Vol. 81 Wednesday, No. 51 March 16, 2016

Part IV

Federal Reserve System

12 CFR Part 252 Single-Counterparty Credit Limits for Large Banking Organizations; Proposed Rule

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FEDERAL RESERVE SYSTEM Public comments may also be viewed the crisis, financial distress at a banking electronically or in paper form in Room organization may materially raise the 12 CFR Part 252 3515, 1801 K Street (between 18th and likelihood of distress at other firms [Regulation YY; Docket No. R–1534] 19th Streets NW.) Washington, DC given the network of contractual 20006 between 9:00 a.m. and 5:00 p.m. obligations throughout the financial RIN 7100–AE 48 on weekdays. system. Accordingly, a large banking organization’s systemic impact is likely Single-Counterparty Credit Limits for FOR FURTHER INFORMATION CONTACT: to be directly related to its Large Banking Organizations Jordan Bleicher, Senior Supervisory Financial Analyst, (202) 973–6123, interconnectedness vis-a`-vis other AGENCY: Board of Governors of the Division of Banking Supervision and financial institutions and the financial Federal Reserve System (Board). Regulation; or Laurie Schaffer, Associate sector as a whole. This ACTION: Notice of proposed rulemaking. General Counsel, (202) 452–2272, interconnectedness of financial firms Benjamin McDonough, Special Counsel, also creates the potential for an increase SUMMARY: The Board is inviting (202) 452–2036, Pam Nardolilli, Senior in the likelihood of distress at non- comment on proposed rules that would Counsel, (202) 452–3289, or Lucy financial firms that are dependent upon establish single-counterparty credit Chang, Attorney, (202) 475–6331, Legal financial firms for funding. limits for domestic and foreign bank Division, Board of Governors of the The financial crisis also revealed holding companies with $50 billion or Federal Reserve System, 20th and C inadequacies in the U.S. regulatory more in total consolidated assets. The Streets NW., Washington, DC 20551. For approach to credit exposure limits, proposed rules would implement the hearing impaired only, which limited only some of the section 165(e) of the Dodd-Frank Wall Telecommunications Device for the Deaf interconnectedness among large Street Reform and Consumer Protection (TDD) users may contact (202) 263– financial companies. For example, Act, which requires the Board to impose 4869. certain commercial banks were subject limits on the amount of credit exposure to single-borrower lending and SUPPLEMENTARY INFORMATION: that such a domestic or foreign bank investment limits. However, these limits holding company can have to an Table of Contents often excluded credit exposures unaffiliated company in order to reduce generated by derivatives and some I. Background the risks arising from the company’s A. General Background securities financing transactions, and failure. The proposed rules, which build B. Summary of Comments on the 2011 and did not apply at the consolidated on earlier proposed rules by the Board 2012 Proposals holding company level.1 to establish single-counterparty credit II. Proposed Rule for Domestic Bank Holding Section 165(e) of the Dodd-Frank Wall limits for large domestic and foreign Companies Street Reform and Consumer Protection banking organizations, would increase A. Overview of the Proposed Rule for Act (Dodd-Frank Act) authorizes the in stringency based on the systemic Domestic Bank Holding Companies Board to establish single-counterparty importance of the firms to which they III. Proposed Rule for Foreign Banking credit limits for bank holding apply. Organizations companies with total consolidated A. Background DATES: Comments should be received by B. Overview of the Proposed Rule for assets of $50 billion or more (covered June 3, 2016. Foreign Banking Organizations companies) and foreign banking ADDRESSES: You may submit comments, IV. Regulatory Analysis organizations with total consolidated identified by Docket No. R–1534 and A. Paperwork Reduction Act assets of $50 billion or more, and any RIN No. 7100 AE–48, by any of the B. Solicitation of Comments on the Use of U.S. intermediate holding company following methods: Plain Language (covered entities), in order to limit the C. Regulatory Flexibility Act Analysis • Agency Web site: http://www. risks that the failure of any individual 2 federalreserve.gov. Follow the Background firm could pose to a covered company. instructions for submitting comments at This section prohibits covered General Background http://www.federalreserve.gov/ companies and covered entities from generalinfo/foia/ProposedRegs.cfm. During the 2007–2008 financial crisis, having credit exposure to any • Federal eRulemaking Portal: http:// some of the largest financial firms in the unaffiliated company that exceeds 25 www.regulations.gov. Follow the world collapsed or experienced material percent of the capital stock and surplus instructions for submitting comments. financial distress. Counterparties of of the covered company, or such lower • Email: regs.comments@federal failing firms were placed under severe amount as the Board may determine by reserve.gov. Include the docket number strain when the failing firm could not regulation to be necessary to mitigate in the subject line of the message. meet its financial obligations, in some risks to the financial stability of the • Fax: (202) 452–3819 or (202) 452– cases resulting in the counterparties’ United States.3 3102. inability to meet their own financial • Mail: Robert deV. Frierson, obligations. Similarly, weakened 1 Section 610 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Secretary, Board of Governors of the financial firms came under increased Act) amends the term ‘‘loans and extensions of Federal Reserve System, 20th Street and stress when counterparties with large credit’’ for purposes of the lending limits applicable Constitution Avenue NW., Washington, exposures to the firm suddenly to national banks to include any credit exposure DC 20551. attempted to reduce those exposures. arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities All public comments will be made The effect of a large financial lending transaction, or securities borrowing available on the Board’s Web site at institution’s failure or near collapse is transaction. See Dodd-Frank Act, Public Law 111– http://www.federalreserve.gov/general amplified by the mutual 203, 610, 124 Stat. 1376, 1611 (2010), codified at info/foia/ProposedRegs.cfm as interconnectedness of large, 12 U.S.C. 84(b). As discussed in more detail below, these types of transactions also are made subject to submitted, unless modified for technical systemically important firms—that is, the single-counterparty credit limits of section reasons. Accordingly, your comments the degree to which they extend each 165(e). 12 U.S.C. 5365(e)(3). will not be edited to remove any other credit and serve as counterparties 2 See 12 U.S.C. 5365(e)(1). identifying or contact information. to one another. As demonstrated during 3 12 U.S.C. 5365(e)(2).

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Credit exposure to a company is credit to one borrower may not exceed Summary of Comments on the 2011 and defined in section 165(e) of the Dodd- 15 percent of the bank’s capital stock 2012 Proposals Frank Act to mean all extensions of and surplus, plus an additional 10 The Board received 48 comments, credit to the company, including loans, percent of the bank’s capital stock and representing approximately 60 parties, deposits, and lines of credit; all surplus, if the amount that exceeds the on the 2011 proposal on section 165(e) repurchase agreements, reverse bank’s 15 percent general limit is fully as it relates to domestic firms and 35 repurchase agreements, and securities secured by readily-marketable comments, representing over 45 8 borrowing and lending transactions collateral. organizations, on the 2012 proposed with the company (to the extent that The requirements in section 165(e) rule as it relates to foreign banking such transactions create credit exposure operate as a separate and independent organizations. The comments were for the covered company); all limit from the investment securities received from a wide range of guarantees, acceptances, and letters of limits and lending limits in the National individuals, banking organizations, credit (including endorsement or Bank Act and Federal Reserve Act, and industry and trade groups representing standby letters of credit) issued on a covered company or covered entity banking, insurance, and the broader behalf of the company; all purchases of, must comply with all of the limits that financial services industry, and public or investments in, securities issued by are applicable to it and its subsidiaries. interest groups. Board staff also met the company; counterparty credit A covered company would be required with industry representatives and exposure to the company in connection to ensure that it does not exceed the government representatives to discuss with derivative transactions between the single-counterparty credit limits when issues relating to the proposed rules. covered company and the company; and all the credit exposures of the Some commenters expressed support any other similar transaction that the organization are consolidated. Because for the broader goals of the proposed Board, by regulation, determines to be a the proposed rules would impose limits rules to limit single-counterparty credit exposure for purposes of section on credit transactions by a covered concentrations at large financial 165.4 Section 165(e) also grants the Board company or covered entity on a companies. Numerous commenters authority to issue such regulations and consolidated basis, including its expressed concerns, however, about orders, including definitions consistent subsidiary depository institutions, the various aspects of the proposed rules. with section 165(e), as may be necessary proposed rules may affect the amount of The Board received comments on all to administer and carry out that section. loans and extensions of credit that aspects of the proposed rules, and the In addition, it authorizes the Board to would otherwise be consistent with a Board has taken into consideration these exempt transactions, in whole or in part, subsidiary depository institution’s comments in these revised proposed from the definition of the term ‘‘credit lending limits. rules for section 165(e). exposure,’’ if the Board finds that the The Board invited public comment on In the 2011 proposed rule, the Board exemption is in the public interest and proposed rules to implement section proposed to limit the aggregate net consistent with the purposes of section 165(e) for domestic banking credit exposure of a covered company to 165(e).5 Finally, section 165(e) organizations in December 2011 and for a single unaffiliated counterparty to no authorizes the Board to establish single- foreign banking organizations in more than 25 percent of the counterparty credit limits for nonbank December 2012.9 The Board is re- consolidated capital stock and surplus financial companies designated by the proposing rules to implement section of the covered company. The Board Financial Stability Oversight Council 165(e) in order to take account of (1) the further proposed to limit the aggregate (FSOC) for supervision by the Board. large volume of comments received on net credit exposure of U.S. bank holding The draft proposed rules would not at the original 165(e) proposed rules from companies with over $500 billion in this time apply to any such nonbank banks, trade associations, public interest assets to any other unaffiliated bank financial company. The Board intends groups, and others; (2) the revised holding company of similar size, or to to apply similar requirements to these lending limits rules applicable to a nonbank financial company companies separately by rule or order at national banks; 10 (3) the introduction by designated by the FSOC for supervision a later time. the Basel Committee on Banking by the Board, to 10 percent of the capital The proposed framework of credit Supervision (BCBS) of a large exposures stock and surplus of the covered exposure limits for covered companies standard (LE Standard), which company. is similar to existing limits for establishes an international standard for Several commenters questioned the depository institutions, including the the maximum amount of credit Board’s basis for lowering the 25 investment securities limits and the exposure that an internationally active percent statutory limit to 10 percent. lending limits imposed on certain bank is permitted to have to a single These commenters generally questioned depository institutions.6 A national counterparty; 11 and (4) the results of the financial stability need for the lower bank generally is limited, subject to quantitative impact studies and related limit and questioned whether the 10 certain exceptions, in the total amount analysis conducted by Board staff to percent limit would have disruptive of investment securities of any one help gauge the impact of the original effects, such as reducing market obligor that it may purchase for its own 165(e) proposed rules and these revised liquidity, decreasing loan capacity, and account to no more than 10 percent of rules. driving financial services to the shadow its capital stock and surplus.7 In banking sector. Several commenters addition, a national bank’s total questioned the Board’s basis for 8 See 12 U.S.C. 84; 12 CFR 32.3. State-chartered outstanding loans and extensions of banks, as well as state and federally-chartered selecting a $500 billion asset threshold savings associations, also are subject to lending as the cutoff for the lower 25 percent 4 See 12 U.S.C. 5365(e)(3). limits imposed by relevant state and federal law. statutory credit limit. Commenters 5 See 12 U.S.C. 5365(e)(5)–(6). 9 http://www.federalreserve.gov/newsevents/ representing the insurance industry 6 See, e.g., 12 U.S.C. 24(7); 12 U.S.C. 84; 12 CFR press/bcreg/20111220a.htm; http:// criticized the proposed standard 1 and 32; see also 12 U.S.C. 335 (applying the www.federalreserve.gov/newsevents/press/bcreg/ provisions of 12 U.S.C. 24(7) to state member 20121214a.htm. because it did not take into account the banks). 10 See 78 FR 37930 (June 25, 2013). unique features of the insurance 7 See 12 U.S.C. 24(7); 12 CFR 1. 11 http://www.bis.org/press/p140415.htm. business. The Board also received

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several comments that supported Some commenters also criticized the Frank Act, the aggregate net credit imposing the more stringent limits on Board’s proposed approach to exposure of a bank holding company single-counterparty credit exposures measuring exposures from securities with total consolidated assets of $50 between very large organizations. financing transactions.12 These billion or more (covered company) to a Some commenters on the 2011 commenters argued that the collateral single counterparty would be subject to proposed rule urged the Board to base volatility haircuts included in the 2011 one of three increasingly stringent credit single-counterparty credit limits on a proposed rule do not recognize the risk- exposure limits. The first category of narrower definition of capital. For mitigating value of positive correlations limits would apply to covered example, one commenter noted that a between securities on loan and companies that have less than $250 central finding of the financial crisis securities received as collateral. These billion in total consolidated assets and was that only common equity was commenters also pointed out that under less than $10 billion in on-balance-sheet reliably loss absorbing, and further the Board’s risk-based capital rules, foreign exposures. Covered companies observed that the Basel III capital collateral volatility haircuts for that have less than $250 billion in total standard reflects this through its securities lending and repurchase consolidated assets and less than $10 redefinition of capital instruments. This transactions reflect a five-day billion in on-balance sheet foreign commenter also argued that there are liquidation period, rather than the ten- exposures would be prohibited from advantages to coordinating regulatory day period used in the proposed 165(e) having aggregate net credit exposure to capital definitions around a limited rule. an unaffiliated counterparty in excess of number of capital definitions that Many of the comments received 25 percent of the covered company’s include only instruments that are concerning the proposed rule for foreign total capital stock and surplus, defined reliably loss absorbing. banking organizations were similar to In its 2011 proposed rule, the Board those filed with respect to the domestic under the rule as the covered company’s proposed to exempt credit exposures proposed rule, especially regarding the total regulatory capital plus allowance that were direct claims on, and the 2012 proposed rule’s treatment of for loan and lease losses (ALLL). portions of claims that were directly and foreign sovereign instruments. Some The second category of exposure fully guaranteed as to principal and commenters argued that, in light of the limits would prohibit any covered interest by, the United States and its BCBS’s development of the LE Standard company with $250 billion or more in agencies. Many commenters supported that would apply to a foreign banking total consolidated assets or $10 billion expanding this exemption to include organization on a consolidated basis, it or more in total on-balance-sheet foreign creditworthy non-U.S. sovereigns. was unnecessary for the Board to exposures, but which is not a global Several commenters noted that develop single-counterparty credit systemically important banking sovereign entities generally are not limits for a foreign banking organization, from having aggregate net regarded as ‘‘companies,’’ and the organization’s combined U.S. credit exposure to an unaffiliated statute covers exposures to companies. operations. Some commenters also counterparty in excess of 25 percent of Others argued there is no rationale for expressed concerns related to the the covered company’s tier 1 capital. distinguishing between U.S. and other definition of the relevant capital base for The third category of exposure limits highly-rated sovereign exposures and their organizations. For example, some that limiting the amount of exposure would prohibit any covered company foreign banking organizations that that is a global systemically important that a covered company can have to a expected to form intermediate holding highly-rated sovereign may increase banking organization (major covered companies (IHCs) to hold their U.S. company) from having aggregate net systemic risk by limiting the company’s subsidiaries were concerned that their ability to invest in or accept as collateral credit exposure in excess of 15 percent relevant capital base would be restricted of the major covered company’s tier 1 instruments issued by such sovereigns. to the capital of the IHC, and not the capital to a major counterparty, and 25 Commenters suggested that exposures to relevant consolidated capital level of percent of the major covered company’s those sovereigns that are assigned a low their entire company. risk-weight under the Basel Capital After a review of these comments, the tier 1 capital to any other counterparty. rules should be exempt. Board has modified the proposed rules A ‘‘major counterparty’’ would be Commenters questioned the Board’s in a number of key respects. The Board defined as a global systemically approach to measuring the exposures welcomes comments on all aspects of important banking organization or a resulting from derivative transactions. the proposed rules, including on the nonbank financial company supervised Under the 2011 proposed rule, a various questions and alternatives by the Board. This framework would be covered company generally would have discussed below. consistent with the requirement in been required to calculate credit section 165(a)(1)(B) of the Dodd-Frank exposure to a derivatives counterparty Proposed Rule for Domestic Bank Act that the enhanced standards using the Current Exposure Method Holding Companies established by the Board under section (CEM). Commenters argued that CEM is Overview of Proposed Rule for Domestic 165 increase in stringency based on insufficiently risk-sensitive and that it Bank Holding Companies factors such as the nature, scope, size, overstates the realistic economic scale, concentration, exposure of a derivative transaction. Under the proposed rule to interconnectedness, and mix of the Commenters attributed this issue in implement section 165(e) of the Dodd- activities of the company.13 The credit significant part to the fact that CEM exposure limits are summarized in 12 ‘‘Securities financing transactions’’ include limits the extent to which netting repurchase agreements, reverse repurchase Table 1. benefits are taken into account in agreements, securities lending transactions, and calculating counterparty exposures. securities borrowing transactions. 13 12 U.S.C. 5323, 5365(e).

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TABLE 1—SINGLE-COUNTERPARTY CREDIT LIMITS APPLICABLE TO COVERED COMPANIES

Category of covered company Applicable credit exposure limit

Covered companies that have less than $250 billion in total consoli- Aggregate net credit exposure to a counterparty cannot exceed 25 per- dated assets and less than $10 billion in on-balance-sheet foreign cent of a covered company’s total regulatory capital plus ALLL. exposures. Covered companies that have $250 billion or more in total consolidated Aggregate net credit exposure to a counterparty cannot exceed 25 per- assets or $10 billion or more in on-balance-sheet foreign exposures, cent of a covered company’s tier 1 capital. but are not major covered companies. Major covered companies ...... Aggregate net credit exposure to a major counterparty cannot exceed 15 percent of a major covered company’s tier 1 capital. Aggregate net credit exposure to other counterparties cannot exceed 25 percent of a major covered company’s tier 1 capital.

The limits of the proposed rule would or controls 25 percent or more of the Standardized Approach risk-based apply to the credit exposures of a total equity; or (3) consolidates for capital rules in Regulation Q to the covered company on a consolidated financial reporting purposes? credit exposure framework in the same basis, including any subsidiaries, to any Question 3: Should funds or vehicles manner as credit exposures to unaffiliated counterparty. A that a covered company sponsors or companies.16 ‘‘subsidiary’’ of a covered company advises be expressly included as part of The Board proposes to extend the would mean a company that is directly the covered company for purposes of single-counterparty credit limits to or indirectly controlled by the specified the proposed rule? Should the proposed individuals, U.S. states, and certain company for purposes of the Bank rule’s definition of ‘‘subsidiary’’ be foreign sovereigns using two authorities. Holding Company Act of 1956, 12 expanded to include any investment Under section 165(b)(1)(b) of the Dodd- U.S.C. 1841 et seq.14 If an investment fund or vehicle advised or sponsored by Frank Act, the Board may impose such fund or vehicle is not controlled by a a covered company? Should the additional enhanced prudential covered company, the exposures of such proposed rule’s definition of standards as the Board of Governors fund or vehicle to its counterparties ‘‘subsidiary’’ be expanded to include determines are appropriate.17 In would not be aggregated with those of any other entity? addition, under section 5(b) of the Bank the covered company for purposes of The proposed rule would establish Holding Company Act, the Board may to the proposed single-counterparty credit limits on the credit exposure of a issue such regulations as may be limits applicable to that covered covered company to a single necessary to enable it to administer and company. ‘‘counterparty.’’ 15 A counterparty carry out the purposes of this chapter A bank holding company should be would be defined to include natural and prevent evasions thereof.18 Such able to monitor and control its credit persons (including the person’s purposes include examining the exposures on a consolidated basis, immediate family); a U.S. State financial, operational, and other risks including the credit exposures of its (including all of its agencies, within the bank holding company subsidiaries. Applying the single- instrumentalities, and political system that may pose a threat to (1) the counterparty credit limits in the subdivisions); and certain foreign safety and soundness of the bank proposed rule to bank holding sovereign entities (including their holding company or of any depository companies on a consolidated basis, agencies, instrumentalities, and political institution subsidiary of the bank which would include the credit subdivisions). The Board is proposing to holding company; or (2) the stability of exposures of their subsidiaries, would include individuals and certain the financial system of the United 19 help to avoid evasion of the rule’s governmental entities within the States. The proposed rule would help purposes. definition of a ‘‘counterparty’’ because to promote the safety and soundness of Question 1: As noted, the proposed credit exposures to such entities create a covered company and mitigate risks to rule would apply the single- risks to the covered company that are financial stability by limiting a covered counterparty credit limits to covered similar to those created by large company’s maximum credit exposure to companies on a consolidated basis and exposures to companies. The severe an individual, U.S. state, or foreign could, therefore, impact the level of distress or failure of an individual, U.S. sovereign, and thereby reducing the risk credit exposures of subsidiaries of these state or municipality, or sovereign entity that the failure of such individual or covered companies, including could have effects on a covered entity could cause the failure or material depository institutions. Is application on company that are comparable to those financial distress of a covered company. For purposes of the proposed credit a consolidated basis appropriate? caused by the failure of a financial firm Question 2: Should the definition of a exposure limits, a covered company’s or nonfinancial corporation to which ‘‘subsidiary’’ of a covered company for exposures to a ‘‘counterparty’’ would the covered company has a large credit purposes of single-counterparty credit include not only exposures to that exposure. With respect to sovereign limits be based on the definition in the particular entity but also exposures to entities, these risks are most acute in the Bank Holding Company Act of 1956? any person with respect to which the case of sovereigns that present greater Should a ‘‘subsidiary’’ instead be counterparty (1) owns, controls, or credit risk. Therefore, the proposed rule defined as any entity that a covered holds with power to vote 25 percent or would subject credit exposures to company (1) owns, controls, or holds more of a class of voting securities; (2) individuals, U.S. states and with power to vote 25 percent or more owns or controls 25 percent or more of municipalities, and foreign sovereign of a class of voting securities; (2) owns governments that do not receive a zero 16 See 12 CFR part 217, subpart D. percent risk weight under the Board’s 17 14 See proposed rule § 252.71(cc); see also section 12 U.S.C. 5363(b)(1)(B). 252.2(g) of the Board’s Regulation YY (12 CFR 18 12 U.S.C. 1844(b). 252.2(g)). 15 See proposed rule § 252.71(e). 19 12 U.S.C. 1844(c)(2)(A)(i)(II).

