank or Federal sav- tive under § 3.132(c). ings association also has obtained cred- (A) If the national bank or Federal it protection on the same underlying savings association purchases credit exposures in the form of first-through- protection from a counterparty that is (n-1)-to-default credit derivatives; or not a securitization SPE, the national (2) If n-1 of the underlying exposures bank or Federal savings association have already defaulted. must determine the risk weight for the (B) If a national bank or Federal sav- exposure according § 3.131. ings association satisfies the require- (B) If the national bank or Federal ments of paragraph (l)(3)(ii)(A) of this savings association purchases the cred- section, the national bank or Federal it protection from a counterparty that savings association must determine its is a securitization SPE, the national risk-based capital requirement for the bank or Federal savings association underlying exposures as if the bank must determine the risk weight for the had only synthetically securitized the exposure according to this section, in- underlying exposure with the nth small- cluding paragraph (a)(5) of this section est risk-based capital requirement and for a credit derivative that has a first had obtained no credit risk mitigant on priority claim on the cash flows from the other underlying exposures. the underlying exposures of the (C) A national bank or Federal sav- securitization SPE (notwithstanding ings association must calculate a risk- amounts due under interest rate or based capital requirement for currency derivative contracts, fees due, counterparty credit risk according to or other similar payments. § 3.132 for a nth-to-default credit derivative that does not meet the rules of § 3.143 Supervisory formula approach recognition of § 3.134(b). (SFA). (m) Guarantees and credit derivatives (a) Eligibility requirements. A national other than nth-to-default credit deriva- bank or Federal savings association tives—(1) Protection provider. For a guar- must use the SFA to determine its antee or credit derivative (other than risk-weighted asset amount for a an nth-to-default credit derivative) pro- securitization exposure if the national vided by a national bank or Federal bank or Federal savings association savings association that covers the full can calculate on an ongoing basis each amount or a pro rata share of a of the SFA parameters in paragraph (e) securitization exposure’s principal and of this section. interest, the national bank or Federal (b) Mechanics. The risk-weighted savings association must risk weight asset amount for a securitization expo- the guarantee or credit derivative as if sure equals its SFA risk-based capital it holds the portion of the reference ex- requirement as calculated under para- posure covered by the guarantee or graph (c) and (d) of this section, multi- credit derivative. plied by 12.5. (2) Protection purchaser. (i) A national (c) The SFA risk-based capital require- bank or Federal savings association ment. (1) If KIRB is greater than or equal that purchases an OTC credit deriva- to L + T, an exposure’s SFA risk-based tive (other than an nth-to-default credit capital requirement equals the expo- derivative) that is recognized under sure amount. § 3.145 as a credit risk mitigant (includ- (2) If KIRB is less than or equal to L, ing via recognized collateral) is not re- an exposure’s SFA risk-based capital

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requirement is UE multiplied by TP equal to UE · TP (KIRB¥L), and the ex- multiplied by the greater of: posure’s SFA risk-based capital re- (i) F · T (where F is 0.016 for all quirement is UE multiplied by TP mul- securitization exposures); or tiplied by the greater of: (ii) S[L + T]¥S[L]. (i) F · (T¥(KIRB¥L)) (where F is 0.016 (3) If KIRB is greater than L and less for all other securitization exposures); than L + T, the national bank or Fed- or eral savings association must apply a (ii) S[L + T]¥S[KIRB]. 1,250 percent risk weight to an amount (d) The supervisory formula:

(e) SFA parameters. For purposes of (1) Amount of the underlying exposures the calculations in paragraphs (c) and (UE). UE is the EAD of any underlying (d) of this section: exposures that are wholesale and retail

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exposures (including the amount of any Federal savings association’s funded spread accounts, cash collateral securitization exposure; to accounts, and other similar funded (B) UE. credit enhancements) plus the amount (ii) A national bank or Federal sav- of any underlying exposures that are ings association must determine L be- securitization exposures (as defined in fore considering the effects of any § 3.142(e)) plus the adjusted carrying tranche-specific credit enhancements. value of any underlying exposures that (iii) Any gain-on-sale or CEIO associ- are equity exposures (as defined in ated with the securitization may not § 3.151(b)). be included in L. (2) Tranche percentage (TP). TP is the (iv) Any reserve account funded by ratio of the amount of the national accumulated cash flows from the un- bank’s or Federal savings association’s derlying exposures that is subordinated securitization exposure to the amount to the tranche that contains the na- of the tranche that contains the tional bank’s or Federal savings asso- securitization exposure. ciation’s securitization exposure may (3) Capital requirement on underlying be included in the numerator and denominator of L to the extent cash has exposures (KIRB). (i) KIRB is the ratio of: (A) The sum of the risk-based capital accumulated in the account. Unfunded requirements for the underlying expo- reserve accounts (that is, reserve accounts that are to be funded from fu- sures plus the expected credit losses of ture cash flows from the underlying ex- the underlying exposures (as deter- posures) may not be included in the mined under this subpart E as if the calculation of L. underlying exposures were directly (v) In some cases, the purchase price held by the national bank or Federal of receivables will reflect a discount savings association); to that provides credit enhancement (for (B) UE. example, first loss protection) for all or (ii) The calculation of KIRB must re- certain tranches of the securitization. flect the effects of any credit risk When this arises, L should be cal- mitigant applied to the underlying ex- culated inclusive of this discount if the posures (either to an individual under- discount provides credit enhancement lying exposure, to a group of under- for the securitization exposure. lying exposures, or to all of the under- (5) Thickness of tranche (T). T is the lying exposures). ratio of: (iii) All assets related to the (i) The amount of the tranche that securitization are treated as under- contains the national bank’s or Federal lying exposures, including assets in a savings association’s securitization ex- reserve account (such as a cash collat- posure; to eral account). (ii) UE. (4) Credit enhancement level (L). (i) L (6) Effective number of exposures (N). is the ratio of: (i) Unless the national bank or Federal (A) The amount of all securitization savings association elects to use the exposures subordinated to the tranche formula provided in paragraph (f) of that contains the national bank’s or this section,

where EADi represents the EAD associ- (ii) Multiple exposures to one obligor ated with the ith instrument in the un- must be treated as a single underlying derlying exposures. exposure.

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(iii) In the case of a resecuritization, originally securitized underlying expo- the national bank or Federal savings sures. association must treat each underlying (7) Exposure-weighted average loss exposure as a single underlying expo- given default (EWALGD). EWALGD is sure and must not look through to the calculated as:

where LGDi represents the average LGD as- (2) Under the conditions in sociated with all exposures to the ith obli- §§ 3.143(f)(3) and (f)(4), a national bank gor. In the case of a resecuritization, an LGD or Federal savings association may em- of 100 percent must be assumed for the un- ploy a simplified method for calcu- derlying exposures that are themselves lating N and EWALGD. securitization exposures. (3) If C1 is no more than 0.03, a na- (f) Simplified method for computing N tional bank or Federal savings associa- and EWALGD. (1) If all underlying ex- tion may set EWALGD = 0.50 if none of posures of a securitization are retail the underlying exposures is a exposures, a national bank or Federal securitization exposure, or may set savings association may apply the SFA EWALGD = 1 if one or more of the un- using the following simplifications: derlying exposures is a securitization (i) h = 0; and exposure, and may set N equal to the (ii) v = 0. following amount:

where: § 3.144 Simplified supervisory formula approach (SSFA). (i) Cm is the ratio of the sum of the amounts of the ‘m’ largest underlying (a) General requirements for the SSFA. exposures to UE; and To use the SSFA to determine the risk (ii) The level of m is to be selected by weight for a securitization exposure, a the national bank or Federal savings national bank or Federal savings asso- association. ciation must have data that enables it (4) Alternatively, if only C is avail- to assign accurately the parameters de- 1 scribed in paragraph (b) of this section. able and C is no more than 0.03, the 1 Data used to assign the parameters de- national bank or Federal savings asso- scribed in paragraph (b) of this section ciation may set EWALGD = 0.50 if none must be the most currently available of the underlying exposures is a data; if the contracts governing the un- securitization exposure, or may set derlying exposures of the securitization EWALGD = 1 if one or more of the un- require payments on a monthly or derlying exposures is a securitization quarterly basis, the data used to assign exposure and may set N = 1/C1. the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A national bank or Federal savings association

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that does not have the appropriate the current dollar amount of under- data to assign the parameters de- lying exposures that are subordinated scribed in paragraph (b) of this section to the exposure of the national bank or must assign a risk weight of 1,250 per- Federal savings association to the cur- cent to the exposure. rent dollar amount of underlying expo- (b) SSFA parameters. To calculate the sures. Any reserve account funded by risk weight for a securitization expo- the accumulated cash flows from the sure using the SSFA, a national bank underlying exposures that is subordi- or Federal savings association must nated to the national bank’s or Federal have accurate information on the fol- savings association’s securitization ex- lowing five inputs to the SSFA calcula- posure may be included in the calculation: tion of parameter A to the extent that (1) KG is the weighted-average (with cash is present in the account. Param- unpaid principal used as the weight for eter A is expressed as a decimal value each exposure) total capital require- between zero and one. ment of the underlying exposures cal- (4) Parameter D is the detachment culated using subpart D of this part. KG point for the exposure, which rep- is expressed as a decimal value between resents the threshold at which credit zero and one (that is, an average risk losses of principal allocated to the ex- weight of 100 percent represents a value posure would result in a total loss of of KG equal to 0.08). principal. Except as provided in section (2) Parameter W is expressed as a 142(l) for nth-to-default credit deriva- decimal value between zero and one. tives, parameter D equals parameter A Parameter W is the ratio of the sum of plus the ratio of the current dollar the dollar amounts of any underlying amount of the securitization exposures exposures of the securitization that that are pari passu with the exposure meet any of the criteria as set forth in (that is, have equal seniority with re- paragraphs (b)(2)(i) through (vi) of this spect to credit risk) to the current dol- section to the balance, measured in lar amount of the underlying expo- dollars, of underlying exposures: sures. Parameter D is expressed as a (i) Ninety days or more past due; decimal value between zero and one. (ii) Subject to a bankruptcy or insol- (5) A supervisory calibration param- vency proceeding; (iii) In the process of foreclosure; eter, p, is equal to 0.5 for securitization (iv) Held as real estate owned; exposures that are not resecuritization (v) Has contractually deferred pay- exposures and equal to 1.5 for ments for 90 days or more, other than resecuritization exposures. principal or interest payments deferred (c) Mechanics of the SSFA. KG and W on: are used to calculate KA, the aug- (A) Federally-guaranteed student mented value of KG, which reflects the loans, in accordance with the terms of observed credit quality of the under- those guarantee programs; or lying exposures. KA is defined in para- (B) Consumer loans, including non- graph (d) of this section. The values of federally-guaranteed student loans, parameters A and D, relative to KA de- provided that such payments are determine the risk weight assigned to a ferred pursuant to provisions included securitization exposure as described in in the contract at the time funds are paragraph (d) of this section. The risk disbursed that provide for period(s) of weight assigned to a securitization ex- deferral that are not initiated based on posure, or portion of a securitization changes in the creditworthiness of the exposure, as appropriate, is the larger borrower; or of the risk weight determined in ac- (vi) Is in default. cordance with this paragraph (c), para- (3) Parameter A is the attachment graph (d) of this section, and a risk point for the exposure, which rep- weight of 20 percent. resents the threshold at which credit (1) When the detachment point, pa- losses will first be allocated to the ex- rameter D, for a securitization expo- posure. Except as provided in section sure is less than or equal to KA, the ex- 142(l) for nth-to-default credit deriva- posure must be assigned a risk weight tives, parameter A equals the ratio of of 1,250 percent;

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(2) When the attachment point, pa- (3) When A is less than KA and D is rameter A, for a securitization expo- greater than KA, the risk weight is a sure is greater than or equal to KA, the weighted-average of 1,250 percent and national bank or Federal savings asso- 1,250 percent times KSSFA calculated in ciation must calculate the risk weight accordance with paragraph (d) of this in accordance with paragraph (d) of section. For the purpose of this weight- this section; ed-average calculation:

§ 3.145 Recognition of credit risk mitigant to hedge its securitization ex- mitigants for securitization expo- posure to a synthetic or traditional sures. securitization that satisfies the oper- (a) General. An originating national ational criteria in § 3.141 may recognize bank or Federal savings association the credit risk mitigant, but only as that has obtained a credit risk provided in this section. An investing

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national bank or Federal savings asso- for the collateralized securitization ex- ciation that has obtained a credit risk posure is equal to the risk-weighted mitigant to hedge a securitization ex- asset amount for the securitization exposure may recognize the credit risk posure as calculated under the SSFA in mitigant, but only as provided in this § 3.144 or under the SFA in § 3.143 multi- section. plied by the ratio of adjusted exposure (b) Collateral—(1) Rules of recognition. amount (SE*) to original exposure A national bank or Federal savings as- amount (SE), sociation may recognize financial col- Where: lateral in determining the national (i) SE* = max {0, [SE¥C × bank’s or Federal savings association’s (1¥Hs¥Hfx)]}; risk-weighted asset amount for a (ii) SE = the amount of the securitization exposure (other than a securitization exposure calculated repo-style transaction, an eligible mar- under § 3.142(e); gin loan, or an OTC derivative contract (iii) C = the current fair value of the for which the national bank or Federal collateral; savings association has reflected col- (iv) Hs = the haircut appropriate to lateral in its determination of exposure the collateral type; and amount under § 3.132) as follows. The (v) Hfx = the haircut appropriate for national bank’s or Federal savings as- any currency mismatch between the sociation’s risk-weighted asset amount collateral and the exposure.

(3) Standard supervisory haircuts. Un- ness days where and as appropriate to less a national bank or Federal savings take into account the illiquidity of the association qualifies for use of and uses collateral. own-estimates haircuts in paragraph (4) Own estimates for haircuts. With (b)(4) of this section: the prior written approval of the OCC, (i) A national bank or Federal sav- a national bank or Federal savings as- ings association must use the collat- sociation may calculate haircuts using eral type haircuts (Hs) in Table 1 to its own internal estimates of market § 3.132 of this subpart; price volatility and foreign exchange (ii) A national bank or Federal sav- volatility, subject to § 3.132(b)(2)(iii). ings association must use a currency The minimum holding period (T ) for mismatch haircut (H ) of 8 percent if M fx securitization exposures is 65 business the exposure and the collateral are de- days. nominated in different currencies; (iii) A national bank or Federal sav- (c) Guarantees and credit derivatives— ings association must multiply the su- (1) Limitations on recognition. A national pervisory haircuts obtained in para- bank or Federal savings association graphs (b)(3)(i) and (ii) of this section may only recognize an eligible guar- by the square root of 6.5 (which equals antee or eligible credit derivative pro- 2.549510); and vided by an eligible guarantor in deter- (iv) A national bank or Federal sav- mining the national bank’s or Federal ings association must adjust the super- savings association’s risk-weighted visory haircuts upward on the basis of asset amount for a securitization expo- a holding period longer than 65 busi- sure.

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(2) ECL for securitization exposures. mined in the wholesale risk weight When a national bank or Federal sav- function described in § 3.131), using the ings association recognizes an eligible national bank’s or Federal savings as- guarantee or eligible credit derivative sociation’s PD for the guarantor, the provided by an eligible guarantor in de- national bank’s or Federal savings as- termining the national bank’s or Fed- sociation’s LGD for the guarantee or eral savings association’s risk-weight- credit derivative, and an EAD equal to ed asset amount for a securitization ex- the protection amount of the credit posure, the national bank or Federal risk mitigant; and savings association must also: (B) Uncovered portion. (1) 1.0 minus (i) Calculate ECL for the protected the ratio of the protection amount of portion of the exposure using the same the eligible guarantee or eligible credit risk parameters that it uses for calcu- derivative to the amount of the lating the risk-weighted asset amount securitization exposure); multiplied by of the exposure as described in para- (2) The risk-weighted asset amount graph (c)(3) of this section; and for the securitization exposure without (ii) Add the exposure’s ECL to the na- the credit risk mitigant (as determined tional bank’s or Federal savings asso- in §§ 3.142 through 146). ciation’s total ECL. (4) Mismatches. The national bank or (3) Rules of recognition. A national Federal savings association must make bank or Federal savings association applicable adjustments to the protec- may recognize an eligible guarantee or tion amount as required in § 3.134(d), eligible credit derivative provided by (e), and (f) for any hedged an eligible guarantor in determining securitization exposure and any more the national bank’s or Federal savings senior securitization exposure that association’s risk-weighted asset benefits from the hedge. In the context amount for the securitization exposure of a synthetic securitization, when an as follows: eligible guarantee or eligible credit de- (i) Full coverage. If the protection rivative covers multiple hedged expo- amount of the eligible guarantee or eli- sures that have different residual ma- gible credit derivative equals or ex- turities, the national bank or Federal ceeds the amount of the securitization savings association must use the long- exposure, the national bank or Federal est residual maturity of any of the savings association may set the risk- hedged exposures as the residual matu- weighted asset amount for the rity of all the hedged exposures. securitization exposure equal to the §§ 3.146–3.150 [Reserved] risk-weighted asset amount for a direct exposure to the eligible guarantor (as RISK-WEIGHTED ASSETS FOR EQUITY determined in the wholesale risk EXPOSURES weight function described in § 3.131), using the national bank’s or Federal § 3.151 Introduction and exposure savings association’s PD for the guar- measurement. antor, the national bank’s or Federal (a) General. (1) To calculate its risk- savings association’s LGD for the guar- weighted asset amounts for equity ex- antee or credit derivative, and an EAD posures that are not equity exposures equal to the amount of the to investment funds, a national bank securitization exposure (as determined or Federal savings association may in § 3.142(e)). apply either the Simple Risk Weight (ii) Partial coverage. If the protection Approach (SRWA) in § 3.152 or, if it amount of the eligible guarantee or eli- qualifies to do so, the Internal Models gible credit derivative is less than the Approach (IMA) in § 3.153. A national amount of the securitization exposure, bank or Federal savings association the national bank or Federal savings must use the look-through approaches association may set the risk-weighted provided in § 3.154 to calculate its risk- asset amount for the securitization ex- weighted asset amounts for equity exposure equal to the sum of: posures to investment funds. (A) Covered portion. The risk-weight- (2) A national bank or Federal sav- ed asset amount for a direct exposure ings association must treat an invest- to the eligible guarantor (as deter- ment in a separate account (as defined

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in § 3.2), as if it were an equity exposure fective notional principal amount is to an investment fund as provided in the notional amount of the commit- § 3.154. ment. For unfunded equity commit- (3) Stable value protection. (i) Stable ments that are conditional, the effec- value protection means a contract tive notional principal amount is the where the provider of the contract is national bank’s or Federal savings as- obligated to pay: sociation’s best estimate of the amount (A) The policy owner of a separate that would be funded under economic account an amount equal to the short- downturn conditions. fall between the fair value and cost basis of the separate account when the § 3.152 Simple risk weight approach policy owner of the separate account (SRWA). surrenders the policy, or (a) General. Under the SRWA, a na- (B) The beneficiary of the contract tional bank’s or Federal savings asso- an amount equal to the shortfall be- ciation’s aggregate risk-weighted asset tween the fair value and book value of amount for its equity exposures is a specified portfolio of assets. equal to the sum of the risk-weighted (ii) A national bank or Federal sav- asset amounts for each of the national ings association that purchases stable bank’s or Federal savings association’s value protection on its investment in a individual equity exposures (other than separate account must treat the por- equity exposures to an investment tion of the carrying value of its invest- fund) as determined in this section and ment in the separate account attrib- the risk-weighted asset amounts for utable to the stable value protection as each of the national bank’s or Federal an exposure to the provider of the pro- savings association’s individual equity tection and the remaining portion of exposures to an investment fund as de- the carrying value of its separate ac- termined in § 3.154. count as an equity exposure to an in- (b) SRWA computation for individual vestment fund. equity exposures. A national bank or (iii) A national bank or Federal sav- Federal savings association must de- ings association that provides stable termine the risk-weighted asset value protection must treat the expo- amount for an individual equity exposure as an equity derivative with an sure (other than an equity exposure to adjusted carrying value determined as an investment fund) by multiplying the the sum of § 3.151(b)(1) and (2). adjusted carrying value of the equity (b) Adjusted carrying value. For pur- exposure or the effective portion and poses of this subpart, the adjusted car- ineffective portion of a hedge pair (as rying value of an equity exposure is: defined in paragraph (c) of this section) (1) For the on-balance sheet compo- by the lowest applicable risk weight in nent of an equity exposure, the na- this section. tional bank’s or Federal savings asso- (1) Zero percent risk weight equity expo- ciation’s carrying value of the exposures. An equity exposure to an entity sure; whose credit exposures are exempt (2) For the off-balance sheet compo- from the 0.03 percent PD floor in nent of an equity exposure, the effec- § 3.131(d)(2) is assigned a zero percent tive notional principal amount of the risk weight. exposure, the size of which is equiva- (2) 20 percent risk weight equity expo- lent to a hypothetical on-balance sheet sures. An equity exposure to a Federal position in the underlying equity in- Home Loan Bank or the Federal Agri- strument that would evidence the same cultural Mortgage Corporation (Farm- change in fair value (measured in dol- er Mac) is assigned a 20 percent risk lars) for a given small change in the weight. price of the underlying equity instru- (3) 100 percent risk weight equity expo- ment, minus the adjusted carrying sures. The following equity exposures value of the on-balance sheet compo- are assigned a 100 percent risk weight: nent of the exposure as calculated in (i) Community development equity expo- paragraph (b)(1) of this section. sures. An equity exposure that qualifies (3) For unfunded equity commit- as a community development investments that are unconditional, the ef- ment under section 24 (Eleventh) of the

