Title 12—Banks and Banking--Volume 1
PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
§ 217.136   Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies.
(3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days.
(4) The positive current exposure of a Board-regulated institution for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the Board-regulated institution to the counterparty.
(b) Scope. This section applies to all transactions involving securities, foreign exchange instruments, and commodities that have a risk of delayed settlement or delivery. This section does not apply to:
(1) Cleared transactions that are subject to daily marking-to-market and daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style transactions (which are addressed in §§ 217.131 and 132);
(3) One-way cash payments on OTC derivative contracts (which are addressed in §§ 217. 131 and 132); or
(4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts and addressed in §§ 217.131 and 132).
(c) System-wide failures. In the case of a system-wide failure of a settlement or clearing system, or a central counterparty, the Board may waive risk-based capital requirements for unsettled and failed transactions until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. A Board-regulated institution must hold risk-based capital against any DvP or PvP transaction with a normal settlement period if the Board-regulated institution's counterparty has not made delivery or payment within five business days after the settlement date. The Board-regulated institution must determine its risk-weighted asset amount for such a transaction by multiplying the positive current exposure of the transaction for the Board-regulated institution by the appropriate risk weight in Table 1 to § 217.136.
Table 1 to § 217.136—Risk Weights for Unsettled DvP and PvP Transactions
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (1) A Board-regulated institution must hold risk-based capital against any non-DvP/non-PvP transaction with a normal settlement period if the Board-regulated institution has delivered cash, securities, commodities, or currencies to its counterparty but has not received its corresponding deliverables by the end of the same business day. The Board-regulated institution must continue to hold risk-based capital against the transaction until the Board-regulated institution has received its corresponding deliverables.
(2) From the business day after the Board-regulated institution has made its delivery until five business days after the counterparty delivery is due, the Board-regulated institution must calculate its risk-based capital requirement for the transaction by treating the current fair value of the deliverables owed to the Board-regulated institution as a wholesale exposure.
(i) A Board-regulated institution may use a 45 percent LGD for the transaction rather than estimating LGD for the transaction provided the Board-regulated institution uses the 45 percent LGD for all transactions described in paragraphs (e)(1) and (2) of this section.
(ii) A Board-regulated institution may use a 100 percent risk weight for the transaction provided the Board-regulated institution uses this risk weight for all transactions described in paragraphs (e)(1) and (2) of this section.
(3) If the Board-regulated institution has not received its deliverables by the fifth business day after the counterparty delivery was due, the Board-regulated institution must apply a 1,250 percent risk weight to the current fair value of the deliverables owed to the Board-regulated institution.
(f) Total risk-weighted assets for unsettled transactions. Total risk-weighted assets for unsettled transactions is the sum of the risk-weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP transactions.
§§ 217.137-217.140   [Reserved]
§ 217.141   Operational criteria for recognizing the transfer of risk.
(a) Operational criteria for traditional securitizations. A Board-regulated institution that transfers exposures it has originated or purchased to a securitization SPE or other third party in connection with a traditional securitization may exclude the exposures from the calculation of its risk-weighted assets only if each of the conditions in this paragraph (a) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any securitization exposures it retains in connection with the securitization. A Board-regulated institution that fails to meet these conditions must hold risk-based capital against the transferred exposures as if they had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the transaction. The conditions are:
(1) The exposures are not reported on the Board-regulated institution's consolidated balance sheet under GAAP;
(2) The Board-regulated institution has transferred to one or more third parties credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible clean-up calls; and
(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For synthetic securitizations, a Board-regulated institution may recognize for risk-based capital purposes under this subpart the use of a credit risk mitigant to hedge underlying exposures only if each of the conditions in this paragraph (b) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the synthetic securitization. A Board-regulated institution that fails to meet these conditions or chooses not to recognize the credit risk mitigant for purposes of this section must hold risk-based capital under this subpart against the underlying exposures as if they had not been synthetically securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral; or
(ii) A guarantee that meets all of the requirements of an eligible guarantee in § 217.2 except for paragraph (3) of the definition; or
(iii) A credit derivative that meets all of the requirements of an eligible credit derivative except for paragraph (3) of the definition of eligible guarantee in § 217.2.