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the total equity; or (3) consolidates for would cause difficulties for the other added together for purposes of the financial reporting purposes. To the counterparty in terms of full and timely proposed rule. extent that one or more of these repayment of liabilities; and (6) when Example: A covered company has credit conditions are met with respect to a both counterparties rely on the same exposures to both a bank and a fund that is company’s relationship to an source for the majority of their funding sponsored by the bank. The bank does not (1) investment fund or vehicle, exposures and, in the event of the common own, control, or hold with power to vote 25 to such fund or vehicle would need to provider’s default, an alternative percent or more of a class of voting securities be aggregated with that counterparty. provider cannot be found.20 of the fund; (2) own or control 25 percent or Question 4: Under what Two entities that are economically more of the total equity of the fund; or (3) circumstances should funds or vehicles interdependent would be expected to consolidate the fund for financial reporting that a counterparty sponsors or advises default on their exposures in a highly purposes. Thus, the covered company generally would not be required to aggregate be expressly included as part of the correlated manner, and therefore they its exposures to the bank and the fund. The counterparty for purposes of the would be treated as a single bank does, however, have the ability to proposed rule? counterparty for purposes of the appoint a majority of the directors of the Further, in cases where total proposed rule. At the same time, there fund. Under the proposed rule, a covered exposures to a single counterparty may be cases in which the burdens of company would be required to add its credit exceed five percent of the covered investigating economic interdependence exposures to the fund to the covered company’s eligible capital base (i.e., would outweigh its credit risk company’s credit exposures to the bank for total regulatory capital plus ALLL or tier mitigating benefits to the covered purposes of determining whether the covered 1 capital), the covered company would company. For this reason, a covered company is in compliance with the proposed need to add to exposures to that company would only be required to rule. counterparty all exposures to other assess whether counterparties are Question 5: Should covered counterparties that are ‘‘economically economically interdependent if the sum companies be required to aggregate interdependent’’ with the first of the covered company’s exposures to exposures to entities that are counterparty. The purpose of this one individual counterparty exceeds economically interdependent? Are the proposed requirement is to limit a five percent of the covered company’s criteria for determining whether entities covered company’s overall credit capital stock and surplus, in the case of are economically interdependent exposure to two or more counterparties a covered company that does not have sufficiently clear, and if not, how should where the underlying risk of one $250 billion or more in total the criteria be further clarified? Should counterparty’s financial distress or consolidated assets or $10 billion or covered companies only be required to failure would cause the financial more in total on-balance-sheet foreign identify entities as economically distress or failure of another exposures, and tier 1 capital, in the case interdependent when exposure to one of counterparty. In particular, under the of a covered company with $250 billion the entities exceeds five percent of the proposed rule, two counterparties or more in total consolidated assets or covered company’s capital stock and would be considered economically $10 billion or more in total on-balance- surplus, in the case of a covered interdependent when it is the case that, sheet foreign exposures. company that does not have $250 if one of the counterparties were to In addition, under the proposed rule, billion or more in total consolidated experience financial problems, the other a covered company would be required assets or $10 billion or more in total on- counterparty would be likely to to add to exposures of an unaffiliated balance-sheet foreign exposures, and experience financial problems as a counterparty all exposures to other tier 1 capital, in the case of a covered result. In determining whether two counterparties that are connected by company with $250 billion or more in entities are economically certain control relationships, such as (i) total consolidated assets or $10 billion interdependent, a covered company the presence of voting agreements; (ii) or more in total on-balance-sheet would be required to take into account the ability of one counterparty to foreign exposures? Should only covered (1) whether 50 percent of one influence significantly the appointment companies with $250 billion or more in counterparty’s gross receipts or gross or dismissal of another counterparty’s total consolidated assets or $10 billion expenditures are derived from administrative, management or or more in total on-balance-sheet transactions with the other supervisory body, or the fact that a foreign exposures be required to identify counterparty; (2) whether one majority of members have been entities as economically counterparty has fully or partly appointed solely as a result of the interdependent? What other threshold(s) guaranteed the exposure of the other exercise of the first entity’s voting would be appropriate and why? counterparty, or is liable by other rights; and (iii) the ability of one means, and the exposure is significant counterparty to significantly influence Question 6: What operational or other enough that the guarantor is likely to senior management or to exercise a challenges, if any, would covered default if a claim occurs; (3) whether a controlling influence over the companies face in identifying significant part of one counterparty’s management or policies of another companies that are economically production or output is sold to the other counterparty.21 As with cases where two interdependent? Will covered counterparty, which cannot easily be companies are economically companies have access to all of the replaced by other customers; (4) interdependent, in cases where a information needed to complete the whether one counterparty has made a counterparty is subject to some degree analysis of economic interdependence? loan to the other counterparty and is of control by another counterparty, a Is this type of information collected by relying on repayment of that loan in covered company’s overall aggregate covered companies in the ordinary order to satisfy its obligations to the credit risk with respect to the two course of business as part of covered company, and the first counterparties may be understated if underwriting or other, similar counterparty does not have another such control relationships are not processes? source of income that it can use to identified and their credit exposures Question 7: Should covered satisfy its obligations to the covered companies be required to aggregate company; (5) whether it is likely that 20 See proposed rule § 252.76(a). exposures to entities that are connected financial distress of one counterparty 21 See proposed rule § 252.76(b). by certain control relationships? Should

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covered companies only be required to ALLL.25 A key financial stability benefit institutions, such as trust preferred aggregate exposures to entities that are of single-counterparty credit limits is shares, hybrid capital instruments, and connected by certain control that such limits help reduce the other term instruments. Instead, market relationships if the exposure exceeds likelihood that the failure of one participants focused on a financial five percent of the covered company’s financial institution will lead to the institution’s common equity capital and capital stock and surplus, in the case of failure of other financial institutions. By other simple, perpetual-maturity a covered company that does not have reducing the likelihood of multiple instruments that now qualify as tier 1 $250 billion or more in total simultaneous failures arising from regulatory capital. For this reason, the consolidated assets or $10 billion or interconnectedness, single-counterparty Board’s revised capital framework more in total on-balance-sheet foreign credit limits reduce the probability of introduced a new definition of common exposures, and tier 1 capital, in the case future financial crises and the social equity tier 1 capital, restricted the set of of a covered company with $250 billion costs that would be associated with instruments that qualify as additional or more in total consolidated assets or such crises. For this benefit to be tier 1 capital, and raised the tier 1 $10 billion or more in total on-balance- realized, single-counterparty credit capital regulatory minimum from 4 to 6 sheet foreign exposures? Should only limits for firms whose failure is more percent.27 In contrast, the Board’s covered companies with $250 billion or likely to have an adverse impact on revised capital framework left the total more in total consolidated assets or $10 financial stability need to be based on regulatory capital minimum billion or more in total on-balance-sheet a measure of capital that is available to requirement unchanged from its pre- foreign exposures be required to absorb losses on a going-concern basis. crisis calibration of 8 percent. aggregate exposures to entities that are Total regulatory capital plus ALLL Thus, basing single-counterparty connected by certain control includes capital elements that do not credit limits for such covered relationships? Are the criteria for absorb losses on a going-concern basis. companies on tier 1 capital would be determining whether entities are For example, total regulatory capital consistent with the post-crisis focus on connected by control relationships includes a covered company’s higher-quality forms of capital and, sufficiently clear, and if not, how could subordinated debt, which is senior in based on the experience in the crisis the criteria be further clarified? Are the creditor hierarchy to equity and whereby market participants there additional criteria that the Board therefore only takes losses once a significantly discounted the value of should consider? company’s equity has been wiped out. capital instruments such as subordinate In contrast, a company’s tier 1 capital Section 165(e) of the Dodd-Frank Act debt that count in total regulatory consists only of equity claims on the capital, would provide a more reliable directs the Board to impose single- company, such as common equity and counterparty credit limits based on the capital base for the credit limits. In certain preferred shares. By definition, addition, the analysis that follows ‘‘capital stock and surplus’’ of a covered these equity claims are available to company, or ‘‘such lower amount as the suggests that using a narrower definition absorb losses on a going-concern basis. of capital for such covered companies Board may determine by regulation to Therefore, in order to limit the aggregate could help to mitigate risks to U.S. be necessary to mitigate risks to the net credit exposure that a covered financial stability. financial stability of the United company with $250 billion or more in 22 The marginal impact of basing single- States.’’ Under the proposed rule, total consolidated assets or $10 billion counterparty credit limits on tier 1 ‘‘capital stock and surplus’’ of a covered or more in total on-balance-sheet foreign company would be defined as the sum exposures can have to a single capital for firms with $250 billion or of the company’s total regulatory capital counterparty relative to the covered more in total assets, or $10 billion or as calculated under the capital adequacy company’s ability to absorb losses on a more in on-balance-sheet foreign guidelines applicable to that bank going-concern basis, single-counterparty exposures, appears to be limited. As of holding company under Regulation Q credit limits applicable to such September 30, 2015, tier 1 capital (12 CFR part 217) and the balance of the companies should be based on their tier represented approximately 82 percent of bank holding company’s ALLL not 1 capital. Basing single-counterparty the total regulatory capital plus ALLL included in tier 2 capital under the credit limits for such companies on tier for these firms. Further, the quantitative capital adequacy guidelines applicable 1 capital also is consistent with the impact study Board staff conducted to to that bank holding company under direction given in section 165(a)(1)(B) of help gauge the likely effects of the Regulation Q (12 CFR part 217).23 This the Dodd-Frank Act to impose enhanced proposed requirements suggests that definition of capital stock and surplus is prudential standards that increase in using tier 1 capital as the eligible capital conceptually similar to the definition of stringency based on the systemic base for bank holding companies with the same term in the Board’s footprint of the firms to which they $250 billion or more in total Regulations O and W and the OCC’s apply.26 consolidated assets or $10 billion or national bank lending limit regulation.24 Basing single-counterparty credit more in total on-balance-sheet foreign As indicated, for those covered limits for covered companies with total exposures likely would increase the companies with $250 billion or more in consolidated assets of $250 billion or total amount of excess exposure among total consolidated assets or $10 billion more, or $10 billion or more in on- U.S. bank holding companies by or more in total on-balance-sheet foreign balance-sheet foreign exposures on tier approximately $30 billion. This exposure, the proposed credit limits 1 capital would be consistent with incremental amount of excess credit would be calculated by reference to lessons learned during the financial exposure could be largely eliminated by those companies’ tier 1 capital as crisis of 2007–2009. During the crisis, firms through compression of defined under Regulation Q, rather than counterparties and other creditors of derivatives, collection of additional their total regulatory capital plus distressed financial institutions collateral from counterparties, greater discounted lower-quality regulatory use of central clearing, and modest rebalancing of portfolios among 22 12 U.S.C. 5365(e)(2). capital instruments issued by such 23 See proposed rule § 252.71(d). counterparties. 24 See 12 CFR 215.3(i), 12 CFR 223.3(d); see also 25 See 12 CFR 217.2; 12 CFR 217.20. 12 CFR 32.2(b). 26 12 U.S.C. 5365(a)(1)(B). 27 See 12 CFR part 217.

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Question 8: Are the proposed counterparty reflects the financial a major counterparty of 15 percent definitions relating to capital stock and stability consequences associated with rather than the statutory limit of 25 surplus and tier 1 capital clear? Should such credit extensions. A credit percent. The more stringent credit limit the single-counterparty credit limits extension between a major covered of 15 percent is informed by the results applicable to covered companies with company and a major counterparty is of a credit risk model that is described $250 billion or more in total expected to result in a heightened in detail in the white paper. More consolidated assets or $10 billion or degree of credit risk to the major specifically, data on correlations, as more in total on-balance-sheet foreign covered company relative to the case in described above, is used to calibrate a exposures be based on a different which a major covered company credit risk model. The credit risk model capital base than that used for other extends credit to a counterparty that is is then used to set the single- firms? not a major counterparty. The counterparty credit limit between SIFIs heightened credit risk arises because such that the amount of credit risk that Credit Exposure Limits major covered companies and major a SIFI is permitted to incur through Section 252.72 of the proposed rule counterparties are often engaged in extensions of credit to another SIFI is no contains the key quantitative limitations common business lines and often have greater than the amount of credit risk on credit exposure of a covered common counterparties and common that the SIFI would be permitted to company to a single counterparty.28 funding sources. This creates a incur through extensions of credit to a First, the general limit in proposed significant degree of commonality in non-SIFI under the 25 percent limit section 252.72 provides that no covered their economic performance. In applicable to such exposures. The company may have aggregate net credit particular, factors that would likely resulting calibrated model produces exposure to any unaffiliated cause the distress of a major inter-SIFI single-counterparty credit counterparty in excess of 25 percent of counterparty would also likely be limits that are in line with the proposed the capital stock and surplus or tier 1 expected to simultaneously adversely limit of 15 percent. capital, as appropriate, of the covered affect a major covered company that has An additional consideration that is company.29 Second, proposed section extended credit to the major not considered explicitly in the context 252.72 provides that no ‘‘major covered counterparty. As a result, such credit of the white paper’s credit risk model, company,’’ defined as a covered extensions would be expected to present but which should influence the company that is a U.S. global more credit risk, and greater potential calibration of the credit limit between systemically important banking for financial instability, than a credit major covered companies and major organization, may have aggregate net extension made by a major covered counterparties, is the relative difference credit exposure to a major counterparty company to a counterparty that is not a in adverse consequences arising from in excess of 15 percent of the major major counterparty. multiple SIFI defaults relative to the covered company’s tier 1 capital.30 In a white paper that has been default of a SIFI and non-SIFI ‘‘Aggregate net credit exposure’’ would released in conjunction with these counterparty. The financial stability be defined in this section to mean the proposed rules, Board staff has analyzed consequences of multiple SIFI defaults sum of all net credit exposures of a data on the default correlation between caused by the default of a SIFI borrower covered company to a single systemically important financial and the resulting default of a SIFI lender counterparty.31 As described in detail institutions (SIFIs) as well as data on the are likely substantially greater than the below, sections 252.73 and 252.74 of the default correlation between SIFIs and a adverse consequences that would result proposed rule describe how a covered sample of non-SIFI companies.34 The from the default of a single SIFI lender company would calculate gross and net analysis supports the view that the and a single non-SIFI borrower. As a credit exposure in order to arrive at the correlation between SIFIs, and hence result, there is a compelling rationale to aggregate net credit exposure relevant to the correlation between major covered require that credit risk posed by inter- the single-counterparty credit limits in companies and major counterparties, is SIFI credit extensions be materially section 252.72.32 measurably higher than the correlation smaller than that posed by credit A ‘‘major counterparty’’ would be between SIFIs and other companies. extensions between a SIFI lender and defined as (1) any major covered This finding further supports the view non-SIFI borrower. This consideration company and all of its subsidiaries, that credit extensions between SIFIs, suggests that an appropriate inter-SIFI collectively; (2) any foreign banking and hence by a major covered company single-counterparty credit limit would organization and all of its subsidiaries, to a major counterparty, present a higher be even lower than the 15 percent limit collectively, that would be considered a degree of risk and the potential for suggested by the calibrated credit risk global systemically important foreign greater financial instability than credit model that is presented in the white banking organization; and (3) any extensions of a major covered company paper. nonbank financial company supervised to a non-major counterparty. Accordingly, the more stringent 15 by the Board.33 Because credit extensions of a major percent single-counterparty credit limit The Board’s proposed rule regarding covered company to a major on credit exposures of a major covered the single-counterparty credit limits that counterparty present a heightened company to a major counterparty should should apply to credit exposures of a degree of credit risk and a greater help to mitigate risks to U.S. financial major covered company to a major potential for heightened financial stability. The Board seeks comment on instability, the Board is proposing to set the analytical rationale that has been 28 See proposed rule § 252.72. a more stringent single-counterparty presented for a tighter single- 29 See proposed rule §§ 252.72(a)–(b). credit limit for credit extensions counterparty credit limit for exposures 30 See proposed rule § 252.72(c). between a major covered company and of a major covered company to a major 31 See proposed rule § 252.71(b). counterparty. The Board also invites 32 See proposed rule §§ 252.73–252.74. 34 See Calibrating the Single-Counterparty Credit comment on the data, analysis, and 33 See proposed rule § 252.72(v). The Financial Limit between Systemically Important Financial economic model that is used in the Stability Board maintains and periodically Institutions. For purposes of the white paper, SIFIs publishes a list of entities that have the include global systemically important banking white paper to support the proposed characteristics of a global systemically important organizations and nonbank financial companies more stringent limit. Commenters are banking organization: http://www.fsb.org/. designated by FSOC for supervision by the Board. encouraged to provide any specific

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analyses that could be used to support covered company first would calculate would also include companies whose an alternative view on the appropriate its gross credit exposure to the primary business includes the level of the single-counterparty credit counterparty on each credit transaction management of financial assets, lending, limit between major covered companies in accordance with certain valuation factoring, leasing, provision of credit and major counterparties. and other requirements under the rule. enhancements, securitization, Question 9: Should more stringent Second, the covered company would investments, financial custody, central credit exposure limits apply to credit reduce its gross credit exposure amount counterparty services, proprietary exposures of a major covered company based on eligible credit risk mitigants to trading, insurance, and other financial to a major counterparty than would determine its net credit exposure for services.36 apply to other credit exposures? each credit transaction with the Question 13: Is the definition of a Question 10: Are the proposed counterparty. Third and finally, the ‘‘financial entity’’ sufficiently clear? If definitions of a ‘‘major covered covered company would sum all of its not, what further guidance should be company’’ and a ‘‘major counterparty’’ net credit exposures to the counterparty provided? appropriate? What alternative to calculate the covered company’s Section 252.73 of the proposed rule definitions should the Board consider? aggregate net credit exposure to the explains in detail how a covered Question 11: Should more stringent counterparty. It is this final amount, the company would calculate its ‘‘gross credit exposure limits apply to aggregate net credit exposure, that credit exposure’’ with respect to a exposures of major covered companies would be subject to a credit exposure counterparty. Gross credit exposure to a nonbank financial company that limit under the rule. would be defined to mean, with respect has been designated by FSOC for Board With respect to a credit exposure to any credit transaction, the credit supervision? Should more stringent involving eligible collateral or an exposure of the covered company to the limits also apply to exposures of a major eligible protection provider, the counterparty before adjusting for the covered company to other entities that proposed rule would apply a ‘‘risk- effect of any qualifying master netting have been designated as global shifting’’ approach. In general, any agreements, eligible collateral, eligible systemically important financial reduction in the exposure amount to the guarantees, eligible credit derivatives institutions by the Financial Stability original counterparty relating to the and eligible equity derivatives, and Board ( e.g., global systemically eligible collateral or eligible protection other eligible hedges (i.e., a short important insurance companies)? If so, provider would result in a dollar-for- position in the counterparty’s debt or what limits should apply? dollar increase in exposure to the equity securities).37 Consistent with the Question 12: What other limits or eligible collateral issuer or eligible statutory definition of credit exposure, modifications to the proposed limits on protection provider (as applicable). For the proposed rule defines ‘‘credit aggregate net credit exposure should the example, in the case discussed above transaction’’ to mean, with respect to a Board consider? For example, should where a covered company had $100 in counterparty, any (i) extension of credit the Board consider developing aggregate gross credit exposure to a counterparty to the counterparty, including loans, exposure limits to certain categories of and the counterparty pledged collateral deposits, and lines of credit, but firms (e.g., a limit on the aggregate with an adjusted market value of $50, excluding advised or other amount of credit exposure that a major the covered company would have net uncommitted lines of credit; (ii) covered company can have to all major credit exposure to the counterparty on counterparties)? How should the Board the transaction of $50 and net credit repurchase or reverse repurchase identify any such categories and the exposure to the issuer of the collateral agreement with the counterparty; (iii) applicable exposure thresholds? of $50. securities lending or securities However, in cases where a covered borrowing transaction with the Gross Credit Exposure company hedges its exposure to an counterparty; (iv) guarantee, acceptance, As noted, the proposed rule would entity that is not a ‘‘financial entity’’ (a or letter of credit (including any impose limits on a covered company’s non-financial entity) using an eligible confirmed letter of credit or standby aggregate net credit exposure, rather credit or equity derivative, and the letter of credit) issued on behalf of the than aggregate gross credit exposure, to underlying exposure is subject to the counterparty; (v) purchase of, or a counterparty. The key difference Board’s market risk capital rule (12 CFR investment in, securities issued by the between these two amounts is that a part 217, subpart F), the covered counterparty; (vi) credit exposure to the company’s net credit exposure would company would calculate its exposure counterparty in connection with a take into account any available credit to the eligible protection provider using derivative transaction between the risk mitigants, such as collateral, methodologies that it is permitted to use covered company and the counterparty; guarantees, credit or equity derivatives, under the Board’s risk-based capital (vii) credit exposure to the counterparty and other hedges, provided the credit rules. For these purposes, a ‘‘financial in connection with a credit derivative or risk mitigants meet certain requirements entity’’ would include regulated U.S. equity derivative transaction between in the rule, as discussed more fully financial institutions, such as insurance the covered company and a third party, below. For example, if a covered companies, broker-dealers, banks, the reference asset of which is an company had $100 in gross credit thrifts, and futures commission obligation or equity security issued by exposure to a counterparty with respect merchants, as well as foreign banking the counterparty; 38 and (viii) any to a particular credit transaction, and organizations and a non-U.S.-based transaction that is the functional the counterparty pledged collateral with securities firm or a non-U.S.-based equivalent of the above, and any similar an adjusted market value of $50, the full insurance company subject to transaction that the Board determines to amount of which qualified as ‘‘eligible consolidated supervision and regulation collateral’’ under the rule, the covered comparable to that imposed on U.S. 36 Id. company’s net credit exposure to the depository institutions, securities 37 See proposed rule § 252.71(r). Section 252.74 of counterparty on the transaction would broker-dealers, or insurance the proposed rule explains how these adjustments are made. 35 be $50. companies. ‘‘Financial entities’’ 38 ‘‘Credit derivative’’ and ‘‘equity derivative’’ are In order to calculate its aggregate net defined in sections 252.71(g) and (p) of the credit exposure to a counterparty, a 35 See proposed rule § 252.71(q). proposed rule, respectively.

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be a credit transaction for purposes of of the counterparty would be equal to hard-to-value? If so, what guidance this subpart.39 the maximum potential loss to the should be provided? Section 252.73 describes how the covered company on the transaction; In the context of repurchase gross credit exposure of a covered (10) Derivative transactions between agreements, securities borrowing company to a counterparty should be the covered company and the transactions, and securities lending calculated for each type of credit counterparty not subject to a qualifying transactions, the ‘‘adjusted market transaction described above.40 In master netting agreement would be value’’ of a security would mean the general, the methodologies contained in valued in an amount equal to the sum sum of (i) the market value of the the proposed rule are similar to those of the current exposure of the security and (ii) the market value of the used to calculate credit exposure under derivatives contract and the potential security multiplied by the product of (a) the standardized risk-based capital rules future exposure of the derivatives the collateral haircut set forth in Table for bank holding companies.41 More contract, calculated using 1 to section 217.132 of the Board’s specifically, section 252.73(a) of the methodologies that the covered Regulation Q (12 CFR 217.132) that is proposed rule provides that, for company is permitted to use under applicable to the security and (b) the purposes of calculating gross credit Regulation Q (12 CFR part 217, subparts square root of 1⁄2.42 The purpose of exposure: D and E); adjusting the value of a security in this (1) The value of loans by a covered (11) Derivative transactions between manner is to capture the market company to a counterparty (and leases the covered company and the volatility (and associated potential in which the covered company is the counterparty subject to a qualifying increase in counterparty credit lessor and the counterparty is the lessee) master netting agreement would be exposure) of the securities transferred or would be equal to the amount owed by valued in an amount equal to the lent by the covered company in these the counterparty to the covered exposure at default amount calculated transactions. Multiplying the values in company under the transaction; using methodologies that the covered Table 1 to section 217.132 of the Board’s company is permitted to use under (2) The value of debt securities held Regulation Q by the square root of 1⁄2 by the covered company that are issued subpart E of Regulation Q (12 CFR part would align with the requirements in by the counterparty would be equal to 217); and the Board’s risk-based capital rules, (12) Credit or equity derivative the market value of the securities (in the which assume a 5-day liquidation transactions between the covered case of trading and available-for-sale period for ‘‘repo-style’’ transactions,43 company and a third party where the securities) or the amortized purchase rather than the 10-day liquidation covered company is the protection price of the securities (in the case of period that is assumed for other provider and the reference asset is an securities that are held to maturity); transactions. With respect to derivative obligation or equity security of the (3) The value of equity securities held transactions between a covered counterparty, would be valued in an by the covered company that are issued company and a counterparty that are not by the counterparty would be equal to amount equal to the maximum potential loss to the covered company on the subject to a qualifying master netting the market value of such securities; agreement, the gross credit exposure of (4) The value of repurchase transaction. Under the proposed rule, trading and a covered company to the counterparty agreements would be equal to the would be valued as the sum of the adjusted market value of the securities available-for-sale debt securities held by the covered company, as well as equity current exposure and the potential transferred by the covered company to 44 securities, would be valued for purposes future exposure of the contract. With the counterparty; respect to derivative transactions (5) The value of reverse repurchase of single-counterparty credit limits between a covered company and a agreements would be equal to the based on their market value. This counterparty that are subject to a amount of cash transferred by the approach would require a covered qualifying master netting agreement, the covered company to the counterparty; company to revalue upwards the proposed rule would require covered (6) The value of securities borrowing amount of an investment in such companies to calculate gross credit transactions would be equal to the sum securities when the market value of the exposure to a counterparty as the of the amount of cash collateral securities increases. In these amount that would be calculated using transferred by the covered company to circumstances, the re-valuation would any methodologies that the covered the counterparty and the adjusted reflect the covered company’s greater company is permitted to use under the market value of the securities collateral financial exposure to the counterparty and would reduce the covered Board’s risk-based capital rules (12 CFR transferred to the counterparty; 45 (7) The value of securities lending company’s ability to engage in part 217, subpart D and E). This transactions would be equal to the additional transactions with the approach would allow certain covered adjusted market value of the securities counterparty. In circumstances where companies to calculate counterparty lent by the covered company to the the market value of the securities falls, exposures for derivatives transactions counterparty; however, a covered company under the subject to a qualifying master netting (8) Committed credit lines extended proposal would revalue downwards its agreement using the internal model by a covered company to the exposure to the issuer of the securities. method in the Board’s Regulation Q (12 counterparty would be valued at the This reflects the fact that, just as an CFR part 217, subpart E). The Board is face amount of the credit line; increase in the value of a security 42 (9) Guarantees and letters of credit results in greater exposure to the issuer See proposed rule § 252.71(a). 43 A ‘‘repo-style’’ transaction is a repurchase or issued by a covered company on behalf of that security, a decrease in the value reverse repurchase transaction, or a securities of the security leaves a firm with less borrowing or lending transaction, that meets certain 39 See proposed rule § 252.71(h). The definition of exposure to that issuer. criteria. See 12 CFR 217.2. ‘‘credit transaction’’ in the proposed rule is similar Question 14: Should the Board 44 See proposed rule § 252.73(a)(10). ‘‘Qualifying to the definition of ‘‘credit exposure’’ in section provide further guidance regarding the master netting agreement’’ is defined in section 165(e) of the Dodd-Frank Act. See 12 U.S.C. 252.71(z) of the proposed rule in a manner 5365(e)(3). calculation of the ‘‘market value’’ of a consistent with the Board’s advanced risk-based 40 See proposed rule § 252.73(a)(1)–(12). debt or equity security, particularly for capital rules for bank holding companies. 41 12 CFR part 217, subpart D. securities that are illiquid or otherwise 45 See proposed rule § 252.73(a)(11).