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National Bank Act, excluding equity (B) When determining which of a na- exposures to an unconsolidated small tional bank’s or Federal savings asso- business investment company and eq- ciation’s equity exposures qualifies for uity exposures held through a consoli- a 100 percent risk weight under this dated small business investment com- section, a national bank or Federal pany described in section 302 of the savings association first must include Small Business Investment Act. equity exposures to unconsolidated (ii) Effective portion of hedge pairs. small business investment companies The effective portion of a hedge pair. or held through consolidated small (iii) Non-significant equity exposures. business investment companies de- Equity exposures, excluding significant scribed in section 302 of the Small investments in the capital of an uncon- Business Investment Act, then must solidated institution in the form of include publicly traded equity expo- common stock and exposures to an in- sures (including those held indirectly vestment firm that would meet the def- through investment funds), and then must include non-publicly traded eq- inition of a traditional securitization uity exposures (including those held in- were it not for the OCC’s application of directly through investment funds). paragraph (8) of that definition in § 3.2 (4) 250 percent risk weight equity expo- and has greater than immaterial lever- sures. Significant investments in the age, to the extent that the aggregate capital of unconsolidated financial in- adjusted carrying value of the expo- stitutions in the form of common stock sures does not exceed 10 percent of the that are not deducted from capital pur- national bank’s or Federal savings as- suant to § 3.22(b)(4) are assigned a 250 sociation’s total capital. percent risk weight. (A) To compute the aggregate ad- (5) 300 percent risk weight equity expo- justed carrying value of a national sures. A publicly traded equity expo- bank’s or Federal savings association’s sure (other than an equity exposure de- equity exposures for purposes of this scribed in paragraph (b)(7) of this sec- section, the national bank or Federal tion and including the ineffective por- savings association may exclude equity tion of a hedge pair) is assigned a 300 exposures described in paragraphs percent risk weight. (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of (6) 400 percent risk weight equity expo- this section, the equity exposure in a sures. An equity exposure (other than hedge pair with the smaller adjusted an equity exposure described in para- carrying value, and a proportion of graph (b)(7) of this section) that is not each equity exposure to an investment publicly traded is assigned a 400 per- fund equal to the proportion of the as- cent risk weight. sets of the investment fund that are (7) 600 percent risk weight equity expo- not equity exposures or that meet the sures. An equity exposure to an invest- criterion of paragraph (b)(3)(i) of this ment firm that: section. If a national bank or Federal (i) Would meet the definition of a savings association does not know the traditional securitization were it not actual holdings of the investment fund, for the OCC’s application of paragraph the national bank or Federal savings (8) of that definition in § 3.2; and association may calculate the propor- (ii) Has greater than immaterial le- tion of the assets of the fund that are verage is assigned a 600 percent risk not equity exposures based on the weight. terms of the prospectus, partnership (c) Hedge transactions—(1) Hedge pair. agreement, or similar contract that de- A hedge pair is two equity exposures fines the fund’s permissible invest- that form an effective hedge so long as ments. If the sum of the investment each equity exposure is publicly traded limits for all exposure classes within or has a return that is primarily based the fund exceeds 100 percent, the na- on a publicly traded equity exposure. tional bank or Federal savings associa- (2) Effective hedge. Two equity expo- tion must assume for purposes of this sures form an effective hedge if the ex- section that the investment fund in- posures either have the same remain- vests to the maximum extent possible ing maturity or each has a remaining in equity exposures. maturity of at least three months; the

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hedge relationship is formally docu- bank or Federal savings association mented in a prospective manner (that must determine the ratio of value is, before the national bank or Federal change (RVC). The RVC is the ratio of savings association acquires at least the cumulative sum of the periodic one of the equity exposures); the docu- changes in value of one equity exposure mentation specifies the measure of ef- to the cumulative sum of the periodic fectiveness (E) the national bank or changes in the value of the other eq- Federal savings association will use for uity exposure. If RVC is positive, the the hedge relationship throughout the hedge is not effective and E equals life of the transaction; and the hedge zero. If RVC is negative and greater relationship has an E greater than or than or equal to ¥1 (that is, between equal to 0.8. A national bank or Fed- zero and ¥1), then E equals the abso- eral savings association must measure lute value of RVC. If RVC is negative E at least quarterly and must use one and less than ¥1, then E equals 2 plus of three alternative measures of E: RVC. (i) Under the dollar-offset method of (ii) Under the variability-reduction measuring effectiveness, the national method of measuring effectiveness:

(iii) Under the regression method of of the adjusted carrying values of the measuring effectiveness, E equals the equity exposures forming a hedge pair. coefficient of determination of a re- [78 FR 62157, 62273, Oct. 11, 2013, as amended gression in which the change in value at 84 FR 35258, July 22, 2019] of one exposure in a hedge pair is the dependent variable and the change in § 3.153 Internal models approach value of the other exposure in a hedge (IMA). pair is the independent variable. How- (a) General. A national bank or Fed- ever, if the estimated regression coeffi- eral savings association may calculate cient is positive, then the value of E is its risk-weighted asset amount for eq- zero. uity exposures using the IMA by mod- (3) The effective portion of a hedge eling publicly traded and non-publicly pair is E multiplied by the greater of traded equity exposures (in accordance the adjusted carrying values of the eq- with paragraph (c) of this section) or uity exposures forming a hedge pair. by modeling only publicly traded eq- (4) The ineffective portion of a hedge uity exposures (in accordance with pair is (1–E) multiplied by the greater paragraphs (c) and (d) of this section). (b) Qualifying criteria. To qualify to use the IMA to calculate risk-weighted

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assets for equity exposures, a national sociation’s benchmarking exercise bank or Federal savings association must be based on daily market prices must receive prior written approval for the benchmark portfolio. If the na- from the OCC. To receive such ap- tional bank’s or Federal savings asso- proval, the national bank or Federal ciation’s model uses a scenario meth- savings association must demonstrate odology, the national bank or Federal to the OCC’s satisfaction that the na- savings association must demonstrate tional bank or Federal savings associa- that the model produces a conservative tion meets the following criteria: estimate of potential losses on the na- (1) The national bank or Federal sav- tional bank’s or Federal savings asso- ings association must have one or more ciation’s modeled equity exposures models that: over a relevant long-term market (i) Assess the potential decline in cycle. If the national bank or Federal value of its modeled equity exposures; savings association employs risk factor (ii) Are commensurate with the size, models, the national bank or Federal complexity, and composition of the na- savings association must demonstrate tional bank’s or Federal savings asso- through empirical analysis the appro- ciation’s modeled equity exposures; and priateness of the risk factors used. (iii) Adequately capture both general (5) The national bank or Federal sav- market risk and idiosyncratic risk. ings association must be able to dem- (2) The national bank’s or Federal onstrate, using theoretical arguments savings association’s model must and empirical evidence, that any prox- produce an estimate of potential losses ies used in the modeling process are for its modeled equity exposures that is comparable to the national bank’s or no less than the estimate of potential Federal savings association’s modeled losses produced by a VaR methodology equity exposures and that the national employing a 99th percentile one-tailed bank or Federal savings association confidence interval of the distribution has made appropriate adjustments for of quarterly returns for a benchmark differences. The national bank or Fed- portfolio of equity exposures com- eral savings association must derive parable to the national bank’s or Fed- any proxies for its modeled equity ex- eral savings association’s modeled eq- posures and benchmark portfolio using uity exposures using a long-term sam- historical market data that are rel- ple period. evant to the national bank’s or Federal (3) The number of risk factors and ex- savings association’s modeled equity posures in the sample and the data pe- exposures and benchmark portfolio (or, riod used for quantification in the na- where not, must use appropriately ad- tional bank’s or Federal savings asso- justed data), and such proxies must be ciation’s model and benchmarking ex- robust estimates of the risk of the na- ercise must be sufficient to provide tional bank’s or Federal savings asso- confidence in the accuracy and ciation’s modeled equity exposures. robustness of the national bank’s or (c) Risk-weighted assets calculation for Federal savings association’s esti- a national bank or Federal savings asso- mates. ciation using the IMA for publicly traded (4) The national bank’s or Federal savings association’s model and and non-publicly traded equity exposures. benchmarking process must incor- If a national bank or Federal savings porate data that are relevant in rep- association models publicly traded and resenting the risk profile of the na- non-publicly traded equity exposures, tional bank’s or Federal savings asso- the national bank’s or Federal savings ciation’s modeled equity exposures, association’s aggregate risk-weighted and must include data from at least asset amount for its equity exposures one equity market cycle containing ad- is equal to the sum of: verse market movements relevant to (1) The risk-weighted asset amount of the risk profile of the national bank’s each equity exposure that qualifies for or Federal savings association’s mod- a 0 percent, 20 percent, or 100 percent eled equity exposures. In addition, the risk weight under § 3.152(b)(1) through national bank’s or Federal savings as- (b)(3)(i) (as determined under § 3.152)

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and each equity exposure to an invest- (i) The estimate of potential losses ment fund (as determined under § 3.154); on the national bank’s or Federal sav- and ings association’s equity exposures (2) The greater of: (other than equity exposures ref- (i) The estimate of potential losses erenced in paragraph (d)(1) of this sec- on the national bank’s or Federal sav- tion) generated by the national bank’s ings association’s equity exposures or Federal savings association’s inter- (other than equity exposures ref- nal equity exposure model multiplied erenced in paragraph (c)(1) of this sec- by 12.5; or tion) generated by the national bank’s (ii) The sum of: or Federal savings association’s inter- (A) 200 percent multiplied by the ag- nal equity exposure model multiplied gregate adjusted carrying value of the by 12.5; or national bank’s or Federal savings as- (ii) The sum of: sociation’s publicly traded equity expo- (A) 200 percent multiplied by the ag- sures that do not belong to a hedge gregate adjusted carrying value of the pair, do not qualify for a 0 percent, 20 national bank’s or Federal savings as- percent, or 100 percent risk weight sociation’s publicly traded equity expo- under § 3.152(b)(1) through (b)(3)(i), and sures that do not belong to a hedge are not equity exposures to an invest- pair, do not qualify for a 0 percent, 20 ment fund; and percent, or 100 percent risk weight (B) 200 percent multiplied by the ag- under § 3.152(b)(1) through (b)(3)(i), and gregate ineffective portion of all hedge are not equity exposures to an invest- pairs. ment fund; (B) 200 percent multiplied by the ag- § 3.154 Equity exposures to investment gregate ineffective portion of all hedge funds. pairs; and (a) Available approaches. (1) Unless (C) 300 percent multiplied by the ag- the exposure meets the requirements gregate adjusted carrying value of the for a community development equity national bank’s or Federal savings as- exposure in § 3.152(b)(3)(i), a national sociation’s equity exposures that are bank or Federal savings association not publicly traded, do not qualify for must determine the risk-weighted a 0 percent, 20 percent, or 100 percent asset amount of an equity exposure to risk weight under § 3.152(b)(1) through an investment fund under the full look- (b)(3)(i), and are not equity exposures through approach in paragraph (b) of to an investment fund. this section, the simple modified look- (d) Risk-weighted assets calculation for through approach in paragraph (c) of a national bank or Federal savings asso- this section, or the alternative modi- ciation using the IMA only for publicly fied look-through approach in para- traded equity exposures. If a national graph (d) of this section. bank or Federal savings association (2) The risk-weighted asset amount of models only publicly traded equity ex- an equity exposure to an investment posures, the national bank’s or Federal fund that meets the requirements for a savings association’s aggregate risk- community development equity expo- weighted asset amount for its equity sure in § 3.152(b)(3)(i) is its adjusted car- exposures is equal to the sum of: rying value. (1) The risk-weighted asset amount of (3) If an equity exposure to an invest- each equity exposure that qualifies for ment fund is part of a hedge pair and a 0 percent, 20 percent, or 100 percent the national bank or Federal savings risk weight under §§ 3.152(b)(1) through association does not use the full look- (b)(3)(i) (as determined under § 3.152), through approach, the national bank or each equity exposure that qualifies for Federal savings association may use a 400 percent risk weight under the ineffective portion of the hedge § 3.152(b)(5) or a 600 percent risk weight pair as determined under § 3.152(c) as under § 3.152(b)(6) (as determined under the adjusted carrying value for the eq- § 3.152), and each equity exposure to an uity exposure to the investment fund. investment fund (as determined under The risk-weighted asset amount of the § 3.154); and effective portion of the hedge pair is (2) The greater of: equal to its adjusted carrying value.

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(b) Full look-through approach. A na- ments. The risk-weighted asset amount tional bank or Federal savings associa- for the national bank’s or Federal sav- tion that is able to calculate a risk- ings association’s equity exposure to weighted asset amount for its propor- the investment fund equals the sum of tional ownership share of each expo- each portion of the adjusted carrying sure held by the investment fund (as value assigned to an exposure class calculated under this subpart E of this multiplied by the applicable risk part as if the proportional ownership weight. If the sum of the investment share of each exposure were held di- limits for all exposure types within the rectly by the national bank or Federal fund exceeds 100 percent, the national savings association) may either: bank or Federal savings association (1) Set the risk-weighted asset must assume that the fund invests to amount of the national bank’s or Fed- the maximum extent permitted under eral savings association’s exposure to its investment limits in the exposure the fund equal to the product of: type with the highest risk weight (i) The aggregate risk-weighted asset under subpart D of this part, and con- amounts of the exposures held by the tinues to make investments in order of fund as if they were held directly by the exposure type with the next high- the national bank or Federal savings est risk weight under subpart D of this association; and part until the maximum total invest- (ii) The national bank’s or Federal ment level is reached. If more than one savings association’s proportional own- exposure type applies to an exposure, ership share of the fund; or the national bank or Federal savings (2) Include the national bank’s or association must use the highest appli- Federal savings association’s propor- cable risk weight. A national bank or tional ownership share of each expo- Federal savings association may ex- sure held by the fund in the national clude derivative contracts held by the bank’s or Federal savings association’s fund that are used for hedging rather IMA. than for speculative purposes and do (c) Simple modified look-through ap- not constitute a material portion of proach. Under this approach, the risk- the fund’s exposures. weighted asset amount for a national bank’s or Federal savings association’s § 3.155 Equity derivative contracts. equity exposure to an investment fund (a) Under the IMA, in addition to equals the adjusted carrying value of holding risk-based capital against an the equity exposure multiplied by the equity derivative contract under this highest risk weight assigned according part, a national bank or Federal sav- to subpart D of this part that applies to ings association must hold risk-based any exposure the fund is permitted to capital against the counterparty credit hold under its prospectus, partnership risk in the equity derivative contract agreement, or similar contract that de- by also treating the equity derivative fines the fund’s permissible invest- contract as a wholesale exposure and ments (excluding derivative contracts computing a supplemental risk-weight- that are used for hedging rather than ed asset amount for the contract under speculative purposes and that do not § 3.132. constitute a material portion of the (b) Under the SRWA, a national bank fund’s exposures). or Federal savings association may (d) Alternative modified look-through choose not to hold risk-based capital approach. Under this approach, a na- against the counterparty credit risk of tional bank or Federal savings associa- equity derivative contracts, as long as tion may assign the adjusted carrying it does so for all such contracts. Where value of an equity exposure to an in- the equity derivative contracts are vestment fund on a pro rata basis to subject to a qualified master netting different risk weight categories as- agreement, a national bank or Federal signed according to subpart D of this savings association using the SRWA part based on the investment limits in must either include all or exclude all of the fund’s prospectus, partnership the contracts from any measure used agreement, or similar contract that de- to determine counterparty credit risk fines the fund’s permissible invest- exposure.

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§§ 3.156–3.160 [Reserved] (ii) Has an initial term of at least one year and a residual term of more than RISK-WEIGHTED ASSETS FOR 90 days; OPERATIONAL RISK (iii) Has a minimum notice period for cancellation by the provider of 90 days; § 3.161 Qualification requirements for (iv) Has no exclusions or limitations incorporation of operational risk based upon regulatory action or for the mitigants. receiver or liquidator of a failed deposi- (a) Qualification to use operational risk tory institution; and mitigants. A national bank or Federal (v) Is explicitly mapped to a poten- savings association may adjust its esti- tial operational loss event; mate of operational risk exposure to (2) Operational risk mitigants other reflect qualifying operational risk than insurance for which the OCC has mitigants if: given prior written approval. In evalu- (1) The national bank’s or Federal ating an operational risk mitigant savings association’s operational risk other than insurance, the OCC will con- quantification system is able to gen- sider whether the operational risk erate an estimate of the national mitigant covers potential operational bank’s or Federal savings association’s losses in a manner equivalent to hold- operational risk exposure (which does ing total capital. not incorporate qualifying operational risk mitigants) and an estimate of the § 3.162 Mechanics of risk-weighted national bank’s or Federal savings as- asset calculation. sociation’s operational risk exposure (a) If a national bank or Federal sav- adjusted to incorporate qualifying ings association does not qualify to use operational risk mitigants; and or does not have qualifying operational (2) The national bank’s or Federal risk mitigants, the national bank’s or savings association’s methodology for Federal savings association’s dollar incorporating the effects of insurance, risk-based capital requirement for if the national bank or Federal savings operational risk is its operational risk association uses insurance as an oper- exposure minus eligible operational ational risk mitigant, captures risk offsets (if any). through appropriate discounts to the (b) If a national bank or Federal sav- amount of risk mitigation: ings association qualifies to use oper- (i) The residual term of the policy, ational risk mitigants and has quali- where less than one year; fying operational risk mitigants, the (ii) The cancellation terms of the pol- national bank’s or Federal savings as- icy, where less than one year; sociation’s dollar risk-based capital re- (iii) The policy’s timeliness of pay- quirement for operational risk is the ment; greater of: (iv) The uncertainty of payment by (1) The national bank’s or Federal the provider of the policy; and savings association’s operational risk (v) Mismatches in coverage between exposure adjusted for qualifying oper- the policy and the hedged operational ational risk mitigants minus eligible loss event. operational risk offsets (if any); or (b) Qualifying operational risk (2) 0.8 multiplied by the difference be- mitigants. Qualifying operational risk tween: mitigants are: (i) The national bank’s or Federal (1) Insurance that: savings association’s operational risk (i) Is provided by an unaffiliated exposure; and company that the national bank or (ii) Eligible operational risk offsets Federal savings association deems to (if any). have strong capacity to meet its claims (c) The national bank’s or Federal payment obligations and the obligor savings association’s risk-weighted rating category to which the national asset amount for operational risk bank or Federal savings association as- equals the national bank’s or Federal signs the company is assigned a PD savings association’s dollar risk-based equal to or less than 10 basis points; capital requirement for operational

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risk determined under sections 162(a) risk profile, then a brief discussion of or (b) multiplied by 12.5. this change and its likely impact must be disclosed as soon as practicable §§ 3.163–3.170 [Reserved] thereafter. Qualitative disclosures that typically do not change each quarter DISCLOSURES (for example, a general summary of the national bank’s or Federal savings as- § 3.171 Purpose and scope. sociation’s risk management objectives §§ 3.171 through 3.173 establish public and policies, reporting system, and disclosure requirements related to the definitions) may be disclosed annually capital requirements of a national after the end of the fourth calendar bank or Federal savings association quarter, provided that any significant that is an advanced approaches na- changes to these are disclosed in the tional bank or Federal savings associa- interim. Management may provide all tion. of the disclosures required by this subpart in one place on the national § 3.172 Disclosure requirements. bank’s or Federal savings association’s (a) A national bank or Federal sav- public Web site or may provide the dis- ings association that is an advanced closures in more than one public finan- approaches national bank or Federal cial report or other regulatory reports, savings association that has completed provided that the national bank or the parallel run process and that has Federal savings association publicly received notification from the OCC provides a summary table specifically pursuant to section 121(d) of subpart E indicating the location(s) of all such of this part must publicly disclose each disclosures. quarter its total and tier 1 risk-based (2) A national bank or Federal sav- capital ratios and their components as ings association described in paragraph calculated under this subpart (that is, (b) of this section must have a formal common equity tier 1 capital, addi- disclosure policy approved by the board tional tier 1 capital, tier 2 capital, of directors that addresses its approach total qualifying capital, and total risk- for determining the disclosures it weighted assets). makes. The policy must address the as- (b) A national bank or Federal sav- sociated internal controls and disclo- ings association that is an advanced sure controls and procedures. The approaches national bank or Federal board of directors and senior manage- savings association that has completed ment are responsible for establishing the parallel run process and that has and maintaining an effective internal received notification from the OCC control structure over financial report- pursuant to section 121(d) of subpart E ing, including the disclosures required of this part must comply with para- by this subpart, and must ensure that graph (c) of this section unless it is a appropriate review of the disclosures consolidated subsidiary of a bank hold- takes place. One or more senior officers ing company, savings and loan holding of the national bank or Federal savings company, or depository institution association must attest that the disclo- that is subject to these disclosure re- sures meet the requirements of this quirements or a subsidiary of a non- subpart. U.S. banking organization that is sub- (3) If a national bank or Federal sav- ject to comparable public disclosure re- ings association described in paragraph quirements in its home jurisdiction. (b) of this section believes that disclo- (c)(1) A national bank or Federal sav- sure of specific commercial or financial ings association described in paragraph information would prejudice seriously (b) of this section must provide timely its position by making public informa- public disclosures each calendar quar- tion that is either proprietary or con- ter of the information in the applicable fidential in nature, the national bank tables in § 3.173. If a significant change or Federal savings association is not occurs, such that the most recent re- required to disclose those specific ported amounts are no longer reflective items, but must disclose more general of the national bank’s or Federal sav- information about the subject matter ings association’s capital adequacy and of the requirement, together with the

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fact that, and the reason why, the spe- § 3.173 Disclosures by certain ad- cific items of information have not vanced approaches national banks been disclosed. or Federal savings associations and (d)(1) A national bank or Federal sav- Category III national banks or Fed- eral savings associations. ings association that meets any of the criteria in § 3.100(b)(1) before January 1, (a)(1) An advanced approaches na- 2015, must publicly disclose each quar- tional bank or Federal savings associa- ter its supplementary leverage ratio tion described in § 3.172(b) must make and the components thereof (that is, the disclosures described in Tables 1 tier 1 capital and total leverage expo- through 12 to § 3.173. (2) An advanced approaches national sure) as calculated under subpart B of bank or Federal savings association this part, beginning with the first and a Category III national bank or quarter in 2015. This disclosure require- Federal savings association that is re- ment applies without regard to wheth- quired to publicly disclose its supple- er the national bank or Federal savings mentary leverage ratio pursuant to association has completed the parallel § 3.172(d) must make the disclosures re- run process and received notification quired under Table 13 to this section from the OCC pursuant to § 3.121(d). unless the national bank or Federal (2) A national bank or Federal sav- savings association is a consolidated ings association that meets any of the subsidiary of a bank holding company, criteria in § 3.100(b)(1) on or after Janu- savings and loan holding company, or ary 1, 2015, or a Category III national depository institution that is subject bank or Federal savings association to these disclosure requirements or a must publicly disclose each quarter its subsidiary of a non-U.S. banking orga- supplementary leverage ratio and the nization that is subject to comparable components thereof (that is, tier 1 cap- public disclosure requirements in its ital and total leverage exposure) as cal- home jurisdiction. culated under subpart B of this part be- (3) The disclosures described in Ta- ginning with the calendar quarter im- bles 1 through 12 to § 3.173 must be mediately following the quarter in made publicly available for twelve con- which the national bank or Federal secutive quarters beginning on Janu- ary 1, 2014, or a shorter period, as appli- savings association becomes an ad- cable, for the quarters after the na- vanced approaches national bank or tional bank or Federal savings associa- Federal savings association or a Cat- tion has completed the parallel run egory III national bank or Federal sav- process and received notification from ings association. This disclosure re- the OCC pursuant to § 3.121(d). The dis- quirement applies without regard to closures described in Table 13 to § 3.173 whether the national bank or Federal must be made publicly available for savings association has completed the twelve consecutive quarters beginning parallel run process and has received on January 1, 2015, or a shorter period, notification from the OCC pursuant to as applicable, for the quarters after the § 3.121(d). national bank or Federal savings association becomes subject to the disclo- [78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 57743, Sept. 26, 2014; 80 FR 41417, sure of the supplementary leverage July 15, 2015; 84 FR 59265, Nov. 1, 2019] ratio pursuant to §§ 3.172(d) and 3.173(a)(2).