(2) The Board-regulated institution transfers credit risk associated with the underlying exposures to third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(ii) Require the Board-regulated institution to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Board-regulated institution's cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the Board-regulated institution in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the Board-regulated institution after the inception of the securitization;
(3) The Board-regulated institution obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible clean-up calls.
(c) Due diligence requirements for securitization exposures. (1) Except for exposures that are deducted from common equity tier 1 capital and exposures subject to § 217.142(k), if a Board-regulated institution is unable to demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the Board-regulated institution must assign a 1,250 percent risk weight to the securitization exposure. The Board-regulated institution's analysis must be commensurate with the complexity of the securitization exposure and the materiality of the position in relation to regulatory capital according to this part.
(2) A Board-regulated institution must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section, for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure and document such analysis within three business days after acquiring the exposure, considering:
(A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under this section for each securitization exposure.
§ 217.142   Risk-based capital requirement for securitization exposures.
(a) Hierarchy of approaches. Except as provided elsewhere in this section and in § 217.141:
(1) A Board-regulated institution must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and must apply a 1,250 percent risk weight to the portion of any CEIO that does not constitute after tax gain-on-sale;
(2) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section, the Board-regulated institution must apply the supervisory formula approach in § 217.143 to the exposure if the Board-regulated institution and the exposure qualify for the supervisory formula approach according to § 217.143(a);
(3) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section and does not qualify for the supervisory formula approach, the Board-regulated institution may apply the simplified supervisory formula approach under § 217.144;
(4) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section, does not qualify for the supervisory formula approach in § 217.143, and the Board-regulated institution does not apply the simplified supervisory formula approach in § 217.144, the Board-regulated institution must apply a 1,250 percent risk weight to the exposure; and
(5) If a securitization exposure is a derivative contract (other than protection provided by a Board-regulated institution in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a Board-regulated institution may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (e) of this section rather than apply the hierarchy of approaches described in paragraphs (a)(1) through (4) of this section.
(b) Total risk-weighted assets for securitization exposures. A Board-regulated institution's total risk-weighted assets for securitization exposures is equal to the sum of its risk-weighted assets calculated using §§ 217.141 through 146.
(c) Deductions. A Board-regulated institution may calculate any deduction from common equity tier 1 capital for a securitization exposure net of any DTLs associated with the securitization exposure.
(d) Maximum risk-based capital requirement. Except as provided in § 217.141(c), unless one or more underlying exposures does not meet the definition of a wholesale, retail, securitization, or equity exposure, the total risk-based capital requirement for all securitization exposures held by a single Board-regulated institution associated with a single securitization (excluding any risk-based capital requirements that relate to the Board-regulated institution's gain-on-sale or CEIOs associated with the securitization) may not exceed the sum of:
(1) The Board-regulated institution's total risk-based capital requirement for the underlying exposures calculated under this subpart as if the Board-regulated institution directly held the underlying exposures; and
(2) The total ECL of the underlying exposures calculated under this subpart.
(e) Exposure amount of a securitization exposure. (1) The exposure amount of an on-balance sheet securitization exposure that is not a repo-style transaction, eligible margin loan, OTC derivative contract, or cleared transaction is the Board-regulated institution's carrying value.
(2) Except as provided in paragraph (m) of this section, the exposure amount of an off-balance sheet securitization exposure that is not an OTC derivative contract (other than a credit derivative), repo-style transaction, eligible margin loan, or cleared transaction (other than a credit derivative) is the notional amount of the exposure. For an off-balance-sheet securitization exposure to an ABCP program, such as an eligible ABCP liquidity facility, the notional amount may be reduced to the maximum potential amount that the Board-regulated institution could be required to fund given the ABCP program's current underlying assets (calculated without regard to the current credit quality of those assets).
(3) The exposure amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or OTC derivative contract (other than a credit derivative) or cleared transaction (other than a credit derivative) is the EAD of the exposure as calculated in § 217.132 or § 217.133.