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proposing this approach, rather than and trace the proceeds of transactions convert gross credit exposure amounts proposing to require all covered made in the ordinary course of business. to net credit exposure amounts by companies to use CEM because of In general, credit exposures resulting taking into account eligible collateral, concerns that CEM may not take fully from transactions made in the ordinary eligible guarantees, eligible credit and into account correlations and netting course of business will not be subject to equity derivatives, other eligible hedges relationships, and therefore, under the attribution rule. (for example, a short position in the certain circumstances, may overstate Question 15: The Board invites counterparty’s debt or equity securities), counterparty credit risk. comment on all aspects of the proposed and for securities financing transactions, The Board notes, however, that the approaches for calculating gross credit the effect also of bilateral netting BCBS has recently finalized a revised exposures. agreements.50 standardized approach (SA–CCR) for Question 16: With respect to measuring credit exposure to a derivative transactions, the Board Calculation of Net Credit Exposure for derivatives counterparty.46 The Board invites comment on the proposed Securities Financing Transactions expects to consider the benefits of reliance on the methodologies covered With respect to any repurchase incorporating SA–CCR in the single- companies are permitted to use under transaction, reverse repurchase counterparty credit limit rule at such the risk-based capital rules. Should transaction, securities lending time as the Board considers the benefits covered companies instead be required transaction, and securities borrowing of SA–CCR for risk-based capital to use CEM? Should the single- transaction with a counterparty that is purposes. counterparty credit limits rule subject to a bilateral netting agreement With respect to derivative ultimately require use of SA–CCR or a with that counterparty and that meets transactions between a covered similar standardized approach to the definition of ‘‘repo-style company and a third party, where the measure a covered company’s credit transaction’’ in section 217.2 of the covered company is the protection exposure to derivatives counterparties? Board’s Regulation Q (12 CFR 217.2), a provider and the reference asset is an Question 17: With respect to credit or covered company’s net credit exposure obligation or equity security of the equity derivative transactions between to a counterparty generally would be counterparty, the credit exposure of the the covered company and a third party, equal to the exposure at default amount covered company to the counterparty where the covered company is the calculated under section 217.37(c)(2) of would be equal to the maximum protection provider and the reference the Board’s Regulation Q (12 CFR potential loss to the covered company asset is an obligation or equity security 217.37(c)(2)), applying standardized on the transaction.47 of the counterparty, is it sufficiently supervisory haircuts as provided in 12 With respect to cleared and uncleared clear how a covered company would CFR 217.37(c)(3)(iii).51 A covered derivatives, the amount of initial margin calculate its ‘‘maximum potential loss’’? company would not be permitted to and excess variation margin (i.e., What additional guidance, if any, apply its own internal estimates for variation margin in excess of that should the Board provide? haircuts. Further, in calculating its net needed to secure the mark-to-market Question 18: With respect to credit credit exposure to a counterparty as a value of a derivative) posted to a derivatives, equity derivatives, result of such transactions, a covered bilateral or central counterparty would guarantees, and letters of credit, are company would be required to disregard be treated as credit exposure to the there cases in which ‘‘maximum any collateral received from that counterparty unless the margin is held potential loss to the covered company’’ counterparty that does not meet the in a segregated account at a third party arising from the transaction is definition of ‘‘eligible collateral’’ in custodian. indeterminate? How should single- § 252.71(k). Section 252.73(c) of the proposed rule counterparty credit limits apply in those The proposal would also require a includes the statutory attribution rule, instances? covered company to recognize a credit which provides that a covered company Question 19: The Board invites exposure to any issuer of eligible must treat a transaction with any person comment on ways to apply the statutory collateral that is used to reduce the as a credit exposure to a counterparty to attribution rule in a manner that would covered company’s gross credit the extent the proceeds of the be consistent with the goal of preventing exposure from a transaction described transaction are used for the benefit of, evasion of the single-counterparty credit in the preceding paragraph. The amount or transferred to, that counterparty.48 limits without imposing undue burden of credit exposure that a covered This attribution rule seeks to prevent on covered companies. Is additional company would be required to firms from evading the single- regulatory clarity around the attribution recognize to an issuer of such collateral counterparty credit limits by using rule necessary? What is the potential would be equal to the market value of intermediaries and thereby avoiding a cost or burden of applying the the collateral minus the standardized direct credit transaction with a attribution rule as proposed? supervisory haircuts provided in 12 CFR particular counterparty. It is the Board’s 217.37(c)(2)(ii). However, in no event intention to avoid interpreting the Net Credit Exposure would the amount of credit exposure attribution rule in a manner that would As noted, the proposed rule would that a covered company is required to impose undue burden on covered impose limits on a covered company’s recognize to such a collateral issuer be companies by requiring firms to monitor net credit exposure to a counterparty. in excess of its gross credit exposure to ‘‘Net credit exposure’’ would be defined the counterparty on the original credit 46 See http://www.bis.org/publ/bcbs279.htm. to mean, with respect to any credit transaction. 47 See proposed rule § 252.73(a)(12). ‘‘Credit transaction, the gross credit exposure of Some commenters on the 2011 section derivative’’ is defined in § 252.71(g) of the proposed 165(e) proposed rule objected to the rule, and ‘‘equity derivative’’ is defined in a covered company calculated under § 252.71(p) of the proposed rule. ‘‘Derivative section 252.73, as adjusted in transaction’’ is defined in § 252.71(j) of the accordance with section 252.74.49 50 See proposed rule § 252.74. proposed rule in the same manner as it is defined Section 252.74 of the proposed rule 51 Pursuant to 12 CFR 217.37(c)(3)(iii), a bank that in the National Bank Act, as amended by section is engaged in a repo-style transaction may multiply 610 of the Dodd-Frank Act. See 12 U.S.C. 84(b)(3). explains how a covered company would the standardized supervisory haircuts that would 48 See proposed rule § 252.73(c); see also 12 otherwise apply pursuant to Table 1 to § 217.37 of U.S.C. 5365(e)(4). 49 See proposed rule § 252.71(x). the Board’s Regulation Q by the square root of 1⁄2.

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proposed methodology for netting Third, the Board considered allowing company (including cash held for the securities financing transactions as credit exposure from repo-style covered company by a third-party overly conservative. The commenters transactions to be measured using custodian or trustee); debt securities generally argued that the proposed standardized correlation matrices. (other than mortgage- or asset-backed approach implied unrealistic Under this approach, securities would securities 54) that are bank-eligible assumptions about correlations among be divided into a handful of asset investments and that have an securities that a covered company classes (for example, sovereign investment grade rating; equity transfers to its counterparty and securities, corporate and municipal securities that are publicly traded; or received from that counterparty. For debt, and equities). Based on convertible bonds that are publicly example, if a covered company loans distinctions between asset classes, traded.55 For any of these asset types to equity securities to a counterparty and specific assumptions about correlations count as eligible collateral for a credit receives equity securities from the within portfolios of securities transaction, the covered company counterparty as collateral, the proposed transferred to or received from a generally would be required to have a methodology implied that, upon the counterparty, as well as assumptions perfected, first priority security interest counterparty’s default, the value of the about correlations across portfolios of in the collateral or the legal equivalent equities transferred to the counterparty securities transferred and received, thereof, if outside of the United States. would increase in value while the value would be provided. These standardized This list of eligible collateral would be of the equities received would decrease correlation assumptions, together with similar to the list of eligible collateral in in value. standardized volatility haircuts for the Regulation Q.56 In developing this proposed rule, the relevant securities, would serve as In computing its net credit exposure Board considered several alternatives to inputs into a formula that would yield to a counterparty with respect to a credit address these concerns. First, the Board an estimate of a covered company’s transaction, a covered company would considered allowing covered firms only credit exposure to its counterparty. be required to reduce its gross credit to apply valuation adjustments to one Again, this could provide a more exposure on the transaction by the side of a securities financing transaction accurate way of taking into account adjusted market value of any eligible where the securities transferred and correlations among securities. collateral.57 Other than in the context of received from a counterparty are of the The first alternative would permit a repo-style transactions, the ‘‘adjusted same asset class. For example, if a covered company to apply valuation market value’’ of eligible collateral covered company loans equity securities adjustments to only one side of a would be defined in section 252.71(a) of to a counterparty and receives equity securities financing transaction where the proposed rule to mean the fair securities from the counterparty as the securities transferred and received market value of the eligible collateral collateral, the covered company could from a counterparty are of the same after application of the applicable be permitted to apply valuation asset class. While this approach is haircut specified in Table 1 to section adjustments only to the value of the meant to reflect the fact that securities 217.132 of the Board’s Regulation Q for in the same asset class are generally 58 equity securities that have been that type of eligible collateral. positively correlated, some securities in transferred to the counterparty. This The net credit exposure of a covered the same asset class may also be would be a relatively simple way of company to a counterparty on a credit negative correlated. In addition, taking account of the fact that securities transaction is the gross credit exposure assumptions about asset correlations in the same asset class tend to be of the covered company on the based on observations during normal somewhat positively correlated. transaction minus the adjusted market times may break down during periods of Second, the Board considered a value of any eligible collateral related to extreme market turbulence, when large the transaction.59 In addition, under the methodology similar to the one recently credit exposures of financial institutions proposed by the BCBS in its second to their counterparties could pose the 54 consultative document on potential The proposed rule generally would exclude greatest risk to financial stability. The mortgage-backed securities and other asset-backed revisions to the standardized approach second and third alternatives would securities from the definition of ‘‘eligible collateral’’ to credit risk.52 Under the formula because of concerns that those securities may be increase the complexity of the more likely than other securities to become illiquid proposed by the Basel Committee, an framework and potentially make the entity’s exposure for repo-style and lose value during periods of financial framework susceptible to arbitrage. For instability. However, asset-backed securities transactions would be equal to 40 the foregoing reasons, the proposed rule guaranteed by a U.S. government sponsored entity, percent of its ‘‘net exposure’’ from the such as Ginnie Mae, Fannie Mae, or Freddie Mac, does not include these alternatives. would qualify as eligible collateral under the transaction plus 60 percent of its ‘‘gross Question 20: Should the Board exposure’’ divided by the square root of proposed rule. consider alternative approaches to 55 See proposed rule § 252.71(k); see also 12 CFR the number of security issues in the measuring the net credit exposure from 252.2(p) (defining ‘‘publicly traded’’). netting set. In this formula, the ‘‘net securities financing transactions? What 56 See 12 CFR 217.2. exposure’’ term is intended to reflect the are the advantages and disadvantages of 57 See proposed rule § 252.74(c). effect of netting long positions and short such alternative measurement 58 Table 1 to section 217.132 of the Board’s positions because the volatility haircuts Regulation Q (12 CFR 217.132) provides haircuts for approaches relative to the proposed multiple collateral types, including some types that that would apply to long positions approach? do not meet the proposed definition of ‘‘eligible would be allowed to offset those that collateral.’’ Notwithstanding the inclusion of those apply to short positions. Although Collateral collateral types in the reference table, a company volatility haircuts would not offset Section 252.74(c) of the proposed rule cannot reduce its gross credit exposure for a transaction with a counterparty based on the when calculating gross exposure, gross describes how eligible collateral would adjusted market value of collateral that does not exposure would reflect the effect of be taken into account in the calculation meet the definition of ‘‘eligible collateral.’’ diversification by dividing the gross of net credit exposure.53 ‘‘Eligible 59 The Board is proposing to treat eligible exposure amount by the square root of collateral’’ would be defined to include collateral as a gross credit exposure to the collateral the number of exposures. issuer under the Board’s authority under section cash on deposit with a covered 165(e) to determine that any other similar transaction is a credit exposure. See 12 U.S.C. 52 http://www.bis.org/bcbs/publ/d347.pdf. 53 See proposed rule § 252.74(c). 5365(e)(3)(F).

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proposed rule, a covered company and its gross credit exposure to definition of ‘‘eligible guarantor’’ in generally must recognize a credit Company C would increase to $800. In section 217.2 of Regulation Q. As such, exposure to the collateral issuer in an each case, the covered company’s total an eligible protection provider would amount equal to the adjusted market credit exposure would be capped at the include a sovereign, the Bank for value of the collateral. As such, the original amount of the exposure created International Settlements, the amount of credit exposure to the by the loan or $1,000—even if the International Monetary Fund, the original counterparty and the issuer of adjusted market value of the eligible European Central Bank, the European the eligible collateral would fluctuate collateral exceeded $1,000. Commission, a Federal Home Loan over time based on the adjusted market Finally, in cases where eligible Bank, the Federal Agricultural Mortgage value of the eligible collateral. Collateral collateral is issued by an issuer covered Corporation (Farmer Mac), a multilateral that previously met the definition of by one of the exemptions in section development bank (MDB), a depository eligible collateral under the proposed 252.76 of the proposed rule or that is institution, a bank holding company, a rule but over time ceases to do so would excluded from the proposed definition savings and loan holding company, a no longer be eligible to reduce gross of a ‘‘counterparty,’’ the requirement to credit union, a foreign bank, or a credit exposure. recognize an exposure to the collateral qualifying central counterparty. An In effect, the proposed treatment of issuer would have no effect. eligible protection provider also would eligible collateral would require a Example: A covered company makes a include any entity, other than a special covered company to shift its credit $1,000 loan to a counterparty and that purpose entity, (i) that at the time the exposure from the original counterparty counterparty has pledged as collateral U.S. guarantee is issued or anytime to the issuer of such collateral. This government bonds with an adjusted market thereafter, has issued and maintains approach would help to promote a value of $1,000. In this case, the covered outstanding an unsecured debt security covered company’s careful monitoring company would not have any net credit without credit enhancement that is of its direct and indirect credit exposure to the original counterparty because investment grade, (ii) whose exposures. So as not to discourage the value of loan and the adjusted market creditworthiness is not positively value of the U.S. government bonds are overcollateralization, however, a correlated with the credit risk of the equal. Although the covered company would exposures for which it has provided covered company’s maximum credit have $1,000 of exposure to the U.S. exposure to the collateral issuer would government, single-counterparty credit limits guarantees, and (iii) that is not an be limited to the credit exposure to the would not apply to that exposure because insurance company engaged original counterparty.60 U.S. government bonds are excluded from predominantly in the business of A covered company would continue the single-counterparty credit limits of the providing credit protection (such as a to have credit exposure to the original proposed rule. monoline bond insurer or re-insurer). counterparty to the extent that the Question 21: Should the list of eligible In calculating its net credit exposure to the counterparty, a covered company adjusted market value of the eligible collateral be broadened or narrowed? would be required to reduce its gross collateral does not equal the full amount What items should be added or deleted? of the credit exposure to the original Question 22: Should covered credit exposure to the counterparty by counterparty. companies have the option of whether the amount of any eligible guarantee from an eligible protection provider.63 Example: A covered company (Company to reduce their gross credit exposures by recognizing eligible collateral in some or The covered company would then have A) makes a $1,000 loan to a counterparty to include the amount of the eligible (Company B), creating $1,000 of gross credit all cases? If so, should covered exposure to that counterparty, and the companies nevertheless have to guarantee when calculating its gross credit exposure to the eligible protection counterparty provides eligible collateral recognize gross credit exposures to the provider.64 Also, as is the case with issued by a third party (Company C) that has issuers of the eligible collateral? Are eligible collateral, a covered company’s an adjusted market value of $700 on day 1. there situations in which full shifting of Company A would be required to reduce its gross credit exposure to an eligible credit exposure to Company B by the exposures would not be appropriate? Question 23: Are the market volatility protection provider (with respect to an adjusted market value of the eligible eligible guarantee) could not exceed its collateral. As a result, on day 1, Company A haircuts in Table 1 to section 217.132 of the Board’s Regulation Q (12 CFR gross credit exposure to the original would have gross credit exposure of $700 to counterparty on the credit transaction Company C and $300 net credit exposure to 217.132) appropriate for the valuation Company B. of eligible collateral for purposes of this prior to the recognition of the eligible 65 rule? Should these haircuts be guarantee. Accordingly, the exposure As noted, the amount of credit to the eligible protection provider exposure to the original counterparty calibrated differently for purposes of this rule? would be capped at the amount of the and the issuer of the eligible collateral credit exposure to the original will fluctuate over time based on Eligible Guarantees counterparty even if the amount of the movements in the adjusted market value Section 252.74(d) of the proposed rule eligible guarantee is larger than the of the eligible collateral. If the adjusted describes how to reflect eligible original exposure. A covered company market value of the eligible collateral guarantees in calculations of net credit would continue to have credit exposure decreased to $400 on day 2 in the exposure to a counterparty.61 Eligible to the original counterparty to the extent previous example, on day 2 Company guarantees would be defined as that the eligible guarantee does not A’s net credit exposure to Company B guarantees that meet certain conditions, equal the full amount of the credit would increase to $600, and its gross including having been written by an exposure to the original counterparty. credit exposure to Company C would eligible protection provider.62 The decrease to $400. By contrast, if on day Example: A covered company makes a definition of ‘‘eligible protection $1,000 loan to an unaffiliated counterparty 3 the adjusted market value of the provider’’ would be the same as the and obtains a $700 eligible guarantee on the eligible collateral increased to $800, on loan from an eligible protection provider. day 3 Company A’s net credit exposure 61 See proposed rule § 252.74(d). to Company B would decrease to $200, 62 See proposed rule § 252.71(n) for the definition 63 See proposed rule § 252.74(d). of ‘‘eligible guarantee’’ and for a description of the 64 See proposed rule §§ 252.74(d)(1)–(2). 60 See proposed rule § 252.74(c)(2). requirements of an eligible guarantee. 65 See proposed rule § 252.74(d)(2).

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The covered company would have gross These derivatives would be required to covered company would be required to credit exposure of $700 to the protection meet certain criteria, including having recognize a credit exposure to the provider as a result of the eligible guarantee been written by an eligible protection eligible protection provider that is and $300 net credit exposure to the original provider.68 An eligible credit derivative measured using methodologies that the counterparty. Example: A covered company makes a hedge would need to be simple in form, covered company is authorized to use $1,000 loan to an unaffiliated counterparty meaning a single-name or standard, under the Board’s risk-based capital and obtains a $1,500 eligible guarantee from non-tranched index credit derivative. rules (12 CFR part 217, subparts D and an eligible protection provider. The covered An eligible equity derivative hedge must E), rather than the notional amount.72 company would have $1,000 gross credit be in the form of an equity-linked total Example: A covered company holds a exposure to the protection provider (capped return swap and would not include $1,000 bond issued by a non-financial entity at the amount of the exposure to the other, more complex forms of equity (for example, a commercial firm or sovereign) unaffiliated counterparty), but the covered derivatives, such as purchased equity- that is a covered position subject to the company would have no net credit exposure linked options. Board’s market risk rule, and the covered to the original counterparty as a result of the The proposed treatment of eligible company purchases an eligible credit eligible guarantee. credit and equity derivatives would be derivative in a notional amount of $800 from As with eligible collateral, a covered similar to the proposed treatment of Protection Provider X, which is an eligible company would be required to reduce eligible guarantees. A covered company protection provider, to hedge its exposure to its gross exposure to a counterparty by would be required to reduce its gross the non-financial entity. The covered the amount of an eligible guarantee in company would continue to have $200 in net credit exposure to a counterparty by the credit exposure to the non-financial entity. In order to ensure that concentrations in notional amount of any eligible credit or addition, the covered company would treat exposures to guarantors are captured by equity derivative hedge that references Protection Provider X as a counterparty, and the risk-shifting approach. This the counterparty if the covered company would measure its exposure to Protection requirement is meant to limit the ability obtains the derivative from an eligible Provider X using any methodology that the of a covered company to extend loans or protection provider.69 In these covered company is permitted to use under other forms of credit to a large number circumstances, the covered company Regulation Q to calculate its risk-based of high risk borrowers that are generally would be required to include capital requirements. guaranteed by a single guarantor. the notional amount of the eligible Example: A covered company holds as a covered position subject to the Board’s Question 24: Should the definition of credit or equity derivative hedge in eligible guarantee or eligible protection market risk rule a $1,000 bond issued by a calculating its gross credit exposure to financial entity (for example, a banking provider be expanded or narrowed? Are the eligible protection provider.70 As is organization), and the covered company there any additional or alternative the case for eligible collateral and purchases an eligible credit derivative in a requirements the Board should place on eligible guarantees, the gross exposure notional amount of $800 from Protection eligible protection providers to ensure to the eligible protection provider Provider X, which is an eligible protection their capacity to perform on their would in no event be greater than it was provider, to hedge its exposure to the guarantee obligations? to the original counterparty prior to financial entity. The covered company would Question 25: Under what recognition of the eligible credit or continue to have credit exposure of $200 to the underlying financial entity. In addition, circumstances, if any, should covered equity derivative.71 companies have the option of whether the covered company would now treat For eligible credit and equity Protection Provider X as a counterparty, and (1) to fully shift exposures to eligible derivatives that are used to hedge would have an $800 credit exposure to protection providers in the case of covered positions subject to the Board’s Protection Provider X. eligible guarantees or (2) divide an market risk rule (12 CFR part 217, exposure between the original subpart F), the approach would be the As with eligible collateral and eligible counterparty and the eligible protection same as that explained above, except in guarantees, a covered company would provider in some manner? If so, should the case of credit derivatives where the be required to reduce its gross exposure covered companies nevertheless have to counterparty on the hedged transaction to a counterparty by the amount of an recognize gross credit exposures to the is not a financial entity. In this case, a eligible equity or credit derivative, and issuers of the eligible collateral? Are covered company would be required to to recognize an exposure to an eligible there situations in which full shifting of reduce its gross credit exposure to the protection provider, in order to ensure exposures would not be appropriate? counterparty on the hedged transaction that concentrations in exposures to eligible protection providers are Eligible Credit and Equity Derivative by the notional amount of the eligible captured in the regime. However, many Hedges credit derivative that references the counterparty if the covered company commenters on the 2011 proposed rule Section 252.74(e) sets forth the obtains the derivative from an eligible argued that requiring a full notional proposed treatment of eligible credit protection provider. In addition, the shifting of risk in the context of credit and equity derivatives in the case where derivatives was overly conservative, the covered company is the protection protection provider, any credit or equity derivative since a covered company would only purchaser.66 In the case where a covered written by the covered company is included in the experience losses in cases where both company is a protection purchaser, such calculation of the covered company’s gross credit the original counterparty and the derivatives can be used to mitigate gross exposure to the reference obligor. 68 See proposed rule §§ 252.71(l) and (m) defining protection provider default. As such, credit exposure. A covered company ‘‘eligible credit derivative’’ and ‘‘eligible equity these commenters recommended may only recognize credit and equity derivative,’’ respectively. ‘‘Eligible protection allowing covered companies to measure derivative hedges that qualify as eligible provider’’ is defined in § 252.71(o) of the proposed exposures from credit derivative hedges credit and equity derivative hedges for rule. The same types of organizations that are eligible protection providers for the purposes of using the methodologies permitted for purposes of calculating net credit eligible guarantees are eligible protection providers derivatives more generally. exposure under the proposed rule.67 for purposes of eligible credit and equity derivatives. 72 At such time as the Board may consider 66 See proposed rule § 252.74(e). 69 See proposed rule § 252.74(e). incorporation of SA–CCR into the U.S. risk-based 67 By contrast, in section 252.73(a)(12) of the 70 See proposed rule §§ 252.74(e)(1)–(2). capital rules, the Board may consider requiring SA– proposed rule, where the covered company is the 71 See proposed rule § 252.74(e)(2)(i). CCR to be used for this purpose as well.