TABLE 1 TO § 3.173—SCOPE OF APPLICATION

Qualitative disclosures ...... (a) ...... The name of the top corporate entity in the group to which subpart E of this part applies. (b) ...... A brief description of the differences in the basis for consolidating entities1 for accounting and regulatory purposes, with a description of those entities: (1) That are fully consolidated; (2) That are deconsolidated and deducted from total capital; (3) For which the total capital requirement is deducted; and (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart).

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TABLE 1 TO § 3.173—SCOPE OF APPLICATION—Continued (c) ...... Any restrictions, or other major impediments, on transfer of funds or total capital within the group. Quantitative disclosures ...... (d) ...... The aggregate amount of surplus capital of insurance subsidiaries included in the total capital of the consolidated group. (e) ...... The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. 1 Such entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority equity investments in insurance, financial and commercial entities.

TABLE 2 TO § 3.173—CAPITAL STRUCTURE

Qualitative disclosures ...... (a) ...... Summary information on the terms and conditions of the main features of all regulatory capital instruments. Quantitative disclosures ...... (b) ...... The amount of common equity tier 1 capital, with separate disclosure of: (1) Common stock and related surplus; (2) Retained earnings; (3) Common equity minority interest; (4) AOCI (net of tax) and other reserves; and (5) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) ...... The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and (2) Regulatory adjustments and deductions made to tier 1 capital. (d) ...... The amount of total capital, with separate disclosure of: (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and (2) Regulatory adjustments and deductions made to total capital. (e) ...... (1) Whether the national bank or Federal savings association has elected to phase in recognition of the transitional amounts as defined in § 3.301. (2) The national bank’s or Federal savings association’s common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts.

TABLE 3 TO § 3.173—CAPITAL ADEQUACY

Qualitative disclosures ...... (a) ...... A summary discussion of the national bank’s or Federal savings association’s approach to assessing the adequacy of its capital to support current and future activities. Quantitative disclosures ...... (b) ...... Risk-weighted assets for credit risk from: (1) Wholesale exposures; (2) Residential mortgage exposures; (3) Qualifying revolving exposures; (4) Other retail exposures; (5) Securitization exposures; (6) Equity exposures: (7) Equity exposures subject to the simple risk weight approach; and (8) Equity exposures subject to the internal models approach. (c) ...... Standardized market risk-weighted assets and advanced market risk-weighted assets as calculated under subpart F of this part: (1) Standardized approach for specific risk; and (2) Internal models approach for specific risk. (d) ...... Risk-weighted assets for operational risk. (e) ...... (1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 3.301: (A) For the top consolidated group; and (2) For each depository institution subsidiary. (f) ...... Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL: (1) For the top consolidated group; and (2) For each depository institution subsidiary. (g) ...... Total risk-weighted assets.

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TABLE 4 TO § 3.173—CAPITAL CONSERVATION AND COUNTERCYCLICAL CAPITAL BUFFERS

Qualitative disclosures ...... (a) ...... The national bank or Federal savings association must publicly disclose the geographic breakdown of its private sector credit exposures used in the calculation of the countercyclical capital buffer. Quantitative disclosures ...... (b) ...... At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the capital conservation buffer and the countercyclical capital buffer as described under § 3.11 of subpart B. (c) ...... At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the buffer retained income of the national bank or Federal savings association, as described under § 3.11 of subpart B. (d) ...... At least quarterly, the national bank or Federal savings association must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer and the countercyclical capital buffer framework described under § 3.11 of subpart B, including the maximum payout amount for the quarter.

(b) General qualitative disclosure re- (2) The structure and organization of quirement. For each separate risk area the relevant risk management func- described in Tables 5 through 12 to tion; § 3.173, the national bank or Federal (3) The scope and nature of risk re- savings association must describe its porting and/or measurement systems; risk management objectives and poli- and cies, including: (4) Policies for hedging and/or miti- (1) Strategies and processes; gating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.

TABLE 5 1 TO § 3.173—CREDIT RISK: GENERAL DISCLOSURES

Qualitative disclosures ...... (a) ...... The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 7 to § 3.173), including: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes). (5) Description of the methodology that the entity uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the national bank’s or Federal savings association’s credit risk management policy Quantitative disclosures ...... (b) ...... Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP,2 without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, national banks or Federal savings associations could use categories similar to that used for financial statement purposes. Such categories might include, for instance: (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; (2) Debt securities; and (3) OTC derivatives. (c) ...... Geographic 3 distribution of exposures, categorized in significant areas by major types of credit exposure. (d) ...... Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) ...... By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual;

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TABLE 5 1 TO § 3.173—CREDIT RISK: GENERAL DISCLOSURES—Continued (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses at the end of each period, disaggregated on the basis of the entity’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. (f) ...... Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area,5 further categorized as required by GAAP. (g) ...... Reconciliation of changes in ALLL or AACL, as applicable.6 (h) ...... Remaining contractual maturity breakdown (for example, one year or less) of the whole portfolio, categorized by credit exposure. 1 Table 5 to § 3.173 does not cover equity exposures, which should be reported in Table 9. 2 See, for example, ASC Topic 815–10 and 210–20 as they may be amended from time to time. 3 Geographical areas may comprise individual countries, groups of countries, or regions within countries. A national bank or Federal savings association might choose to define the geographical areas based on the way the company’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified. 4 A national bank or Federal savings association is encouraged also to provide an analysis of the aging of past-due loans. 5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately. 6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge- offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.

TABLE 6 TO § 3.173—CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB RISK-BASED CAPITAL FORMULAS

Qualitative disclosures ...... (a) ...... Explanation and review of the: (1) Structure of internal rating systems and if the national bank or Federal savings association considers external ratings, the relation between internal and external ratings; (2) Use of risk parameter estimates other than for regulatory capital purposes; (3) Process for managing and recognizing credit risk mitigation (see Table 8 to § 3.173); and (4) Control mechanisms for the rating system, including discussion of independence, accountability, and rating systems review. (b) ...... Description of the internal ratings process, provided separately for the following: (1) Wholesale category; (2) Retail subcategories; (i) Residential mortgage exposures; (ii) Qualifying revolving exposures; and (iii) Other retail exposures. For each category and subcategory above the description should include: (A) The types of exposure included in the category/subcategories; and (B) The definitions, methods and data for estimation and validation of PD, LGD, and EAD, including assumptions employed in the derivation of these variables.1 Quantitative disclosures: risk as- (c) ...... (1) For wholesale exposures, present the following information sessment. across a sufficient number of PD grades (including default) to allow for a meaningful differentiation of credit risk: 2 (i) Total EAD; 3 (ii) Exposure-weighted average LGD (percentage); (iii) Exposure-weighted average risk weight; and (iv) Amount of undrawn commitments and exposure-weighted average EAD including average drawdowns prior to default for wholesale exposures. (2) For each retail subcategory, present the disclosures outlined above across a sufficient number of segments to allow for a meaningful differentiation of credit risk. Quantitative disclosures: historical (d) ...... Actual losses in the preceding period for each category and sub- results. category and how this differs from past experience. A discussion of the factors that impacted the loss experience in the preceding period—for example, has the national bank or Federal savings association experienced higher than average default rates, loss rates or EADs.

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TABLE 6 TO § 3.173—CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB RISK-BASED CAPITAL FORMULAS—Continued (e) ...... The national bank’s or Federal savings association’s estimates compared against actual outcomes over a longer period.4 At a minimum, this should include information on estimates of losses against actual losses in the wholesale category and each retail subcategory over a period sufficient to allow for a meaningful assessment of the performance of the internal rating processes for each category/subcategory.5 Where appropriate, the national bank or Federal savings association should further decompose this to provide analysis of PD, LGD, and EAD outcomes against estimates provided in the quantitative risk assessment disclosures above.6 1 This disclosure item does not require a detailed description of the model in full—it should provide the reader with a broad overview of the model approach, describing definitions of the variables and methods for estimating and validating those variables set out in the quantitative risk disclosures below. This should be done for each of the four category/subcategories. The national bank or Federal savings association must disclose any significant differences in approach to estimating these variables within each category/subcategories. 2 The PD, LGD and EAD disclosures in Table 6 (c) to § 3.173 should reflect the effects of collateral, qualifying master netting agreements, eligible guarantees and eligible credit derivatives as defined under this part. Disclosure of each PD grade should include the exposure-weighted average PD for each grade. Where a national bank or Federal savings association aggregates PD grades for the purposes of disclosure, this should be a representative breakdown of the distribution of PD grades used for regulatory capital purposes. 3 Outstanding loans and EAD on undrawn commitments can be presented on a combined basis for these disclosures. 4 These disclosures are a way of further informing the reader about the reliability of the information provided in the ‘‘quantitative disclosures: Risk assessment’’ over the long run. The disclosures are requirements from year-end 2010; in the meantime, early adoption is encouraged. The phased implementation is to allow a national bank or Federal savings association sufficient time to build up a longer run of data that will make these disclosures meaningful. 5 This disclosure item is not intended to be prescriptive about the period used for this assessment. Upon implementation, it is expected that a national bank or Federal savings association would provide these disclosures for as long a set of data as possible—for example, if a national bank or Federal savings association has 10 years of data, it might choose to disclose the average default rates for each PD grade over that 10-year period. Annual amounts need not be disclosed. 6 A national bank or Federal savings association must provide this further decomposition where it will allow users greater in- sight into the reliability of the estimates provided in the ‘‘quantitative disclosures: Risk assessment.’’ In particular, it must provide this information where there are material differences between its estimates of PD, LGD or EAD compared to actual outcomes over the long run. The national bank or Federal savings association must also provide explanations for such differences.

TABLE 7 TO § 3.173—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK OF OTC DERIVATIVE CONTRACTS, REPO-STYLE TRANSACTIONS, AND ELIGIBLE MARGIN LOANS

Qualitative Disclosures ...... (a) ...... The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including: (1) Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures; (2) Discussion of policies for securing collateral, valuing and managing collateral, and establishing credit reserves; (3) Discussion of the primary types of collateral taken; (4) Discussion of policies with respect to wrong-way risk exposures; and (5) Discussion of the impact of the amount of collateral the national bank or Federal savings association would have to provide if the national bank or Federal savings association were to receive a credit rating downgrade. Quantitative Disclosures ...... (b) ...... Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure.1 Also report measures for EAD used for regulatory capital for these transactions, the notional value of credit derivative hedges purchased for counterparty credit risk protection, and, for national banks or Federal savings associations not using the internal models methodology in § 3.132(d) , the distribution of current credit exposure by types of credit exposure.2 (c) ...... Notional amount of purchased and sold credit derivatives, segregated between use for the national bank’s or Federal savings association’s own credit portfolio and for its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. (d) ...... The estimate of alpha if the national bank or Federal savings association has received supervisory approval to estimate alpha. 1 Net unsecured credit exposure is the credit exposure after considering the benefits from legally enforceable netting agreements and collateral arrangements, without taking into account haircuts for price volatility, liquidity, etc. 2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.

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TABLE 8 TO § 3.173—CREDIT RISK MITIGATION 12

Qualitative disclosures ...... (a) ...... The general qualitative disclosure requirement with respect to credit risk mitigation, including: (1) Policies and processes for, and an indication of the extent to which the national bank or Federal savings association uses, on- or off-balance sheet netting; (2) Policies and processes for collateral valuation and management; (3) A description of the main types of collateral taken by the national bank or Federal savings association; (4) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (5) Information about (market or credit) risk concentrations within the mitigation taken. Quantitative disclosures ...... (b) ...... For each separately disclosed portfolio, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit derivatives. 1 At a minimum, a national bank or Federal savings association must provide the disclosures in Table 8 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, national banks or Federal savings associations are encouraged to give further information about mitigants that have not been recognized for that purpose. 2 Credit derivatives and other credit mitigation that are treated for the purposes of this subpart as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures (in Table 8 to § 3.173) and included within those relating to securitization (in Table 9 to § 3.173).

TABLE 9 TO § 3.173—SECURITIZATION

Qualitative disclosures...... (a) ...... The general qualitative disclosure requirement with respect to securitization (including synthetic securitizations), including a discussion of: (1) The national bank’s or Federal savings association’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the national bank or Federal savings association to other entities and including the type of risks assumed and retained with resecuritization activity; 1 (2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets; (3) The roles played by the national bank or Federal savings association in the securitization process 2 and an indication of the extent of the national bank’s or Federal savings association’s involvement in each of them; (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The national bank’s or Federal savings association’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the national bank or Fed- eral savings association follows for its securitization exposures including the type of securitization exposure to which each approach applies. (b) ...... A list of: (1) The type of securitization SPEs that the national bank or Federal savings association, as sponsor, uses to securitize third-party exposures. The national bank or Federal savings association must indicate whether it has exposure to these SPEs, either on- or off- balance sheet; and (2) Affiliated entities: (i) That the national bank or Federal savings association manages or advises; and (ii) That invest either in the securitization exposures that the national bank or Federal savings association has securitized or in securitization SPEs that the national bank or Federal savings association sponsors.3 (c) ...... Summary of the national bank’s or Federal savings association’s accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings; (2) Recognition of gain-on-sale; (3) Methods and key assumptions and inputs applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions and inputs from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations;

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TABLE 9 TO § 3.173—SECURITIZATION—Continued (6) How exposures intended to be securitized are valued and whether they are recorded under subpart E of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the national bank or Federal savings association to provide financial support for securitized assets. (d) ...... An explanation of significant changes to any of the quantitative information set forth below since the last reporting period. Quantitative disclosures ...... (e) ...... The total outstanding exposures securitized 4 by the national bank or Federal savings association in securitizations that meet the operational criteria in § 3.141 (categorized into traditional/synthetic), by underlying exposure type 5 separately for securitizations of third-party exposures for which the bank acts only as sponsor. (f) ...... For exposures securitized by the national bank or Federal savings association in securitizations that meet the operational criteria in § 3.141: (1) Amount of securitized assets that are impaired 6/past due categorized by exposure type; and (2) Losses recognized by the national bank or Federal savings association during the current period categorized by exposure type.7 (g) ...... The total amount of outstanding exposures intended to be securitized categorized by exposure type. (h) ...... Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i) ...... (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g. SA, SFA, or SSFA). (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital: And (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. (j) ...... Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by asset type. (k) ...... Aggregate amount of resecuritization exposures retained or purchased categorized according to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 The national bank or Federal savings association must describe the structure of resecuritizations in which it participates; this description must be provided for the main categories of resecuritization products in which the national bank or Federal savings association is active. 2 For example, these roles would include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider. 3 For example, money market mutual funds should be listed individually, and personal and private trusts, should be noted collectively. 4 ‘‘Exposures securitized’’ include underlying exposures originated by the bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the bank’s balance sheet and underlying exposures acquired by the bank from third-party entities) in which the originating bank does not retain any securitization exposure should be shown separately but need only be reported for the year of inception. 5 A national bank or Federal savings association is required to disclose exposures regardless of whether there is a capital charge under this part. 6 A national bank or Federal savings association must include credit-related other than temporary impairment (OTTI). 7 For example, charge-offs/allowances (if the assets remain on the bank’s balance sheet) or credit-related OTTI of I/O strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the bank with respect to securitized assets.

TABLE 10 TO § 3.173—OPERATIONAL RISK

Qualitative disclosures ...... (a) ...... The general qualitative disclosure requirement for operational risk. (b) ...... Description of the AMA, including a discussion of relevant internal and external factors considered in the national bank’s or Federal savings association’s measurement approach. (c) ...... A description of the use of insurance for the purpose of mitigating operational risk.

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TABLE 11 TO § 3.173—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART

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

TABLE 12 TO § 3.173—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES

(c) Except as provided in § 3.172(b), a eral savings association has completed national bank or Federal savings asso- the parallel run process and has re- ciation described in § 3.172(d) must ceived notification from the OCC pur- make the disclosures described in suant to § 3.121(d). The national bank or Table 13 to § 3.173; provided, however, Federal savings association must make the disclosures required under this these disclosures publicly available be- paragraph are required without regard ginning on January 1, 2015. to whether the national bank or Fed-

TABLE 13 TO § 3.173—SUPPLEMENTARY LEVERAGE RATIO

Dollar amounts in thousands Tril Bil Mil Thou

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

1 Total consolidated assets as reported in published financial statements. 2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation. 3 Adjustment for fiduciary assets recognized on balance sheet but excluded from total leverage exposure.

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TABLE 13 TO § 3.173—SUPPLEMENTARY LEVERAGE RATIO—Continued

Dollar amounts in thousands Tril Bil Mil Thou

4 Adjustment for derivative exposures. 5 Adjustment for repo-style transactions. 6 Adjustment for off-balance sheet exposures (that is, conversion to credit equivalent amounts of off-balance sheet exposures). 7 Other adjustments. 8 Total leverage exposure.

Part 2: Supplementary leverage ratio

On-balance sheet exposures 1 On-balance sheet assets (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions). 2 LESS: Amounts deducted from tier 1 capital. 3 Total on-balance sheet exposures (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) (sum of lines 1 and 2). Derivative exposures 4 Current exposure for derivative exposures (that is, net of cash variation margin). 5 Add-on amounts for potential future exposure (PFE) for derivative exposures. 6 Gross-up for cash collateral posted if deducted from the on-balance sheet assets, except for cash variation margin. 7 LESS: Deductions of receivable assets for cash variation margin posted in derivative transactions, if included in on-balance sheet assets. 8 LESS: Exempted CCP leg of client-cleared transactions. 9 Effective notional principal amount of sold credit protection. 10 LESS: Effective notional principal amount offsets and PFE adjustments for sold credit protection. 11 Total derivative exposures (sum of lines 4 to 10). Repo-style transactions 12 On-balance sheet assets for repo-style transactions, except include the gross value of receivables for reverse repurchase transactions. Exclude from this item the value of securities received in a security-for-security repo-style transaction where the securities lender has not sold or re-hypothecated the securities received. In- clude in this item the value of securities that qualified for sales treatment that must be reversed. 13 LESS: Reduction of the gross value of receivables in reverse repurchase transactions by cash payables in repurchase transactions under netting agreements. 14 Counterparty credit risk for all repo-style transactions. 15 Exposure for repo-style transactions where a banking organization acts as an agent. 16 Total exposures for repo-style transactions (sum of lines 12 to 15). Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amounts. 18 LESS: Adjustments for conversion to credit equivalent amounts. 19 Off-balance sheet exposures (sum of lines 17 and 18). Capital and total leverage exposure 20 Tier 1 capital. 21 Total leverage exposure (sum of lines 3, 11, 16 and 19). Supplementary leverage ratio

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

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[78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 57743, Sept. 26, 2014; 80 FR 41418, July 15, 2015; 84 FR 4238, Feb. 14, 2019; 84 FR 59265, Nov. 1, 2019; 85 FR 4413, Jan. 24, 2020]

§§ 3.174–3.200 [Reserved] amount of capital greater than otherwise required under this subpart if the Subpart F—Risk-Weighted Assets— OCC determines that the national Market Risk bank’s or Federal savings association’s capital requirement for market risk as calculated under this subpart is not SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, un- commensurate with the market risk of less otherwise noted. the national bank’s or Federal savings § 3.201 Purpose, applicability, and res- association’s covered positions. In ervation of authority. making determinations under paragraphs (c)(1) through (c)(3) of this sec- (a) Purpose. This subpart F estab- tion, the OCC will apply notice and re- lishes risk-based capital requirements sponse procedures generally in the for national banks or Federal savings same manner as the notice and re- associations with significant exposure sponse procedures set forth in 12 CFR to market risk, provides methods for 3.404. these national banks or Federal savings associations to calculate their (2) If the OCC determines that the standardized measure for market risk risk-based capital requirement cal- and, if applicable, advanced measure culated under this subpart by the na- for market risk, and establishes public tional bank or Federal savings associa- disclosure requirements. tion for one or more covered positions (b) Applicability. (1) This subpart F or portfolios of covered positions is not applies to any national bank or Federal commensurate with the risks associ- savings association with aggregate ated with those positions or portfolios, trading assets and trading liabilities the OCC may require the national bank (as reported in the national bank’s or or Federal savings association to as- Federal savings association’s most re- sign a different risk-based capital recent quarterly [regulatory report]), quirement to the positions or port- equal to: folios that more accurately reflects the (i) 10 percent or more of quarter-end risk of the positions or portfolios. total assets as reported on the most re- (3) The OCC may also require a na- cent quarterly [Call Report or FR Y– tional bank or Federal savings associa- 9C]; or tion to calculate risk-based capital re- (ii) $1 billion or more. quirements for specific positions or (2) The OCC may apply this subpart portfolios under this subpart, or under to any national bank or Federal sav- subpart D or subpart E of this part, as ings association if the OCC deems it appropriate, to more accurately reflect necessary or appropriate because of the the risks of the positions. level of market risk of the national (4) Nothing in this subpart limits the bank or Federal savings association or authority of the OCC under any other to ensure safe and sound banking prac- provision of law or regulation to take tices. supervisory or enforcement action, in- (3) The OCC may exclude a national cluding action to address unsafe or un- bank or Federal savings association sound practices or conditions, deficient that meets the criteria of paragraph capital levels, or violations of law. (b)(1) of this section from application of this subpart if the OCC determines § 3.202 Definitions. that the exclusion is appropriate based (a) Terms set forth in § 3.2 and used in on the level of market risk of the na- this subpart have the definitions as- tional bank or Federal savings associa- signed thereto in § 3.2. tion and is consistent with safe and (b) For the purposes of this subpart, sound banking practices. the following terms are defined as fol- (c) Reservation of authority. (1) The lows: OCC may require a national bank or Backtesting means the comparison of Federal savings association to hold an a national bank’s or Federal savings

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association’s internal estimates with (i) The position is a trading position actual outcomes during a sample pe- or hedges another covered position; 33 riod not used in model development. and For purposes of this subpart, (ii) The position is free of any restric- backtesting is one form of out-of-sam- tive covenants on its tradability or the ple testing. national bank or Federal savings asso- Commodity position means a position ciation is able to hedge the material for which price risk arises from risk elements of the position in a two- changes in the price of a commodity. way market; Corporate debt position means a debt (2) A foreign exchange or commodity position that is an exposure to a composition, regardless of whether the po- pany that is not a sovereign entity, the sition is a trading asset or trading li- Bank for International Settlements, ability (excluding any structural for- the European Central Bank, the Euro- eign currency positions that the na- pean Commission, the International tional bank or Federal savings associa- Monetary Fund, the European Sta- tion chooses to exclude with prior su- bility Mechanism, the European Finan- pervisory approval); and cial Stability Facility, a multilateral (3) Notwithstanding paragraphs (1) development bank, a depository insti- and (2) of this definition, a covered po- tution, a foreign bank, a credit union, sition does not include: a public sector entity, a GSE, or a (i) An intangible asset, including any securitization. servicing asset; Correlation trading position means: (ii) Any hedge of a trading position (1) A securitization position for that the OCC determines to be outside which all or substantially all of the the scope of the national bank’s or value of the underlying exposures is Federal savings association’s hedging based on the credit quality of a single strategy required in paragraph (a)(2) of company for which a two-way market § 3.203; exists, or on commonly traded indices (iii) Any position that, in form or based on such exposures for which a substance, acts as a liquidity facility two-way market exists on the indices; that provides support to asset-backed or commercial paper; (2) A position that is not a (iv) A credit derivative the national securitization position and that hedges bank or Federal savings association a position described in paragraph (1) of recognizes as a guarantee for risk- this definition; and weighted asset amount calculation purposes under subpart D or subpart E of (3) A correlation trading position this part; does not include: (v) Any position that is recognized as (i) A resecuritization position; a credit valuation adjustment hedge (ii) A derivative of a securitization under § 3.132(e)(5) or § 3.132(e)(6), except position that does not provide a pro as provided in § 3.132(e)(6)(vii); rata share in the proceeds of a (vi) Any equity position that is not securitization tranche; or publicly traded, other than a derivative (iii) A securitization position for that references a publicly traded eq- which the underlying assets or ref- uity and other than a position in an in- erence exposures are retail exposures, vestment company as defined in and residential mortgage exposures, or registered with the SEC under the In- commercial mortgage exposures. vestment Company Act of 1940 (15 Covered position means the following U.S.C. 80a–1 et seq.), provided that all positions: the underlying equities held by the in- (1) A trading asset or trading liabil- vestment company are publicly traded; ity (whether on- or off-balance sheet),32 (vii) Any equity position that is not as reported on Call Report, that meets publicly traded, other than a derivative the following conditions: 33 A position that hedges a trading position 32 Securities subject to repurchase and must be within the scope of the bank’s hedg- lending agreements are included as if they ing strategy as described in paragraph (a)(2) are still owned by the lender. of section 203 of this subpart.