(f) Overlapping exposures. If a Board-regulated institution has multiple securitization exposures that provide duplicative coverage of the underlying exposures of a securitization (such as when a Board-regulated institution provides a program-wide credit enhancement and multiple pool-specific liquidity facilities to an ABCP program), the Board-regulated institution is not required to hold duplicative risk-based capital against the overlapping position. Instead, the Board-regulated institution may assign to the overlapping securitization exposure the applicable risk-based capital treatment under this subpart that results in the highest risk-based capital requirement.
(g) Securitizations of non-IRB exposures. Except as provided in § 217.141(c), if a Board-regulated institution has a securitization exposure where any underlying exposure is not a wholesale exposure, retail exposure, securitization exposure, or equity exposure, the Board-regulated institution:
(1) Must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization and apply a 1,250 percent risk weight to the portion of any CEIO that does not constitute gain-on-sale, if the Board-regulated institution is an originating Board-regulated institution;
(2) May apply the simplified supervisory formula approach in § 217.144 to the exposure, if the securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (g)(1) of this section;
(3) Must assign a 1,250 percent risk weight to the exposure if the securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (g)(1) of this section, does not qualify for the supervisory formula approach in § 217.143, and the Board-regulated institution does not apply the simplified supervisory formula approach in § 217.144 to the exposure.
(h) Implicit support. If a Board-regulated institution provides support to a securitization in excess of the Board-regulated institution's contractual obligation to provide credit support to the securitization (implicit support):
(1) The Board-regulated institution must calculate a risk-weighted asset amount for underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and
(2) The Board-regulated institution must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The regulatory capital impact to the Board-regulated institution of providing such implicit support.
(i) Undrawn portion of a servicer cash advance facility. (1) Notwithstanding any other provision of this subpart, a Board-regulated institution that is a servicer under an eligible servicer cash advance facility is not required to hold risk-based capital against potential future cash advance payments that it may be required to provide under the contract governing the facility.
(2) For a Board-regulated institution that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible servicer cash advance facility is equal to the amount of all potential future cash advance payments that the Board-regulated institution may be contractually required to provide during the subsequent 12 month period under the contract governing the facility.
(j) Interest-only mortgage-backed securities. Regardless of any other provisions in this part, the risk weight for a non-credit-enhancing interest-only mortgage-backed security may not be less than 100 percent.
(k) Small-business loans and leases on personal property transferred with recourse. (1) Notwithstanding any other provisions of this subpart E, a Board-regulated institution that has transferred small-business loans and leases on personal property (small-business obligations) with recourse must include in risk-weighted assets only the contractual amount of retained recourse if all the following conditions are met:
(i) The transaction is a sale under GAAP.
(ii) The Board-regulated institution establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the Board-regulated institution's reasonably estimated liability under the recourse arrangement.
(iii) The loans and leases are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act (15 U.S.C. 632 et seq. ); and
(iv)(A) In the case of a state member bank, the bank is well capitalized, as defined in section 208.43 of this chapter. For purposes of determining whether a state member bank is well capitalized for purposes of this paragraph, the state member bank's capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in this paragraph (k)(1).
(B) In the case of a bank holding company or savings and loan holding company, the bank holding company or savings and loan holding company is well capitalized, as defined in 12 CFR 225.2. For purposes of determining whether a bank holding company or savings and loan holding company is well capitalized for purposes of this paragraph, the bank holding company or savings and loan holding company's capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in this paragraph (k)(1).
(2) The total outstanding amount of recourse retained by a Board-regulated institution on transfers of small-business obligations subject to paragraph (k)(1) of this section cannot exceed 15 percent of the Board-regulated institution's total capital.
(3) If a Board-regulated institution ceases to be well capitalized or exceeds the 15 percent capital limitation in paragraph (k)(2) of this section, the preferential capital treatment specified in paragraph (k)(1) of this section will continue to apply to any transfers of small-business obligations with recourse that occurred during the time that the Board-regulated institution was well capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of a Board-regulated institution must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section.