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The proposed rule includes this permitted to offset long positions would eligible collateral or to an eligible modification for credit derivatives that help to ensure that any loss arising from protection provider in cases of maturity are used to hedge covered positions the covered company’s long exposure is mismatch, such amount generally subject to the market risk rule, where offset by a gain in the covered would be equal to the amount by which the credit derivative is used to hedge an company’s short exposure. the relevant form of credit risk exposure to an entity that is not a Example: A covered company holds $100 mitigation has reduced the exposure to financial entity. The proposed rule of bonds issued by Company X. If the the original counterparty. However, in would require full notional risk-shifting covered company sells short $100 of equity the case of credit and equity derivatives for credit derivatives used to hedge shares issued by Company X, the covered used to hedge exposures subject to the exposures to financial entities because company would not have any net credit Board’s market risk rule (12 CFR 217, most protection providers are financial exposure to Company X. Similarly, the subpart F) that are to counterparties that entities, and when both the protection covered company would not have any net credit exposure to Company X if it sells short are non-financial entities, the covered provider and the reference entity are $100 of Company X’s debt obligations, company would be permitted to financial entities, the probability of provided that those obligations are junior to, recognize a credit exposure with regard correlated defaults generally is or pari passu with, the Company X bonds to the eligible protection provider substantially greater than when that the covered company holds. measured using methodologies that the protection is sold on non-financial Question 29: Should the Board permit covered company is authorized to use reference entities. short positions to offset long positions under the Board’s risk-based capital In cases where a covered company is only if the short position is in an rules, including CEM for all covered required to shift its credit exposure from instrument that is junior to, or pari companies and approaches that rely on the counterparty to an eligible passu with, the instrument that gives internal models for companies subject to protection provider pursuant to section rise to the firm’s long exposure? the Board’s advanced approaches risk- 252.74(e), the covered company would Question 30: Should the Board place based capital rules (12 CFR 217, be permitted to exclude the relevant any additional requirements, including subparts D and E). equity or credit derivative when maturity match requirements, on short calculating its gross exposure to the Example: A covered company makes a loan positions that are eligible to offset long to a counterparty and hedges the resulting eligible protection provider under positions? To the extent that there is a exposure by obtaining an eligible guarantee sections 252.74(a)(10) and 252.94(a)(11). maturity mismatch between the from an eligible protection provider. If the This is to avoid requiring covered positions, should the value of the short residual maturity of the guarantee is less than companies to double count the same position be subject to application of the that of the loan, the covered company would exposures. maturity mismatch adjustment adjust the value assigned to the guarantee Question 26: Should the proposed using the formula in the Board’s Regulation approach of § 217.36(d) of the Board’s definitions of eligible credit derivative or Q (12 CFR part 217). The covered company Regulation Q? eligible equity derivative be expanded or would then reduce its gross credit exposure narrowed? In particular, are there more Treatment of Maturity Mismatches to the underlying counterparty by the complex forms of derivatives that adjusted value of the guarantee and would The above discussion of credit risk set its exposure to the eligible guarantor should be eligible hedges? mitigation techniques (collateral, equal to the adjusted value of the guarantee. Question 27: Under what guarantees, equity and credit Example: A covered company holds bonds circumstances, if any, should covered derivatives, and offsetting short issued by a non-financial entity that are companies be permitted not to recognize positions) assumes that the residual subject to the Board’s market risk rule, and an eligible credit or equity derivative maturity of the credit risk mitigant is hedges the exposure using an eligible credit hedge, or to apportion the exposure greater than or equal to that of the derivative obtained from an eligible between the original counterparty and protection provider. If the residual maturity underlying exposure. If the residual of the eligible credit derivative is less than the eligible protection provider? maturity of the credit risk mitigant is Question 28: To the extent that that of the bonds, the covered company less than that of the underlying covered companies will be required to would reduce its exposure to the issuer of the exposure, the credit risk mitigant would shift exposures to protection providers bonds by the adjusted value of the credit only be recognized under the proposed derivative using the formula in the Board’s in the case of eligible credit or equity rule if the credit risk mitigant’s original Regulation Q. The covered company would derivative hedges, would the proposed maturity is equal to or greater than one measure its exposure to the eligible approach result in recognition of the year and its residual maturity is not less protection provider using methodologies that proper amount of exposure by a covered than three months from the current date. the covered company is permitted to use company to an eligible protection under the Board’s risk-based capital rules (12 In that case, the reduction in the provider? If not, what modifications CFR part 217, subparts D and E), without any underlying exposure would be adjusted should the Board consider? specific adjustment to reflect the maturity based on the same approach that is used mismatch between the bonds and the credit Other Eligible Hedges in the Board’s Regulation Q (12 CFR derivative. Under the proposed rule, a covered part 217) to address a maturity 74 Question 31: The Board invites company would be allowed to reduce its mismatch. comment on the proposed treatment of With respect to the amount of credit exposure to a counterparty by the maturity mismatches in the context of exposure that a covered company would face amount of a short sale of the credit risk mitigation. counterparty’s debt or equity securities, need to recognize to the issuer of provided that the instrument in which Unused Credit Lines 74 A credit risk mitigant would be adjusted using the covered company has a short the formula Pa = P × (t¥0.25)/(T¥0.25), where Pa Section 252.74(g) of the proposed rule position is junior to, or pari passu with, is the value of the credit protection adjusted for addresses the treatment of any unused the instrument in which the covered maturity mismatch; P is the credit protection portion of certain extensions of credit. company has the long position.73 This adjusted for any haircuts; t is the lesser of (1) T or In computing its net credit exposure to (2) the residual maturity of the credit protection, restriction on the set of short positions expressed in years; and T is the lesser of (1) 5 or a counterparty for a credit line or (2) the residual maturity of the exposure, expressed revolving credit facility, a covered 73 See proposed rule § 252.74(f). in years. See 12 CFR 217.36(d). company would be permitted to reduce

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its gross credit exposure by the amount were to an entity that is not excluded (considering only exposures that arise of the unused portion of the credit from the definition of a counterparty. from the SPV), the covered company extension to the extent that the covered Example: A covered company has would be required to apply a ‘‘look- company does not have any legal purchased a credit derivative from an eligible through approach’’ and recognize an obligation to advance additional funds protection provider to hedge the credit risk exposure to each issuer of the assets under the facility until the counterparty on a portfolio of U.S. government bonds. The held by the SPV.78 Conversely, if a provides collateral that qualifies under covered company would need to recognize covered company with $250 billion or the credit line or revolving credit an exposure to the credit protection provider more in total consolidated assets or $10 equal to the full notional of the credit billion or more in total on-balance-sheet facility equal to or greater than the derivative (if the bonds are subject to the entire used portion of the facility.75 To Board’s risk-based capital rules in 12 CFR foreign exposures can demonstrate that qualify for this reduction, the contract part 217, subparts D and E) or to the its exposure to each underlying asset in governing the extension of credit would counterparty credit risk measurements an SPV is less than 0.25 percent of the be required to specify that any used obtained by using methodologies that the covered company’s tier 1 capital portion of the credit extension must be covered company is permitted to use under (considering only exposures that arise the market risk capital rules (if the bonds are fully secured at all times by collateral from the SPV), the covered company subject to the Board’s market risk rule in 12 would be allowed to recognize an that is either (i) cash; (ii) obligations of CFR part 217, subpart F). the United States or its agencies; (iii) exposure solely to the SPV and not to Question 33: If a covered company 79 obligations directly and fully guaranteed the underlying assets. The proposed has an exempted credit exposure but as to principal and interest by, the 0.25 percent threshold for requiring the either (1) receives non-exempt eligible Federal National Mortgage Association use of the look-through approach is collateral in support of the exempted or the Federal Home Loan Mortgage intended to strike a balance between the transaction or (2) obtains a non-exempt goals of limiting a covered company’s Corporation, but only while operating eligible guarantee or eligible credit or under the conservatorship or exposures to underlying assets in an equity derivative referencing the SPV and avoiding excessive burden. If receivership of the Federal Housing exempted credit exposure from an Finance Agency; or (iv) any additional a covered company with $250 billion or eligible protection provider, should the more in total consolidated assets or $10 obligations issued by a U.S. government covered company be required to sponsored entity, as determined by the billion or more in total on-balance-sheet recognize an exposure to the issuer(s) of foreign exposures would be required to Board.76 the collateral or eligible protection apply the look-through approach, but is Question 32: What alternative provider even though the original credit unable to identify an issuer of assets approaches should the Board consider exposure was exempt? Should the Board underlying an SPV, the covered concerning the unused portion of consider any alternative treatment in company would be required to attribute certain credit facilities? such situations? the exposure to a single ‘‘unknown Credit Transactions Involving Exempt Exposures to Funds and Securitizations counterparty.’’ The covered company would then be required to aggregate all and Excluded Persons Special considerations arise in exposures to an unknown counterparty connection with measuring credit 77 as if they related to a single Section 252.74(h) provides that, if a exposure of a covered company to a counterparty. covered company has reduced its credit securitization fund, investment fund or exposure to a counterparty that would The application of the look-through other special purpose vehicle approach would depend on the nature be exempt under the proposed rule by (collectively, SPVs). In some cases, a obtaining eligible collateral from that of the investment of the covered covered company’s failure to recognize company in the SPV. Where all entity, or by obtaining an eligible an exposure to the issuers of the investors in an SPV are pari passu, the guarantee or an eligible credit or equity underlying assets held by an SPV may covered company would calculate its derivative from an eligible protection understate the covered company’s credit exposure to an issuer of assets held by provider, the covered company must exposure to those issuers. In other cases, the SPV as an amount equal to the recognize an exposure to the collateral a covered company’s credit exposure to covered company’s pro rata share in the issuer or eligible protection provider to the issuers of the underlying assets held SPV multiplied by the value of the the same extent as if the underlying by an SPV may be insignificant and, in SPV’s underlying assets issued by that exposure were to an entity that is not such cases, requiring a covered issuer. exempt. Similarly, if a covered company company to recognize an exposure to has reduced its exposure to an entity each issuer of underlying assets for Example: An SPV holds $10 of bonds that is excluded from the definition of every SPV in which a covered company issued by Company A and $20 of bonds a ‘‘counterparty’’ (e.g., the U.S. invests could be unduly burdensome. issued by Company B. Assuming that all government or a foreign sovereign entity Under the proposed rule, covered investors in the SPV are pari passu and that a covered company’s pro rata share in the that receives a zero percent risk weight companies that have $250 billion or SPV is 50 percent, a covered company (with under Regulation Q) by obtaining more in total consolidated assets or $10 $250 billion or more in total consolidated eligible collateral from that entity, or by billion or more in total on-balance-sheet assets or $10 billion or more in total on- obtaining an eligible guarantee or an foreign exposures would be required to balance-sheet foreign exposures) would need eligible credit or equity derivative from analyze their credit exposure to the an eligible protection provider, the issuers of the underlying assets in an 78 See proposed rule § 252.75. The calculation of covered company must recognize an SPV in which the covered company a covered company’s exposure to an issuer of assets held by an SPV is discussed in more detail in the exposure to the collateral issuer or invests or to which the covered following paragraphs. eligible protection provider to the same company otherwise has credit exposure. 79 A covered company’s exposure to each extent as if the underlying exposure If a covered company cannot underlying asset in an SPV necessarily would be demonstrate that its exposure to the less than 0.25 percent of the covered company’s eligible capital base where the covered company’s 75 See proposed rule § 252.74(g). issuer of each underlying asset held by entire investment in the SPV is less than 0.25 76 Id. an SPV is less than 0.25 percent of the percent of the covered company’s eligible capital 77 See proposed rule § 252.74(h). covered company’s tier 1 capital base.

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to recognize a $5 exposure to Company A value of the covered company’s make this demonstration with respect to (i.e., 50 percent of $10) and a $10 exposure investment in the SPV are originators of all the underlying assets? to Company B (i.e., 50 percent of $20) if the assets held by the SPV, liquidity Exemptions look-through approach is required. providers to the SPV, and (potentially) If all investors in an SPV are not pari fund managers. In such cases, the Under the proposal, single- passu, a covered company that is covered company would be required to counterparty credit limits would not required to use the look-through recognize an exposure to the relevant apply to exposures to the U.S. approach would measure its exposure to third party that is equal to the value of government or a foreign sovereign entity an issuer of assets held by the SPV for the covered company’s investment in that receives a zero percent risk weight each tranche in the SPV in which the the SPV. This requirement would be in under Regulation Q because such covered company invests. The covered addition to the requirements described entities are not included in the company would do this using a two-step above to recognize an exposure to the definition of a ‘‘counterparty.’’ Section process. First, the covered company SPV and, if needed, to the issuers of 252.77 of the proposed rule sets forth would assume that the total exposure to assets held by the SPV. additional exemptions from the single- an issuer of assets held by the SPV These proposed requirements for counterparty credit limits.81 Section among all investors in a given SPV covered companies with $250 billion or 165(e)(6) of the Dodd-Frank Act states tranche is equal to the lesser of the more in total consolidated assets or $10 that the Board may, by regulation or value of the tranche and the value of the billion or more in total on-balance-sheet order, exempt transactions, in whole or assets issued by the issuer that are held foreign exposures would be appropriate in part, from the definition of the term by the SPV. Second, the covered in light of the larger systemic footprint ‘‘credit exposure’’ for purposes of this company would multiply this exposure of those firms, and is consistent with the subsection, if the Board finds that the amount by the percentage of the SPV direction in section 165(a)(1)(B) of the exemption is in the public interest and tranche that the covered company Dodd-Frank Act to tailor enhanced is consistent with the purposes of this holds. prudential standards based on factors subsection.82 such as the nature, scope, size, scale, Example: An SPV holds $10 of bonds The first exemption from the issued by Company A. The SPV has issued concentration, interconnectedness, and proposed rule would be for direct $4 of junior notes and $6 of senior notes to mix of the activities of the company to claims on, and the portions of claims the SPV’s investors. A covered company with which the standards apply.80 that are directly and fully guaranteed as $250 billion or more in total consolidated Question 34: Is the proposed to principal and interest by, the Federal assets or $10 billion or more in total on- treatment of a covered company that National Mortgage Association and the balance-sheet foreign exposures holds 50 has less than $250 billion or more in percent of the junior notes and 50 percent of Federal Home Loan Mortgage total consolidated assets and less than Corporation, while these entities are the senior notes. With respect to the junior $10 billion or more in total on-balance- tranche of the SPV, the lesser of the value of operating under the conservatorship or the tranche (i.e., $4) and the value of the sheet foreign exposures with respect to receivership of the Federal Housing underlying assets issued by Company A (i.e., its exposures related to SPVs Finance Agency.83 This proposed $10) is $4. With respect to the senior tranche appropriate? What alternatives should exemption reflects a policy decision that of the SPV, the lesser of the value of the the Board consider? credit exposures to these government- tranche (i.e., $6) and the value of the Question 35: Is the proposed sponsored entities should not be subject underlying assets issued by Company A (i.e., treatment of a covered company with to a regulatory limit for so long as the $10) is $6. Because the covered company has $250 billion or more in total entities are in the conservatorship or $250 billion or more in total consolidated consolidated assets or $10 billion or receivership of the U.S. government. assets or $10 billion or more in total on- more in total on-balance-sheet foreign balance-sheet foreign exposures and its pro This approach is consistent with the exposures with respect to its exposures rata share of each tranche is 50 percent, it approach that the Board used in its risk related to SPVs appropriate? Are there would need to recognize $2 of exposure to retention rules.84 situations in which the proposed As determined by the Company A because of its investment in the Board, obligations issued by another junior tranche (i.e., 50 percent of $4), and $3 treatment would result in recognition of of exposure to Company A because of its inappropriate amounts of credit U.S. government sponsored entity investment in the senior tranche (i.e., 50 exposure concerning an SPV? What would also be exempt. The Board percent of $6), assuming the look-through alternative approaches should the requests comment on whether these approach is required. Board consider? exemptions are appropriate. In addition, a covered company with Question 36: Is the proposed The second exemption from the $250 billion or more in total treatment of exposures related to SPVs proposed rule would be for intraday 85 consolidated assets or $10 billion or sufficiently clear? Would further credit exposure to a counterparty. more in total on-balance-sheet foreign clarification or simplification be This exemption would help minimize exposures would be required to identify appropriate? What modifications should the impact of the rule on the payment third parties whose failure or distress the Board consider? For example, and settlement of financial transactions. would likely result in a loss in the value should the Board modify the approach The third exemption from the of the covered company’s investment in such that a covered company would proposed rule would be for trade the SPV. For example, the value of an only be required to use the look-through exposures to a central counterparty that investment by the covered company in approach with respect to particular meet the definition of a qualified central an SPV might be reliant on various underlying exposures rather than all counterparty under Regulation Q 86 forms of credit support provided by a underlying exposures in the event that (QCCPs). These exposures would financial institution to the SPV. The the covered company is able to failure or distress of the credit support demonstrate that its credit exposure to 81 See proposed rule § 252.77. 82 provider would then lead to loss in the some of the underlying assets in an SPV See 12 U.S.C. 5365(e)(6). 83 See proposed rule § 252.77(a)(1). value of the investment of the covered is less than 0.25 percent of the covered 84 See 12 CFR 244.8. company in the SPV. Other examples of company’s tier 1 capital but not able to 85 See proposed rule § 252.77(a)(2). third parties whose failure or distress 86 See proposed rule § 252.71(y); see also 12 CFR could potentially lead to a loss in the 80 12 U.S.C. 5365(a)(1)(B). 217.2.

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include potential future exposure with the requirements of the proposed are developed for covered companies to arising from transactions cleared by a rule on a daily basis as of the end of use in reporting their 165(e) exposures. QCCP and pre-funded default fund each business day. Such covered Question 39: Should the rule provide contributions.87 The proposed rule companies also would be required to a cure period for covered companies would exempt these exposures to submit a monthly compliance report to that fall out of compliance? Under what QCCPs from single-counterparty credit the Board.91 circumstances should such a cure limits because of the concern that period be provided, and how long Section 252.78(c) of the proposed rule should such a period be? application of single-counterparty credit would address the consequences if a limits to these exposures would require Question 40: If a cure period is covered company fails to comply with firms to spread activity across a greater provided, would it be appropriate to the credit exposure limits.92 This number of CCPs, which could lead to a generally prohibit additional credit section states that if a covered company reduction in multilateral netting transactions with the affected is not in compliance with respect to a benefits.88 counterparty during the cure period? The fourth exemption category would counterparty due to a decrease in the Are there additional situations in which implement section 165(e)(6) of the covered company’s capital, the merger additional credit transactions with the Dodd-Frank Act and provide a catch-all of a covered company with another affected counterparty would be category to exempt any transaction covered company, or the merger of two appropriate? What additional which the Board determines to be in the unaffiliated counterparties of the modifications or clarifications should public interest and consistent with the covered company, the covered company the Board consider with respect to any purposes of section 165(e).89 would not be subject to enforcement cure period? actions with respect to such Section 252.77(b) of the proposed rule Timing would implement section 165(e)(6) of noncompliance for a period of 90 days Under the proposed rule, covered the Dodd-Frank Act, which provides a (or such shorter or longer period companies with total consolidated statutory exemption for credit exposures determined by the Board to be assets of less than $250 billion in total to the Federal Home Loan Banks. appropriate to maintain the safety and consolidated assets and less than $10 Question 37: Should all trade soundness of the covered company or billion or more in total on-balance-sheet exposures to QCCPs be exempt from the financial stability), so long as the foreign exposures would be required to proposed rules? Is the definition of company uses reasonable efforts to comply initially with the proposed rules ‘‘QCCP’’ sufficiently clear? Should the return to compliance with the proposed two years from the effective date of the Board consider exempting any different rule during this period. The covered proposed rules, unless that time is or additional exposures to QCCPs? company would be prohibited from extended by the Board in writing.96 Would additional clarification on these engaging in any additional credit Covered companies that have $250 issues be appropriate? transactions with such a counterparty in billion or more in total consolidated Question 38: Should the Board contravention of this rule during the assets or $10 billion or more in total on- exempt any additional credit exposures non-compliance period, except in cases balance-sheet foreign exposures would from the limitations of the proposed where the Board determines that such be required to comply initially with the rule? If so, please explain why. additional credit transactions are proposed rules one year from the Compliance necessary or appropriate to preserve the effective date of the rule, unless that safety and soundness of the covered time is extended by the Board in 93 Under section 252.78(a) of the company or financial stability. In 97 proposed rule, covered companies with writing. granting approval for any such special Any company that becomes a covered less than $250 billion in total temporary exceptions, the Board may company after the effective date of the consolidated assets and less than $10 impose supervisory oversight and rule would be required to comply with billion in total on-balance-sheet foreign reporting measures that it determines the requirements of the rule beginning exposures would be required to are appropriate to monitor compliance on the first day of the fifth calendar demonstrate compliance with the 94 with the foregoing standards. quarter after it becomes a covered requirements of the proposed rule as of company, unless that time is accelerated the end of each calendar quarter.90 The Board plans to develop reporting forms for covered companies to use to or extended by the Board in writing.98 These companies would, however, need Question 41: Should the Board to have systems in place that would report credit exposures to their counterparties as those credit exposures consider a longer or shorter phase-in allow them to calculate compliance on period for all or a subset of covered a daily basis and would be required to would be measured under section 165(e). In addition, section 165(d)(2) of companies? Is a shorter phase-in period calculate compliance on a more frequent for covered companies with $250 billion basis than quarterly if directed to do so the Dodd-Frank Act directs the Board to require bank holding companies with or more in total consolidated exposures, by the Board. A covered company with or $10 billion or more in total on- $250 billion or more in total $50 billion or more in total consolidated assets and nonbank financial companies balance-sheet foreign exposures, consolidated assets or $10 billion or compared to firms below these more in total on-balance-sheet foreign that are supervised by the Board to 95 thresholds, appropriate? exposures would be required to comply prepare period exposure reports. The Board anticipates that 165(d)(2) credit Proposed Rule for Foreign Banking 87 As initial margin and excess variation margin exposure reporting obligations will be Organizations posted to the QCCP and held in a segregated informed by the requirements of the account by a third party custodian are not subject 165(e) framework and by any forms that Background to counterparty risk, these amounts would not be In February 2014, the Board adopted considered credit exposures under the proposed rule. 91 See proposed rule § 252.78(a). a final rule establishing enhanced 88 See proposed rule § 252.77(a)(3). 92 See proposed rule § 252.78(c). 89 See 12 U.S.C. 5365(e)(6); proposed rule 93 Id. 96 See proposed rule § 252.70(g)(1). § 252.76(a)(4). 94 See proposed rule § 252.78(d). 97 See proposed rule § 252.70(g)(2). 90 See proposed rule § 252.78(a). 95 12 U.S.C. 5365(d)(2). 98 See proposed rule § 252.70(h).

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prudential standards for foreign banking intermediate holding companies, would consolidated assets or $10 billion or organizations with U.S. banking only apply with respect to credit more in total on-balance-sheet foreign operations and total consolidated assets exposures of that foreign banking exposures, but less than $500 billion in of $50 billion or more.99 Under that organization’s combined U.S. operations total consolidated assets, from having rule, a foreign banking organization (i.e., any U.S. intermediate holding aggregate net credit exposure to an with U.S. non-branch assets of $50 company, including its subsidiaries, unaffiliated counterparty in excess of 25 billion or more will be required to form plus any U.S. branches or agencies of percent of the covered entity’s tier 1 an intermediate holding company (U.S. the foreign banking organization), capital. For the same reasons as intermediate holding company) to hold although the foreign banking described above with respect to the its interests in U.S. bank and nonbank organization’s total consolidated assets portion of the proposed rule applicable subsidiaries.100 A foreign banking on a worldwide basis would determine to covered companies, the proposed organization’s U.S. intermediate holding whether the credit exposure limits single-counterparty credit limits company will be subject to enhanced apply. applicable to a covered entity, including prudential standards on a consolidated The first category of limits would both a foreign banking organization and basis, including risk-based and leverage apply to covered entities that have less any U.S. intermediate holding company, capital requirements, liquidity than $250 billion in total consolidated with $250 billion or more in total requirements, and risk management assets and less than $10 billion in on- consolidated assets or $10 billion or standards. Certain enhanced prudential balance-sheet foreign exposures. more in total on-balance-sheet foreign standards also will apply to a foreign Covered entities that have less than exposures would be based on tier 1 banking organization’s ‘‘combined U.S. $250 billion in total consolidated assets capital. operations,’’ which would include a and less than $10 billion in on-balance The third category of exposure limits foreign banking organization’s U.S. sheet foreign exposures would be would prohibit any covered entity with branches and agencies as well as U.S. prohibited from having aggregate net total consolidated assets of $500 billion subsidiaries. credit exposure to an unaffiliated or more (major foreign banking Like the enhanced prudential counterparty in excess of 25 percent of organization or major U.S. intermediate standards for foreign banking the covered entity’s total capital stock holding company) from having organizations that the Board previously and surplus, defined under the rule as aggregate net credit exposure in excess has adopted, the single-counterparty (1) in the case of a U.S. intermediate of 15 percent of the tier 1 capital of the credit limits in this proposed rule holding company, the sum of the U.S. major foreign banking organization or would apply to a foreign banking intermediate holding company’s total major U.S. intermediate holding organization with U.S. banking regulatory capital, as calculated under company to a major counterparty, and operations and $50 billion or more in the risk-based capital adequacy 25 percent of the tier 1 capital of the total consolidated assets, and to the U.S. guidelines applicable to that U.S. major foreign banking organization or intermediate holding company of such a intermediate holding company, plus the major U.S. intermediate holding foreign banking organization. balance of the ALLL of the U.S. company to any other counterparty. A intermediate holding company not ‘‘major counterparty’’ would be defined Overview of the Proposed Rule for included in tier 2 capital under the as a global systemically important Foreign Banking Organizations capital adequacy guidelines, and (2) in banking organization or a nonbank Similar to the proposed rule to the case of a foreign banking financial company supervised by the implement section 165(e) of the Dodd- organization, the total regulatory capital Board. This framework would be Frank Act for domestic companies, the of the foreign banking organization on a consistent with the requirement in aggregate net credit exposure of a consolidated basis, as determined in section 165(a)(1)(B) of the Dodd-Frank foreign banking organization or U.S. accordance with section 252.171(d) of Act that the enhanced standards intermediate holding company with the proposed rule.101 The different established by the Board under section total consolidated assets of $50 billion definition of ‘‘capital stock and surplus’’ 165 increase in stringency based on or more (each a covered entity) to a with respect to a foreign banking factors such as the nature, scope, size, single counterparty would be subject to organization reflects differences in scale, concentration, one of three increasingly stringent credit international accounting standards. interconnectedness, and mix of the exposure limits. Credit exposure limits The second category of exposure activities of the company.102 The credit as applied to foreign banking limits would prohibit any covered entity exposure limits are summarized in organizations, as opposed to with $250 billion or more in total Table 2.

TABLE 2—SINGLE-COUNTERPARTY CREDIT LIMITS APPLICABLE TO COVERED ENTITIES

Category of covered entities Applicable credit exposure limit

U.S. intermediate holding companies or foreign banking organizations Aggregate net credit exposure of a U.S. intermediate holding company with less than $250 billion in total consolidated assets and less than cannot exceed 25 percent of the U.S. intermediate holding com- $10 billion in on-balance-sheet foreign exposures.. pany’s total regulatory capital plus the balance of its ALLL not in- cluded in tier 2 capital under the capital adequacy guidelines in 12 CFR part 252. Aggregate net credit exposure of a foreign banking organization, with respect to its U.S. combined operations, to a counterparty cannot ex- ceed 25 percent of the foreign banking organization’s total regulatory capital on a consolidated basis.

99 See 79 FR 17240 (Mar. 27, 2014). banking organization’s interest in any company 101 See 12 CFR part 252, subpart L. 100 A foreign banking organization’s intermediate held under section 2(h)(2) of the Bank Holding 102 12 U.S.C. 5323, 5365(e). holding company is not required to hold the foreign Company Act, 12 U.S.C. 1841(h)(2).

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TABLE 2—SINGLE-COUNTERPARTY CREDIT LIMITS APPLICABLE TO COVERED ENTITIES—Continued

Category of covered entities Applicable credit exposure limit

U.S. intermediate holding companies or foreign banking organizations Aggregate net credit exposure of a U.S. intermediate holding company with $250 billion or more in total consolidated assets or $10 billion or to a counterparty cannot exceed 25 percent of the U.S. intermediate more in on-balance-sheet foreign exposures.. holding company’s tier 1 capital. Aggregate net credit exposure of a foreign banking organization, with respect to its U.S. combined operations, to a counterparty cannot ex- ceed 25 percent of the foreign banking organization’s worldwide tier 1 capital. Major U.S. intermediate holding companies and major foreign banking Aggregate net credit exposure of a major U.S. intermediate holding organizations.. company or, with respect to its combined U.S. operations, of a for- eign banking organization to a major counterparty cannot exceed 15 percent of the covered entity’s tier 1 capital. Aggregate net credit exposure of a major U.S. intermediate holding company or, with respect to its combined U.S. operations, of a for- eign banking organization to other counterparties cannot exceed 25 percent of the covered entity’s tier 1 capital.