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that references a publicly traded eq- cant changes in the underlying credit uity and other than a position in an en- quality of the position. tity not domiciled in the United States Market risk means the risk of loss on (or a political subdivision thereof) that a position that could result from move- is supervised and regulated in a man- ments in market prices. ner similar to entities described in Resecuritization position means a cov- paragraph (3)(vi) of this definition; ered position that is: (viii) Any position a national bank or (1) An on- or off-balance sheet expo- Federal savings association holds with sure to a resecuritization; or the intent to securitize; or (2) An exposure that directly or indi- (ix) Any direct real estate holding. rectly references a resecuritization ex- Debt position means a covered posi- posure in paragraph (1) of this definition that is not a securitization position. tion or a correlation trading position Securitization means a transaction in and that has a value that reacts pri- which: marily to changes in interest rates or (1) All or a portion of the credit risk credit spreads. of one or more underlying exposures is Default by a sovereign entity has the transferred to one or more third par- same meaning as the term sovereign ties; default under § 3.2. (2) The credit risk associated with Equity position means a covered posi- the underlying exposures has been sep- tion that is not a securitization posi- arated into at least two tranches that tion or a correlation trading position reflect different levels of seniority; and that has a value that reacts primarily to changes in equity prices. (3) Performance of the securitization Event risk means the risk of loss on exposures depends upon the perform- equity or hybrid equity positions as a ance of the underlying exposures; result of a financial event, such as the (4) All or substantially all of the un- announcement or occurrence of a com- derlying exposures are financial expo- pany merger, acquisition, spin-off, or sures (such as loans, commitments, dissolution. credit derivatives, guarantees, receiv- Foreign exchange position means a po- ables, asset-backed securities, mort- sition for which price risk arises from gage-backed securities, other debt se- changes in foreign exchange rates. curities, or equity securities); General market risk means the risk of (5) For non-synthetic securitizations, loss that could result from broad mar- the underlying exposures are not ket movements, such as changes in the owned by an operating company; general level of interest rates, credit (6) The underlying exposures are not spreads, equity prices, foreign ex- owned by a small business investment change rates, or commodity prices. company described in section 302 of the Hedge means a position or positions Small Business Investment Act; that offset all, or substantially all, of (7) The underlying exposures are not one or more material risk factors of owned by a firm an investment in another position. which qualifies as a community devel- Idiosyncratic risk means the risk of opment investment under section loss in the value of a position that 24(Eleventh) of the National Bank Act; arises from changes in risk factors (8) The OCC may determine that a unique to that position. transaction in which the underlying Incremental risk means the default exposures are owned by an investment risk and credit migration risk of a po- firm that exercises substantially unfet- sition. Default risk means the risk of tered control over the size and com- loss on a position that could result position of its assets, liabilities, and from the failure of an obligor to make off-balance sheet exposures is not a timely payments of principal or inter- securitization based on the trans- est on its debt obligation, and the risk action’s leverage, risk profile, or eco- of loss that could result from bank- nomic substance; ruptcy, insolvency, or similar pro- (9) The OCC may deem an exposure to ceeding. Credit migration risk means a transaction that meets the definition the price risk that arises from signifi- of a securitization, notwithstanding

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paragraph (5), (6), or (7) of this defini- ciation’s capital ratios or earnings tion, to be a securitization based on against the effect on paragraphs (1), (2), the transaction’s leverage, risk profile, or (3) of this definition of adverse ex- or economic substance; and change rate movements. (10) The transaction is not: Term repo-style transaction means a (i) An investment fund; repo-style transaction that has an (ii) A collective investment fund (as original maturity in excess of one busi- defined in [12 CFR 208.34 (Board), 12 ness day. CFR 9.18 (OCC)]); Trading position means a position (iii) An employee benefit plan as de- that is held by the national bank or fined in paragraphs (3) and (32) of sec- Federal savings association for the pur- tion 3 of ERISA, a ‘‘governmental plan’’ (as defined in 29 U.S.C. 1002(32)) pose of short-term resale or with the that complies with the tax deferral intent of benefiting from actual or ex- qualification requirements provided in pected short-term price movements, or the Internal Revenue Code, or any to lock in arbitrage profits. similar employee benefit plan estab- Two-way market means a market lished under the laws of a foreign juris- where there are independent bona fide diction; or offers to buy and sell so that a price (iv) Registered with the SEC under reasonably related to the last sales the Investment Company Act of 1940 (15 price or current bona fide competitive U.S.C. 80a–1 et seq.) or foreign equiva- bid and offer quotations can be deter- lents thereof. mined within one day and settled at Securitization position means a cov- that price within a relatively short ered position that is: time frame conforming to trade cus- (1) An on-balance sheet or off-balance tom. sheet credit exposure (including credit- Value-at-Risk (VaR) means the esti- enhancing representations and warran- mate of the maximum amount that the ties) that arises from a securitization value of one or more positions could (including a resecuritization); or decline due to market price or rate (2) An exposure that directly or indi- movements during a fixed holding pe- rectly references a securitization expo- riod within a stated confidence inter- sure described in paragraph (1) of this val. definition. Sovereign debt position means a direct [78 FR 62157, 62273, Oct. 11, 2013, as amended exposure to a sovereign entity. at 84 FR 35258, July 22, 2019; 85 FR 4405, Jan. Specific risk means the risk of loss on 24, 2020] a position that could result from factors other than broad market move- § 3.203 Requirements for application ments and includes event risk, default of this subpart F. risk, and idiosyncratic risk. (a) Trading positions—(1) Identification Structural position in a foreign cur- of trading positions. A national bank or rency means a position that is not a Federal savings association must have trading position and that is: clearly defined policies and procedures (1) Subordinated debt, equity, or mi- for determining which of its trading as- nority interest in a consolidated sub- sets and trading liabilities are trading sidiary that is denominated in a for- positions and which of its trading posi- eign currency; tions are correlation trading positions. (2) Capital assigned to foreign These policies and procedures must branches that is denominated in a foreign currency; take into account: (3) A position related to an uncon- (i) The extent to which a position, or solidated subsidiary or another item a hedge of its material risks, can be that is denominated in a foreign cur- marked-to-market daily by reference rency and that is deducted from the na- to a two-way market; and tional bank’s or Federal savings asso- (ii) Possible impairments to the li- ciation’s tier 1 or tier 2 capital; or quidity of a position or its hedge. (4) A position designed to hedge a national bank’s or Federal savings asso-

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(2) Trading and hedging strategies. A tions to market or to model, inde- national bank or Federal savings asso- pendent price verification, and valu- ciation must have clearly defined trad- ation adjustments or reserves. The ing and hedging strategies for its trad- valuation process must consider, as ap- ing positions that are approved by sen- propriate, unearned credit spreads, ior management of the national bank close-out costs, early termination or Federal savings association. costs, investing and funding costs, li- (i) The trading strategy must articu- quidity, and model risk. late the expected holding period of, and (c) Requirements for internal models. (1) the market risk associated with, each A national bank or Federal savings as- portfolio of trading positions. sociation must obtain the prior written (ii) The hedging strategy must ar- approval of the OCC before using any ticulate for each portfolio of trading internal model to calculate its risk- positions the level of market risk the based capital requirement under this national bank or Federal savings asso- subpart. ciation is willing to accept and must (2) A national bank or Federal sav- detail the instruments, techniques, and ings association must meet all of the strategies the national bank or Federal requirements of this section on an on- savings association will use to hedge going basis. The national bank or Fed- the risk of the portfolio. eral savings association must promptly (b) Management of covered positions— notify the OCC when: (1) Active management. A national bank (i) The national bank or Federal sav- or Federal savings association must ings association plans to extend the have clearly defined policies and proce- use of a model that the OCC has ap- dures for actively managing all covered proved under this subpart to an addi- positions. At a minimum, these poli- tional business line or product type; cies and procedures must require: (ii) The national bank or Federal sav- (i) Marking positions to market or to ings association makes any change to model on a daily basis; an internal model approved by the OCC (ii) Daily assessment of the national under this subpart that would result in bank’s or Federal savings association’s a material change in the national ability to hedge position and portfolio bank’s or Federal savings association’s risks, and of the extent of market li- risk-weighted asset amount for a port- quidity; folio of covered positions; or (iii) Establishment and daily moni- (iii) The national bank or Federal toring of limits on positions by a risk savings association makes any mate- control unit independent of the trading rial change to its modeling assump- business unit; tions. (iv) Daily monitoring by senior man- (3) The OCC may rescind its approval agement of information described in of the use of any internal model (in paragraphs (b)(1)(i) through (b)(1)(iii) of whole or in part) or of the determina- this section; tion of the approach under (v) At least annual reassessment of § 3.209(a)(2)(ii) for a national bank’s or established limits on positions by sen- Federal savings association’s modeled ior management; and correlation trading positions and deter- (vi) At least annual assessments by mine an appropriate capital require- qualified personnel of the quality of ment for the covered positions to market inputs to the valuation proc- which the model would apply, if the ess, the soundness of key assumptions, OCC determines that the model no the reliability of parameter estimation longer complies with this subpart or in pricing models, and the stability and fails to reflect accurately the risks of accuracy of model calibration under al- the national bank’s or Federal savings ternative market scenarios. association’s covered positions. (2) Valuation of covered positions. The (4) The national bank or Federal sav- national bank or Federal savings asso- ings association must periodically, but ciation must have a process for prudent no less frequently than annually, revaluation of its covered positions that view its internal models in light of de- includes policies and procedures on the velopments in financial markets and valuation of positions, marking posi- modeling technologies, and enhance

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those models as appropriate to ensure ing basis. The national bank’s or Fed- that they continue to meet the OCC’s eral savings association’s validation standards for model approval and em- process must be independent of the in- ploy risk measurement methodologies ternal models’ development, implemen- that are most appropriate for the na- tation, and operation, or the validation tional bank’s or Federal savings asso- process must be subjected to an inde- ciation’s covered positions. pendent review of its adequacy and ef- (5) The national bank or Federal sav- fectiveness. Validation must include: ings association must incorporate its (i) An evaluation of the conceptual internal models into its risk manage- soundness of (including developmental ment process and integrate the inter- evidence supporting) the internal mod- nal models used for calculating its els; VaR-based measure into its daily risk (ii) An ongoing monitoring process management process. that includes verification of processes (6) The level of sophistication of a na- and the comparison of the national tional bank’s or Federal savings asso- bank’s or Federal savings association’s ciation’s internal models must be com- model outputs with relevant internal mensurate with the complexity and and external data sources or esti- amount of its covered positions. A na- mation techniques; and tional bank’s or Federal savings asso- (iii) An outcomes analysis process ciation’s internal models may use any that includes backtesting. For internal of the generally accepted approaches, models used to calculate the VaR-based including but not limited to variance- measure, this process must include a covariance models, historical simula- comparison of the changes in the na- tions, or Monte Carlo simulations, to tional bank’s or Federal savings asso- measure market risk. ciation’s portfolio value that would (7) The national bank’s or Federal have occurred were end-of-day posi- savings association’s internal models tions to remain unchanged (therefore, must properly measure all the material excluding fees, commissions, reserves, risks in the covered positions to which they are applied. net interest income, and intraday trad- (8) The national bank’s or Federal ing) with VaR-based measures during a savings association’s internal models sample period not used in model devel- must conservatively assess the risks opment. arising from less liquid positions and (3) The national bank or Federal sav- positions with limited price trans- ings association must stress test the parency under realistic market sce- market risk of its covered positions at narios. a frequency appropriate to each port- (9) The national bank or Federal sav- folio, and in no case less frequently ings association must have a rigorous than quarterly. The stress tests must and well-defined process for re-esti- take into account concentration risk mating, re-evaluating, and updating its (including but not limited to con- internal models to ensure continued centrations in single issuers, indus- applicability and relevance. tries, sectors, or markets), illiquidity (10) If a national bank or Federal sav- under stressed market conditions, and ings association uses internal models risks arising from the national bank’s to measure specific risk, the internal or Federal savings association’s trad- models must also satisfy the require- ing activities that may not be ade- ments in paragraph (b)(1) of § 3.207. quately captured in its internal mod- (d) Control, oversight, and validation els. mechanisms. (1) The national bank or (4) The national bank or Federal sav- Federal savings association must have ings association must have an internal a risk control unit that reports di- audit function independent of business- rectly to senior management and is line management that at least annu- independent from the business trading ally assesses the effectiveness of the units. controls supporting the national (2) The national bank or Federal sav- bank’s or Federal savings association’s ings association must validate its in- market risk measurement systems, internal models initially and on an ongo- cluding the activities of the business

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trading units and independent risk conditional capital requirement estab- trol unit, compliance with policies and lished by the OCC]. An advanced ap- procedures, and calculation of the na- proaches national bank or Federal sav- tional bank’s or Federal savings asso- ings association that has completed ciation’s measures for market risk the parallel run process and that has under this subpart. At least annually, received notifications from the OCC the internal audit function must report pursuant to § 3.121(d) also must cal- its findings to the national bank’s or culate the advanced measure for mar- Federal savings association’s board of ket risk, which equals the sum of the directors (or a committee thereof). VaR-based capital requirement, (e) Internal assessment of capital ade- stressed VaR-based capital require- quacy. The national bank or Federal ment, specific risk add-ons, incre- savings association must have a rig- mental risk capital requirement, com- orous process for assessing its overall prehensive risk capital requirement, capital adequacy in relation to its mar- and capital requirement for de minimis ket risk. The assessment must take exposures as defined under this para- into account risks that may not be graph (a)(2) [, plus any additional cap- captured fully in the VaR-based meas- ital requirement established by the ure, including concentration and li- OCC]. quidity risk under stressed market (i) VaR-based capital requirement. A conditions. national bank’s or Federal savings as- (f) Documentation. The national bank sociation’s VaR-based capital require- or Federal savings association must ment equals the greater of: adequately document all material as- (A) The previous day’s VaR-based pects of its internal models, manage- measure as calculated under § 3.205; or ment and valuation of covered positions, control, oversight, validation (B) The average of the daily VaR- and review processes and results, and based measures as calculated under internal assessment of capital ade- § 3.205 for each of the preceding 60 busi- quacy. ness days multiplied by three, except as provided in paragraph (b) of this sec- § 3.204 Measure for market risk. tion. (a) General requirement. (1) A national (ii) Stressed VaR-based capital require- bank or Federal savings association ment. A national bank’s or Federal sav- must calculate its standardized meas- ings association’s stressed VaR-based ure for market risk by following the capital requirement equals the greater steps described in paragraph (a)(2) of of: this section. An advanced approaches (A) The most recent stressed VaR- national bank or Federal savings asso- based measure as calculated under ciation also must calculate an ad- § 3.206; or vanced measure for market risk by fol- (B) The average of the stressed VaR- lowing the steps in paragraph (a)(2) of based measures as calculated under this section. § 3.206 for each of the preceding 12 (2) Measure for market risk. A national weeks multiplied by three, except as bank or Federal savings association provided in paragraph (b) of this sec- must calculate the standardized meas- tion. ure for market risk, which equals the (iii) Specific risk add-ons. A national sum of the VaR-based capital require- bank’s or Federal savings association’s ment, stressed VaR-based capital re- specific risk add-ons equal any specific quirement, specific risk add-ons, incre- risk add-ons that are required under mental risk capital requirement, com- § 3.207 and are calculated in accordance prehensive risk capital requirement, with § 3.210. and capital requirement for de minimis (iv) Incremental risk capital require- exposures all as defined under this ment. A national bank’s or Federal sav- paragraph (a)(2), (except, that the na- ings association’s incremental risk tional bank or Federal savings associa- capital requirement equals any incre- tion may not use the SFA in section mental risk capital requirement as cal- 210(b)(2)(vii)(B) of this subpart for pur- culated under section 208 of this sub- poses of this calculation)[, plus any ad- part.

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(v) Comprehensive risk capital require- that corresponds to the number of ex- ment. A national bank’s or Federal sav- ceptions identified in paragraph (b)(1) ings association’s comprehensive risk of this section to determine its VaR- capital requirement equals any com- based capital requirement for market prehensive risk capital requirement as risk under paragraph (a)(2)(i) of this calculated under section 209 of this section and to determine its stressed subpart. VaR-based capital requirement for (vi) Capital requirement for de minimis market risk under paragraph (a)(2)(ii) exposures. A national bank’s or Federal of this section until it obtains the next savings association’s capital require- quarter’s backtesting results, unless ment for de minimis exposures equals: the OCC notifies the national bank or (A) The absolute value of the fair Federal savings association in writing value of those de minimis exposures that a different adjustment or other that are not captured in the national action is appropriate. bank’s or Federal savings association’s VaR-based measure or under paragraph TABLE 1 TO § 3.204—MULTIPLICATION FACTORS (a)(2)(vi)(B) of this section; and BASED ON RESULTS OF BACKTESTING (B) With the prior written approval of the OCC, the capital requirement for Multiplication Number of exceptions factor any de minimis exposures using alternative techniques that appropriately 4 or fewer ...... 3.00 measure the market risk associated 5 ...... 3.40 with those exposures. 6 ...... 3.50 (b) Backtesting. A national bank or 7 ...... 3.65 8 ...... 3.75 Federal savings association must com- 9 ...... 3.85 pare each of its most recent 250 busi- 10 or more ...... 4.00 ness days’ trading losses (excluding fees, commissions, reserves, net inter- § 3.205 VaR-based measure. est income, and intraday trading) with the corresponding daily VaR-based (a) General requirement. A national measures calibrated to a one-day hold- bank or Federal savings association ing period and at a one-tail, 99.0 per- must use one or more internal models cent confidence level. A national bank to calculate daily a VaR-based measure or Federal savings association must of the general market risk of all cov- begin backtesting as required by this ered positions. The daily VaR-based paragraph (b) no later than one year measure also may reflect the national after the later of January 1, 2014 and bank’s or Federal savings association’s the date on which the national bank or specific risk for one or more portfolios Federal savings association becomes of debt and equity positions, if the in- subject to this subpart. In the interim, ternal models meet the requirements consistent with safety and soundness of paragraph (b)(1) of § 3.207. The daily principles, a national bank or Federal VaR-based measure must also reflect savings association subject to this sub- the national bank’s or Federal savings part as of January 1, 2014 should con- association’s specific risk for any port- tinue to follow backtesting procedures folio of correlation trading positions in accordance with the OCC’s super- that is modeled under § 3.209. A na- visory expectations. tional bank or Federal savings associa- (1) Once each quarter, the national tion may elect to include term repo- bank or Federal savings association style transactions in its VaR-based must identify the number of exceptions measure, provided that the national (that is, the number of business days bank or Federal savings association infor which the actual daily net trading cludes all such term repo-style trans- loss, if any, exceeds the corresponding actions consistently over time. daily VaR-based measure) that have (1) The national bank’s or Federal occurred over the preceding 250 busi- savings association’s internal models ness days. for calculating its VaR-based measure (2) A national bank or Federal sav- must use risk factors sufficient to ings association must use the mul- measure the market risk inherent in tiplication factor in Table 1 to § 3.204 all covered positions. The market risk

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categories must include, as appro- positions for which such proxies are priate, interest rate risk, credit spread used. risk, equity price risk, foreign ex- (b) Quantitative requirements for VaR- change risk, and commodity price risk. based measure. (1) The VaR-based meas- For material positions in the major ure must be calculated on a daily basis currencies and markets, modeling using a one-tail, 99.0 percent confidence techniques must incorporate enough level, and a holding period equivalent segments of the yield curve—in no case to a 10-business-day movement in unless than six—to capture differences in derlying risk factors, such as rates, volatility and less than perfect correla- spreads, and prices. To calculate VaR- tion of rates along the yield curve. based measures using a 10-business-day (2) The VaR-based measure may in- holding period, the national bank or corporate empirical correlations with- Federal savings association may cal- in and across risk categories, provided culate 10-business-day measures di- the national bank or Federal savings rectly or may convert VaR-based meas- association validates and demonstrates ures using holding periods other than the reasonableness of its process for 10 business days to the equivalent of a measuring correlations. If the VaR- 10-business-day holding period. A na- based measure does not incorporate tional bank or Federal savings associa- empirical correlations across risk cat- tion that converts its VaR-based meas- egories, the national bank or Federal ure in such a manner must be able to savings association must add the sepa- justify the reasonableness of its ap- rate measures from its internal models proach to the satisfaction of the OCC. used to calculate the VaR-based meas- (2) The VaR-based measure must be ure for the appropriate market risk based on a historical observation pe- categories (interest rate risk, credit riod of at least one year. Data used to spread risk, equity price risk, foreign determine the VaR-based measure exchange rate risk, and/or commodity must be relevant to the national price risk) to determine its aggregate bank’s or Federal savings association’s VaR-based measure. actual exposures and of sufficient qual- (3) The VaR-based measure must in- ity to support the calculation of risk- clude the risks arising from the nonlinear price characteristics of options based capital requirements. The na- positions or positions with embedded tional bank or Federal savings associa- optionality and the sensitivity of the tion must update data sets at least fair value of the positions to changes in monthly or more frequently as changes the volatility of the underlying rates, in market conditions or portfolio com- prices, or other material risk factors. A position warrant. For a national bank national bank or Federal savings asso- or Federal savings association that ciation with a large or complex options uses a weighting scheme or other portfolio must measure the volatility method for the historical observation of options positions or positions with period, the national bank or Federal embedded optionality by different ma- savings association must either: turities and/or strike prices, where ma- (i) Use an effective observation pe- terial. riod of at least one year in which the (4) The national bank or Federal sav- average time lag of the observations is ings association must be able to justify at least six months; or to the satisfaction of the OCC the (ii) Demonstrate to the OCC that its omission of any risk factors from the weighting scheme is more effective calculation of its VaR-based measure than a weighting scheme with an aver- that the national bank or Federal sav- age time lag of at least six months rep- ings association uses in its pricing resenting the volatility of the national models. bank’s or Federal savings association’s (5) The national bank or Federal sav- trading portfolio over a full business ings association must demonstrate to cycle. A national bank or Federal sav- the satisfaction of the OCC the appro- ings association using this option must priateness of any proxies used to cap- update its data more frequently than ture the risks of the national bank’s or monthly and in a manner appropriate Federal savings association’s actual for the type of weighting scheme.