(l) N th -to-default credit derivatives—(1) Protection provider. A Board-regulated institution must determine a risk weight using the supervisory formula approach (SFA) pursuant to § 217.143 or the simplified supervisory formula approach (SSFA) pursuant to § 217.144 for an n th -to-default credit derivative in accordance with this paragraph (l). In the case of credit protection sold, a Board-regulated institution must determine its exposure in the n th -to-default credit derivative as the largest notional amount of all the underlying exposures.
(2) For purposes of determining the risk weight for an n th -to-default credit derivative using the SFA or the SSFA, the Board-regulated institution must calculate the attachment point and detachment point of its exposure as follows:
(i) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the Board-regulated institution's exposure to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter A is expressed as a decimal value between zero and one. For purposes of using the SFA to calculate the risk weight for its exposure in an n th -to-default credit derivative, parameter A must be set equal to the credit enhancement level (L) input to the SFA formula. In the case of a first-to-default credit derivative, there are no underlying exposures that are subordinated to the Board-regulated institution's exposure. In the case of a second-or-subsequent-to-default credit derivative, the smallest (n-1) risk-weighted asset amounts of the underlying exposure(s) are subordinated to the Board-regulated institution's exposure.
(ii) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the Board-regulated institution's exposure in the n th -to-default credit derivative to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter W is expressed as a decimal value between zero and one. For purposes of the SFA, parameter D must be set to equal L plus the thickness of tranche T input to the SFA formula.
(3) A Board-regulated institution that does not use the SFA or the SSFA to determine a risk weight for its exposure in an n th -to-default credit derivative must assign a risk weight of 1,250 percent to the exposure.
(4) Protection purchaser —(i) First-to-default credit derivatives. A Board-regulated institution that obtains credit protection on a group of underlying exposures through a first-to-default credit derivative that meets the rules of recognition of § 217.134(b) must determine its risk-based capital requirement under this subpart for the underlying exposures as if the Board-regulated institution synthetically securitized the underlying exposure with the lowest risk-based capital requirement and had obtained no credit risk mitigant on the other underlying exposures. A Board-regulated institution must calculate a risk-based capital requirement for counterparty credit risk according to § 217.132 for a first-to-default credit derivative that does not meet the rules of recognition of § 217.134(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A Board-regulated institution that obtains credit protection on a group of underlying exposures through a n th -to-default credit derivative that meets the rules of recognition of § 217.134(b) (other than a first-to-default credit derivative) may recognize the credit risk mitigation benefits of the derivative only if:
( 1 ) The Board-regulated institution also has obtained credit protection on the same underlying exposures in the form of first-through-(n-1)-to-default credit derivatives; or
( 2 ) If n-1 of the underlying exposures have already defaulted.
(B) If a Board-regulated institution satisfies the requirements of paragraph (l)(3)(ii)(A) of this section, the Board-regulated institution must determine its risk-based capital requirement for the underlying exposures as if the bank had only synthetically securitized the underlying exposure with the n th smallest risk-based capital requirement and had obtained no credit risk mitigant on the other underlying exposures.
(C) A Board-regulated institution must calculate a risk-based capital requirement for counterparty credit risk according to § 217.132 for a n th -to-default credit derivative that does not meet the rules of recognition of § 217.134(b).
(m) Guarantees and credit derivatives other than n th -to-default credit derivatives —(1) Protection provider. For a guarantee or credit derivative (other than an n th -to-default credit derivative) provided by a Board-regulated institution that covers the full amount or a pro rata share of a securitization exposure's principal and interest, the Board-regulated institution must risk weight the guarantee or credit derivative as if it holds the portion of the reference exposure covered by the guarantee or credit derivative.
(2) Protection purchaser. (i) A Board-regulated institution that purchases an OTC credit derivative (other than an n th -to-default credit derivative) that is recognized under § 217.145 as a credit risk mitigant (including via recognized collateral) is not required to compute a separate counterparty credit risk capital requirement under § 217.131 in accordance with § 217.132(c)(3).