Question 42: Should the Board apply factors, including size, complexity, Holding Company Act of 1956.105 For these single-counterparty credit limits to interconnectedness, cross-border purposes of the proposed rule all foreign banking organizations that exposure, and substitutability. Imposing applicable to covered entities, the have $50 billion or more in total stricter limits on exposures of the definitions of subsidiary, counterparty, consolidated assets, regardless of the combined U.S. operations of major and related terms and the economic size of these organizations’ combined foreign banking organizations or major interdependence, control relationship, operations in the United States? Is this U.S. intermediate holding companies to and attribution requirements would be application appropriate? their respective major counterparties the same as under the portions of the The more stringent limit for major based on a simple asset threshold may proposed rule applicable to covered U.S. intermediate holding companies not take into account nuances that companies. and, with respect to their combined U.S. might be captured by other approaches. Although the major components of operations, major foreign banking Question 43: Should the Board adopt the proposed single-counterparty credit organizations would be consistent with a different approach in determining limits for foreign banking organizations the Board’s discretion under the Dodd- which foreign banking organizations, would be the same as the proposed Frank Act to impose such lower single- with respect to their combined U.S. requirements for domestic covered counterparty credit limits as the Board operations, and U.S. intermediate companies, there are also some may determine by regulation to be holding companies should be treated as differences between the proposed rules. necessary to mitigate risks to the major foreign banking organizations or For example, as discussed in more financial stability of the United States, major U.S. intermediate holding detail below, the proposed single- as well as with the standard in section companies? counterparty credit limits would not 165(a)(1)(B) of the Dodd-Frank Act that apply to exposures of a U.S. the Board establish enhanced prudential Question 44: Should the Board adopt intermediate holding company or a standards that increase in stringency a different approach to the definition of foreign banking organization’s based on the systemic footprint of the a ‘‘major counterparty’’? combined U.S. operations to the foreign firms to which they apply. The rationale In determining whether a U.S. banking organization’s home country for proposing to apply a 15 percent limit intermediate holding company complies sovereign, regardless of the risk weight to such exposures is set out in more with these limits, exposures of the U.S. assigned to that sovereign under the detail in the discussion in the intermediate holding company itself Board’s Regulation Q (12 CFR part 217). SUPPLEMENTARY INFORMATION concerning and its subsidiaries would need to be the credit exposure limits of the taken into account. Exposures of a Question 45: As noted, the proposed domestic proposed rule. foreign banking organization’s rule would apply the single- The proposed approach to identifying combined U.S. operations would counterparty credit limits to covered a major U.S. intermediate holding include exposures of any branch or entities on a consolidated basis and company and major foreign banking agency of the foreign banking could, therefore, impact the level of organization is based only on size, and organization; exposures of the U.S. credit exposures of subsidiaries of these the Board recognizes that size is only a subsidiaries of the foreign banking covered entities, including depository rough proxy for the systemic footprint of organization, including any U.S. institutions. Is application on a a company. By contrast, the domestic intermediate holding company; and any consolidated basis appropriate? proposed rule would only subject a U.S. subsidiaries of such subsidiaries (other Question 46: What challenges, if any, banking organization to a 15 percent than any companies held under section would a foreign banking organization limit on its exposures to major 2(h)(2) of the Bank Holding Company face in implementing the requirement counterparties if that U.S. banking Act of 1956).104 ‘‘Subsidiary’’ would be that all subsidiaries of the U.S. organization has been identified as a defined in the same manner as under intermediate holding company and the global systemically important banking the proposed requirements for domestic combined U.S. operations be subject to organization under Method 1 of the covered companies: any company that a the proposed single-counterparty credit Board’s G–SIB surcharge rule.103 These parent company directly or indirectly limit? determinations are based on multiple controls for purposes of the Bank 105 12 U.S.C. 1841 et seq.; see proposed rule 103 12 CFR 217.402. 104 12 U.S.C. 1841(h)(2). § 252.171(dd).

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Question 47: What other alternatives of derivative exposures of a foreign finds that the exemption is in the public to the proposed capital bases should the banking organization’s combined U.S. interest and is consistent with the Board consider in applying single- operations or U.S. intermediate holding purposes of this subsection. The counterparty credit limits to U.S. company and the treatment derivative proposed rule would provide the same intermediate holding companies and the exposures of U.S. covered companies? exemptions for the credit exposures of combined U.S. operations of foreign Question 52: Should the rule provide covered entities as the proposed rule banking organizations? a separate process that allows foreign provides for credit exposures of Question 48: Should tier 1 capital be banking organizations to receive Board domestic covered companies.109 In used as the capital base in applying approval to use internal models to value addition, the proposed rule would single-counterparty credit limits to U.S. derivative transactions solely for the include an additional exemption for a intermediate holding companies and the purpose of complying with this rule? foreign banking organization’s combined U.S. operations of foreign exposures to its home country banking organizations with $250 billion Net Credit Exposure sovereign, notwithstanding the risk or more in total consolidated assets, or The proposed rule describes how a weight assigned to that sovereign entity $10 billion or more in total on-balance- covered entity would convert gross under the Board’s Regulation Q (12 CFR sheet foreign exposures? credit exposure amounts to net credit part 217).110 This exemption would Question 49: Should single- exposure amounts by taking into recognize that a foreign banking counterparty credit limits apply to a account eligible collateral, eligible organization’s U.S. operations may have foreign banking organization’s guarantees, eligible credit and equity exposures to its home country sovereign combined U.S. operations, or is derivatives, other eligible hedges (that entity that are required by home country application of single-counterparty credit is, a short position in the counterparty’s laws or are necessary to facilitate the limits to a foreign banking debt or equity securities), and for normal course of business for the organization’s combined U.S. securities financing transactions, the consolidated company. This proposed operations unnecessary in light of the effect also of bilateral netting exemption would be in the public Basel Committee’s adoption of a Large agreements. The proposed treatment interest and consistent with the Exposures standard? described below is generally consistent treatment of credit exposures of covered Gross Credit Exposure with the proposed treatment for companies to the U.S. government. domestic bank holding companies. Question 55: Would additional The proposed valuation rules for However, the definition of ‘‘eligible exemptions for foreign banking measuring gross credit exposure to a collateral’’ for covered entities would organizations or the U.S. intermediate counterparty would be the same as exclude debt or equity securities holding companies of foreign banking those set forth in the proposed rule for (including convertible bonds) issued by organizations be appropriate? Why or domestic bank holding companies, other an affiliate of the U.S. intermediate why not? than the proposed valuation rules for holding company or the combined U.S. Compliance derivatives exposures of U.S. branches operations of a foreign banking and agencies that are subject to a organization, and the definition of Under the proposed rule, an U.S. qualifying master netting agreement. ‘‘eligible protection provider’’ would intermediate holding company or the When calculating a U.S. branch or exclude the foreign banking combined U.S. operations of a foreign agency’s gross credit exposure to a organization or any affiliate thereof.107 banking organization with less than counterparty for a derivative contract Question 53: Does the proposed $250 billion in total consolidated assets, that is subject to a qualifying master approach to the calculation of net credit and less than $10 billion in total on- netting agreement, a foreign banking exposure pose particular concerns for balance-sheet foreign exposures, would organization could choose either to use U.S. intermediate holding companies or be required to comply with the the exposure at default calculation set foreign banking organizations, with requirements of the proposed rule as of forth in the Board’s advanced respect to their U.S. operations? the end of each quarter.111 Other approaches capital rules (12 CFR intermediate holding companies and 217.132(c)) provided that the collateral Exposures to Funds and Securitizations foreign banking organizations would be recognition rules of the proposed rule The proposed rule’s treatment for a required to comply with the proposed would apply, or use the gross valuation covered entity’s exposures to funds and rule on a daily basis as of the end of methodology for derivatives not subject securitizations would be the same as the each business day and submit a monthly to a qualified master netting proposed treatment for a domestic compliance report demonstrating its agreements.106 Under this approach, a covered company’s exposures to such daily compliance.112 A foreign banking foreign banking organization would be entities.108 organization would be required to able to rely on a qualified master netting Question 54: Does the proposed ensure the compliance of its U.S. agreement to which the U.S. branch or treatment of exposures related to SPVs intermediate holding company and its agency is subject that covers exposures pose particular concerns for foreign combined U.S. operations. If either the of the foreign banking organization banking organizations, with respect to U.S. intermediate holding company or outside of the U.S. branch and agency its combined U.S. operations, or U.S. the combined U.S. operations were not network. intermediate holding companies? in compliance with respect to a Question 50: Is the proposed counterparty, both of the U.S. Exemptions treatment of derivatives exposures of intermediate holding company and the U.S. branches and agencies that are As noted, section 165(e)(6) of the combined U.S. operations would be subject to a qualifying master netting Dodd-Frank Act permits the Board to prohibited from engaging in any agreement appropriate? What exempt transactions from the definition additional credit transactions with such alternatives should the Board consider? of the term ‘‘credit exposure’’ for Question 51: Should there be any purposes of this subsection, if the Board 109 See proposed rule § 252.177(a). other differences between the treatment 110 See proposed rule § 252.177(a)(4). 107 See proposed rule § 252.171(k). 111 See proposed rule § 252.178(a). 106 See proposed rule § 252.173(a)(11). 108 See proposed rule § 252.175. 112 Id.

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a counterparty, except in cases when the Board in writing.116 Any company that • What other changes can the Board Board determines that such additional becomes a covered company after the incorporate to make the regulation credit transactions are necessary or effective date of the rule would be easier to understand? appropriate to preserve the safety and required to comply with the Regulatory Flexibility Act Analysis soundness of the foreign banking requirements of the rule beginning on organization or financial stability.113 In the first day of the fifth calendar quarter In accordance with section 3(a) of the considering special temporary after it becomes a covered entity, unless Regulatory Flexibility Act 118 (RFA), the exceptions, the Board could impose that time is accelerated or extended by Board is publishing an initial regulatory supervisory oversight and reporting the Board in writing.117 flexibility analysis of the proposed rules. The RFA requires an agency measures that it determines are Regulatory Analysis appropriate to monitor compliance with either to provide an initial regulatory the foregoing standards.114 Paperwork Reduction Act flexibility analysis with a proposed rule for which a general notice of proposed Question 56: Should the rule provide Certain provisions of the proposed rulemaking is required or to certify that a cure period for covered entities that rules contain ‘‘collection of the proposed rule will not have a are not compliant? Under what information’’ requirements within the significant economic impact on a circumstances should such a cure meaning of the Paperwork Reduction substantial number of small entities. period be provided, and how long Act (PRA) of 1995 (44 U.S.C. 3501 Based on its analysis and for the reasons should such a period be? through 3521). The Board has reviewed stated below, the Board believes that Question 57: If a cure period is the reporting requirements in sections these proposed rules will not have a provided, would it be appropriate to 252.78(a) and 252.178(a) of the significant economic impact on a generally prohibit additional credit proposed rules under the authority substantial number of small entities. transactions with the affected delegated to the Board by Office of Nevertheless, the Board is publishing an counterparty during the cure period? Management and Budget (OMB). The initial regulatory flexibility analysis. A Are there additional situations in which Board will address these requirements final regulatory flexibility analysis will additional credit transactions with the in a separate notice, such as when the be conducted after comments received affected counterparty would be Board proposes reporting forms for during the public comment period have appropriate? What additional companies subject to these rules to use modifications or clarifications should been considered. to report credit exposures to their In accordance with section 165 of the the Board consider with respect to any counterparties as those credit exposures cure period? Dodd-Frank Act, the Board is proposing would be measured under the proposed to amend Regulation YY to establish Question 58: Should the Board rules. consider any temporary exceptions single-counterparty credit limits for particularly for foreign banking Solicitation of Comments on the Use of bank holding companies, foreign organizations or the U.S. intermediate Plain Language banking organizations, and U.S. holding companies of foreign banking Section 722 of the Gramm-Leach intermediate holding companies with organizations? In what situations would Bliley Act (Pub. L. 106–102, 113 Stat. total consolidated assets of $50 billion a temporary exception be appropriate? 1338, 1471, 12 U.S.C. 4809) requires the or more in order to limit the risks that Federal banking agencies to use plain the failure of any individual firm could Timing 119 language in all proposed and final rules pose to those organizations. Under regulations issued by the Small The proposed rule is designed to be published after January 1, 2000. The Business Administration (SBA), a less stringent for those foreign banking Board has sought to present the ‘‘small entity’’ includes a depository organizations and U.S. intermediate proposed rules in a simple and institution, bank holding company, or holding companies whose failure or straightforward manner, and invites savings and loan holding company with distress would be less likely to pose a comment on the use of plain language. risk to U.S. financial stability. Foreign assets of $550 million or less (small For example: 120 banking organizations and U.S. • Have the agencies organized the banking organizations). As discussed intermediate holding companies with material to suit your needs? If not, how in the SUPPLEMENTARY INFORMATION, the less than $250 billion in total could they present the proposed rules proposed rules generally would apply to consolidated assets and less than $10 more clearly? bank holding companies, foreign billion in total on-balance-sheet foreign • Are the requirements in the banking organizations, and U.S. assets would be required to comply proposed rules clearly stated? If not, intermediate holding companies with initially with the proposed rule two how could the proposed rules be more total consolidated assets of $50 billion years from the effective date of the clearly stated? or more. Companies that are subject to proposed rule, unless that time is • Do the regulations contain technical the proposed rule have consolidated extended by the Board in writing.115 language or jargon that is not clear? If assets that substantially exceed the $550 Foreign banking organizations and U.S. so, which language requires million asset threshold at which a intermediate holding companies with clarification? banking entity is considered a ‘‘small $250 billion or more in total • Would a different format (grouping entity’’ under SBA regulations. Because consolidated assets or $10 billion or and order of sections, use of headings, the proposed rules would not apply to more in total on-balance-sheet foreign paragraphing) make the regulation any company with assets of $550 assets would be required to comply easier to understand? If so, what million or less, if adopted in final form, initially with the proposed rule one year changes would achieve that? the proposed rules would not apply to from the effective date of the rule, • Is the section format adequate? If any ‘‘small entity’’ for purposes of the unless that time is extended by the not, which of the sections should be RFA. The Board does not believe that changed and how? the proposed rules duplicate, overlap, or 113 See proposed rule § 252.178(c). 114 See proposed rule § 252.178(d). 116 See proposed rule §§ 252.170(c)(1)(ii) and 118 5 U.S.C. 601 et seq. 115 See proposed rule §§ 252.170(c)(1)(i) and 252.170(c)(2)(ii). 119 See 12 U.S.C. 5365(e). 252.170(c)(2)(i). 117 See proposed rule § 252.170(d). 120 See 13 CFR 121.201.

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conflict with any other Federal rules. In foreign exposures is subject to the credit (3) A company that becomes a light of the foregoing, the Board does exposure limit set forth in § 252.72(b). covered company subject to this subpart not believe that the proposed rules, if (c) Major covered companies. A major under paragraphs (a), (b), or (c) of this adopted in final form, would have a covered company is subject to the credit section after the effective date of this significant economic impact on a exposure limit set forth in § 252.72(c). part will be subject to the requirements substantial number of small entities (d) Total consolidated assets. For of this subpart in accordance with supervised. Nonetheless, the Board purposes of this section, total paragraph (h) of this section. seeks comment on whether the consolidated assets are determined (h) Ongoing applicability. Except as proposed rules would impose undue based on: provided in paragraph (g)(1) or (g)(2) of burdens on, or have unintended (1) The average of the bank holding this section, a covered company that is consequences for, small organizations, company’s total consolidated assets in subject to this subpart under paragraphs and whether there are ways such the four most recent consecutive (a), (b), or (c) of this section must potential burdens or consequences quarters as reported quarterly on the FR comply with the requirements of could be minimized in a manner Y–9C; or §§ 252.72(a)–(c), as applicable, consistent with section 165(e) of the (2) If the bank holding company has beginning on the first day of the fifth Dodd-Frank Act. not filed an FR Y–9C for each of the calendar quarter after it becomes a most recent four quarters, the average of covered company, unless that time is List of Subjects in 12 CFR Part 252 the bank holding company’s total accelerated or extended by the Board in Administrative practice and consolidated assets in the most recent writing. procedure, Banks, Banking, Federal consecutive quarters as reported § 252.71 Definitions. Reserve System, Holding companies, quarterly on the bank holding Reporting and recordkeeping company’s FR Y–9Cs. For purposes of this subpart: (a) Adjusted market value means: requirements, Securities. (e) Cessation of requirements. Once a covered company meets the (1) With respect to the value of Authority and Issuance requirements described in paragraphs securities transferred by the covered For the reasons stated in the (a) or (b) of this section, the company company to a counterparty, the sum of: (i) The market value of the securities; preamble, the Board of Governors of the shall remain a covered company for purposes of this subpart unless and and Federal Reserve System proposes to (ii) The product of the market value until the company has less than $50 amend 12 CFR part 252 as follows: of the securities multiplied by the billion in total consolidated assets as applicable collateral haircut in Table 1 PART 252—ENHANCED PRUDENTIAL determined based on each of the bank STANDARDS (REGULATION YY) to § 217.132 of the Board’s Regulation Q holding company’s four most recent FR (12 CFR 217.132); and Y–9Cs. (2) With respect to eligible collateral ■ 1. The authority citation for part 252 (1) A bank holding company that has continues to read as follows: received by the covered company from ceased to be a major covered company a counterparty: Authority: 12 U.S.C. 321–338a, 1467a(g), for purposes of paragraph (c) of this (i) The market value of the securities; 1818, 1831p–1, 1844(b), 1844(c), 5361, 5365, section shall no longer be subject to the minus 5366. requirements of § 252.70(c) beginning (ii) The market value of the securities ■ 2. Add subpart H to read as follows: on the first day of the calendar quarter multiplied by the applicable collateral following the reporting date on which it haircut in Table 1 to § 217.132 of the Subpart H—Single-Counterparty Credit ceased to be a major covered company. Board’s Regulation Q (12 CFR 217.132). Limits (2) Nothing in paragraph (c) of this (3) Prior to calculating the adjusted section shall preclude a company from Sec. market value pursuant to paragraphs (1) 252.70 Applicability. becoming a covered company pursuant and (2) of this section, with regard to a 252.71 Definitions. to paragraphs (a) or (b) of this section. transaction that meets the definition of 252.72 Credit exposure limits. (f) Measurement date. For purposes of ‘‘repo-style transaction’’ in § 217.2 the 252.73 Gross credit exposure. this section, total consolidated assets are Board’s Regulation Q (12 CFR 217.2), 252.74 Net credit exposure. measured on the last day of the quarter the covered company would first 252.75 Investments in and exposures to used in calculation of the average. multiply the applicable collateral securitization vehicles, investment (g) Initial applicability. haircuts in Table 1 to § 217.132 of the funds, and other special purpose (1) A covered company that is subject Board’s Regulation Q (12 CFR 217.132) vehicles. to this subpart under paragraph (a) of 1 252.76 Aggregation of exposures to more by the square root of ⁄2. this section as of [INSERT EFFECTIVE (b) Aggregate net credit exposure than one counterparty due to economic DATE], must comply with the interdependence or control means the sum of all net credit relationships. requirements of this subpart, including exposures of a covered company to a 252.77 Exemptions. § 252.72(a), beginning on [INSERT single counterparty. 252.78 Compliance. DATE TWO YEARS FROM EFFECTIVE (c) Bank-eligible investments means DATE], unless that time is extended by investment securities that a national § 252.70 Applicability. the Board in writing. bank is permitted to purchase, sell, deal (a) In general. A covered company is (2) A covered company that is subject in, underwrite, and hold under 12 subject to the general credit exposure to this subpart under paragraph (b) of U.S.C. 24 (Seventh) and 12 CFR part 1. limit set forth in § 252.72(a). this section as of [INSERT EFFECTIVE (d) Capital stock and surplus means, (b) Covered companies with $250 DATE], must comply with the with respect to a bank holding billion or more in total consolidated requirements of this subpart, including company, the sum of the following assets or $10 billion or more in total on- §§ 252.72(b)–(c), as applicable, amounts in each case as reported by the balance-sheet foreign exposures. A beginning on [INSERT DATE ONE bank holding company on the most covered company with $250 billion or YEAR FROM EFFECTIVE DATE], unless recent FR Y–9C report: more in total consolidated assets or $10 that time is extended by the Board in (1) The company’s tier 1 and tier 2 billion or more in total on-balance-sheet writing. capital, as calculated under the capital

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adequacy guidelines applicable to that (4) Any guarantee, acceptance, or (2) Any assignment of the derivative bank holding company under the letter of credit (including any contract has been confirmed by all Board’s Regulation Q (12 CFR part 217); endorsement, confirmed letter of credit, relevant parties; and or standby letter of credit) issued on (3) If the credit derivative is a credit (2) The balance of the allowance for behalf of the counterparty; default swap, the derivative contract loan and lease losses of the bank (5) Any purchase of, or investment in, includes the following credit events: holding company not included in its tier securities issued by the counterparty; (i) Failure to pay any amount due 2 capital under the capital adequacy (6) Any credit exposure to the under the terms of the reference guidelines applicable to that bank counterparty in connection with a exposure, subject to any applicable holding company under the Board’s derivative transaction between the minimal payment threshold that is Regulation Q (12 CFR part 217). covered company and the counterparty; consistent with standard market (e) Counterparty means: (7) Any credit exposure to the practice and with a grace period, if any, (1) With respect to a natural person, counterparty in connection with a credit that is in line with the grace period of the person, and members of the person’s derivative or equity derivative the reference exposure; and immediate family; transaction between the covered (ii) Receivership, insolvency, (2) With respect to a company, the company and a third party, the liquidation, conservatorship, or inability company and all persons that that reference asset of which is an obligation of the reference exposure issuer to pay counterparty or equity security of the counterparty; its debts, or its failure or admission in (i) Owns, controls, or holds with and writing of its inability generally to pay power to vote 25 percent or more of a (8) Any transaction that is the its debts as they become due and similar class of voting securities of the person; functional equivalent of the above, and events; (ii) Owns or controls 25 percent or any other similar transaction that the (4) The terms and conditions dictating more of the total equity of the person; Board, by regulation, determines to be a the manner in which the derivative or credit transaction for purposes of this contract is to be settled are incorporated (iii) Consolidates for financial subpart. into the contract; reporting purposes, as described in (i) Depository institution has the same (5) If the contract allows for cash § 252.72(d), collectively; meaning as in section 3 of the Federal settlement, the contract incorporates a (3) With respect to a State, the State Deposit Insurance Act (12 U.S.C. robust valuation process to estimate loss and all of its agencies, instrumentalities, 1813(c)). reliably and specifies a reasonable and political subdivisions (including (j) Derivative transaction means any period for obtaining post-credit event any municipalities) collectively; transaction that is a contract, agreement, valuations of the reference exposure; (4) With respect to a foreign sovereign swap, warrant, note, or option that is (6) If the contract requires the entity that is not assigned a zero percent based, in whole or in part, on the value protection purchaser to transfer an risk weight under the standardized of, any interest in, or any quantitative exposure to the protection provider at approach in the Board’s Regulation Q measure or the occurrence of any event settlement, the terms of at least one of (12 CFR part 217, subpart D), the foreign relating to, one or more commodities, the exposures that is permitted to be sovereign entity and all of its agencies securities, currencies, interest or other transferred under the contract provides and instrumentalities (but not including rates, indices, or other assets. that any required consent to transfer any political subdivision), collectively; (k) Eligible collateral means collateral may not be unreasonably withheld; and and in which the covered company has a (5) With respect to a political perfected, first priority security interest (7) If the credit derivative is a credit subdivision of a foreign sovereign entity or the legal equivalent thereof, if outside default swap, the contract clearly such as states, provinces, and of the United States (with the exception identifies the parties responsible for municipalities, any political subdivision of cash on deposit and notwithstanding determining whether a credit event has of a foreign sovereign entity and all of the prior security interest of any occurred, specifies that this such political subdivision’s agencies custodial agent) and is in the form of: determination is not the sole and instrumentalities, collectively. (1) Cash on deposit with the covered responsibility of the protection (f) Covered company means any bank company (including cash held for the provider, and gives the protection holding company (other than a foreign covered company by a third-party purchaser the right to notify the banking organization that is subject to custodian or trustee); protection provider of the occurrence of subpart Q of the Board’s Regulation YY), (2) Debt securities (other than a credit event. that has $50 billion or more in total mortgage- or asset-backed securities and (m) Eligible equity derivative means consolidated assets, calculated pursuant resecuritization securities, unless those an equity derivative, provided that: to § 252.70(d), and all of its subsidiaries. securities are issued by a U.S. (1) The derivative contract has been (g) Credit derivative has the same government-sponsored enterprise) that confirmed by the counterparties; meaning as in § 217.2 of the Board’s are bank-eligible investments and that (2) Any assignment of the derivative Regulation Q (12 CFR 217.2). are investment grade; contract has been confirmed by all (h) Credit transaction means, with (3) Equity securities that are publicly relevant parties; and respect to a counterparty: traded; or (3) The terms and conditions dictating (1) Any extension of credit to the (4) Convertible bonds that are the manner in which the derivative counterparty, including loans, deposits, publicly traded. contract is to be settled are incorporated and lines of credit, but excluding (l) Eligible credit derivative means a into the contract. uncommitted lines of credit; single-name credit derivative or a (n) Eligible guarantee has the same (2) Any repurchase transaction or standard, non-tranched index credit meaning as in § 217.2 of the Board’s reverse repurchase transaction with the derivative, provided that: Regulation Q (12 CFR 217.2) that is counterparty; (1) The derivative contract is subject provided by an eligible protection (3) Any securities lending or to an eligible guarantee and has been provider. securities borrowing transaction with confirmed by the protection purchaser (o) Eligible protection provider has the the counterparty; and the protection provider; same meaning as ‘‘eligible guarantor’’ in