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(c) A national bank or Federal sav- nancial stress appropriate to the na- ings association must divide its port- tional bank’s or Federal savings asso- folio into a number of significant sub- ciation’s current portfolio. portfolios approved by the OCC for sub- (2) The stressed VaR-based measure portfolio backtesting purposes. These must be calculated at least weekly and subportfolios must be sufficient to be no less than the national bank’s or allow the national bank or Federal sav- Federal savings association’s VaR- ings association and the OCC to assess based measure. the adequacy of the VaR model at the (3) A national bank or Federal sav- risk factor level; the OCC will evaluate ings association must have policies and the appropriateness of these subport- procedures that describe how it deter- folios relative to the value and com- mines the period of significant finan- position of the national bank’s or Fed- cial stress used to calculate the na- eral savings association’s covered posi- tional bank’s or Federal savings asso- tions. The national bank or Federal ciation’s stressed VaR-based measure savings association must retain and under this section and must be able to make available to the OCC the fol- provide empirical support for the pe- lowing information for each subport- riod used. The national bank or Fed- folio for each business day over the eral savings association must obtain previous two years (500 business days), the prior approval of the OCC for, and with no more than a 60-day lag: notify the OCC if the national bank or (1) A daily VaR-based measure for Federal savings association makes any the subportfolio calibrated to a one- material changes to, these policies and tail, 99.0 percent confidence level; procedures. The policies and procedures (2) The daily profit or loss for the must address: subportfolio (that is, the net change in (i) How the national bank or Federal price of the positions held in the port- savings association links the period of folio at the end of the previous busi- significant financial stress used to cal- ness day); and culate the stressed VaR-based measure (3) The p-value of the profit or loss on to the composition and directional bias each day (that is, the probability of ob- of its current portfolio; and serving a profit that is less than, or a (ii) The national bank’s or Federal loss that is greater than, the amount savings association’s process for select- reported for purposes of paragraph ing, reviewing, and updating the period (c)(2) of this section based on the model of significant financial stress used to used to calculate the VaR-based meas- calculate the stressed VaR-based measure described in paragraph (c)(1) of this ure and for monitoring the appro- section). priateness of the period to the national bank’s or Federal savings association’s § 3.206 Stressed VaR-based measure. current portfolio. (a) General requirement. At least (4) Nothing in this section prevents weekly, a national bank or Federal the OCC from requiring a national savings association must use the same bank or Federal savings association to internal model(s) used to calculate its use a different period of significant fi- VaR-based measure to calculate a nancial stress in the calculation of the stressed VaR-based measure. stressed VaR-based measure. (b) Quantitative requirements for stressed VaR-based measure. (1) A na- § 3.207 Specific risk. tional bank or Federal savings associa- (a) General requirement. A national tion must calculate a stressed VaR- bank or Federal savings association based measure for its covered positions must use one of the methods in this using the same model(s) used to cal- section to measure the specific risk for culate the VaR-based measure, subject each of its debt, equity, and to the same confidence level and hold- securitization positions with specific ing period applicable to the VaR-based risk. measure under § 3.205, but with model (b) Modeled specific risk. A national inputs calibrated to historical data bank or Federal savings association from a continuous 12-month period may use models to measure the specific that reflects a period of significant fi- risk of covered positions as provided in

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paragraph (a) of section 205 of this sub- national bank or Federal savings asso- part (therefore, excluding ciation must calculate a specific-risk securitization positions that are not add-on for the portfolio under the modeled under section 209 of this sub- standardized measurement method as part). A national bank or Federal sav- described in § 3.210. ings association must use models to (2) A national bank or Federal sav- measure the specific risk of correlation ings association must calculate a spe- trading positions that are modeled cific risk add-on under the standard- under § 3.209. ized measurement method as described (1) Requirements for specific risk mod- in § 3.210 for all of its securitization po- eling. (i) If a national bank or Federal sitions that are not modeled under savings association uses internal mod- § 3.209. els to measure the specific risk of a portfolio, the internal models must: § 3.208 Incremental risk. (A) Explain the historical price variation in the portfolio; (a) General requirement. A national (B) Be responsive to changes in mar- bank or Federal savings association ket conditions; that measures the specific risk of a (C) Be robust to an adverse environ- portfolio of debt positions under ment, including signaling rising risk in § 3.207(b) using internal models must an adverse environment; and calculate at least weekly an incre- (D) Capture all material components mental risk measure for that portfolio of specific risk for the debt and equity according to the requirements in this positions in the portfolio. Specifically, section. The incremental risk measure the internal models must: is the national bank’s or Federal sav- (1) Capture event risk and idiosyn- ings association’s measure of potential cratic risk; and losses due to incremental risk over a (2) Capture and demonstrate sensi- one-year time horizon at a one-tail, tivity to material differences between 99.9 percent confidence level, either positions that are similar but not iden- under the assumption of a constant tical and to changes in portfolio com- level of risk, or under the assumption position and concentrations. of constant positions. With the prior (ii) If a national bank or Federal sav- approval of the OCC, a national bank ings association calculates an incre- or Federal savings association may mental risk measure for a portfolio of choose to include portfolios of equity debt or equity positions under section positions in its incremental risk 208 of this subpart, the national bank model, provided that it consistently in- or Federal savings association is not cludes such equity positions in a man- required to capture default and credit ner that is consistent with how the na- migration risks in its internal models tional bank or Federal savings associa- used to measure the specific risk of tion internally measures and manages those portfolios. the incremental risk of such positions (2) Specific risk fully modeled for one or at the portfolio level. If equity posi- more portfolios. If the national bank’s or Federal savings association’s VaR- tions are included in the model, for based measure captures all material modeling purposes default is consid- aspects of specific risk for one or more ered to have occurred upon the default of its portfolios of debt, equity, or cor- of any debt of the issuer of the equity relation trading positions, the national position. A national bank or Federal bank or Federal savings association savings association may not include has no specific risk add-on for those correlation trading positions or portfolios for purposes of paragraph securitization positions in its incre- (a)(2)(iii) of § 3.204. mental risk measure. (c) Specific risk not modeled. (1) If the (b) Requirements for incremental risk national bank’s or Federal savings as- modeling. For purposes of calculating sociation’s VaR-based measure does the incremental risk measure, the in- not capture all material aspects of spe- cremental risk model must: cific risk for a portfolio of debt, equity, (1) Measure incremental risk over a or correlation trading positions, the one-year time horizon and at a one-

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tail, 99.9 percent confidence level, ei- across product classes during stressed ther under the assumption of a con- conditions. stant level of risk, or under the as- (4) Reflect netting only of long and sumption of constant positions. short positions that reference the same (i) A constant level of risk assump- financial instrument. tion means that the national bank or (5) Reflect any material mismatch Federal savings association rebalances, between a position and its hedge. or rolls over, its trading positions at (6) Recognize the effect that liquidity the beginning of each liquidity horizon horizons have on dynamic hedging over the one-year horizon in a manner strategies. In such cases, a national that maintains the national bank’s or bank or Federal savings association Federal savings association’s initial must: risk level. The national bank or Fed- (i) Choose to model the rebalancing eral savings association must deter- of the hedge consistently over the rel- mine the frequency of rebalancing in a evant set of trading positions; manner consistent with the liquidity (ii) Demonstrate that the inclusion of horizons of the positions in the port- rebalancing results in a more appro- folio. The liquidity horizon of a posi- priate risk measurement; tion or set of positions is the time re- (iii) Demonstrate that the market for quired for a national bank or Federal the hedge is sufficiently liquid to per- savings association to reduce its expo- mit rebalancing during periods of sure to, or hedge all of its material stress; and risks of, the position(s) in a stressed (iv) Capture in the incremental risk market. The liquidity horizon for a po- model any residual risks arising from sition or set of positions may not be such hedging strategies. less than the shorter of three months (7) Reflect the nonlinear impact of or the contractual maturity of the po- options and other positions with mate- sition. rial nonlinear behavior with respect to (ii) A constant position assumption default and migration changes. means that the national bank or Fed- eral savings association maintains the (8) Maintain consistency with the na- same set of positions throughout the tional bank’s or Federal savings asso- one-year horizon. If a national bank or ciation’s internal risk management Federal savings association uses this methodologies for identifying, meas- assumption, it must do so consistently uring, and managing risk. across all portfolios. (c) Calculation of incremental risk cap- (iii) A national bank’s or Federal sav- ital requirement. The incremental risk ings association’s selection of a con- capital requirement is the greater of: stant position or a constant risk as- (1) The average of the incremental sumption must be consistent between risk measures over the previous 12 the national bank’s or Federal savings weeks; or association’s incremental risk model (2) The most recent incremental risk and its comprehensive risk model de- measure. scribed in section 209 of this subpart, if applicable. § 3.209 Comprehensive risk. (iv) A national bank’s or Federal sav- (a) General requirement. (1) Subject to ings association’s treatment of liquid- the prior approval of the OCC, a na- ity horizons must be consistent be- tional bank or Federal savings associa- tween the national bank’s or Federal tion may use the method in this sec- savings association’s incremental risk tion to measure comprehensive risk, model and its comprehensive risk that is, all price risk, for one or more model described in section 209, if appli- portfolios of correlation trading posi- cable. tions. (2) Recognize the impact of correla- (2) A national bank or Federal sav- tions between default and migration ings association that measures the events among obligors. price risk of a portfolio of correlation (3) Reflect the effect of issuer and trading positions using internal models market concentrations, as well as con- must calculate at least weekly a com- centrations that can arise within and prehensive risk measure that captures

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all price risk according to the require- such as the cross-effect between ments of this section. The comprehen- spreads and correlations; sive risk measure is either: (iv) Basis risk; (i) The sum of: (v) Recovery rate volatility as it re- (A) The national bank’s or Federal lates to the propensity for recovery savings association’s modeled measure rates to affect tranche prices; and of all price risk determined according (vi) To the extent the comprehensive to the requirements in paragraph (b) of risk measure incorporates the benefits this section; and of dynamic hedging, the static nature (B) A surcharge for the national of the hedge over the liquidity horizon bank’s or Federal savings association’s must be recognized. In such cases, a na- modeled correlation trading positions tional bank or Federal savings associa- equal to the total specific risk add-on tion must: for such positions as calculated under (A) Choose to model the rebalancing section 210 of this subpart multiplied of the hedge consistently over the rel- by 8.0 percent; or evant set of trading positions; (ii) With approval of the OCC and (B) Demonstrate that the inclusion of provided the national bank or Federal rebalancing results in a more appro- savings association has met the re- priate risk measurement; quirements of this section for a period (C) Demonstrate that the market for of at least one year and can dem- the hedge is sufficiently liquid to per- onstrate the effectiveness of the model mit rebalancing during periods of through the results of ongoing model stress; and validation efforts including robust (D) Capture in the comprehensive benchmarking, the greater of: risk model any residual risks arising (A) The national bank’s or Federal from such hedging strategies; savings association’s modeled measure (3) The national bank or Federal sav- of all price risk determined according ings association must use market data to the requirements in paragraph (b) of that are relevant in representing the this section; or risk profile of the national bank’s or (B) The total specific risk add-on Federal savings association’s correla- that would apply to the bank’s modeled tion trading positions in order to en- correlation trading positions as cal- sure that the national bank or Federal culated under section 210 of this sub- savings association fully captures the part multiplied by 8.0 percent. material risks of the correlation trad- (b) Requirements for modeling all price ing positions in its comprehensive risk risk. If a national bank or Federal sav- measure in accordance with this sec- ings association uses an internal model tion; and to measure the price risk of a portfolio (4) The national bank or Federal sav- of correlation trading positions: ings association must be able to dem- (1) The internal model must measure onstrate that its model is an appro- comprehensive risk over a one-year priate representation of comprehensive time horizon at a one-tail, 99.9 percent risk in light of the historical price var- confidence level, either under the as- iation of its correlation trading posi- sumption of a constant level of risk, or tions. under the assumption of constant posi- (c) Requirements for stress testing. (1) A tions. national bank or Federal savings asso- (2) The model must capture all mate- ciation must at least weekly apply spe- rial price risk, including but not lim- cific, supervisory stress scenarios to its ited to the following: portfolio of correlation trading posi- (i) The risks associated with the con- tions that capture changes in: tractual structure of cash flows of the (i) Default rates; position, its issuer, and its underlying (ii) Recovery rates; exposures; (iii) Credit spreads; (ii) Credit spread risk, including non- (iv) Correlations of underlying expo- linear price risks; sures; and (iii) The volatility of implied correla- (v) Correlations of a correlation trad- tions, including nonlinear price risks ing position and its hedge.

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(2) Other requirements. (i) A national purchased credit protection is capped bank or Federal savings association at the current fair value of the trans- must retain and make available to the action plus the absolute value of the OCC the results of the supervisory present value of all remaining pay- stress testing, including comparisons ments to the protection seller under with the capital requirements gen- the transaction. This sum is equal to erated by the national bank’s or Fed- the value of the protection leg of the eral savings association’s comprehen- transaction. sive risk model. (2) For debt, equity, or securitization (ii) A national bank or Federal sav- positions that are derivatives with lin- ings association must report to the ear payoffs, a national bank or Federal OCC promptly any instances where the savings association must assign a spe- stress tests indicate any material defi- cific risk-weighting factor to the fair ciencies in the comprehensive risk value of the effective notional amount model. of the underlying instrument or index (d) Calculation of comprehensive risk portfolio, except for a securitization capital requirement. The comprehensive position for which the national bank or risk capital requirement is the greater Federal savings association directly of: calculates a specific risk add-on using (1) The average of the comprehensive the SFA in paragraph (b)(2)(vii)(B) of risk measures over the previous 12 this section. A swap must be included weeks; or as an effective notional position in the (2) The most recent comprehensive underlying instrument or portfolio, risk measure. with the receiving side treated as a long position and the paying side treat- § 3.210 Standardized measurement ed as a short position. For debt, equity, method for specific risk. or securitization positions that are de- (a) General requirement. A national rivatives with nonlinear payoffs, a na- bank or Federal savings association tional bank or Federal savings associa- must calculate a total specific risk tion must risk weight the fair value of add-on for each portfolio of debt and the effective notional amount of the equity positions for which the national underlying instrument or portfolio bank’s or Federal savings association’s multiplied by the derivative’s delta. VaR-based measure does not capture (3) For debt, equity, or securitization all material aspects of specific risk and positions, a national bank or Federal for all securitization positions that are savings association may net long and not modeled under § 3.209. A national short positions (including derivatives) bank or Federal savings association in identical issues or identical indices. must calculate each specific risk add- A national bank or Federal savings as- on in accordance with the require- sociation may also net positions in de- ments of this section. Notwithstanding positary receipts against an opposite any other definition or requirement in position in an identical equity in dif- this subpart, a position that would ferent markets, provided that the na- have qualified as a debt position or an tional bank or Federal savings associa- equity position but for the fact that it tion includes the costs of conversion. qualifies as a correlation trading posi- (4) A set of transactions consisting of tion under paragraph (2) of the defini- either a debt position and its credit de- tion of correlation trading position in rivative hedge or a securitization posi- § 3.202, shall be considered a debt position and its credit derivative hedge has tion or an equity position, respec- a specific risk add-on of zero if: tively, for purposes of this section 210 (i) The debt or securitization position of this subpart. is fully hedged by a total return swap (1) The specific risk add-on for an in- (or similar instrument where there is a dividual debt or securitization position matching of swap payments and that represents sold credit protection changes in fair value of the debt or is capped at the notional amount of the securitization position); credit derivative contract. The specific (ii) There is an exact match between risk add-on for an individual debt or the reference obligation of the swap securitization position that represents and the debt or securitization position;

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(iii) There is an exact match between of the debt or securitization position. the currency of the swap and the debt The maturity date of the credit deriva- or securitization position; and tive hedge may not exceed the matu- (iv) There is either an exact match rity date of the debt or securitization between the maturity date of the swap position by more than 90 calendar days. and the maturity date of the debt or (6) The specific risk add-on for a set securitization position; or, in cases of transactions consisting of either a where a total return swap references a debt position and its credit derivative portfolio of positions with different hedge or a securitization position and maturity dates, the total return swap its credit derivative hedge that does maturity date must match the matu- not meet the criteria of either para- rity date of the underlying asset in graph (a)(4) or (a)(5) of this section, but that portfolio that has the latest matu- in which all or substantially all of the rity date. price risk has been hedged, is equal to (5) The specific risk add-on for a set the specific risk add-on for the side of of transactions consisting of either a the transaction with the higher spe- debt position and its credit derivative cific risk add-on. hedge or a securitization position and (b) Debt and securitization positions. (1) its credit derivative hedge that does The total specific risk add-on for a not meet the criteria of paragraph portfolio of debt or securitization posi- (a)(4) of this section is equal to 20.0 per- tions is the sum of the specific risk cent of the capital requirement for the add-ons for individual debt or side of the transaction with the higher securitization positions, as computed specific risk add-on when: under this section. To determine the (i) The credit risk of the position is specific risk add-on for individual debt fully hedged by a credit default swap or or securitization positions, a national similar instrument; bank or Federal savings association (ii) There is an exact match between must multiply the absolute value of the reference obligation of the credit the current fair value of each net long derivative hedge and the debt or or net short debt or securitization posi- securitization position; tion in the portfolio by the appropriate (iii) There is an exact match between specific risk-weighting factor as set the currency of the credit derivative forth in paragraphs (b)(2)(i) through hedge and the debt or securitization (b)(2)(vii) of this section. position; and (2) For the purpose of this section, (iv) There is either an exact match the appropriate specific risk-weighting between the maturity date of the cred- factors include: it derivative hedge and the maturity (i) Sovereign debt positions. (A) In ac- date of the debt or securitization posi- cordance with Table 1 to § 3.210, a nation; or, in the case where the credit tional bank or Federal savings associa- derivative hedge has a standard matu- tion must assign a specific risk- rity date: weighting factor to a sovereign debt (A) The maturity date of the credit position based on the CRC applicable to derivative hedge is within 30 business the sovereign, and, as applicable, the days of the maturity date of the debt remaining contractual maturity of the or securitization position; or position, or if there is no CRC applica- (B) For purchased credit protection, ble to the sovereign, based on whether the maturity date of the credit deriva- the sovereign entity is a member of the tive hedge is later than the maturity OECD. Notwithstanding any other pro- date of the debt or securitization posi- vision in this subpart, sovereign debt tion, but is no later than the standard positions that are backed by the full maturity date for that instrument that faith and credit of the United States immediately follows the maturity date are treated as having a CRC of 0.

TABLE 1 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR SOVEREIGN DEBT POSITIONS

Specific risk-weighting factor (in percent)

CRC:

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TABLE 1 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR SOVEREIGN DEBT POSITIONS— Continued 0–1 ...... 0.0

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

4–6 ...... 8.0

7 ...... 12.0

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

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

Sovereign Default ...... 12.0

(B) Notwithstanding paragraph (ii) Certain supranational entity and (b)(2)(i)(A) of this section, a national multilateral development bank debt posi- bank or Federal savings association tions. A national bank or Federal sav- may assign to a sovereign debt position ings association may assign a 0.0 per- a specific risk-weighting factor that is cent specific risk-weighting factor to a lower than the applicable specific risk- debt position that is an exposure to the weighting factor in Table 1 to § 3.210 if: Bank for International Settlements, (1) The position is denominated in the European Central Bank, the Euro- the sovereign entity’s currency; pean Commission, the International (2) The national bank or Federal sav- Monetary Fund, the European Sta- ings association has at least an equiva- bility Mechanism, the European Finan- lent amount of liabilities in that cur- cial Stability Facility, or an MDB. rency; and (iii) GSE debt positions. A national (3) The sovereign entity allows banks bank or Federal savings association under its jurisdiction to assign the must assign a 1.6 percent specific risk- lower specific risk-weighting factor to weighting factor to a debt position the same exposures to the sovereign that is an exposure to a GSE. Notwith- entity. standing the foregoing, a national bank (C) A national bank or Federal sav- or Federal savings association must as- ings association must assign a 12.0 per- sign an 8.0 percent specific risk- cent specific risk-weighting factor to a weighting factor to preferred stock sovereign debt position immediately issued by a GSE. upon determination a default has oc- (iv) Depository institution, foreign curred; or if a default has occurred bank, and credit union debt positions. (A) within the previous five years. Except as provided in paragraph (D) A national bank or Federal sav- (b)(2)(iv)(B) of this section, a national ings association must assign a 0.0 percent specific risk-weighting factor to a bank or Federal savings association sovereign debt position if the sovereign must assign a specific risk-weighting entity is a member of the OECD and factor to a debt position that is an ex- does not have a CRC assigned to it, exposure to a depository institution, a cept as provided in paragraph foreign bank, or a credit union, in ac- (b)(2)(i)(C) of this section. cordance with Table 2 to § 3.210, based (E) A national bank or Federal sav- on the CRC that corresponds to that ings association must assign an 8.0 per- entity’s home country or the OECD cent specific risk-weighting factor to a membership status of that entity’s sovereign debt position if the sovereign home country if there is no CRC appli- is not a member of the OECD and does cable to the entity’s home country, not have a CRC assigned to it, except and, as applicable, the remaining con- as provided in paragraph (b)(2)(i)(C) of tractual maturity of the position. this section.