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§ 217.2 of the Board’s Regulation Q (12 systemically important banking (aa) Short sale means any sale of a CFR 217.2). organization under the assessment security which the seller does not own (p) Equity derivative has the same methodology and the higher loss or any sale which is consummated by meaning as ‘‘equity derivative contract’’ absorbency requirement for global the delivery of a security borrowed by, in § 217.2 of the Board’s Regulation Q systemically important banks issued by or for the account of, the seller. (12 CFR 217.2). the Basel Committee on Banking (bb) Sovereign entity means a central (q) Financial entity means: Supervision, as updated from time to national government (including the U.S. (1) A depository institution; time; or government) or an agency, department, (2) A bank holding company; (ii) The Board, using information ministry, or central bank, but not (3) A savings and loan holding reported by the foreign banking including any political governmental company (as defined in 12 U.S.C. organization or its U.S. subsidiaries, subdivision such as a state, province, or 1467a); information that is publicly available, municipality. (4) A securities broker or dealer and confidential supervisory (cc) Subsidiary of a specified registered with the U.S. Securities and information, determines: company means a company that is Exchange Commission under the (A) That the foreign banking directly or indirectly controlled by the Securities Exchange Act of 1934 (15 organization would be a global specified company. U.S.C. 78o et seq.); systemically important banking (dd) Tier 1 capital means common (5) An insurance company that is organization under the global equity tier 1 capital and additional tier subject to the supervision by a State methodology; 1 capital, as defined in the Board’s insurance regulator; (B) That the foreign banking Regulation Q (12 CFR part 217). (6) A foreign banking organization; (7) A non-U.S.-based securities firm or organization, if it were subject to the § 252.72 Credit exposure limits. Board’s Regulation Q, would be a non-U.S.-based insurance company (a) General limit on aggregate net identified as a global systemically that is subject to consolidated credit exposure. No covered company important bank holding company under supervision and regulation comparable shall have an aggregate net credit § 217.402 of the Board’s Regulation Q; to that applicable to U.S. depository exposure to any unaffiliated institutions, securities broker-dealers, or or (C) That the U.S. intermediate holding counterparty that exceeds 25 percent of insurance companies; the consolidated capital stock and (8) A central counterparty; and company, if it were subject to the Board’s Regulation Q, would be surplus of the covered company. (9) A legal entity whose main (b) Limit on aggregate net credit identified as a global systemically business includes the management of exposure for covered companies with important bank holding company. financial assets, lending, factoring, $250 billion or more in total (iii) A foreign banking organization leasing, provision of credit consolidated assets or $10 billion or that prepares or reports for any purpose enhancements, securitization, more in total on-balance-sheet foreign the indicator amounts necessary to investments, financial custody, exposures. No covered company that determine whether the foreign banking proprietary trading, and other financial has $250 billion or more in total organization is a global systemically services. consolidated assets or $10 billion or important banking organization under (r) Gross credit exposure means, with more in total on-balance-sheet foreign the assessment methodology and the respect to any credit transaction, the exposures shall have an aggregate net higher loss absorbency requirement for credit exposure of the covered company credit exposure to any unaffiliated global systemically important banks before adjusting, pursuant to section counterparty that exceeds 25 percent of issued by the Basel Committee on 252.74, for the effect of any qualifying the covered company’s tier 1 capital. master netting agreement, eligible Banking Supervision, as updated from (c) Limit on aggregate net credit collateral, eligible guarantee, eligible time to time, must use the data to exposure of major covered companies to credit derivative, eligible equity determine whether the foreign banking major counterparties. No major covered derivative, other eligible hedge, and any organization has the characteristics of a company shall have aggregate net credit unused portion of certain extensions of global systemically important banking exposure to any unaffiliated major credit. organization under the global counterparty that exceeds 15 percent of (s) Immediate family means the methodology; and the tier 1 capital of the major covered spouse of an individual, the individual’s (3) Any nonbank financial company company. minor children, and any of the supervised by the Board. (d) For purposes of this subpart, a individual’s children (including adults) (w) Major covered company means counterparty and major counterparty residing in the individual’s home. any U.S. bank holding company shall include any person that the (t) Intraday credit exposure means identified as a global systemically counterparty or major counterparty credit exposure of a covered company to important bank holding company (1) Owns, controls, or holds with a counterparty that by its terms is to be pursuant to 12 CFR 217.402, and all of power to vote 25 percent or more of a repaid, sold, or terminated by the end of its subsidiaries. class of voting securities of the person; its business day in the United States. (x) Net credit exposure means, with (2) Owns or controls 25 percent or (u) Investment grade has the same respect to any credit transaction, the more of the total equity of the person; meaning as in § 217.2 of the Board’s gross credit exposure of a covered or Regulation Q (12 CFR 217.2). company calculated under § 252.73, as (3) Consolidates for financial (v) Major counterparty means any: adjusted in accordance with § 252.74. reporting purposes. (1) Major covered company and all of (y) Qualifying central counterparty its subsidiaries, collectively; has the same meaning as in § 217.2 of § 252.73 Gross credit exposure. (2) Any foreign banking organization the Board’s Regulation Q (12 CFR (a) Calculation of gross credit (and all of its subsidiaries, collectively) 217.2). exposure. Except as provided in that meets one of the following (z) Qualifying master netting paragraph (b), the amount of gross credit conditions: agreement has the same meaning as in exposure of a covered company to a (i) The foreign banking organization § 217.2 of the Board’s Regulation Q (12 counterparty with respect to a credit has the characteristics of a global CFR 217.2). transactions is, in the case of:

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(1) Loans by a covered company to the transaction when calculating its gross counterparty and that meets the counterparty and leases in which the exposure to the original counterparty definition of ‘‘repo-style transaction’’ in covered company is the lessor and the under this section. § 217.2 of the Board’s Regulation Q (12 counterparty is the lessee, equal to the (11) Derivative transactions between CFR 217.2), a covered company’s net amount owed by the counterparty to the the covered company and the credit exposure to a counterparty shall covered company under the transaction. counterparty subject to a qualifying be equal to the exposure at default (2) Debt securities held by the covered master netting agreement: amount calculated under § 217.37(c)(2) company that are issued by the (i) The derivative transaction shall be of the Board’s Regulation Q (12 CFR counterparty, equal to: valued using any of the methods that 217.37(c)(2)); provided that: (i) The market value of the securities, the covered company is authorized to (1) The covered company shall apply for trading and available-for-sale use under the Board’s Regulation Q (12 the standardized supervisory haircuts as securities; and CFR part 217, subparts D and E) to value provided in 12 CFR 217.37(c)(3)(iii) of (ii) The amortized purchase price of such transactions; and the Board’s Regulation (12 CFR the securities, for securities held to (ii) In cases where a covered company 217.37(c)(3)(iii), and is not permitted to maturity. is required to recognize an exposure to use its own internal estimates for (3) Equity securities held by the an eligible protection provider pursuant haircuts; covered company that are issued by the to § 252.74(e), the covered company (2) The covered company shall, in counterparty, equal to the market value. must exclude the relevant derivative calculating its net credit exposure to a (4) Repurchase transactions, equal to transaction when calculating its gross counterparty as a result of the the adjusted market value of securities exposure to the original counterparty transactions described in paragraph (b) transferred by the covered company to under this section. of this section, disregard any collateral the counterparty. (12) Credit or equity derivative received from that counterparty that (5) Reverse repurchase transactions, transactions between the covered does not meet the definition of ‘‘eligible equal to the amount of cash transferred company and a third party where the collateral’’ in § 252.71(k); and by the covered company to the covered company is the protection (3) The covered company shall counterparty. provider and the reference asset is an include the adjusted market value of (6) Securities borrowing transactions, obligation or equity security of the any eligible collateral, as further equal to: counterparty, equal to the maximum adjusted by the application of the (i) The amount of cash collateral potential loss to the covered company maturity mismatch adjustment approach transferred by the covered company to on the transaction. of § 217.36(d) of the Board’s Regulation the counterparty; plus (b) Investments in and Exposures to Q (12 CFR 217.36(d)), if applicable, (ii) The adjusted market value of Securitization Vehicles, Investment when calculating its gross credit securities collateral transferred by the Funds, and Other Special Purpose exposure to the collateral issuer, covered company to the counterparty. Vehicles. A covered company that has including in instances where the (7) Securities lending transactions, $250 billion or more in total underlying repurchase transaction, equal to the adjusted market value of consolidated assets or $10 billion or reverse repurchase transaction, securities lent by the covered company more in total on-balance-sheet foreign securities lending transaction, or to the counterparty. exposures shall calculate its gross credit securities borrowing transaction would (8) Committed credit lines extended exposure for investments in and not be subject to the credit limits of by a covered company to a counterparty, exposures to a securitization vehicle, § 272.72. equal to the face amount of the credit investment fund, and other special (c) Eligible collateral. line. purpose vehicle pursuant to § 252.75. (1) In computing its net credit (9) Guarantees and letters of credit (c) Attribution rule. A covered exposure to a counterparty for any issued by a covered company on behalf company must treat any credit credit transaction other than of a counterparty, equal to the transaction with any person as a credit transactions described in paragraph (b) maximum potential loss to the covered transaction with a counterparty, to the of this section, a covered company must company on the transaction. extent that the proceeds of the reduce its gross credit exposure on the (10) Derivative transactions between transaction are used for the benefit of, transaction by: the covered company and the or transferred to, that counterparty. (i) The adjusted market value of any counterparty not subject to a qualifying eligible collateral, in cases where the master netting agreement: § 252.74 Net Credit Exposure. eligible collateral has the same or (i) Valued at an amount equal to the (a) In general. For purposes of this greater maturity as the credit sum of subpart, a covered company shall transactions; or (A) The current exposure of the calculate its net credit exposure to a (ii) The adjusted market value of any derivatives contract equal to the greater counterparty by adjusting its gross eligible collateral, as further adjusted by of the mark-to-market value of the credit exposure to that counterparty in application of the maturity mismatch derivative contract or zero; and accordance with the rules set forth in adjustment approach of § 217.36(d) of (B) The potential future exposure of this section. the Board’s Regulation Q (12 CFR the derivatives contract, calculated by (b) Calculation of net credit exposure 217.36(d)), if the eligible collateral has multiplying the notional principal for repurchase transactions, reverse an original maturity equal to or greater amount of the derivative contract by the repurchase transactions, securities than one year and a residual maturity of applicable conversion factor in Table 2 lending transactions, and securities not less than three months, in cases to § 217.132 of the Board’s Regulation Q borrowing transactions. With respect to where the eligible collateral has a (12 CFR 217.132); and any repurchase transaction, reverse shorter maturity than the credit (ii) In cases where a covered company repurchase transaction, securities transaction. is required to recognize an exposure to lending transaction, and securities (2) A covered company that reduces an eligible protection provider pursuant borrowing transaction with a its gross credit exposure to a to § 252.74(e), the covered company counterparty that is subject to a bilateral counterparty as required under must exclude the relevant derivative netting agreement with that paragraph (c)(1) of this section must

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include the adjusted market value of the (i) The notional amount of any (1) The instrument in which the eligible collateral, as further adjusted by eligible credit or equity derivative from covered company has a short position is the application of the maturity an eligible protection provider, in cases junior to, or pari passu with, the mismatch adjustment approach of where the eligible credit or equity instrument in which the covered § 217.36(d) of the Board’s Regulation Q derivative has a maturity that is the company has the long position; and (12 CFR 217.36(d)), if applicable, when same or greater than the maturity of the (2) The instrument in which the calculating its gross credit exposure to credit transaction; or covered company has a short position the collateral issuer, including in (ii) The notional amount of any and the instrument in which the instances where the underlying credit eligible credit or equity derivative from covered company has the long position transaction would not be subject to the an eligible protection provider, as are either both treated as trading or credit limits of § 272.72. further adjusted by application of the available-for-sale exposures or both Notwithstanding the foregoing, in no maturity mismatch adjustment approach treated as held-to-maturity exposures. event will the covered company’s gross of § 217.36(d) of the Board’s Regulation (g) Unused portion of certain credit exposure to the issuer of Q (12 CFR 217.36(d)), if the eligible extensions of credit. (1) In computing its collateral be in excess of its gross credit credit or equity derivative has an net credit exposure to a counterparty for exposure to the counterparty on the original maturity equal to or greater than a credit line or revolving credit facility, credit transaction. one year and a residual maturity of not (d) Eligible guarantees. less than three months, in cases where a covered company may reduce its gross (1) In calculating net credit exposure the eligible credit or equity derivative credit exposure by the amount of the to a counterparty for any credit has a shorter maturity than the credit unused portion of the credit extension transaction, a covered company must transaction. to the extent that the covered company reduce its gross credit exposure to the (2)(i) In general, a covered company does not have any legal obligation to counterparty by any eligible guarantees that reduces its gross credit exposure to advance additional funds under the from an eligible protection provider that a counterparty as provided under extension of credit, until the covers the transaction by: paragraph (e)(1) must include the counterparty provides the amount of (i) The amount of any eligible notional amount of the eligible credit or adjusted market value of collateral guarantees from an eligible protection equity derivative from an eligible required with respect to the entire used provider that covers the transaction, in protection provider, as further adjusted portion of the extension of credit. cases where the eligible guarantee has by the application of the maturity (2) To qualify for this reduction, the the same or greater maturity as the mismatch adjustment approach of credit contract must specify that any credit transaction; or § 217.36(d) of the Board’s Regulation Q used portion of the credit extension (ii) The amount of any eligible (12 CFR 217.36(d)), as applicable, when must be fully secured by collateral that guarantees from an eligible protection calculating its gross credit exposure to is: provider that covers the transaction as the eligible protection provider, (i) Cash; further adjusted by application of the including in instances where the (ii) Obligations of the United States or maturity mismatch adjustment approach underlying credit transaction would not its agencies; or of § 217.36(d) of the Board’s Regulation be subject to the credit limits of (iii) Obligations directly and fully Q (12 CFR 217.36(d)), if the eligible § 272.72. Notwithstanding the foregoing, guaranteed as to principal and interest guarantees have an original maturity in no event will the covered company’s equal to or greater than one year and a gross credit exposure to an eligible by, the Federal National Mortgage residual maturity of not less than three protection provider with respect to an Association and the Federal Home Loan months, in cases where the eligible eligible credit or equity derivative be in Mortgage Corporation, while operating guarantee has a shorter maturity than excess of its gross credit exposure to under the conservatorship or the credit transaction. that counterparty on the credit receivership of the Federal Housing (2) A covered company that reduces transaction prior to recognition of the Finance Agency, and any additional its gross credit exposure to a eligible credit or equity derivative; and obligations issued by a U.S. counterparty as required under (ii) In cases where the eligible credit government-sponsored enterprise as paragraph (d)(1) must include the or equity derivative is used to hedge determined by the Board. amount of eligible guarantees when covered positions and available-for-sale (h) Credit transactions involving calculating its gross credit exposure to exposures that are subject to the Board’s exempt and excluded persons. If a the eligible protection provider, market risk rule (12 CFR part 217, covered company has a credit including in instances where the subpart F) and the counterparty on the transaction with any person that is underlying credit transaction would not hedged transaction is not a financial exempt from this subpart under be subject to the credit limits of entity, the amount of credit exposure § 252.75, or is otherwise excluded from § 272.72. Notwithstanding the foregoing, that a company must recognize to the this subpart, and the covered company in no event will the covered company’s eligible protection provider is the has reduced its credit exposure on the gross credit exposure to an eligible amount that would be calculated credit transaction with that person by protection provider with respect to an pursuant to § 252.73(a), including in obtaining collateral from that person or eligible guarantee be in excess of its instances where the underlying credit a guarantee or credit or equity derivative gross credit exposure to the transaction would not be subject to the from an eligible protection provider, the counterparty on the credit transaction credit limits of § 272.72. covered company shall calculate its prior to recognition of the eligible (f) Other eligible hedges. In credit exposure to the issuer of the guarantee. calculating net credit exposure to a collateral or protection provider, as (e) Eligible credit and equity counterparty for a credit transaction, a applicable, in accordance with the rules derivatives. (1) In calculating net credit covered company may reduce its gross set forth in this section to the same exposure to a counterparty for a credit credit exposure to the counterparty by extent as if the credit transaction with transaction, a covered company must the face amount of a short sale of the the person were subject to the reduce its gross credit exposure to the counterparty’s debt or equity security, requirements in this subpart, including counterparty by: provided that: § 252.72.

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§ 252.75 Investments in and exposures to limits of § 252.72 shall apply to that vehicle, investment fund, or other securitization vehicles, investment funds, counterparty as a single counterparty. special purpose vehicle. and other special purpose vehicles. (3) A covered company that is (d) Notwithstanding paragraph (a)(1) (a) In general. (1) This section applies required to calculate its gross credit of this section, in order to avoid evasion only to covered companies with $250 exposure to an issuer of assets held by of this subpart, the Board may billion or more in total consolidated a securitization vehicle, investment determine, after notice to the covered assets or $10 billion or more in on- fund, or other special purpose vehicle company and opportunity for hearing, balance-sheet foreign exposures, subject pursuant to paragraph (b)(1) of this that a covered company with less than to paragraph (d) of this section. section, or to an unknown counterparty $250 billion in total consolidated assets (2)(i) If a covered company can satisfy pursuant to paragraph (b)(2) of this and less than $10 billion in total on- the requirements of paragraph (a)(3) of section, must calculate the gross credit balance-sheet foreign exposures must this section, a covered company must exposure as follows: apply the look-through approach or calculate its gross credit exposure to (i) Where all investors in the recognize exposures to third parties that each securitization vehicle, investment securitization vehicle, investment fund, have a contractual or other business fund, and other special purpose vehicle or other special purpose vehicle rank relationship for purposes of this in which it invests pursuant to pari passu, the gross credit exposure is subpart. § 252.73(a), and the covered company is equal to the covered company’s pro rata not required to calculate its gross credit share multiplied by the value of the § 252.76 Aggregation of exposures to exposure to each issuer of assets held by assets attributed to the issuer or the more than one counterparty due to a securitization vehicle, investment unknown counterparty, as applicable, economic interdependence or control fund, or other special purpose vehicle. that are held within the structure; and relationships. (ii) If a covered company cannot (ii) Where all investors in the (a) Aggregation of Exposures to More satisfy the requirements of paragraph securitization vehicle, investment fund, than One Counterparty due to Economic (a)(3), the covered company must or other special purpose vehicle do not Interdependence. (1)(i) If a covered calculate its gross credit exposure to rank pari passu, the gross credit company has an aggregate net credit each issuer of assets held by a exposure is equal to: exposure to any unaffiliated securitization vehicle, investment fund, (A) The lower of the value of the counterparty that exceeds 5 percent of or other special purpose vehicle using tranche in which the covered company the consolidated capital stock and the look-through approach in paragraph has invested, calculated pursuant to surplus of the covered company, or 5 (b) of this section. § 252.73(a), and the value of each asset percent of its tier 1 capital in the case (3) A covered company is not required attributed to the issuer or the unknown of a covered company with $250 billion to calculate its gross credit exposure to counterparty, as applicable, that are or more in total consolidated assets or each issuer of assets held by a held by the securitization vehicle, $10 billion or more in total foreign securitization vehicle, investment fund, investment fund, or other special exposures, the covered company shall or other special purpose vehicle, as purpose vehicle; multiplied by analyze its relationship with the applicable, if the covered company can (B) The pro rata share of the covered unaffiliated counterparty under demonstrate that its gross credit company’s investment in the tranche. paragraph (a)(2) of this section to (c) Exposures to Third Parties. (1) exposure to each issuer, considering determine whether the unaffiliated Notwithstanding any other requirement only the credit exposures to that issuer counterparty is economically in this section, a covered company must arising from the covered company’s interdependent with one or more other recognize, for purposes of this subpart, investment in a particular securitization unaffiliated counterparties of the a gross credit exposure to each third vehicle, investment fund, or other covered company. special purpose vehicle, is less than party that has a contractual or other business relationship with a (ii) For purposes of this paragraph, 0.25 percent of the covered company’s: two counterparties are economically (i) Capital stock and surplus in the securitization vehicle, investment fund, interdependent if the failure, default, case of a covered company subject to the or other special purpose vehicle, such as insolvency, or material financial distress credit exposure limit of § 252.72(a); or a fund manager or protection provider (ii) Tier 1 capital in the case of a to such securitization vehicle, of one counterparty would cause the covered company subject to the credit investment fund, or other special failure, default, insolvency, or material exposure limit of § 252.72(b). purpose vehicle, whose failure or financial distress of the other (b) Look-through Approach. (1) A material financial distress would cause counterparty, taking into account the covered company that cannot satisfy the a loss in the value of the covered factors in paragraph (a)(2) of this requirements of paragraph (a)(3) must company’s investment in or exposure to section. calculate its gross credit exposure, for the securitization vehicle, investment (iii) If a covered company or the purposes of § 252.73(a), to each issuer of fund, or other special purpose vehicle. Board determines pursuant to paragraph assets held by a securitization vehicle, (2) For purposes of § 252.72, with (a)(2) or (a)(3) of this section, as investment fund, or other special respect to a covered company’s gross applicable, that one or more other purpose vehicle pursuant to paragraph credit exposure to a third party that a unaffiliated counterparties of a covered (b)(3). covered company must recognize company are economically dependent, (2) If a covered company that cannot pursuant to paragraph (c)(1) of this the covered company shall aggregate its satisfy the requirements of paragraph section, the covered company shall net credit exposure to the unaffiliated (a)(3) of this section is unable to identify recognize an exposure to the third party counterparties for all purposes under each issuer of assets held by a in an amount equal to the covered this subpart, including but not limited securitization vehicle, investment fund, company’s gross credit exposure to the to, § 252.72. or other special purpose vehicle, the associated securitization vehicle, (2) In making a determination as to covered company, for purposes of investment fund, or other special whether any two counterparties are paragraph (b)(3) of this section, must purpose vehicle, in addition to the economically interdependent, a covered attribute the gross credit exposure to a covered company’s gross credit company shall consider the following single unknown counterparty, and the exposure to the associated securitization factors:

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(i) Whether 50 percent or more of one administrative, management or covered company does not include any counterparty’s gross revenue or gross governing body, or the fact that a Federal Home Loan Bank. expenditures are derived from majority of members of such body have (c) Additional Exemptions by the transactions with the other been appointed solely as a result of the Board. The Board may, by regulation or counterparty; exercise of the first counterparty’s order, exempt transactions, in whole or (ii) Whether one counterparty voting rights; and in part, from the definition of the term (counterparty A) has fully or partly (iii) Ability of one counterparty to ‘‘credit exposure,’’ if the Board finds guaranteed the credit exposure of the exercise a controlling influence over the that the exemption is in the public other counterparty (counterparty B), or management or policies of another interest and is consistent with the is liable by other means, and the credit counterparty. purpose of § 165(e) of the Dodd-Frank exposure is significant enough that (2) If a covered company or the Board Wall Street Reform and Consumer counterparty B is likely to default if determines pursuant to paragraph (b)(1) Protection Act (12 U.S.C. 5365(e)). presented with a claim relating to the or (b)(3) of this section that one or more § 252.78 Compliance. guarantee or liability; other unaffiliated counterparties of a (iii) Whether 25 percent or more of (a) Scope of compliance. A covered covered company are connected by company with $250 billion or more in one counterparty’s production or output control relationships, the covered is sold to the other counterparty, which total consolidated assets or $10 billion company shall aggregate its net credit or more in total on-balance-sheet foreign cannot easily be replaced by other exposure to the unaffiliated customers; exposures must comply with the counterparties for all purposes under requirements of this section on a daily (iv) Whether the expected source of this subpart, including but not limited funds to repay any credit exposure basis at the end of each business day to, § 252.72. and submit on a monthly basis a report between the counterparties is the same (3) In order to avoid evasion of this and at least one of the counterparties demonstrating its daily compliance. A subpart, the Board may determine, after covered company with less than $250 does not have another source of income notice to the covered company and from which the extension of credit may billion in total consolidated assets and opportunity for hearing, that one or less than $10 billion in total on-balance- be fully repaid; more unaffiliated counterparties of a (v) Whether the financial distress of sheet foreign exposures must comply covered company are connected by one counterparty (counterparty A) is with the requirements of this section on control relationships for purposes of likely to impair the ability of the other a quarterly basis and submit on a this subpart. In making any such counterparty (counterparty B) to fully quarterly basis a report demonstrating determination, the Board shall consider and timely repay counterparty B’s its quarterly compliance, unless the the factors in paragraph (b)(1) of this liabilities; Board determines and notifies that section as well as any other control (vi) Whether one counterparty company that more frequent compliance relationships that the Board determines (counterparty A) has made a loan to the and reporting is required. to be relevant. other counterparty (counterparty B) and (b) Qualifying Master Netting Agreement. A covered company must is relying on repayment of that loan in § 252.77 Exemptions. establish and maintain procedures that order to satisfy its obligations to the (a) Exempted exposure categories. covered company, and counterparty A meet or exceed the requirements of The following categories of credit § 217.3(d) of the Board’s Regulation Q does not have another source of income transactions are exempt from the limits that it can use to satisfy its obligations (12 CFR 217.3(d)) to monitor possible on credit exposure under this subpart: changes in relevant law and to ensure to the covered company; and (1) Direct claims on, and the portions (vii) Any other indicia of that the agreement continues to satisfy of claims that are directly and fully interdependence that the covered the requirements of a qualifying master guaranteed as to principal and interest company determines to be relevant to netting agreement. by, the Federal National Mortgage this analysis. (c) Noncompliance. Except as (3) In order to avoid evasion of this Association and the Federal Home Loan otherwise provided in this section, if a subpart, the Board may determine, after Mortgage Corporation, only while covered company is not in compliance notice to the covered company and operating under the conservatorship or with this subpart with respect to a opportunity for hearing, that one or receivership of the Federal Housing counterparty solely due to the more unaffiliated counterparties of a Finance Agency, and any additional circumstances listed in paragraphs covered company are economically obligations issued by a U.S. (c)(1)–(4) of this section, the covered dependent for purposes of this subpart. government-sponsored entity as company will not be subject to In making any such determination, the determined by the Board. enforcement actions for a period of 90 Board shall consider the factors in (2) Intraday credit exposure to a days (or such other period determined paragraph (a)(2) of this section as well counterparty. by the Board to be appropriate to as any other indicia of economic (3) Trade exposures to a qualifying preserve the safety and soundness of the interdependence that the Board central counterparty related to the covered company or U.S. financial determines to be relevant. covered company’s clearing activity, stability) if the company uses reasonable (b) Aggregation of exposures to more including potential future exposure efforts to return to compliance with this than one counterparty due to certain arising from transactions cleared by the subpart during this period. The covered control relationships. (1) A covered qualifying central counterparty and pre- company may not engage in any company shall assess whether funded default fund contributions. additional credit transactions with such counterparties are connected by control (4) Any transaction that the Board a counterparty in contravention of this relationships due to the following exempts if the Board finds that such rule during the compliance period, factors: exemption is in the public interest and except in cases where the Board (i) The presence of voting agreements; is consistent with the purpose of this determines that such credit transactions (ii) Ability of one counterparty to section. are necessary or appropriate to preserve significantly influence the appointment (b) Exemption for Federal Home Loan the safety and soundness of the covered or dismissal of another counterparty’s Banks. For purposes of this subpart, a company or U.S. financial stability. In

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granting approval for such a special quarters as reported quarterly on the FR (i) The average of the total temporary credit exposure limit, the Y–7Q; or consolidated assets for the four most Board will consider the following: (ii) If the foreign banking organization recent consecutive quarters as reported (1) A decrease in the covered has not filed the FR Y–7Q for each of by the U.S. intermediate holding company’s capital stock and surplus; the four most recent consecutive company on its FR Y–9C, or (2) The merger of the covered quarters, the average of the foreign (ii) If the U.S. intermediate holding company with another covered banking organization’s total company has not filed the FR Y–9C for company; consolidated assets in the most recent each of the four most recent consecutive (3) A merger of two unaffiliated consecutive quarters as reported quarters, for the most recent quarter or counterparties; or quarterly on the foreign banking consecutive quarters as reported on the (4) Any other circumstance the Board organization’s FR Y–7Qs; or FR Y–9C, or determines is appropriate. (iii) If the foreign banking (iii) If the U.S. intermediate holding (d) Other measures. The Board may organization has not yet filed an FR Y– company has not yet filed an FR Y–9C, impose supervisory oversight and 7Q, as determined under applicable as determined under applicable reporting measures that it determines accounting standards. accounting standards. are appropriate to monitor compliance (5) Cessation of requirements. A (5) Cessation of requirements. A major with this subpart. foreign banking organization will U.S. intermediate holding company will ■ 3. Add subpart Q to read as follows: remain subject to the requirements of remain subject to the requirements of this subpart, including § 252.172(a) and, this subpart, including § 252.172(a) and, Subpart Q—Single-Counterparty Credit as applicable, the credit exposure limits Limits as applicable, the credit exposure limits of §§ 252.172(b) and (c), unless and set forth in §§ 252.172(b) and (c), unless Sec. until total assets are less than $50 and until total assets are less than $50 252.170 Applicability. billion (with respect to the requirements billion (with respect to the requirements 252.171 Definitions. in paragraphs (a) and (b)) or $500 billion in paragraphs (a) or (b) of this section) 252.172 Credit exposure limits. (with respect to the requirement in or $500 billion (with respect to the 252.173 Gross credit exposure. paragraph (c)) for each of the four most requirement in paragraph (c) of this 252.174 Net credit exposure. section) for each of the four most recent 252.175 Investments in and exposures to recent consecutive calendar quarters, either as reported on the foreign banking consecutive calendar quarters either as securitization vehicles, investment reported on its FR Y–9C or as funds, and other special purpose organization’s FR Y–7Q or as vehicles. determined under applicable accounting determined under applicable accounting 252.176 Aggregation of exposures to more standards, to the extent the foreign standards, to the extent the foreign than one counterparty due to economic banking organization has not yet filed banking organization has not yet filed interdependence or control an FR Y–7Q. an FR Y–9C. (i) Nothing in paragraph (b)(3) shall relationships. (i) Nothing in paragraph (a)(3) shall 252.177 Exemptions. preclude a company from becoming a preclude a company from becoming a 252.178 Compliance. covered company pursuant to covered company pursuant to paragraphs (b)(1) or (b)(2) of this paragraphs (a)(1) or (a)(2) of this section. § 252.170 Applicability. section. (6) Measurement date. For purposes (a) Foreign banking organizations (5) Measurement date. For purposes of this section, total consolidated assets with total consolidated assets of $50 of this section, total consolidated assets are measured on the last day of the billion or more. are measured on the last day of the (1) In general. A foreign banking quarter used in calculation of the quarter used in calculation of the organization with total consolidated average. average. assets of $50 billion or more is subject (b) U.S. intermediate holding (c) Initial applicability. to the general credit exposure limit set companies. (1) Foreign banking organizations. (i) forth in § 252.173(a). (1) In general. A U.S. intermediate A foreign banking organization that is (2) Foreign banking organizations holding company is subject to the subject to this subpart under paragraph with $250 billion or more in total general credit exposure limit set forth in (a)(1) of this section as of [INSERT consolidated assets or $10 billion or § 252.172(a). EFFECTIVE DATE], must comply with more in total on-balance-sheet foreign (2) U.S. intermediate holding the requirements of this subpart exposures. A foreign banking companies with $250 billion or more in beginning on [INSERT DATE TWO organization with $250 billion or more total consolidated assets or $10 billion YEARS FROM EFFECTIVE DATE], in total consolidated assets or $10 or more in total on-balance-sheet unless that time is extended by the billion or more in total on-balance-sheet foreign exposures. A U.S intermediate Board in writing. foreign exposures is subject to the credit holding company with $250 billion or (ii) A foreign banking organization exposure limit set forth in § 252.172(b). more in total consolidated assets or $10 that is subject to this subpart under (3) Major foreign banking billion or more in total on-balance-sheet paragraphs (a)(2) or (3) of this section as organizations. A foreign banking foreign exposures is subject to the credit of [INSERT EFFECTIVE DATE], must organization with total consolidated exposure limit set forth in § 252.172(b). comply with the requirements of this assets of $500 billion or more is subject (3) Major U.S. intermediate holding subpart, as applicable, beginning on to the credit exposure limit set forth in companies. A U.S. intermediate holding [INSERT DATE ONE YEAR FROM § 252.172(c). company that has total consolidated EFFECTIVE DATE]. (4) Total consolidated assets. For assets of $500 billion or more is subject (2) U.S. intermediate holding purposes of this section, total to the credit exposure limit set forth in companies. (i) A U.S. intermediate consolidated assets are determined § 252.172(c).. holding company that is subject to the based on: (4) Total consolidated assets. For requirements of this subpart under (i) The average of the foreign banking purposes of this paragraph, total paragraph (b)(1) of this section as of organization’s total consolidated assets consolidated assets are determined [INSERT EFFECTIVE DATE], must in the four most recent consecutive based on: comply with the requirements of this

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subpart beginning on [INSERT DATE (ii) The market value of the securities and political subdivisions (including TWO YEARS FROM EFFECTIVE multiplied by the applicable collateral any municipalities) collectively; DATE], unless that time is extended by haircut in Table 1 to § 217.132 of the (4) With respect to a foreign sovereign the Board in writing. Board’s Regulation Q (12 CFR 217.132). entity that is not assigned a zero percent (ii) A U.S. intermediate holding (3) Prior to calculating the adjusted risk weight under the standardized company that is subject to this subpart market value pursuant to paragraphs (1) approach in the Board’s Regulation Q under paragraphs (b)(2) or (3) of this and (2) of this section, with regard to a (12 CFR part 217, subpart D), the foreign section as of [INSERT EFFECTIVE transaction that meets the definition of sovereign entity and all of its agencies DATE], must comply with the ‘‘repo-style transaction’’ in § 217.2 the and instrumentalities (but not including requirements of this subpart, including Board’s Regulation Q (12 CFR 217.2), any political subdivision), collectively; §§ 252.172(b)–(c), beginning on [INSERT the covered company would first and DATE ONE YEAR FROM EFFECTIVE multiply the applicable collateral (5) With respect to a political DATE]. haircuts in Table 1 to § 217.132 of the subdivision of a foreign sovereign entity (3) A foreign banking organization or Board’s Regulation Q (12 CFR 217.132) such as states, provinces, and U.S. intermediate holding company that by the square root of 1⁄2. municipalities, any political becomes subject to the requirements of (b) Aggregate net credit exposure subdivisions of a foreign sovereign this subpart after the effective date of means the sum of all net credit entity and all such political the subpart will be subject to the exposures of a covered entity to a single subdivision’s agencies and requirements of this subpart in counterparty. instrumentalities, collectively. accordance with paragraph (d) of this (c) Bank-eligible investments means (f) Covered entity means: section. investment securities that a national (1) Any entity that is part of the (d) Ongoing applicability. bank is permitted to purchase, sell, deal combined U.S. operations of a foreign (1) Foreign banking organizations. in, underwrite, and hold under 12 banking organization with total Except as provided in paragraphs (c)(1) U.S.C. 24 (Seventh) and 12 CFR part 1. consolidated assets of $50 billion or or (c)(2) of this section, a foreign (d) Capital stock and surplus means: more, calculated pursuant to banking organization that becomes (1) With respect to a U.S. intermediate § 252.170(a), and all of its subsidiaries; subject to the requirements of this holding company, the sum of the and subpart after [INSERT EFFECTIVE following amounts in each case as (2) Any U.S. intermediate holding DATE], must comply with the reported by a U.S. intermediate holding company of a foreign banking requirements of this subpart, as company on the most recent FR Y–9C: organization with total consolidated applicable, beginning on the first day of (i) The tier 1 and tier 2 capital of the assets of $50 billion or more, calculated the fifth calendar quarter after it U.S. intermediate holding company, as pursuant to § 252.170(b), and all of its becomes subject to those requirements, calculated under the capital adequacy subsidiaries. unless that time is accelerated or guidelines applicable to that U.S. (g) Credit derivative has the same extended by the Board in writing. intermediate holding company under meaning as in § 217.2 of the Board’s (2) U.S. intermediate holding subpart O of the Board’s Regulation YY Regulation Q (12 CFR 217.2). companies. Except as provided in (12 CFR part 252); and (h) Credit transaction means: paragraph (c)(2) of this section, a U.S. (ii) The excess allowance for loan and (1) Any extension of credit, including intermediate holding company that lease losses of the U.S. intermediate loans, deposits, and lines of credit, but becomes subject to the requirements of holding company not included in tier 2 excluding uncommitted lines of credit; this subpart after [INSERT EFFECTIVE capital under the capital adequacy (2) Any repurchase transaction or DATE], must comply with the guidelines applicable to that U.S. reverse repurchase transaction; requirements of this subpart, as intermediate holding company under (3) Any securities lending or applicable, on the later of: subpart O of the Board’s Regulation YY securities borrowing transaction; (i) The first day of the fifth calendar (12 CFR part 252); and (4) Any guarantee, acceptance, or quarter after it becomes subject to those (2) With respect to a foreign banking letter of credit (including any requirements, or organization, the total regulatory capital endorsement, confirmed letter of credit, (ii) The date on which the U.S. as reported on the foreign banking or standby letter of credit) issued on intermediate holding company is organization’s most recent FR Y–7Q or behalf of a counterparty; required to be established, unless that other reporting form specified by the (5) Any purchase of, or investment in, time is accelerated or extended by the Board. securities issued by a counterparty; Board in writing. (e) Counterparty means: (6) Any credit exposure to the § 252.171 Definitions. (1) With respect to a natural person, counterparty in connection with a For purposes of this subpart: the person, and members of the person’s derivative transaction between the (a) Adjusted market value means: immediate family; covered company and the counterparty; (1) With respect to the value of (2) With respect to a company, the (7) Any credit exposure to the securities transferred by the covered company and all persons that that counterparty in connection with a credit company to a counterparty, the sum of: counterparty derivative or equity derivative (i) Market value of the securities and (i) Owns, controls, or holds with transaction between the covered (ii) The product of the market value power to vote 25 percent or more of a company and a third party, the of the securities multiplied by the class of voting securities of the person; reference asset of which is an obligation applicable collateral haircut in Table 1 (ii) Owns or controls 25 percent or or equity security of the counterparty; to § 217.132 of the Board’s Regulation Q more of the total equity of the person; and (12 CFR 217.132); and or (8) Any transaction that is the (2) With respect to eligible collateral (iii) Consolidates for financial functional equivalent of the above, and received by the covered company from reporting purposes, as described in any other similar transaction that the a counterparty: § 252.172(d), collectively; Board, by regulation, determines to be a (i) The market value of the securities (3) With respect to a State, the State credit transaction for purposes of this minus and all of its agencies, instrumentalities, subpart.

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(i) Depository institution has the same practice and with a grace period that is in § 217.2 of the Board’s Regulation Q meaning as in section 3 of the Federal closely in line with the grace period of (12 CFR 217.2). Deposit Insurance Act (12 U.S.C. the reference exposure; and (q) Financial entity means: 1813(c)). (ii) Receivership, insolvency, (1) A depository institution; (j) Derivative transaction means any liquidation, conservatorship, or inability (2) A bank holding company; transaction that is a contract, agreement, of the reference exposure issuer to pay (3) A savings and loan holding swap, warrant, note, or option that is its debts, or its failure or admission in company (as defined in 12 U.S.C. based, in whole or in part, on the value writing of its inability generally to pay 1467a); (4) A securities broker or dealer of, any interest in, or any quantitative its debts as they become due and similar registered with the U.S. Securities and measure or the occurrence of any event events; Exchange Commission under the relating to, one or more commodities, (4) The terms and conditions dictating Securities Exchange Act of 1934 (15 securities, currencies, interest or other the manner in which the derivative U.S.C. 78o et seq.); rates, indices, or other assets. contract is to be settled are incorporated (k) Eligible collateral means collateral (5) An insurance company that is into the contract; subject to the supervision by a State in which a U.S. intermediate holding (5) If the contract allows for cash company or any part of the foreign insurance regulator; settlement, the contract incorporates a (6) A foreign banking organization; banking organization’s combined U.S. robust valuation process to estimate loss (7) A non-U.S.-based securities firm or operations has a perfected, first priority reliably and specifies a reasonable a non-U.S.-based insurance company security interest or the legal equivalent period for obtaining post-credit event that is subject to consolidated thereof, if outside of the United States valuations of the reference exposure; supervision and regulation comparable (with the exception of cash on deposit (6) If the contract requires the to that imposed on U.S. depository and notwithstanding the prior security protection purchaser to transfer an institutions, securities broker-dealers, or interest of any custodial agent) and is in exposure to the protection provider at insurance companies; the form of: settlement, the terms of at least one of (8) A central counterparty; and (1) Cash on deposit with the U.S. the exposures that is permitted to be (9) A legal entity whose main intermediate holding company or any transferred under the contract provides business includes the management of part of the U.S. operations, the U.S. that any required consent to transfer financial assets, lending, factoring, branch, or the U.S. agency (including may not be unreasonably withheld; and leasing, provision of credit cash held for the foreign banking (7) If the credit derivative is a credit enhancements, securitization, organization or U.S. intermediate default swap, the contract clearly investments, financial custody, holding company by a third-party identifies the parties responsible for proprietary trading, and other financial custodian or trustee); determining whether a credit event has services. (2) Debt securities (other than occurred, specifies that this (r) Gross credit exposure means, with mortgage- or asset-backed securities and determination is not the sole respect to any credit transaction, the resecuritization securities, unless those responsibility of the protection credit exposure of the covered company securities are issued by a U.S. provider, and gives the protection before adjusting, pursuant to section government-sponsored enterprise) that purchaser the right to notify the 252.174, for the effect of any qualifying are bank-eligible investments and that protection provider of the occurrence of master netting agreement, eligible are investment grade; a credit event. collateral, eligible guarantee, eligible (3) Equity securities that are publicly (m) Eligible equity derivative means credit derivative, eligible equity traded; or an equity-linked total return swap, derivative, other eligible hedge, and any (4) Convertible bonds that are provided that: unused portion of certain extensions of publicly traded; and credit. (5) Does not include any debt or (1) The derivative contract has been confirmed by the counterparties; (s) Immediate family means the equity securities (including convertible spouse of an individual, the individual’s (2) Any assignment of the derivative bonds), issued by an affiliate of the U.S. minor children, and any of the contract has been confirmed by all intermediate holding company or by individual’s children (including adults) relevant parties; and any part of the foreign banking residing in the individual’s home. organization’s combined U.S. (3) The terms and conditions dictating (t) Intraday credit exposure means operations. the manner in which the derivative credit exposure of the U.S. intermediate (l) Eligible credit derivative means a contract is to be settled are incorporated holding company or any part of the single-name credit derivative or a into the contract. combined U.S. operations to a standard, non-tranched index credit (n) Eligible guarantee has the same counterparty that by its terms is to be derivative, provided that: meaning as in § 217.2 of the Board’s repaid, sold, or terminated by the end of (1) The derivative contract is subject Regulation Q (12 CFR 217.2) that is its business day in the United States. to an eligible guarantee and has been provided by an eligible protection (u) Investment grade has the same confirmed by the protection purchaser provider. meaning as in § 217.2 of the Board’s and the protection provider; (o) Eligible protection provider has the Regulation Q (12 CFR 217.2). (2) Any assignment of the derivative same meaning as ‘‘eligible guarantor’’ in (v) Major counterparty means: contract has been confirmed by all § 217.2 of the Board’s Regulation Q (12 (1) A U.S. company identified as a relevant parties; CFR 217.2), but does not include the global systemically important bank (3) If the credit derivative is a credit foreign banking organization or any holding company pursuant to 12 CFR default swap, the derivative contract entity that is an affiliate of either the 217.402; includes the following credit events: U.S. intermediate holding company or (2) Any foreign banking organization (i) Failure to pay any amount due of any part of the foreign banking (and all of its subsidiaries, collectively) under the terms of the reference organization’s combined U.S. that meets one of the following exposure, subject to any applicable operations. conditions: minimal payment threshold that is (p) Equity derivative has the same (i) The foreign banking organization consistent with standard market meaning as ‘‘equity derivative contract’’ has the characteristics of a global

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systemically important banking the Board’s Regulation Q (12 CFR exposures shall permit its combined organization under the assessment 217.2). U.S. operations, including, but not methodology and the higher loss (aa) Qualifying master netting limited to, any U.S. intermediate absorbency requirement for global agreement has the same meaning as in holding company and any subsidiary of systemically important banks issued by § 217.2 of the Board’s Regulation Q (12 any U.S. intermediate holding company, the Basel Committee on Banking CFR 217.2). to have an aggregate net credit exposure Supervision, as updated from time to (bb) Short sale means any sale of a to any unaffiliated counterparty in time; or security which the seller does not own excess of 25 percent of the tier 1 capital (ii) The Board, using information or any sale which is consummated by of the foreign banking organization. reported by the foreign banking the delivery of a security borrowed by, (c) Major U.S. intermediate holding organization or its U.S. subsidiaries, or for the account of, the seller. company and major foreign banking information that is publicly available, (cc) Sovereign entity means a central organization limits on aggregate net and confidential supervisory national government (including the U.S. credit exposure to each other. information, determines: government) or an agency, department, (1) No U.S. intermediate holding (A) That the foreign banking ministry, or central bank, but not company shall have an aggregate net organization would be a global including any political governmental credit exposure to any unaffiliated systemically important banking subdivision such as a state, province, or major counterparty in excess of 15 organization under the global municipality. percent of the tier 1 capital of the U.S. methodology; (dd) Subsidiary of a specified intermediate holding company. (2) No major foreign banking (B) That the foreign banking company means a company that is organization may permit its combined organization, if it were subject to the directly or indirectly controlled by the U.S. operations to have an aggregate net Board’s Regulation Q, would be specified company. credit exposure to any unaffiliated identified as a global systemically (ee) Tier 1 capital means common major counterparty in excess of 15 important bank holding company under equity tier 1 capital and additional tier percent of the tier 1 capital of the major § 217.402 of the Board’s Regulation Q; 1 capital, as defined in subpart O of the foreign banking organization. or Board’s Regulation YY (12 CFR part 252). (d) For purposes of this subpart, a (C) That the U.S. intermediate holding counterparty and major counterparty company, if it were subject to the § 252.172 Credit exposure limits. shall include any person that the Board’s Regulation Q, would be (a) General limit on aggregate net counterparty or major counterparty: identified as a global systemically credit exposure. (1) owns, controls, or holds with important bank holding company. (1) No U.S. intermediate holding power to vote 25 percent or more of a (iii) A foreign banking organization company shall have an aggregate net class of voting securities of the person; that prepares or reports for any purpose credit exposure to any unaffiliated (2) owns or controls 25 percent or the indicator amounts necessary to counterparty in excess of 25 percent of more of the total equity of the person; determine whether the foreign banking the consolidated capital stock and or organization is a global systemically surplus of the U.S. intermediate holding (3) consolidates for financial reporting important banking organization under company. purposes. the assessment methodology and the (2) No foreign banking organization § 252.173 Gross credit exposure. higher loss absorbency requirement for may permit its combined U.S. (a) Calculation of gross credit global systemically important banks operations, including, but not limited exposure for U.S. intermediate holding issued by the Basel Committee on to, any U.S. intermediate holding companies and foreign banking Banking Supervision, as updated from company and any subsidiary of any U.S. organizations. Except as provided in time to time, must use the data to intermediate holding company, to have determine whether the foreign banking paragraph (b) of this section, the amount an aggregate net credit exposure to any of gross credit exposure of a U.S. organization has the characteristics of a unaffiliated counterparty in excess of 25 global systemically important banking intermediate holding company or, with percent of the consolidated capital stock respect to any part of its combined U.S. organization under the global and surplus of the foreign banking methodology; and operations, a foreign banking organization. organization (each a covered entity), to (3) Any nonbank financial company (b) Limit on aggregate net credit supervised by the Board. a counterparty is, in the case of: exposure for U.S. intermediate holding (1) Loans by a covered entity to a (w) Major foreign banking companies and foreign banking counterparty and leases in which a organization means any foreign banking organizations with $250 billion or more covered entity is the lessor and a organization that has total consolidated in total consolidated assets or $10 counterparty is the lessee, an amount assets of $500 billion or more, billion or more in total on-balance-sheet equal to the amount owed by the calculated pursuant to § 252.170(a)(4). foreign exposures. counterparty to the covered entity under (x) Major U.S. intermediate holding (1) No U.S. intermediate holding the transaction. company means a U.S. intermediate company that has $250 billion or more (2) Debt securities held by a covered holding company that has total in total consolidated assets or $10 entity that is issued by the counterparty, consolidated assets of $500 billion or billion or more in total on-balance-sheet equal to: more, calculated pursuant to foreign exposures shall have an (i) The market value, for trading and § 252.170(b)(3). aggregate net credit exposure to any available-for-sale securities; and (y) Net credit exposure means, with unaffiliated counterparty that exceeds (ii) The amortized purchase price, for respect to any credit transaction, the 25 percent of the tier 1 capital of the securities held to maturity. gross credit exposure of a covered U.S. intermediate holding company. (3) Equity securities held by a covered company calculated under § 252.173, as (2) No foreign banking organization entity that is issued by the counterparty, adjusted in accordance with § 252.174. that has $250 billion or more in total equal to the market value. (z) Qualifying central counterparty consolidated assets or $10 billion or (4) Repurchase transactions, equal to has the same meaning as in § 217.2 of more in total on-balance-sheet foreign the adjusted market value of securities