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TABLE 2 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR DEPOSITORY INSTITUTION, FOREIGN BANK, AND CREDIT UNION DEBT POSITIONS

Specific risk-weighting factor (in percent)

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

CRC 3 ...... 8.0

CRC 4–7 ...... 12.0

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

Sovereign Default ...... 12.0

(B) A national bank or Federal sav- country or the OECD membership sta- ings association must assign a specific tus of the PSE’s home country if there risk-weighting factor of 8.0 percent to a is no CRC applicable to the PSE’s home debt position that is an exposure to a country, and, as applicable, the re- depository institution or a foreign maining contractual maturity of the bank that is includable in the deposi- position, as set forth in Tables 3 and 4 tory institution’s or foreign bank’s reg- of this section. ulatory capital and that is not subject (B) A national bank or Federal sav- to deduction as a reciprocal holding ings association may assign a lower under § 3.22. specific risk-weighting factor than (C) A national bank or Federal sav- would otherwise apply under Tables 3 ings association must assign a 12.0 per- and 4 of this section to a debt position cent specific risk-weighting factor to a that is an exposure to a foreign PSE if: debt position that is an exposure to a (1) The PSE’s home country allows foreign bank immediately upon deter- banks under its jurisdiction to assign a mination that a default by the foreign lower specific risk-weighting factor to bank’s home country has occurred or if such position; and a default by the foreign bank’s home (2) The specific risk-weighting factor country has occurred within the pre- is not lower than the risk weight that vious five years. corresponds to the PSE’s home country (v) PSE debt positions. (A) Except as in accordance with Tables 3 and 4 of provided in paragraph (b)(2)(v)(B) of this section. this section, a national bank or Fed- (C) A national bank or Federal sav- eral savings association must assign a ings association must assign a 12.0 per- specific risk-weighting factor to a debt cent specific risk-weighting factor to a position that is an exposure to a PSE PSE debt position immediately upon in accordance with Tables 3 and 4 to determination that a default by the § 3.210 depending on the position’s cat- PSE’s home country has occurred or if egorization as a general obligation or a default by the PSE’s home country revenue obligation based on the CRC has occurred within the previous five that corresponds to the PSE’s home years.

TABLE 3 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE GENERAL OBLIGATION DEBT POSITIONS

General obligation specific risk-weighting factor (in percent)

CRC 3 ...... 8.0

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TABLE 3 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE GENERAL OBLIGATION DEBT POSITIONS—Continued CRC 4–7 ...... 12.0

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

Sovereign Default ...... 12.0

TABLE 4 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE REVENUE OBLIGATION DEBT POSITIONS

Revenue obligation specific risk-weighting factor (in percent)

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

CRC 2–3 ...... 8.0

CRC 4–7 ...... 12.0

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

Sovereign Default ...... 12.0

(vi) Corporate debt positions. Except as and outstanding publicly traded instru- otherwise provided in paragraph ments, a national bank or Federal sav- (b)(2)(vi)(B) of this section, a national ings association must assign a specific bank or Federal savings association risk-weighting factor based on the cat- must assign a specific risk-weighting egory and remaining contractual matu- factor to a corporate debt position in rity of the position, in accordance with accordance with the investment grade Table 5 to § 3.210. For purposes of this methodology in paragraph (b)(2)(vi)(A) paragraph (b)(2)(vi)(A)(1), the national of this section. bank or Federal savings association (A) Investment grade methodology. (1) must determine whether the position is For corporate debt positions that are in the investment grade or not invest- exposures to entities that have issued ment grade category.

TABLE 5 TO § 3.210—SPECIFIC RISK-WEIGHTING FACTORS FOR CORPORATE DEBT POSITIONS UNDER THE INVESTMENT GRADE METHODOLOGY

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

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

Non-investment Grade ...... 12.00

(2) A national bank or Federal sav- mortgage-backed security that is not a ings association must assign an 8.0 per- securitization position. cent specific risk-weighting factor for (2) A national bank or Federal sav- corporate debt positions that are expo- ings association shall not assign a cor- sures to entities that do not have pub- porate debt position a specific risk- licly traded instruments outstanding. weighting factor that is lower than the (B) Limitations. (1) A national bank or specific risk-weighting factor that cor- Federal savings association must as- responds to the CRC of the issuer’s sign a specific risk-weighting factor of home country, if applicable, in table 1 at least 8.0 percent to an interest-only of this section.

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(vii) Securitization positions. (A) Gen- (D) Nth-to-default credit derivatives. A eral requirements. (1) A national bank national bank or Federal savings asso- or Federal savings association that is ciation must determine a specific risk not an advanced approaches national add-on using the SFA in paragraph bank or Federal savings association (b)(2)(vii)(B) of this section, or assign a must assign a specific risk-weighting specific risk-weighting factor using the factor to a securitization position SSFA in paragraph (b)(2)(vii)(C) of this using either the simplified supervisory section to an nth-to-default credit deriv- formula approach (SSFA) in paragraph ative in accordance with this para- (b)(2)(vii)(C) of this section (and § 3.211) graph (b)(2)(vii)(D), regardless of or assign a specific risk-weighting fac- whether the national bank or Federal tor of 100 percent to the position. savings association is a net protection (2) A national bank or Federal sav- buyer or net protection seller. A na- ings association that is an advanced tional bank or Federal savings associa- approaches national bank or Federal tion must determine its position in the savings association must calculate a nth-to-default credit derivative as the specific risk add-on for a securitization largest notional amount of all the un- position in accordance with paragraph derlying exposures. (b)(2)(vii)(B) of this section if the na- (1) For purposes of determining the tional bank or Federal savings associa- specific risk add-on using the SFA in tion and the securitization position paragraph (b)(2)(vii)(B) of this section each qualifies to use the SFA in § 3.143. or the specific risk-weighting factor for A national bank or Federal savings as- an nth-to-default credit derivative using sociation that is an advanced ap- the SSFA in paragraph (b)(2)(vii)(C) of proaches national bank or Federal sav- this section the national bank or Fed- ings association with a securitization eral savings association must calculate position that does not qualify for the the attachment point and detachment SFA under paragraph (b)(2)(vii)(B) of point of its position as follows: this section may assign a specific risk- (i) The attachment point (parameter weighting factor to the securitization A) is the ratio of the sum of the no- position using the SSFA in accordance tional amounts of all underlying expo- with paragraph (b)(2)(vii)(C) of this sec- sures that are subordinated to the nation or assign a specific risk-weighting tional bank’s or Federal savings asso- factor of 100 percent to the position. ciation’s position to the total notional (3) A national bank or Federal sav- amount of all underlying exposures. ings association must treat a short For purposes of the SSFA, parameter A securitization position as if it is a long is expressed as a decimal value between securitization position solely for cal- zero and one. For purposes of using the culation purposes when using the SFA SFA in paragraph (b)(2)(vii)(B) of this in paragraph (b)(2)(vii)(B) of this sec- section to calculate the specific add-on tion or the SSFA in paragraph for its position in an nth-to-default (b)(2)(vii)(C) of this section. credit derivative, parameter A must be (B) SFA. To calculate the specific set equal to the credit enhancement risk add-on for a securitization posi- level (L) input to the SFA formula in tion using the SFA, a national bank or section 143 of this subpart. In the case Federal savings association that is an of a first-to-default credit derivative, advanced approaches national bank or there are no underlying exposures that Federal savings association must set are subordinated to the national bank’s the specific risk add-on for the position or Federal savings association’s posi- equal to the risk-based capital require- tion. In the case of a second-or-subse- ment as calculated under § 3.143. quent-to-default credit derivative, the (C) SSFA. To use the SSFA to deter- smallest (n-1) notional amounts of the mine the specific risk-weighting factor underlying exposure(s) are subordi- for a securitization position, a national nated to the national bank’s or Federal bank or Federal savings association savings association’s position. must calculate the specific risk- (ii) The detachment point (parameter weighting factor in accordance with D) equals the sum of parameter A plus § 3.211. the ratio of the notional amount of the

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national bank’s or Federal savings as- securitization position calculated sociation’s position in the nth-to-de- under this section. fault credit derivative to the total no- (e) Equity positions. The total specific tional amount of all underlying expo- risk add-on for a portfolio of equity posures. For purposes of the SSFA, pa- sitions is the sum of the specific risk rameter A is expressed as a decimal add-ons of the individual equity posi- value between zero and one. For pur- tions, as computed under this section. poses of using the SFA in paragraph To determine the specific risk add-on (b)(2)(vii)(B) of this section to calculate of individual equity positions, a na- the specific risk add-on for its position tional bank or Federal savings associa- in an nth-to-default credit derivative, tion must multiply the absolute value parameter D must be set to equal the L of the current fair value of each net input plus the thickness of tranche T long or net short equity position by the input to the SFA formula in § 3.143 of appropriate specific risk-weighting fac- this subpart. tor as determined under this paragraph (2) A national bank or Federal sav- (e): (1) The national bank or Federal savings association that does not use the ings association must multiply the ab- SFA in paragraph (b)(2)(vii)(B) of this solute value of the current fair value of section to determine a specific risk-add each net long or net short equity posi- on, or the SSFA in paragraph tion by a specific risk-weighting factor (b)(2)(vii)(C) of this section to deter- of 8.0 percent. For equity positions mine a specific risk-weighting factor that are index contracts comprising a th for its position in an n -to-default well-diversified portfolio of equity in- credit derivative must assign a specific struments, the absolute value of the risk-weighting factor of 100 percent to current fair value of each net long or the position. net short position is multiplied by a (c) Modeled correlation trading posi- specific risk-weighting factor of 2.0 tions. For purposes of calculating the percent.34 comprehensive risk measure for mod- (2) For equity positions arising from eled correlation trading positions the following futures-related arbitrage under either paragraph (a)(2)(i) or strategies, a national bank or Federal (a)(2)(ii) of § 3.209, the total specific savings association may apply a 2.0 risk add-on is the greater of: percent specific risk-weighting factor (1) The sum of the national bank’s or to one side (long or short) of each posi- Federal savings association’s specific tion with the opposite side exempt risk add-ons for each net long correla- from an additional capital require- tion trading position calculated under ment: this section; or (i) Long and short positions in ex- (2) The sum of the national bank’s or actly the same index at different dates Federal savings association’s specific or in different market centers; or risk add-ons for each net short correla- (ii) Long and short positions in index tion trading position calculated under contracts at the same date in different, this section. but similar indices. (d) Non-modeled securitization posi- (3) For futures contracts on main in- tions. For securitization positions that dices that are matched by offsetting are not correlation trading positions positions in a basket of stocks com- and for securitizations that are cor- prising the index, a national bank or relation trading positions not modeled Federal savings association may apply under § 3.209, the total specific risk add- a 2.0 percent specific risk-weighting factor to the futures and stock basket on is the greater of: positions (long and short), provided (1) The sum of the national bank’s or that such trades are deliberately en- Federal savings association’s specific tered into and separately controlled, risk add-ons for each net long securitization position calculated 34 under this section; or A portfolio is well-diversified if it contains a large number of individual equity po- (2) The sum of the national bank’s or sitions, with no single position representing Federal savings association’s specific a substantial portion of the portfolio’s total risk add-ons for each net short fair value.

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and that the basket of stocks is com- average loan-to-value ratio; and indus- prised of stocks representing at least try and geographic diversification data 90.0 percent of the capitalization of the on the underlying exposure(s); index. A main index refers to the (C) Relevant market data of the Standard & Poor’s 500 Index, the FTSE securitization, for example, bid-ask All-World Index, and any other index spreads, most recent sales price and for which the national bank or Federal historical price volatility, trading vol- savings association can demonstrate to ume, implied market rating, and size, the satisfaction of the OCC that the eq- depth and concentration level of the uities represented in the index have li- market for the securitization; and quidity, depth of market, and size of (D) For resecuritization positions, bid-ask spreads comparable to equities performance information on the under- in the Standard & Poor’s 500 Index and lying securitization exposures, for ex- FTSE All-World Index. ample, the issuer name and credit qual- (f) Due diligence requirements for ity, and the characteristics and per- securitization positions. (1) A national formance of the exposures underlying bank or Federal savings association the securitization exposures. must demonstrate to the satisfaction (ii) On an on-going basis (no less fre- of the OCC a comprehensive under- quently than quarterly), evaluating, standing of the features of a reviewing, and updating as appropriate securitization position that would ma- the analysis required under paragraph terially affect the performance of the (f)(1) of this section for each position by conducting and docu- securitization position. menting the analysis set forth in para- [78 FR 62157, 62273, Oct. 11, 2013, as amended graph (f)(2) of this section. The na- at 84 FR 35258, July 22, 2019; 85 FR 4405, Jan. tional bank’s or Federal savings asso- 24, 2020] ciation’s analysis must be commensurate with the complexity of the § 3.211 Simplified supervisory formula securitization position and the materi- approach (SSFA). ality of the position in relation to cap- (a) General requirements. To use the ital. SSFA to determine the specific risk- (2) A national bank or Federal sav- weighting factor for a securitization ings association must demonstrate its position, a national bank or Federal comprehensive understanding for each savings association must have data securitization position by: that enables it to assign accurately the (i) Conducting an analysis of the risk parameters described in paragraph (b) characteristics of a securitization posi- of this section. Data used to assign the tion prior to acquiring the position and parameters described in paragraph (b) document such analysis within three of this section must be the most cur- business days after acquiring position, rently available data; if the contracts considering: governing the underlying exposures of (A) Structural features of the the securitization require payments on securitization that would materially a monthly or quarterly basis, the data impact the performance of the posi- used to assign the parameters de- tion, for example, the contractual cash scribed in paragraph (b) of this section flow waterfall, waterfall-related trig- must be no more than 91 calendar days gers, credit enhancements, liquidity old. A national bank or Federal savings enhancements, fair value triggers, the association that does not have the ap- performance of organizations that serv- propriate data to assign the param- ice the position, and deal-specific defi- eters described in paragraph (b) of this nitions of default; section must assign a specific risk- (B) Relevant information regarding weighting factor of 100 percent to the the performance of the underlying position. credit exposure(s), for example, the (b) SSFA parameters. To calculate the percentage of loans 30, 60, and 90 days specific risk-weighting factor for a past due; default rates; prepayment securitization position using the SSFA, rates; loans in foreclosure; property a national bank or Federal savings as- types; occupancy; average credit score sociation must have accurate informa- or other measures of creditworthiness; tion on the five inputs to the SSFA

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calculation described in paragraphs savings association’s securitization ex- (b)(1) through (b)(5) of this section. posure may be included in the calcula- (1) KG is the weighted-average (with tion of parameter A to the extent that unpaid principal used as the weight for cash is present in the account. Param- each exposure) total capital require- eter A is expressed as a decimal value ment of the underlying exposures cal- between zero and one. culated using subpart D. KG is ex- (4) Parameter D is the detachment pressed as a decimal value between point for the position, which represents zero and one (that is, an average risk the threshold at which credit losses of weight of 100 percent represents a value principal allocated to the position of KG equal to 0.08). would result in a total loss of principal. (2) Parameter W is expressed as a Except as provided in decimal value between zero and one. § 3.210(b)(2)(vii)(D) for nth-to-default Parameter W is the ratio of the sum of credit derivatives, parameter D equals the dollar amounts of any underlying parameter A plus the ratio of the cur- exposures of the securitization that rent dollar amount of the meet any of the criteria as set forth in securitization positions that are pari paragraphs (b)(2)(i) through (vi) of this passu with the position (that is, have section to the balance, measured in equal seniority with respect to credit dollars, of underlying exposures: risk) to the current dollar amount of (i) Ninety days or more past due; the underlying exposures. Parameter D (ii) Subject to a bankruptcy or insol- is expressed as a decimal value between vency proceeding; zero and one. (iii) In the process of foreclosure; (5) A supervisory calibration param- (iv) Held as real estate owned; eter, p, is equal to 0.5 for securitization (v) Has contractually deferred pay- positions that are not resecuritization ments for 90 days or more, other than positions and equal to 1.5 for principal or interest payments deferred resecuritization positions. on: (c) Mechanics of the SSFA. KG and W (A) Federally-guaranteed student are used to calculate KA, the aug- loans, in accordance with the terms of mented value of KG, which reflects the those guarantee programs; or observed credit quality of the under- (B) Consumer loans, including non- lying exposures. KA is defined in para- federally-guaranteed student loans, graph (d) of this section. The values of provided that such payments are de- parameters A and D, relative to KA deferred pursuant to provisions included termine the specific risk-weighting fac- in the contract at the time funds are tor assigned to a position as described disbursed that provide for period(s) of in this paragraph (c) and paragraph (d) deferral that are not initiated based on of this section. The specific risk- changes in the creditworthiness of the weighting factor assigned to a borrower; or securitization position, or portion of a (vi) Is in default. position, as appropriate, is the larger (3) Parameter A is the attachment of the specific risk-weighting factor de- point for the position, which represents termined in accordance with this para- the threshold at which credit losses graph (c), paragraph (d) of this section, will first be allocated to the position. and a specific risk-weighting factor of Except as provided in 1.6 percent. § 3.210(b)(2)(vii)(D) for nth-to-default (1) When the detachment point, pa- credit derivatives, parameter A equals rameter D, for a securitization position the ratio of the current dollar amount is less than or equal to KA, the position of underlying exposures that are subor- must be assigned a specific risk- dinated to the position of the national weighting factor of 100 percent. bank or Federal savings association to (2) When the attachment point, pa- the current dollar amount of under- rameter A, for a securitization position lying exposures. Any reserve account is greater than or equal to KA, the na- funded by the accumulated cash flows tional bank or Federal savings associa- from the underlying exposures that is tion must calculate the specific risk- subordinated to the position that con- weighting factor in accordance with tains the national bank’s or Federal paragraph (d) of this section.

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(3) When A is less than KA and D is graphs (c)(3)(i) and (c)(3)(ii) of this sec- greater than KA, the specific risk- tion. For the purpose of this calcula- weighting factor is a weighted-average tion: of 1.00 and KSSFA calculated under para- (i) The weight assigned to 1.00 equals

§ 3.212 Market risk disclosures. most recent reporting amounts are no longer reflective of the national bank’s (a) Scope. A national bank or Federal or Federal savings association’s capital savings association must comply with adequacy and risk profile, then a brief this section unless it is a consolidated subsidiary of a bank holding company discussion of this change and its likely or a depository institution that is sub- impact must be provided as soon as ject to these requirements or of a non- practicable thereafter. Qualitative dis- U.S. banking organization that is sub- closures that typically do not change ject to comparable public disclosure re- each quarter may be disclosed annu- quirements in its home jurisdiction. A ally, provided any significant changes national bank or Federal savings asso- are disclosed in the interim. If a na- ciation must make timely public dis- tional bank or Federal savings associa- closures each calendar quarter. If a sig- tion believes that disclosure of specific nificant change occurs, such that the commercial or financial information

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would prejudice seriously its position riod and the VaR-based measure at pe- by making public certain information riod-end; that is either proprietary or confiden- (ii) The high, low, and mean stressed tial in nature, the national bank or VaR-based measures over the reporting Federal savings association is not re- period and the stressed VaR-based quired to disclose these specific items, measure at period-end; but must disclose more general infor- (iii) The high, low, and mean incre- mation about the subject matter of the mental risk capital requirements over requirement, together with the fact the reporting period and the incre- that, and the reason why, the specific mental risk capital requirement at pe- items of information have not been dis- riod-end; closed. The national bank’s or Federal (iv) The high, low, and mean com- savings association’s management may prehensive risk capital requirements provide all of the disclosures required over the reporting period and the com- by this section in one place on the na- prehensive risk capital requirement at tional bank’s or Federal savings asso- period-end, with the period-end re- ciation’s public Web site or may pro- quirement broken down into appro- vide the disclosures in more than one priate risk classifications (for example, public financial report or other regu- default risk, migration risk, correla- latory reports, provided that the nation risk); tional bank or Federal savings associa- (v) Separate measures for interest tion publicly provides a summary table rate risk, credit spread risk, equity specifically indicating the location(s) price risk, foreign exchange risk, and of all such disclosures. commodity price risk used to calculate (b) Disclosure policy. The national the VaR-based measure; and bank or Federal savings association (vi) A comparison of VaR-based esti- must have a formal disclosure policy mates with actual gains or losses expe- approved by the board of directors that rienced by the national bank or Fed- addresses the national bank’s or Fed- eral savings association, with an anal- eral savings association’s approach for ysis of important outliers. determining its market risk disclo- (2) In addition, the national bank or sures. The policy must address the as- Federal savings association must dis- sociated internal controls and disclo- close publicly the following informa- sure controls and procedures. The tion at least quarterly: board of directors and senior manage- (i) The aggregate amount of on-bal- ment must ensure that appropriate ance sheet and off-balance sheet verification of the disclosures takes securitization positions by exposure place and that effective internal con- type; and trols and disclosure controls and proce- (ii) The aggregate amount of correla- dures are maintained. One or more sen- tion trading positions. ior officers of the national bank or (d) Qualitative disclosures. For each Federal savings association must at- material portfolio of covered positions, test that the disclosures meet the re- the national bank or Federal savings quirements of this subpart, and the association must provide timely public board of directors and senior manage- disclosures of the following informa- ment are responsible for establishing tion at least annually after the end of and maintaining an effective internal the fourth calendar quarter, or more control structure over financial report- frequently in the event of material ing, including the disclosures required changes for each portfolio: by this section. (1) The composition of material port- (c) Quantitative disclosures. (1) For folios of covered positions; each material portfolio of covered posi- (2) The national bank’s or Federal tions, the national bank or Federal savings association’s valuation poli- savings association must provide time- cies, procedures, and methodologies for ly public disclosures of the following covered positions including, for information at least quarterly: securitization positions, the methods (i) The high, low, and mean VaR- and key assumptions used for valuing based measures over the reporting pe- such positions, any significant changes

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since the last reporting period, and the quacy assessment that is consistent impact of such change; with the soundness standard; (3) The characteristics of the internal (8) A description of the national models used for purposes of this sub- bank’s or Federal savings association’s part. For the incremental risk capital processes for monitoring changes in requirement and the comprehensive the credit and market risk of risk capital requirement, this must in- securitization positions, including how clude: those processes differ for (i) The approach used by the national resecuritization positions; and bank or Federal savings association to (9) A description of the national determine liquidity horizons; bank’s or Federal savings association’s (ii) The methodologies used to policy governing the use of credit risk achieve a capital assessment that is mitigation to mitigate the risks of consistent with the required soundness securitization and resecuritization po- standard; and sitions. (iii) The specific approaches used in the validation of these models; §§ 3.213–3.299 [Reserved] (4) A description of the approaches used for validating and evaluating the Subpart G—Transition Provisions accuracy of internal models and modeling processes for purposes of this subpart; SOURCE: 78 FR 62157, 62273, Oct. 11, 2013, un- (5) For each market risk category less otherwise noted. (that is, interest rate risk, credit § 3.300 Transitions. spread risk, equity price risk, foreign exchange risk, and commodity price (a) Capital conservation and counter- risk), a description of the stress tests cyclical capital buffer. (1) From January applied to the positions subject to the 1, 2014 through December 31, 2015, a na- factor; tional bank or Federal savings associa- (6) The results of the comparison of tion is not subject to limits on dis- the national bank’s or Federal savings tributions and discretionary bonus association’s internal estimates for payments under § 3.11 of subpart B of purposes of this subpart with actual this part notwithstanding the amount outcomes during a sample period not of its capital conservation buffer or used in model development; any applicable countercyclical capital (7) The soundness standard on which buffer amount. the national bank’s or Federal savings (2) Beginning January 1, 2016 through association’s internal capital adequacy December 31, 2018 a national bank’s or assessment under this subpart is based, Federal savings association’s max- including a description of the meth- imum payout ratio shall be determined odologies used to achieve a capital ade- as set forth in Table 1 to § 3.300.