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transferred by a covered entity to the required to recognize an exposure to an § 252.174 Net credit exposure. counterparty. eligible protection provider pursuant to (a) In general. For purposes of this (5) Reverse repurchase transactions, section 252.174(e), the U.S. intermediate subpart, a U.S. intermediate holding equal to the amount of cash transferred holding company must exclude the company, or with respect to its by the covered company to the relevant derivative transaction when combined U.S. operations, a foreign counterparty. calculating its gross exposure to the banking organization, shall calculate its (6) Securities borrowing transactions, original counterparty under this section. net credit exposure to a counterparty by equal to: (ii) Between an entity within the adjusting its gross credit exposure to (i) The amount of cash collateral combined U.S. operations of a foreign that counterparty in accordance with transferred by the covered entity to the banking organization and a counterparty the rules set forth in this section. counterparty; plus that is subject to a qualifying master (b) Calculation of net credit exposure (ii) The adjusted market value of netting agreement between an entity for repurchase transactions, reverse securities collateral transferred by the within the combined U.S. operations repurchase transactions, securities covered entity to the counterparty. and the counterparty: lending transactions, and securities (7) Securities lending transactions, (A) The derivative transaction shall be borrowing transactions. With respect to equal to the adjusted market value of valued at an amount equal to either (1) any repurchase transaction, reverse securities lent by the covered entity to the exposure at default amount repurchase transaction, securities the counterparty. calculated under any of the methods lending transaction, and securities (8) Committed credit lines extended that the covered company is authorized borrowing transaction with a by a covered entity to a counterparty, to use under the Board’s Regulation Q counterparty that is subject to a bilateral equal to the face amount of the credit (12 CFR part 217, subparts D and E) to netting agreement with that line. value such transactions (provided that counterparty and that meets the (9) Guarantees and letters of credit the rules governing the recognition of definition of ‘‘repo-style transaction’’ in issued by a covered entity on behalf of collateral set forth in this subpart shall section 217.2 of the Board’s Regulation a counterparty, equal to the maximum apply); or (2) the gross credit exposure Q (12 CFR 217.2), the net credit potential loss to the covered entity on amount calculated under exposure of a U.S. intermediate holding the transaction. § 252.173(a)(10) of this subpart. company or, with respect to its (10) Derivative transactions between (B) In cases where, the foreign combined U.S. operations, a foreign the covered entity and the counterparty banking organization is required to banking organization to a counterparty that is not subject to a qualifying master recognize an exposure to an eligible shall be equal to the exposure at default netting agreement: protection provider pursuant to amount calculated under § 217.37(c)(2) (i) The derivative transaction shall be of the Board’s Regulation Q (12 CFR § 252.174(e), the foreign banking valued at an amount equal to the sum 217.37(c)(2)); provided that: organization must exclude the relevant of: (1) The U.S. intermediate holding (A) The current exposure of the derivative transaction when calculating company or, with respect to its derivatives contract equal to the greater its gross exposure to the original combined U.S. operations, a foreign of the mark-to-market value of the counterparty under this section. banking organization shall apply the derivative contract or zero; and (12) Credit or equity derivative standardized supervisory haircuts as (B) The potential future exposure of transactions between the covered entity provided in 12 CFR 217.37(c)(3)(iii) of the derivatives contract, calculated by and a third party where the covered the Board’s Regulation (12 CFR multiplying the notional principal entity is the protection provider and the 217.37(c)(3)(iii), and is not permitted to amount of the derivative contract by the reference asset is an obligation or equity use its own internal estimates for applicable conversion factor in Table 2 security of the counterparty, equal to the haircuts; to § 217.132 of the Board’s Regulation Q maximum potential loss to the covered (2) The U.S. intermediate holding (12 CFR 217.132). entity on the transaction. company or, with respect to its (ii) In cases where a covered entity is (b) Investments in and Exposures to combined U.S. operations, a foreign required to recognize an exposure to an Securitization Vehicles, Investment banking organization shall, in eligible protection provider pursuant to Funds, and Other Special Purpose calculating its net credit exposure to a section 252.174(e), the covered entity Vehicles. A U.S. intermediate holding counterparty as a result of the must exclude the relevant derivative company or a foreign banking transactions described in paragraph (b), transaction when calculating its gross organization that has $250 billion or disregard any collateral received from exposure to the original counterparty more in total consolidated assets or $10 that counterparty that does not meet the under this section. billion or more in total on-balance-sheet definition of ‘‘eligible collateral’’ in (11) Derivative transactions: foreign exposures shall calculate its § 252.171(k); and (i) Between a U.S. intermediate gross credit exposure for investments in (3) The U.S. intermediate holding holding company and a counterparty and exposures to a securitization company or, with respect to its that is subject to a qualifying master vehicle, investment fund, and other combined U.S. operations, a foreign netting agreement: special purpose vehicle pursuant to banking organization shall include the (A) The derivative transaction shall be § 252.175. adjusted market value of any eligible valued using any of the methods that (c) Attribution rule. A U.S. collateral, as further adjusted by the the U.S. intermediate holding company intermediate holding company or, with application of the maturity mismatch is authorized to use under the Board’s respect to its combined U.S. operations, adjustment approach of § 217.36(d) of Regulation Q (12 CFR part 217, subparts a foreign banking organization must the Board’s Regulation Q (12 CFR D and E) to value such transactions treat any credit transaction with any 217.36(d)), if applicable, when (provided that the rules governing the person as a credit transaction with a calculating its gross credit exposure to recognition of collateral set forth in this counterparty, to the extent that the the collateral issuer, including in subpart shall apply). proceeds of the transaction are used for instances where the underlying (B) In cases where the U.S. the benefit of, or transferred to, that repurchase transaction, reverse intermediate holding company is counterparty. repurchase transaction, securities

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lending transaction, or securities (i) The amount of any eligible than one year and a residual maturity of borrowing transaction would not be guarantees from an eligible protection not less than three months, in cases subject to the credit limits of § 272.172. provider that covers the transaction, in where the eligible credit or equity (c) Eligible collateral. cases where the eligible guarantee has derivative has a shorter maturity than (1) In computing its net credit the same or greater maturity as the the credit transaction. exposure to a counterparty for any credit transaction; or (2)(i) In general, a U.S. intermediate credit transaction other than (ii) The amount of any eligible holding company or, with respect to its transactions described in paragraph (b) guarantees from an eligible protection combined U.S. operations, a foreign of this section, a U.S. intermediate provider that covers the transaction as banking organization that reduces its holding company or, with respect to its further adjusted by application of the gross credit exposure to a counterparty combined U.S. operations, a foreign maturity mismatch adjustment approach as provided under paragraph (e)(1) must banking organization must reduce its of § 217.36(d) of the Board’s Regulation include the notional amount of the gross credit exposure on the transaction Q (12 CFR 217.36(d)), if the eligible eligible credit or equity derivative from by: guarantees have an original maturity an eligible protection provider, as (i) The adjusted market value of any equal to or greater than one year and a further adjusted by the application of eligible collateral, in cases where the residual maturity of not less than three the maturity mismatch adjustment eligible collateral has the same or months, in cases where the eligible approach of § 217.36(d) of the Board’s greater maturity as the credit guarantee has a shorter maturity than Regulation Q (12 CFR 217.36(d)), as transactions; or the credit transaction. applicable, when calculating its gross (2) A U.S. intermediate holding (ii) The adjusted market value of any credit exposure to the eligible protection company or, with respect to its eligible collateral, as further adjusted by provider, including in instances where combined U.S. operations, a foreign application of the maturity mismatch the underlying credit transaction would banking organization that reduces its adjustment approach of § 217.36(d) of not be subject to the credit limits of gross credit exposure to a counterparty the Board’s Regulation Q (12 CFR § 272.172. Notwithstanding the as required under paragraph (d)(1) must 217.36(d)), but only if the eligible foregoing, in no event will the gross include the amount of eligible credit exposure of the U.S. intermediate collateral has an original maturity equal guarantees when calculating its gross holding company or, with respect to its to or greater than one year and a credit exposure to the eligible protection combined U.S. operations, of the foreign residual maturity of not less than three provider, including in instances where banking organization to an eligible months, in cases where the eligible the underlying credit transaction would provider with respect to an eligible collateral has a shorter maturity than the not be subject to the credit limits of credit or equity derivative be in excess credit transaction. § 272.172. Notwithstanding the of its gross credit exposure to that (2) A U.S. intermediate holding foregoing, in no event will the gross counterparty on the credit transaction company or, with respect to its credit exposure of the U.S. intermediate prior to recognition of the eligible credit combined U.S. operations, a foreign holding company or, with respect to its or equity derivative; and banking organization that reduces its combined U.S. operations, of the foreign (ii) In cases where the eligible credit gross credit exposure to a counterparty banking organization to an eligible or equity derivative is used to hedge as required under paragraph (c)(1) must protection provider with respect to an covered positions and available-for-sale include the adjusted market value of the eligible guarantee be in excess of its exposures that are subject to the Board’s eligible collateral, as further adjusted by gross credit exposure to the market risk rule (12 CFR part 217, the application of the maturity counterparty on the credit transaction subpart F) and the counterparty on the mismatch adjustment approach of prior to recognition of the eligible hedged transaction is not a financial § 217.36(d) of the Board’s Regulation Q guarantee. entity, the amount of credit exposure (12 CFR 217.36(d)), if applicable, when (e) Eligible credit and equity that a company must recognize to the calculating its gross credit exposure to derivatives. eligible protection provider is the the collateral issuer, including in (1) In calculating net credit exposure amount that would be calculated instances where the underlying credit to a counterparty for a credit pursuant to § 252.173(a), including in transaction would not be subject to the transaction, a U.S. intermediate holding instances where the underlying credit credit limits of § 272.172. company or, with respect to its transaction would not be subject to the Notwithstanding the foregoing, in no combined U.S. operations, a foreign credit limits of § 272.172. event will the gross credit exposure of banking organization must reduce its (f) Other eligible hedges. In the U.S. intermediate holding company gross credit exposure to the calculating net credit exposure to a or, with respect to its combined U.S. counterparty by: counterparty for a credit transaction, a operations, of the foreign banking (i) The notional amount of any U.S. intermediate holding company or, organization to the issuer of collateral be eligible credit or equity derivative from with respect to its combined U.S. in excess of its gross credit exposure to an eligible protection provider, in cases operations, a foreign banking the counterparty on the credit where the eligible credit or equity organization may reduce its gross credit transaction. derivative has a maturity that is the exposure to the counterparty by the face (d) Eligible guarantees. same or greater than the maturity of the amount of a short sale of the (1) In calculating net credit exposure credit transaction; or counterparty’s debt or equity security, to a counterparty for any credit (ii) The notional amount of any provided that: transaction, a U.S. intermediate holding eligible credit or equity derivative from (1) The instrument in which the company or, with respect to its an eligible protection provider, as covered company has a short position is combined U.S. operations, a foreign further adjusted by application of the junior to, or pari passu with, the banking organization must reduce its maturity mismatch adjustment approach instrument in which the covered gross credit exposure to the of § 217.36(d) of the Board’s Regulation company has the long position; and counterparty by any eligible guarantees Q (12 CFR 217.36(d)), but only if the (2) The instrument in which the from an eligible protection provider that eligible credit or equity derivative has covered company has a short position covers the transaction by: an original maturity equal to or greater and the instrument in which the

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covered company has the long position foreign banking organization shall special purpose vehicle, pursuant to are either both treated as trading or calculate its credit exposure to the paragraph (b)(3) of this section. available-for-sale exposures or both issuer of the collateral or protection (2) If a covered entity that cannot treated as held-to-maturity exposures. provider, as applicable, in accordance satisfy the requirements of paragraph (g) Unused portion of certain with the rules set forth in this section (a)(3) is unable to identify each issuer of extensions of credit. to the same extent as if the credit assets held by a securitization vehicle, (1) In computing its net credit transaction with the person were subject investment fund, or other special exposure to a counterparty for a credit to the requirements in this subpart, purpose vehicle, the covered entity, for line or revolving credit facility, a U.S. including § 252.172. purposes of paragraph (b)(3) of this intermediate holding company or, with section, must attribute the gross credit respect to its combined U.S. operations, § 252.175 Investments in and exposures to exposure to a single unknown a foreign banking organization may securitization vehicles, investment funds, counterparty, and the limits of § 252.172 reduce its gross credit exposure by the and other special purpose vehicles. shall apply to that counterparty as a amount of the unused portion of the (a) In general. (1) This section applies single counterparty. credit extension to the extent that the only to covered entities with $250 (3) A covered entity that is required U.S. intermediate holding company or billion or more in total consolidated to calculate its gross credit exposure to any part of the combined U.S. assets or $10 billion or more in on- an issuer of assets held by a operations of the foreign banking balance-sheet foreign exposures, subject securitization vehicle, investment fund, organization does not have any legal to paragraph (d) of this section. or other special purpose vehicle obligation to advance additional funds (2)(i) If a covered entity can satisfy the pursuant to paragraph (b)(1), or to an under the extension of credit, until the requirements of paragraph (a)(3), a unknown counterparty pursuant to counterparty provides the amount of covered company must calculate its paragraph (b)(2), must calculate the adjusted market value of collateral of gross credit exposure to each gross credit exposure as follows: the type described in paragraph (g)(2) of securitization vehicle, investment fund, (i) Where all investors in the this section in the amount (calculated in and other special purpose vehicle in securitization vehicle, investment fund, accordance with § 252.171 of this which it invests pursuant to or other special purpose vehicle rank subpart) required with respect to the § 252.173(a), and the covered entity is pari passu, the gross credit exposure is entire used portion of the extension of not required to calculate its gross credit equal to the covered entity’s pro rata credit. exposure to each issuer of assets held by share multiplied by the value of the (2) To qualify for this reduction, the a securitization vehicle, investment assets attributed to the issuer or the credit contract must specify that any fund, or other special purpose vehicle. unknown counterparty, as applicable, used portion of the credit extension (ii) If a covered entity cannot satisfy that are held within the structure; and must be fully secured by collateral that the requirements of paragraph (a)(3), the (ii) Where all investors in the is: covered entity must calculate its gross securitization vehicle, investment fund, (i) Cash; credit exposure to each issuer of assets or other special purpose vehicle do not (ii) Obligations of the United States or held by a securitization vehicle, rank pari passu, the gross credit its agencies; investment fund, or other special exposure is equal to: (iii) Obligations directly and fully purpose vehicle using the look-through (A) The lower of the value of the guaranteed as to principal and interest approach in paragraph (b) of this tranche in which the covered entity has by, the Federal National Mortgage section. invested, calculated pursuant to Association and the Federal Home Loan § 252.173(a), and the value of each asset (2) A covered entity is not required to Mortgage Corporation, while operating attributed to the issuer or the unknown calculate its gross credit exposure to under the conservatorship or counterparty, as applicable, that are each issuer of assets held by a receivership of the Federal Housing held by the securitization vehicle, securitization vehicle, investment fund, Finance Agency, and any additional investment fund, or other special or other special purpose vehicle, as obligations issued by a U.S. purpose vehicle; multiplied by government-sponsored enterprise as applicable, if the covered entity can (B) The pro rata share of the covered determined by the Board; or demonstrate that its gross credit entity’s investment in the tranche. (iv) Obligations of the foreign banking exposure to each such issuer, (c) Exposures to Third Parties. (1) organization’s home country sovereign considering only the credit exposures to Notwithstanding any other requirement entity. that issuer arising from the covered in this section, a covered entity must (h) Credit transactions involving entity’s investment in a particular recognize, for purposes of this subpart, exempt and excluded persons. If a U.S. securitization vehicle, investment fund, a gross credit exposure to each third intermediate holding company or, with or other special purpose vehicle, is less party that has a contractual or other respect to its combined U.S. operations, than 0.25 percent of the covered business relationship with a a foreign banking organization has a entity’s: securitization vehicle, investment fund, credit transaction with any person, (i) Capital stock and surplus in the or other special purpose vehicle, such as exposures to which are exempt from case of a covered entity subject to the a fund manager or protection provider, this subpart under § 252.175 or credit exposure limit of § 252.172(a); or whose failure or material financial otherwise excluded from the limits in (ii) Tier 1 capital in the case of a distress would cause a loss in the value this subpart, and the U.S. intermediate covered company subject to the credit of the covered entity’s investment in or holding company or foreign banking exposure limit of § 252.172(b). exposure to the securitization vehicle, organization has reduced its credit (b) Look-Through Approach. (1) A investment fund, or other special exposure on the credit transaction with covered entity that cannot satisfy the purpose vehicle. that person by obtaining collateral from requirements of paragraph (a)(3) must (2) For purposes of § 252.172, with that person or a guarantee or credit or calculate its gross credit exposure, for respect to a covered entity’s gross credit equity derivative from an eligible purposes of § 252.173(a), to each issuer exposure to a third party that a covered protection provider, the U.S. of assets held by a securitization entity must recognize pursuant to intermediate holding company or vehicle, investment fund, or other paragraph (c)(1), the covered entity shall

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recognize an exposure to the third party (iii) If a U.S. intermediate holding company determines to be relevant to in an amount equal to the covered company or, with respect to its this analysis. entity’s gross credit exposure to the combined U.S. operations, a foreign (3) In order to avoid evasion of this associated securitization vehicle, banking organization or the Board section, the Board may determine, after investment fund, or other special determines pursuant to paragraph (a)(2) notice to the company and opportunity purpose vehicle, in addition to the or (a)(3) of this section, as applicable, for hearing, that one or more covered entity’s gross credit exposure to that one or more other unaffiliated unaffiliated counterparties of a U.S. the associated securitization vehicle, counterparties of a U.S. intermediate intermediate holding company or, with investment fund, or other special holding company or, with respect to its respect to its combined U.S. operations, purpose vehicle. combined U.S. operations, of a foreign of a foreign banking organization are (d) Notwithstanding paragraph (a)(1) banking organization are economically economically dependent for purposes of of this section, in order to avoid evasion dependent, the U.S. intermediate this subpart. In making any such of this subpart, the Board may holding company or, with respect to its determination, the Board shall consider determine, after notice to the covered combined U.S. operations, the foreign the factors in paragraph (a)(2) of this entity and opportunity for hearing, that banking organization shall aggregate its section as well as any other indicia of a covered entity with less than $250 net credit exposure to the unaffiliated economic interdependence that the billion in total consolidated assets and counterparties for all purposes under Board determines to be relevant. less than $10 billion in total on-balance- this subpart, including but not limited (b) Aggregation of exposures to more sheet foreign exposures must apply the to § 252.172. than one counterparty due to certain look-through approach or recognize (2) In making a determination as to control relationships. exposures to third parties that have a whether any two counterparties are (1) A U.S. intermediate holding contractual or other business economically interdependent, a U.S. company or, with respect to its relationship for purposes of this intermediate holding company or, with combined U.S. operations, a foreign subpart. respect to its combined U.S. operations, banking organization shall assess a foreign banking organization shall whether counterparties are connected § 252.176 Aggregation of exposures to consider the following factors: by control relationships due to the more than one counterparty due to (i) Whether 50 percent or more of one following factors: economic interdependence or control counterparty’s gross revenue or gross (i) The presence of voting agreements; relationships. expenditures are derived from (ii) Ability of one counterparty to (a) Aggregation of Exposures to More transactions with the other significantly influence the appointment than One Counterparty due to Economic counterparty; or dismissal of another counterparty’s Interdependence. (ii) Whether one counterparty administrative, management or (1)(i) If a U.S. intermediate holding (counterparty A) has fully or partly governing body, or the fact that a company or, with respect to its guaranteed the credit exposure of the majority of members of such body have combined U.S. operations, a foreign other counterparty (counterparty B), or been appointed solely as a result of the banking organization that has less than is liable by other means, and the credit exercise of the first counterparty’s $250 billion in total consolidated assets exposure is significant enough that voting rights; and and less than $10 billion in total on- counterparty B is likely to default if (iii) Ability of one counterparty to balance-sheet foreign exposures has an presented with a claim relating to the exercise a controlling influence over the aggregate net credit exposure to any guarantee or liability; management or policies of another unaffiliated counterparty that exceeds 5 (iii) Whether 25 percent or more of counterparty. percent of the consolidated capital stock one counterparty’s production or output (2) If a U.S. intermediate holding and surplus of the covered company, or is sold to the other counterparty, which company or, with respect to its 5 percent of its tier 1 capital in the case cannot easily be replaced by other combined U.S. operations, a foreign of a U.S. intermediate holding company customers; banking organization or the Board with $250 billion or more in total (iv) Whether the expected source of determines pursuant to paragraph (b)(1) consolidated assets or $10 billion or funds to repay any credit exposure or (b)(3) of this section that one or more more in total on-balance-sheet foreign between the counterparties is the same other unaffiliated counterparties of the exposures, the U.S. intermediate and at least one of the counterparties U.S. intermediate holding company or, holding company or, with respect to its does not have another source of income with respect to its combined U.S. combined U.S. operations, the foreign from which the extension of credit may operations, of the foreign banking banking organization shall analyze its be fully repaid; organization are connected by control relationship with the unaffiliated (v) Whether the financial distress of relationships, the U.S. intermediate counterparty under paragraph (a)(2) of one counterparty (counterparty A) is holding company or, with respect to its this section to determine whether the likely to impair the ability of the other combined U.S. operations, the foreign unaffiliated counterparty is counterparty (counterparty B) to fully banking organization shall aggregate its economically interdependent with one and timely repay counterparty B’s net credit exposure to the unaffiliated or more other unaffiliated liabilities; counterparties for all purposes under counterparties of the covered company. (vi) Whether one counterparty this subpart, including but not limited (ii) For purposes of this paragraph, (counterparty A) has made a loan to the to, § 252.172. two counterparties are economically other counterparty (counterparty B) and (3) In order to avoid evasion of this interdependent if the failure, default, is relying on repayment of that loan in section, the Board may determine, after insolvency, or material financial distress order to satisfy its obligations to the notice to the company and opportunity of one counterparty would cause the covered company, and counterparty A for hearing, that one or more failure, default, insolvency, or material does not have another source of income unaffiliated counterparties of a U.S. financial distress of the other that it can use to satisfy its obligations intermediate holding company or, with counterparty, taking into account the to the covered company; and respect to its combined U.S. operations, factors in paragraph (a)(2) of this (vii) Any other indicia of of a foreign banking organization are section. interdependence that the covered connected by control relationships for

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purposes of this subpart. In making any that the exemption is in the public not be subject to enforcement actions for such determination, the Board shall interest and is consistent with the a period of 90 days (or such other period consider the factors in paragraph (b)(1) purpose of § 165(e) of the Dodd-Frank determined by the Board to be of this section as well as any other Wall Street Reform and Consumer appropriate to preserve the safety and control relationships that the Board Protection Act (12 U.S.C. 5365(e)). soundness of the covered company or determines to be relevant. U.S. financial stability) if the covered § 252.178 Compliance. entity uses reasonable efforts to return § 252.177 Exemptions. (a) Scope of compliance. A foreign to compliance with this subpart during (a) Exempted exposure categories. banking organization or U.S. this period. Neither the U.S. The following categories of credit intermediate holding company with intermediate holding company nor the transactions are exempt from the limits $250 billion or more in total combined U.S. operations may engage on credit exposure under this subpart: consolidated assets or $10 billion or in any additional credit transactions (1) Direct claims on, and the portions more in total on-balance-sheet foreign with such a counterparty in of claims that are directly and fully exposures must ensure its compliance contravention of this subpart, unless the guaranteed as to principal and interest with the requirements of this section on Board determines that such credit by, the Federal National Mortgage a daily basis at the end of each business transactions are necessary or Association and the Federal Home Loan day and submit to the Board on a appropriate to preserve the safety and Mortgage Corporation, only while monthly basis a report demonstrating its soundness of the foreign banking operating under the conservatorship or daily compliance. A foreign banking organization or U.S. financial stability. receivership of the Federal Housing organization or U.S. intermediate In considering this determination, the Finance Agency, and any additional holding company with less than $250 Board will consider whether any of the obligations issued by a U.S. billion in total consolidated assets or following circumstances exist: government-sponsored entity as $10 billion in total on-balance-sheet (1) A decrease in the U.S. determined by the Board. foreign exposures must comply with the intermediate holding company’s or (2) Intraday credit exposure to a requirements of this section on a foreign banking organization’s capital counterparty. quarterly basis and submit on a (3) Trade exposures to a qualifying quarterly basis a report demonstrating stock and surplus; central counterparty related to the its quarterly compliance, unless the (2) The merger of the U.S. covered entity’s clearing activity, Board determines and notifies that intermediate holding company or including potential future exposure company that more frequent compliance foreign banking organization with a arising from transactions cleared by the and reporting is required. bank holding company with total qualifying central counterparty and pre- (b) Qualifying Master Netting consolidated assets of $50 billion or funded default fund contributions. Agreement. A foreign banking more, a nonbank financial company (4) Direct claims on, and the portions organization must ensure that its U.S. supervised by the Board, a foreign of claims that are directly and fully intermediate holding company and banking organization, or U.S. guaranteed as to principal and interest combined U.S. operations establish and intermediate holding company; by, the foreign banking organization’s maintain procedures that meet or (3) A merger of two unaffiliated home country sovereign entity, exceed the requirements of § 217.3(d) of counterparties; or notwithstanding the risk weight the Board’s Regulation Q (12 CFR (4) Any other circumstance the Board assigned to that sovereign entity under 217.3(d)) to monitor possible changes in determines is appropriate. the Board’s Regulation Q (12 CFR part relevant law and to ensure that the (d) Other measures. The Board may 217). agreement continues to satisfy the impose supervisory oversight and (5) Any transaction that the Board requirements of a qualifying master reporting measures that it determines exempts if the Board finds that such netting agreement. are appropriate to monitor compliance exemption is in the public interest and (c) Noncompliance. Except as with this subpart. consistent with the purpose of this otherwise provided in this section, section. either the U.S. intermediate holding By order of the Board of Governors of the (b) Additional Exemptions by the company or the foreign banking Federal Reserve System, March 4, 2016. Board. The Board may, by regulation or organization is not in compliance with Robert deV. Frierson, order, exempt transactions, in whole or this subpart solely due to the Secretary of the Board. in part, from the definition of the term circumstances listed in §§ 252.178(c) [FR Doc. 2016–05386 Filed 3–15–16; 8:45 am] ‘‘credit exposure,’’ if the Board finds (1)–(4) below, the covered entity will BILLING CODE P

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