TABLE 1 TO § 3.300

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

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

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TABLE 1 TO § 3.300—Continued

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

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

(b) [Reserved] criteria for tier 2 capital instruments (c) Non-qualifying capital instruments. under § 3.20(d). (1)–(3) [Reserved] (4) Depository institutions. (i) Begin- TABLE 9 TO § 3.300 ning on January 1, 2014, a depository Percentage of institution that is an advanced ap- non-qualifying capital instruments proaches national bank or Federal sav- Transition period (calendar year) includable in addi- ings association, and beginning on Jan- tional tier 1 or tier 2 capital uary 1, 2015, all other depository institutions, may include in regulatory cap- Calendar year 2014 ...... 80 ital debt or equity instruments issued Calendar year 2015 ...... 70 Calendar year 2016 ...... 60 prior to September 12, 2010 that do not Calendar year 2017 ...... 50 meet the criteria for additional tier 1 Calendar year 2018 ...... 40 or tier 2 capital instruments in § 3.20 Calendar year 2019 ...... 30 but that were included in tier 1 or tier Calendar year 2020 ...... 20 Calendar year 2021 ...... 10 2 capital respectively as of September Calendar year 2022 and thereafter ...... 0 12, 2010 (non-qualifying capital instruments issued prior to September 12, (d) [Reserved] 2010) up to the percentage of the out- (e) Prompt corrective action. For pur- standing principal amount of such non- poses of 12 CFR part 6, a national bank qualifying capital instruments as of or Federal savings association must January 1, 2014 in accordance with calculate its capital measures and tan- Table 9 to § 3.300. gible equity ratio in accordance with (ii) Table 9 to § 3.300 applies sepa- the transition provisions in this sec- rately to tier 1 and tier 2 non-quali- tion. fying capital instruments. (f) A national bank or Federal sav- (iii) The amount of non-qualifying ings association that is not an ad- capital instruments that cannot be in- vanced approaches national bank or cluded in additional tier 1 capital Federal savings association may apply under this section may be included in the treatment under §§ 3.21 and tier 2 capital without limitation, pro- 3.22(c)(2), (5), (6), and (d)(2) applicable vided that the instruments meet the to an advanced approaches national

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bank or Federal savings association fund contribution to a QCCP under ei- during the calendar quarter beginning ther method 1 under § 3.35(d)(3)(i) or January 1, 2020. During the quarter be- method 2 under § 3.35(d)(3)(ii), rather ginning January 1, 2020, a national than under § 3.133(d). bank or Federal savings association [78 FR 62157, 62273, Oct. 11, 2013, as amended that makes such an election must de- at 82 FR 55315, Nov. 21, 2017; 84 FR 35258, July duct 80 percent of the amount other- 22, 2019; 84 FR 61807, Nov. 13, 2019; 85 FR 4414, wise required to be deducted under Jan. 24, 2020] § 3.22(d)(2) and must apply a 100 percent risk weight to assets not deducted § 3.301 Current Expected Credit Losses under § 3.22(d)(2). In addition, during (CECL) transition. the quarter beginning January 1, 2020, (a) CECL transition provision. (1) Ex- a national bank or Federal savings as- cept as provided in paragraph (d) of sociation that makes such an election this section, a national bank or Fed- must include in its regulatory capital eral savings organization may elect to 20 percent of any minority interest use a CECL transition provision pursu- that exceeds the amount of minority ant to this section only if the national interest includable in regulatory cap- bank or Federal savings association ital under § 3.21 as it applies to an ad- records a reduction in retained earn- vanced approaches national bank or ings due to the adoption of CECL as of Federal savings association. A national the beginning of the fiscal year in bank or Federal savings association which the national bank or Federal that is not an advanced approaches na- savings association adopts CECL. tional bank or Federal savings associa- (2) Except as provided in paragraph tion must apply the treatment under (d) of this section, a national bank or §§ 3.21 and 3.22 applicable to a national Federal savings association that elects bank or Federal savings association to use the CECL transition provision that is not an advanced approaches na- must elect to use the CECL transition tional bank or Federal savings associa- provision in the first Call Report that tion beginning April 1, 2020, and there- includes CECL filed by the national after. bank or Federal savings association (g) SA–CCR. An advanced approaches after it adopts CECL. national bank or Federal savings asso- (3) A national bank or Federal sav- ciation may use CEM rather than SA– ings association that does not elect to CCR for purposes of §§ 3.34(a) and use the CECL transition provision as of 3.132(c) until January 1, 2022. An ad- the first Call Report that includes vanced approaches national bank or CECL filed as described in paragraph Federal savings association must pro- (a)(2) of this section may not elect to vide prior notice to the OCC if it de- use the CECL transition provision in cides to begin using SA–CCR before subsequent reporting periods. January 1, 2022. On January 1, 2022, and (b) Definitions. For purposes of this thereafter, an advanced approaches na- section, the following definitions tional bank or Federal savings associa- apply: tion must use SA–CCR for purposes of (1) Transition period means the three- §§ 3.34(a), 3.132(c), and 3.133(d). Once an year period beginning the first day of advanced approaches national bank or the fiscal year in which a national Federal savings association has begun bank or Federal savings association to use SA–CCR, the advanced ap- adopts CECL and reflects CECL in its proaches national bank or Federal sav- first Call Report filed after that date; ings association may not change to use or, for the 2020 CECL transition provi- CEM. sion under paragraph (d) of this sec- (h) Default fund contributions. Prior to tion, the five-year period beginning on January 1, 2022, a national bank or the earlier of the date a national bank Federal savings association that cal- or Federal savings association was re- culates the exposure amounts of its de- quired to adopt CECL for accounting rivative contracts under the standard- purposes under GAAP (as in effect Jan- ized approach for counterparty credit uary 1, 2020), or the first day of the fis- risk in § 3.132(c) may calculate the risk- cal year that begins during the 2020 weighted asset amount for a default calendar year in which the national

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bank or Federal savings association (a)(1) of this section and except as profiles regulatory reports that include vided in paragraph (d) of this section, a CECL. national bank or Federal savings asso- (2) CECL transitional amount means ciation must make the following ad- the difference, net of any DTAs, in the justments in its calculation of regu- amount of a national bank’s or Federal latory capital ratios: savings association’s retained earnings (i) Increase retained earnings by sev- as of the beginning of the fiscal year in enty-five percent of its CECL transi- which the national bank or Federal tional amount during the first year of savings association adopts CECL from the transition period, increase retained the amount of the national bank’s or earnings by fifty percent of its CECL Federal savings association’s retained transitional amount during the second earnings as of the closing of the fiscal year of the transition period, and in- year-end immediately prior to the na- crease retained earnings by twenty-five tional bank’s or Federal savings asso- percent of its CECL transitional ciation’s adoption of CECL. amount during the third year of the (3) DTA transitional amount means the transition period; difference in the amount of a national (ii) Decrease amounts of DTAs aris- bank’s or Federal savings association’s ing from temporary differences by sev- DTAs arising from temporary dif- enty-five percent of its DTA transi- ferences as of the beginning of the fis- tional amount during the first year of cal year in which the national bank or the transition period, decrease Federal savings association adopts amounts of DTAs arising from tem- CECL from the amount of the national porary differences by fifty percent of bank’s or Federal savings association’s its DTA transitional amount during DTAs arising from temporary dif- the second year of the transition pe- ferences as of the closing of the fiscal riod, and decrease amounts of DTAs year-end immediately prior to the na- arising from temporary differences by tional bank’s or Federal savings asso- twenty-five percent of its DTA transi- ciation’s adoption of CECL. tional amount during the third year of (4) AACL transitional amount means the transition period; the difference in the amount of a na- (iii) Decrease amounts of AACL by tional bank’s or Federal savings asso- seventy-five percent of its AACL tran- ciation’s AACL as of the beginning of sitional amount during the first year of the fiscal year in which the national the transition period, decrease bank or Federal savings association amounts of AACL by fifty percent of adopts CECL and the amount of the na- its AACL transitional amount during tional bank’s or Federal savings asso- the second year of the transition pe- ciation’s ALLL as of the closing of the riod, and decrease amounts of AACL by fiscal year-end immediately prior to twenty-five percent of its AACL transi- the national bank’s or Federal savings tional amount during the third year of association’s adoption of CECL. the transition period; and (5) Eligible credit reserves transitional (iv) Increase average total consoli- amount means the difference in the dated assets as reported on the Call Re- amount of a national bank’s or Federal port for purposes of the leverage ratio savings association’s eligible credit re- by seventy-five percent of its CECL serves as of the beginning of the fiscal transitional amount during the first year in which the national bank or year of the transition period, increase Federal savings association adopts average total consolidated assets as re- CECL from the amount of the national ported on the Call Report for purposes bank’s or Federal savings association’s of the leverage ratio by fifty percent of eligible credit reserves as of the closing its CECL transitional amount during of the fiscal year-end immediately the second year of the transition pe- prior to the national bank’s or Federal riod, and increase average total con- savings association’s adoption of solidated assets as reported on the Call CECL. Report for purposes of the leverage (c) Calculation of the three-year CECL ratio by twenty-five percent of its transition provision. (1) For purposes of CECL transitional amount during the the election described in paragraph third year of the transition period.

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(2) For purposes of the election de- poses of its Call Report. A national scribed in paragraph (a)(1) of this sec- bank or Federal savings association tion, an advanced approaches or Cat- may use the transition provision in egory III national bank or Federal sav- this paragraph (d) if it has a positive ings association must make the fol- modified CECL transitional amount lowing additional adjustments to its during any quarter ending in 2020, and calculation of its applicable regulatory makes the election in the Call Report capital ratios: filed for the same quarter. A national (i) Increase total leverage exposure bank or Federal savings association for purposes of the supplementary le- that does not calculate a positive verage ratio by seventy-five percent of modified CECL transitional amount in its CECL transitional amount during any quarter is not required to apply the first year of the transition period, the adjustments in its calculation of increase total leverage exposure for regulatory capital ratios in paragraph purposes of the supplementary leverage (d)(2) of this section in that quarter. ratio by fifty percent of its CECL tran- (1) Definitions. For purposes of the sitional amount during the second year 2020 CECL transition provision calcula- of the transition period, and increase tion in paragraph (d)(2) of this section, total leverage exposure for purposes of the following definitions apply: the supplementary leverage ratio by (i) Modified CECL transitional amount twenty-five percent of its CECL transi- means: tional amount during the third year of (A) During the first two years of the the transition period; and transition period, the difference be- (ii) An advanced approaches national tween AACL as reported in the most bank or Federal savings association recent Call Report and the AACL as of that has completed the parallel run the beginning of the fiscal year in process and that has received notifica- which the national bank or Federal tion from the OCC pursuant to § 3.121(d) savings association adopts CECL, mul- must decrease amounts of eligible cred- tiplied by 0.25, plus the CECL transi- it reserves by seventy-five percent of its eligible credit reserves transitional tional amount; and amount during the first year of the (B) During the last three years of the transition period, decrease amounts of transition period, the difference be- eligible credit reserves by fifty percent tween AACL as reported in the Call Re- of its eligible credit reserves transi- port at the end of the second year of tional amount during the second year the transition period and the AACL as of the transition provision, and de- of the beginning of the fiscal year in crease amounts of eligible credit re- which the national bank or Federal serves by twenty-five percent of its eli- savings association adopts CECL, mul- gible credit reserves transitional tiplied by 0.25, plus the CECL transi- amount during the third year of the tional amount. transition period. (ii) Modified AACL transitional amount (d) 2020 CECL transition provision. means: Notwithstanding paragraph (a) of this (A) During the first two years of the section, a national bank or Federal transition period, the difference be- savings association that adopts CECL tween AACL as reported in the most for accounting purposes under GAAP recent Call Report and the AACL as of as of the first day of a fiscal year that the beginning of the fiscal year in begins during the 2020 calendar year which the national bank or Federal may elect to use the transitional savings association adopts CECL, mul- amounts and modified transitional tiplied by 0.25, plus the AACL transi- amounts in paragraph (d)(1) of this sec- tional amount; and tion with the 2020 CECL transition pro- (B) During the last three years of the vision calculation in paragraph (d)(2) of transition period, the difference be- this section to adjust its calculation of tween AACL as reported in the Call Re- regulatory capital ratios during each port at the end of the second year of quarter of the transition period in the transition period and the AACL as which a national bank or Federal sav- of the beginning of the fiscal year in ings association uses CECL for pur- which the national bank or Federal

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savings association adopts CECL, mul- transitional amount during the second tiplied by 0.25, plus the AACL transi- year of the transition period, decrease tional amount. amounts of AACL by seventy-five per- (2) Calculation of 2020 CECL transition cent of its modified AACL transitional provision. (i) A national bank or Fed- amount during the third year of the eral savings association that has elect- transition period, decrease amounts of ed the 2020 CECL transition provision AACL by fifty percent of its modified described in this paragraph (d) may AACL transitional amount during the make the following adjustments in its fourth year of the transition period, calculation of regulatory capital ra- and decrease amounts of AACL by tios: twenty-five percent of its modified (A) Increase retained earnings by AACL transitional amount during the one-hundred percent of its modified fifth year of the transition period; and CECL transitional amount during the (D) Increase average total consoli- first year of the transition period, in- dated assets as reported on the Call Re- crease retained earnings by one hun- port for purposes of the leverage ratio dred percent of its modified CECL tran- by one-hundred percent of its modified sitional amount during the second year CECL transitional amount during the of the transition period, increase re- first year of the transition period, in- tained earnings by seventy-five percent crease average total consolidated as- of its modified CECL transitional sets as reported on the Call Report for amount during the third year of the purposes of the leverage ratio by one transition period, increase retained hundred percent of its modified CECL earnings by fifty percent of its modi- transitional amount during the second fied CECL transitional amount during year of the transition period, increase the fourth year of the transition pe- average total consolidated assets as re- riod, and increase retained earnings by ported on the Call Report for purposes twenty-five percent of its modified of the leverage ratio by seventy-five CECL transitional amount during the percent of its modified CECL transi- fifth year of the transition period; tional amount during the third year of (B) Decrease amounts of DTAs aris- the transition period, increase average ing from temporary differences by one- total consolidated assets as reported on hundred percent of its DTA transi- the Call Report for purposes of the le- tional amount during the first year of verage ratio by fifty percent of its the transition period, decrease modified CECL transitional amount amounts of DTAs arising from tem- during the fourth year of the transition porary differences by one hundred per- period, and increase average total con- cent of its DTA transitional amount solidated assets as reported on the Call during the second year of the transi- Report for purposes of the leverage tion period, decrease amounts of DTAs ratio by twenty-five percent of its arising from temporary differences by modified CECL transitional amount seventy-five percent of its DTA transi- during the fifth year of the transition tional amount during the third year of period. the transition period, decrease (ii) An advanced approaches or Cat- amounts of DTAs arising from tem- egory III national bank or Federal sav- porary differences by fifty percent of ings association that has elected the its DTA transitional amount during 2020 CECL transition provision de- the fourth year of the transition pe- scribed in this paragraph (d) may make riod, and decrease amounts of DTAs the following additional adjustments arising from temporary differences by to its calculation of its applicable reg- twenty-five percent of its DTA transi- ulatory capital ratios: tional amount during the fifth year of (A) Increase total leverage exposure the transition period; for purposes of the supplementary le- (C) Decrease amounts of AACL by verage ratio by one-hundred percent of one-hundred percent of its modified its modified CECL transitional amount AACL transitional amount during the during the first year of the transition first year of the transition period, de- period, increase total leverage expo- crease amounts of AACL by one hun- sure for purposes of the supplementary dred percent of its modified AACL leverage ratio by one hundred percent

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of its modified CECL transitional amount (or modified CECL transitional amount during the second year of the amount) must decrease its CECL tran- transition period, increase total lever- sitional amount (or modified CECL age exposure for purposes of the supple- transitional amount) used in paragraph mentary leverage ratio by seventy-five (c) of this section by the full amount of percent of its modified CECL transi- its DTA transitional amount. tional amount during the third year of (f) Business combinations. Notwith- the transition period, increase total le- standing any other requirement in this verage exposure for purposes of the section, for purposes of this paragraph supplementary leverage ratio by fifty (f), in the event of a business combina- percent of its modified CECL transition involving a national bank or Fed- tional amount during the fourth year eral savings association where one or of the transition period, and increase both of the national banks or Federal total leverage exposure for purposes of savings associations have elected the the supplementary leverage ratio by treatment described in this section: twenty-five percent of its modified (1) If the acquirer national bank or CECL transitional amount during the Federal savings association (as deter- fifth year of the transition period; and mined under GAAP) elected the treat- (B) An advanced approaches national ment described in this section, the bank or Federal savings association acquirer national bank or Federal sav- that has completed the parallel run ings association must continue to use process and that has received notifica- the transitional amounts (unaffected tion from the OCC pursuant to § 3.121(d) by the business combination) that it must decrease amounts of eligible cred- calculated as of the date that it adopt- it reserves by one-hundred percent of ed CECL through the end of its transi- its eligible credit reserves transitional tion period. amount during the first year of the (2) If the acquired insured depository transition period, decrease amounts of institution (as determined under eligible credit reserves by one hundred GAAP) elected the treatment described percent of its eligible credit reserves in this section, any transitional transitional amount during the second amount of the acquired insured deposi- year of the transition period, decrease tory institution does not transfer to amounts of eligible credit reserves by the resulting national bank or Federal seventy-five percent of its eligible savings association. credit reserves transitional amount during the third year of the transition [85 FR 61586, Sept. 30, 2020] period, decrease amounts of eligible § 3.302 Exposures related the Money credit reserves by fifty percent of its Market Mutual Fund Liquidity Fa- eligible credit reserves transitional cility. amount during the fourth year of the Notwithstanding any other section of transition period, and decrease this part, a national bank or federal amounts of eligible credit reserves by savings association may exclude expo- twenty-five percent of its eligible cred- sures acquired pursuant to a non-re- it reserves transitional amount during course loan that is provided as part of the fifth year of the transition period. the Money Market Mutual Fund Li- (e) Eligible credit reserves shortfall. An quidity Facility, announced by the advanced approaches national bank or Board on March 18, 2020, from total le- Federal savings association that has verage exposure, average total consoli- completed the parallel run process and dated assets, advanced approaches that has received notification from the total risk-weighted assets, and stand- OCC pursuant to § 3.121(d), and whose ardized total risk-weighted assets, as amount of expected credit loss exceed- applicable. For the purpose of this pro- ed its eligible credit reserves imme- vision, a national bank’s or federal sav- diately prior to the adoption of CECL, ings association’s liability under the and that has an increase in common facility must be reduced by the pur- equity tier 1 capital as of the beginning chase price of the assets acquired with of the fiscal year in which it adopts funds advanced from the facility. CECL after including the first year portion of the CECL transitional [85 FR 16236, Mar. 23, 2020]

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§ 3.303 Temporary changes to the com- this section as provided in paragraph munity bank leverage ratio frame- (c) of this section, a qualifying commu- work. nity banking organization, as defined (a)(1) A national bank or Federal sav- in § 3.12(a)(2), is subject to the fol- ings association that is not an ad- lowing: vanced approaches national bank or (1) Through December 31, 2020: Federal savings association and that (i) A national bank or Federal sav- meets all the criteria to be a qualifying ings association that is not an ad- community banking organization vanced approaches national bank or under § 3.12(a)(2) but for § 3.12(a)(2)(i) is Federal savings association and that a qualifying community banking orga- meets all the criteria to be a qualifying nization if it has a leverage ratio equal community banking organization to or greater than 8 percent. under § 3.12(a)(2) but for § 3.12(a)(2)(i) is (2) Notwithstanding § 3.12(a)(1), a a qualifying banking organization if it qualifying community banking organi- has a leverage ratio greater than 8 per- zation that has made an election to use cent. the community bank leverage ratio framework under § 3.12(a)(3) shall be (ii) Notwithstanding § 3.12(a)(1), a considered to have met the minimum qualifying community banking organi- capital requirements under § 3.10, the zation that has made an election to use capital ratio requirements for the well the community bank leverage ratio capitalized capital category under framework under § 3.12(a)(3) shall be § 6.4(b)(1) of this chapter, and any other considered to have met the minimum capital or leverage requirements to capital requirements under § 3.10, the which the qualifying community bank- capital ratio requirements for the well ing organization is subject, if it has a capitalized capital category under leverage ratio equal to or greater than § 6.4(b)(1) of this chapter, and any other 8 percent. capital or leverage requirements to (b) Notwithstanding § 3.12(c)(6) and which the qualifying community bank- subject to § 3.12(c)(5), a qualifying com- ing organization is subject, if it has a munity banking organization that has leverage ratio greater than 8 percent. a leverage ratio of 7 percent or greater (iii) Notwithstanding § 3.12(c)(6) and has the grace period described in subject to § 3.12(c)(5), a qualifying com- § 3.12(c)(1) through (4). A national bank munity banking organization that has or Federal savings association that has a leverage ratio of greater than 7 per- a leverage ratio of less than 7 percent cent has the grace period described in does not have a grace period and must § 3.12(c)(1) through (4). A national bank comply with the minimum capital re- or Federal savings association that has quirements under § 3.10(a)(1) and must a leverage ratio of 7 percent or less report the required capital measures does not have a grace period and must under § 3.10(a)(1) for the quarter in comply with the minimum capital re- which it reports a leverage ratio of less quirements under § 3.10(a)(1) and must than 7 percent. report the required capital measures (c) Pursuant to section 4012 of the under § 3.10(a)(1) for the quarter in Coronavirus Aid, Relief, and Economic which it reports a leverage ratio of 7 Security Act, the requirements pro- percent or less. vided under paragraphs (a) and (b) of this section are effective during the pe- (2) From January 1, 2021, through De- riod beginning on April 23, 2020 and cember 31, 2021: ending on the sooner of: (i) A national bank or Federal sav- (1) The termination date of the na- ings association that is not an ad- tional emergency concerning the novel vanced approaches national bank or coronavirus disease outbreak declared Federal savings association and that by the President on March 13, 2020, meets all the criteria to be a qualifying under the National Emergencies Act community banking organization (50 U.S.C. 1601 et seq.); or under § 3.12(a)(2) but for § 3.12(a)(2)(i) is (2) December 31, 2020. a qualifying banking organization if it (d) Upon the termination of the re- has a leverage ratio greater than 8.5 quirements in paragraphs (a) and (b) of percent.

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(ii) Notwithstanding § 3.12(a)(1), a the reporting quarter in which the na- qualifying community banking organi- tional bank or Federal savings associa- zation that has made an election to use tion filed an opt-in notice through the the community bank leverage ratio termination date specified in para- framework under § 3.12(a)(3) shall be graph (d) of this section. considered to have met the minimum (d) Termination of exclusions. This sec- capital requirements under § 3.10, the tion shall cease to be effective after capital ratio requirements for the well the reporting period that ends March capitalized capital category under 31, 2021. § 6.4(b)(1) of this chapter, and any other (e) Custody bank. A custody bank capital or leverage requirements to must reduce the amount in which the qualifying community bank- § 3.10(c)(4)(ii)(J)(1) (to no less than zero) ing organization is subject, if it has a by any amount excluded under para- leverage ratio greater than 8.5 percent. graph (a)(2) of this section. (iii) Notwithstanding § 3.12(c)(6) and (f) Disclosure. Notwithstanding Table subject to § 3.12(c)(5), a qualifying com- 13 to § 3.173, a national bank or Federal munity banking organization that has savings association that is required to a leverage ratio of greater than 7.5 per- make the disclosures pursuant to § 3.173 cent has the grace period described in must exclude the items excluded pursu- § 3.12(c)(1) through (4). A national bank ant to paragraph (a) of this section or Federal savings association that has from Table 13 to § 3.173. a leverage ratio of 7.5 percent or less (g) OCC approval for distributions. does not have a grace period and must During the calendar quarter beginning comply with the minimum capital re- on July 1, 2020, and until March 31, quirements under § 3.10(a)(1) and must 2021, no national bank or Federal sav- report the required capital measures ings association that has opted in to under § 3.10(a)(1) for the quarter in the relief provided under paragraph (a) which it reports a leverage ratio of 7.5 of this section may make a distribu- percent or less. tion, or create an obligation to make such a distribution, without prior OCC [85 FR 22928, Apr. 23, 2020, as amended at 85 FR 22937, Apr. 23, 2020] approval. When reviewing a request under this paragraph (g), the OCC will § 3.304 Temporary exclusions from consider all relevant factors, including total leverage exposure. whether the distribution would be con- (a) In general. Subject to paragraphs trary to the safety and soundness of (b) through (g) of this section, and not- the national bank or Federal savings withstanding any other requirement in association; the nature, purpose, and this part, a national bank or Federal extent of the request; and the par- savings association, when calculating ticular circumstances giving rise to the on-balance sheet assets as of each day request. of a reporting quarter for purposes of [85 FR 32988, June 1, 2020] determining the national bank’s or Federal savings association’s total le- § 3.305 Exposures related to the Pay- verage exposure under § 3.10(c)(4), may check Protection Program Lending exclude the balance sheet carrying Facility. value of the following items: Notwithstanding any other section of (1) U.S. Treasury securities; and this part, a national bank or Federal (2) Funds on deposit at a Federal Re- savings association may exclude expo- serve Bank. sures pledged as collateral for a non-re- (b) Opt-in period. Before applying the course loan that is provided as part of relief provided in paragraph (a) of this the Paycheck Protection Program section, a national bank or Federal Lending Facility, announced by the savings association must first notify Federal Reserve Board on April 7, 2020, the OCC before July 1, 2020. from total leverage exposure, average (c) Calculation of relief. When calcu- total consolidated assets, advanced ap- lating on-balance sheet assets as of proaches total risk-weighted assets, each day of a reporting quarter, the re- and standardized total risk-weighted lief provided in paragraph (a) of this assets, as applicable. For the purpose section applies from the beginning of of this section, a national bank’s or

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Federal savings association’s liability tions of credit, certain risks arising under the facility must be reduced by from nontraditional activities, or man- the principal amount of the loans agement’s overall inability to monitor pledged as collateral for funds ad- and control financial and operating vanced under the facility. risks presented by concentrations of [85 FR 20393, Apr. 13, 2020] credit and nontraditional activities; (e) A national bank or Federal savings association with significant expo- Subpart H—Establishment of Min- sure to declines in the economic value imum Capital Ratios for an In- of its capital due to changes in interest dividual Bank or Individual rates; Federal Savings Association (f) A national bank or Federal savings association with significant expo- SOURCE: 78 FR 62269, Oct. 11, 2013, unless sure due to fiduciary or operational otherwise noted. risk; (g) A national bank or Federal sav- § 3.401 Purpose and scope. ings association exposed to a high de- The rules and procedures specified in gree of asset depreciation, or a low this subpart are applicable to a pro- level of liquid assets in relation to ceeding to establish required minimum short term liabilities; capital ratios that would otherwise be (h) A national bank or Federal sav- applicable to a national bank or Fed- ings association exposed to a high vol- eral savings association under subpart ume of, or particularly severe, problem B of this part. The OCC is authorized loans; under 12 U.S.C. 1464(s)(2) and 3907(a)(2) (i) A national bank or Federal sav- to establish such minimum capital re- ings association that is growing rap- quirements for a national bank or Fed- idly, either internally or through ac- eral savings association as the OCC, in quisitions; or its discretion, deems appropriate in (j) A national bank or Federal sav- light of the particular circumstances ings association that may be adversely at that national bank or Federal sav- affected by the activities or condition ings association. Proceedings under of its holding company, affiliate(s), or this subpart also may be initiated to other persons or institutions, including require a national bank or Federal sav- chain banking organizations, with ings association having capital ratios which it has significant business rela- above those set forth in subpart B of tionships. this part, or other legal authority to continue to maintain those higher ra- § 3.403 Standards for determination of tios. appropriate individual minimum capital ratios. § 3.402 Applicability. The appropriate minimum capital ra- The OCC may require higher min- tios for an individual national bank or imum capital ratios for an individual Federal savings association cannot be national bank or Federal savings asso- determined solely through the applica- ciation in view of its circumstances. tion of a rigid mathematical formula For example, higher capital ratios may or wholly objective criteria. The deci- be appropriate for: sion is necessarily based in part on sub- (a) A newly chartered national bank jective judgment grounded in agency or Federal savings association; expertise. The factors to be considered (b) A national bank or Federal sav- in the determination will vary in each ings association receiving special su- case and may include, for example: pervisory attention; (a) The conditions or circumstances (c) A national bank or Federal sav- leading to the OCC’s determination ings association that has, or is ex- that higher minimum capital ratios are pected to have, losses resulting in cap- appropriate or necessary for the na- ital inadequacy; tional bank or Federal savings associa- (d) A national bank or Federal sav- tion; ings association with significant expo- (b) The exigency of those cir- sure due to the risks from concentra- cumstances or potential problems;

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(c) The overall condition, manage- specified by the OCC shall constitute a ment strength, and future prospects of waiver of any objections to the pro- the national bank or Federal savings posed minimum capital ratios or the association and, if applicable, its hold- deadline for their achievement. ing company and/or affiliate(s); (c) Decision. After the close of the na- (d) The national bank’s or Federal tional bank’s or Federal savings asso- savings association’s liquidity, capital, ciation’s response period, the OCC will risk asset and other ratios compared to decide, based on a review of the na- the ratios of its peer group; and tional bank’s or Federal savings asso- (e) The views of the national bank’s ciation’s response and other informa- or Federal savings association’s direc- tion concerning the national bank or tors and senior management. Federal savings association, whether individual minimum capital ratios § 3.404 Procedures. should be established for the national (a) Notice. When the OCC determines bank or Federal savings association that minimum capital ratios above and, if so, the ratios and the date the those set forth in subpart B of this part requirements will become effective. or other legal authority are necessary The national bank or Federal savings or appropriate for a particular national association will be notified of the deci- bank or Federal savings association, sion in writing. The notice will include the OCC will notify the national bank an explanation of the decision, except or Federal savings association in writ- for a decision not to establish indi- ing of the proposed minimum capital vidual minimum capital requirements ratios and the date by which they for the national bank or Federal sav- should be reached (if applicable) and ings association. will provide an explanation of why the (d) Submission of plan. The decision ratios proposed are considered nec- may require the national bank or Fed- essary or appropriate for the national eral savings association to develop and bank or Federal savings association. submit to the OCC, within a time pe- (b) Response. (1) The national bank or riod specified, an acceptable plan to Federal savings association may re- reach the minimum capital ratios es- spond to any or all of the items in the tablished for the national bank or Fed- notice. The response should include eral savings association by the date re- any matters which the national bank quired. or Federal savings association would (e) Change in circumstances. If, after have the OCC consider in deciding the OCC’s decision in paragraph (c) of whether individual minimum capital this section, there is a change in the ratios should be established for the na- circumstances affecting the national tional bank or Federal savings associa- bank’s or Federal savings association’s tion, what those capital ratios should capital adequacy or its ability to reach be, and, if applicable, when they should the required minimum capital ratios be achieved. The response must be in by the specified date, the national writing and delivered to the designated bank or Federal savings association OCC official within 30 days after the may propose to the OCC, or the OCC date on which the national bank or may propose to the national bank or Federal savings association received Federal savings association, a change the notice. The OCC may shorten the in the minimum capital ratios for the time period when, in the opinion of the national bank or Federal savings asso- OCC, the condition of the national ciation, the date when the minimums bank or Federal savings association so must be achieved, or the national requires, provided that the national bank’s or Federal savings association’s bank or Federal savings association is plan (if applicable). The OCC may de- informed promptly of the new time pe- cline to consider proposals that are not riod, or with the consent of the na- based on a significant change in cir- tional bank or Federal savings associa- cumstances or are repetitive or frivo- tion. In its discretion, the OCC may ex- lous. Pending a decision on reconsider- tend the time period for good cause. ation, the OCC’s original decision and (2) Failure to respond within 30 days any plan required under that decision or such other time period as may be shall continue in full force and effect.

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§ 3.405 Relation to other actions. tive under 12 U.S.C. 3907(b)(2) or 12 In lieu of, or in addition to, the pro- U.S.C. 1464(s), as appropriate. A direc- cedures in this subpart, the required tive is an order issued to a national minimum capital ratios for a national bank or Federal savings association bank or Federal savings association that does not have or maintain capital may be established or revised through at or above the minimum ratios set a written agreement or cease and de- forth in subpart B of this part, or es- sist proceedings under 12 U.S.C. 1818 (b) tablished for the national bank or Fed- or (c) (12 CFR 19.0 through 19.21 for na- eral savings association under subpart tional banks and 12 CFR part 109 for H of this part, by a written agreement Federal savings associations) or as a under 12 U.S.C. 1818(b), or as a condi- condition for approval of an application for approval of an application. A tion. directive may order the national bank or Federal savings association to: Subpart I—Enforcement (1) Achieve the minimum capital ratios applicable to it by a specified date; SOURCE: 78 FR 62269, Oct. 11, 2013, unless (2) Adhere to a previously submitted otherwise noted. plan to achieve the applicable capital ratios; § 3.501 Remedies. (3) Submit and adhere to a plan ac- A national bank or Federal savings ceptable to the OCC describing the association that does not have or main- means and time schedule by which the tain the minimum capital ratios appli- national bank or Federal savings asso- cable to it, whether required in subpart ciation shall achieve the applicable B of this part, in a decision pursuant to subpart H of this part, in a written capital ratios; agreement or temporary or final order (4) Take other action, such as reduc- under 12 U.S.C. 1818 (b) or (c), or in a tion of assets or the rate of growth of condition for approval of an applica- assets, or restrictions on the payment tion, or a national bank or Federal sav- of dividends, to achieve the applicable ings association that has failed to sub- capital ratios; or mit or comply with an acceptable plan (5) A combination of any of these or to attain those ratios, will be subject similar actions. to such administrative action or sanc- (b) A directive issued under this rule, tions as the OCC considers appropriate. including a plan submitted under a di- These sanctions may include the rective, is enforceable under the provi- issuance of a Directive pursuant to sions of 12 U.S.C. 1818(i) in the same subpart J of this part or other enforce- manner and to the same extent as an ment action, assessment of civil money effective and outstanding cease and de- penalties, and/or the denial, condi- sist order issued pursuant to 12 U.S.C. tioning, or revocation of applications. 1818(b) that has become final. Violation A national bank’s or Federal savings of a directive may result in assessment association’s failure to achieve or of civil money penalties in accordance maintain minimum capital ratios in with 12 U.S.C. 3909(d). subpart B of this part may also be the basis for an action by the Federal De- [78 FR 62269, Oct. 11, 2013, as amended at 85 posit Insurance Corporation to termi- FR 42640, July 14, 2020] nate Federal deposit insurance. See 12 CFR part 308, subpart F. § 3.602 Notice of intent to issue a directive. Subpart J—Issuance of a Directive The OCC will notify a national bank or Federal savings association in writ-

SOURCE: 78 FR 62269, Oct. 11, 2013, unless ing of its intention to issue a directive. otherwise noted. The notice will state: (a) Reasons for issuance of the direc- § 3.601 Purpose and scope. tive; and (a) This subpart is applicable to pro- (b) The proposed contents of the di- ceedings by the OCC to issue a direc- rective.

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§ 3.603 Response to notice. originally proposed or in modified form. (a) A national bank or Federal savings association may respond to the § 3.605 Issuance of a directive. notice by stating why a directive should not be issued and/or by pro- (a) A directive will be served by delivery to the national bank or Federal posing alternative contents for the di- savings association. It will include or rective. The response should include be accompanied by a statement of rea- any matters which the national bank sons for its issuance. or Federal savings association would (b) A directive is effective imme- have the OCC consider in deciding diately upon its receipt by the national whether to issue a directive and/or bank or Federal savings association, or what the contents of the directive upon such later date as may be speci- should be. The response may include a fied therein, and shall remain effective plan for achieving the minimum cap- and enforceable until it is stayed, ital ratios applicable to the national modified, or terminated by the OCC. bank or Federal savings association. The response must be in writing and § 3.606 Change in circumstances. delivered to the designated OCC official Upon a change in circumstances, a within 30 days after the date on which national bank or Federal savings asso- the national bank or Federal savings ciation may request the OCC to recon- association received the notice. The sider the terms of its directive or may OCC may shorten the 30-day time pe- propose changes in the plan to achieve riod: the national bank’s or Federal savings (1) When, in the opinion of the OCC, association’s applicable minimum cap- the condition of the national bank or ital ratios. The OCC also may take Federal savings association so requires, such action on its own motion. The provided that the national bank or OCC may decline to consider requests Federal savings association shall be in- or proposals that are not based on a formed promptly of the new time pe- significant change in circumstances or riod; are repetitive or frivolous. Pending a (2) With the consent of the national decision on reconsideration, the direc- bank or Federal savings association; or tive and plan shall continue in full (3) When the national bank or Fed- force and effect. eral savings association already has advised the OCC that it cannot or will § 3.607 Relation to other administra- not achieve its applicable minimum tive actions. capital ratios. A directive may be issued in addition (b) In its discretion, the OCC may ex- to, or in lieu of, any other action au- tend the time period for good cause. thorized by law, including cease and (c) Failure to respond within 30 days desist proceedings, civil money pen- or such other time period as may be alties, or the conditioning or denial of specified by the OCC shall constitute a applications. The OCC also may, in its waiver of any objections to the pro- discretion, take any action authorized posed directive. by law, in lieu of a directive, in response to a national bank’s or Federal § 3.604 Decision. savings association’s failure to achieve After the closing date of the national or maintain the applicable minimum bank’s or Federal savings association’s capital ratios. response period, or receipt of the national bank’s or Federal savings asso- Subpart K—Interpretations ciation’s response, if earlier, the OCC will consider the national bank’s or SOURCE: 78 FR 62272, Oct. 11, 2013, unless Federal savings association’s response, otherwise noted. and may seek additional information or clarification of the response. There- § 3.701 Capital and surplus. after, the OCC will determine whether For purposes of determining statu- or not to issue a directive, and if one is tory limits that are based on the to be issued, whether it should be as amount of a national bank’s capital

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and/or surplus, the provisions of this (i) Amounts paid in in excess of the section are to be used, rather than the par or stated value of capital stock; definitions of capital contained in sub- (ii) Amounts contributed to the na- parts A through J of this part. tional bank other than for capital (a) Capital. The term capital as used stock; in provisions of law relating to the cap- (iii) Amounts transferred from undi- ital of national banks shall include the vided profits pursuant to 12 U.S.C. 60; amount of common stock outstanding and and unimpaired plus the amount of per- (iv) Other amounts transferred from petual preferred stock outstanding and undivided profits. unimpaired. (3) Intangible assets means those pur- (b) Capital Stock. The term capital chased assets that are to be reported as stock as used in provisions of law relat- intangible assets in accordance with ing to the capital stock of national the Instructions—Consolidated Reports of banks, other than 12 U.S.C. 101, 177, and Condition and Income (Call Report). 178 shall have the same meaning as the (4) Limited life preferred stock means term capital set forth in paragraph (a) preferred stock which has a maturity of this section. or which may be redeemed at the op- (c) Surplus. The term surplus as used tion of the holder. in provisions of law relating to the sur- (5) Mandatory convertible debt means plus of national banks means the sum subordinated debt instruments which of paragraphs (c)(1), (2), (3), and (4) of unqualifiedly require the issuer to ex- this section: change either common or perpetual preferred stock for such instruments (1) Capital surplus; undivided profits; by a date at or before the maturity of reserves for contingencies and other the instrument. The maturity of these capital reserves (excluding accrued instruments must be 12 years or less. In dividends on perpetual and limited life addition, the instrument must meet preferred stock); net worth certificates the requirements of paragraphs (f)(1)(i) issued pursuant to 12 U.S.C. 1823(i); mi- through (v) of this section for subordi- nority interests in consolidated sub- nated notes and debentures or other re- sidiaries; and allowances for loan and quirements published by the OCC. lease losses; minus intangible assets; (6) Minority interest in consolidated (2) Mortgage servicing assets; subsidiaries means the portion of equity (3) Mandatory convertible debt to the capital accounts of all consolidated extent of 20 percent of the sum of para- subsidiaries of the national bank that graphs (a) and (c) (1) and (2) of this sec- is allocated to minority shareholders of tion; such subsidiaries. (4) Other mandatory convertible (7) Mortgage servicing assets means the debt, limited life preferred stock and national bank-owned rights to service subordinated notes and debentures to for a fee mortgage loans that are the extent set forth in paragraph (f)(2) owned by others. of this section. (8) Perpetual preferred stock means (d) Unimpaired surplus fund. The term preferred stock that does not have a unimpaired surplus fund as used in pro- stated maturity date and cannot be re- visions of law relating to the deemed at the option of the holder. unimpaired surplus fund of national (f) Requirements and restrictions: Lim- banks shall have the same meaning as ited life preferred stock, mandatory con- the term surplus set forth in paragraph vertible debt, and other subordinated (c) of this section. debt—(1) Requirements. Issues of limited (e) Definitions. (1) Allowance for loan life preferred stock and subordinated and lease losses means the balance of notes and debentures (except manda- the valuation reserve on December 31, tory convertible debt) shall have origi- 1968, plus additions to the reserve nal weighted average maturities of at charged to operations since that date, least five years to be included in the less losses charged against the allow- definition of surplus. In addition, a sub- ance net of recoveries. ordinated note or debenture must also: (2) Capital surplus means the total of (i) Be subordinated to the claims of those accounts reflecting: depositors;

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(ii) State on the instrument that it is tions, may continue to be included as not a deposit and is not insured by the surplus up to 25 percent of the sum of FDIC; paragraphs (a) and (c)(1) of this section. (iii) Be unsecured; EFFECTIVE DATE NOTE: At 85 FR 80434, Dec. (iv) Be ineligible as collateral for a 11, 2020, § 3.701(f)(1)(vi) was amended by re- loan by the issuing national bank; moving the phrase ‘‘12 CFR 5.3(g)’’ and add- (v) Provide that once any scheduled ing in its place the phrase ‘‘12 CFR 5.3’’, ef- payments of principal begin, all sched- fective Jan. 11, 2021. uled payments shall be made at least annually and the amount repaid in PART 4—ORGANIZATION AND each year shall be no less than in the FUNCTIONS, AVAILABILITY AND prior year; and RELEASE OF INFORMATION, (vi) Provide that no prepayment (including payment pursuant to an accel- CONTRACTING OUTREACH PRO- eration clause or redemption prior to GRAM, POST-EMPLOYMENT RE- maturity) shall be made without prior STRICTIONS FOR SENIOR EXAM- OCC approval unless the national bank INERS remains an eligible bank, as defined in 12 CFR 5.3(g), after the prepayment. Subpart A—Organization and Functions (2) Restrictions. The total amount of Sec. mandatory convertible debt not in- 4.1 Purpose. cluded in paragraph (c)(3) of this sec- 4.2 Office of the Comptroller of the Cur- tion, limited life preferred stock, and rency. subordinated notes and debentures con- 4.3 Comptroller of the Currency. sidered as surplus is limited to 50 per- 4.4 Washington office and web site. cent of the sum of paragraphs (a) and 4.5 Other OCC supervisory offices. (c) (1), (2) and (3) of this section. 4.6 Frequency of examination of national banks and Federal savings associations. (3) Reservation of authority. The OCC 4.7 Frequency of examination of Federal expressly reserves the authority to agencies and branches. waive the requirements and restrictions set forth in paragraphs (f)(1) and Subpart B—Availability of Information (2) of this section, in order to allow the Under the Freedom of Information Act inclusion of other limited life preferred 4.11 Purpose and scope. stock, mandatory convertible notes 4.12 Information available under the FOIA. and subordinated notes and debentures 4.13 Publication in the Federal Register. in the capital base of any national 4.14 Public inspection in an electronic for- bank for capital adequacy purposes or mat. for purposes of determining statutory 4.15 How to request records. limits. The OCC further expressly re- 4.16 Predisclosure notice for confidential serves the authority to impose more commercial information. stringent conditions than those set 4.17 FOIA request fees. 4.18 How to track a FOIA request. forth in paragraphs (f)(1) and (2) of this section to exclude any component of Subpart C—Release of Non-Public OCC tier 1 or tier 2 capital, in whole or in Information part, as part of a national bank’s capital and surplus for any purpose. 4.31 Purpose and scope. (g) Transitional rules. (1) Equity com- 4.32 Definitions. 4.33 Requirements for a request of records mitment notes approved by the OCC as or testimony. capital and issued prior to April 15, 4.34 Where to submit a request. 1985, may continue to be included in 4.35 Consideration of requests. paragraph (c)(3) of this section. All 4.36 Disclosure of non-public OCC informa- other instruments approved by the OCC tion. as capital and issued prior to April 15, 4.37 Persons and entities with access to OCC 1985, are to be included in paragraph information; prohibition on dissemina- (c)(4) of this section. tion. 4.38 Restrictions on dissemination of re- (2) Intangible assets (other than leased information. mortgage servicing assets) purchased 4.39 Notification of parties and procedures prior to April 15, 1985, and accounted for sharing and using OCC records in liti- for in accordance with OCC instruc- gation.

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