(ii) If a Board-regulated institution cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 217.145, the Board-regulated institution must determine the exposure amount of the credit derivative under § 217.132(c).
(A) If the Board-regulated institution purchases credit protection from a counterparty that is not a securitization SPE, the Board-regulated institution must determine the risk weight for the exposure according § 217.131.
(B) If the Board-regulated institution purchases the credit protection from a counterparty that is a securitization SPE, the Board-regulated institution must determine the risk weight for the exposure according to this section, including paragraph (a)(5) of this section for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments.
§ 217.143   Supervisory formula approach (SFA).
(a) Eligibility requirements. A Board-regulated institution must use the SFA to determine its risk-weighted asset amount for a securitization exposure if the Board-regulated institution can calculate on an ongoing basis each of the SFA parameters in paragraph (e) of this section.
(b) Mechanics. The risk-weighted asset amount for a securitization exposure equals its SFA risk-based capital requirement as calculated under paragraph (c) and (d) of this section, multiplied by 12.5.
(c) The SFA risk-based capital requirement. (1) If K IRB is greater than or equal to L + T, an exposure's SFA risk-based capital requirement equals the exposure amount.
(2) If K IRB is less than or equal to L, an exposure's SFA risk-based capital requirement is UE multiplied by TP multiplied by the greater of:
(i) F · T (where F is 0.016 for all securitization exposures); or
(ii) S[L + T]−S[L].
(3) If K IRB is greater than L and less than L + T, the Board-regulated institution must apply a 1,250 percent risk weight to an amount equal to UE · TP (K IRB −L), and the exposure's SFA risk-based capital requirement is UE multiplied by TP multiplied by the greater of:
(i) F · (T−(K IRB −L)) (where F is 0.016 for all other securitization exposures); or
(ii) S[L + T]−S[K IRB ].
(d) The supervisory formula:
(e) SFA parameters. For purposes of the calculations in paragraphs (c) and (d) of this section:
(1) Amount of the underlying exposures (UE). UE is the EAD of any underlying exposures that are wholesale and retail exposures (including the amount of any funded spread accounts, cash collateral accounts, and other similar funded credit enhancements) plus the amount of any underlying exposures that are securitization exposures (as defined in § 217.142(e)) plus the adjusted carrying value of any underlying exposures that are equity exposures (as defined in § 217.151(b)).
(2) Tranche percentage (TP ). TP is the ratio of the amount of the Board-regulated institution's securitization exposure to the amount of the tranche that contains the securitization exposure.
(3) Capital requirement on underlying exposures (K IRB ). (i) K IRB is the ratio of:
(A) The sum of the risk-based capital requirements for the underlying exposures plus the expected credit losses of the underlying exposures (as determined under this subpart E as if the underlying exposures were directly held by the Board-regulated institution); to
(B) UE.
(ii) The calculation of K IRB must reflect the effects of any credit risk mitigant applied to the underlying exposures (either to an individual underlying exposure, to a group of underlying exposures, or to all of the underlying exposures).
(iii) All assets related to the securitization are treated as underlying exposures, including assets in a reserve account (such as a cash collateral account).
(4) Credit enhancement level (L). (i) L is the ratio of:
(A) The amount of all securitization exposures subordinated to the tranche that contains the Board-regulated institution's securitization exposure; to
(B) UE.
(ii) A Board-regulated institution must determine L before considering the effects of any tranche-specific credit enhancements.
(iii) Any gain-on-sale or CEIO associated with the securitization may not be included in L.
(iv) Any reserve account funded by accumulated cash flows from the underlying exposures that is subordinated to the tranche that contains the Board-regulated institution's securitization exposure may be included in the numerator and denominator of L to the extent cash has accumulated in the account. Unfunded reserve accounts (that is, reserve accounts that are to be funded from future cash flows from the underlying exposures) may not be included in the calculation of L.
(v) In some cases, the purchase price of receivables will reflect a discount that provides credit enhancement (for example, first loss protection) for all or certain tranches of the securitization. When this arises, L should be calculated inclusive of this discount if the discount provides credit enhancement for the securitization exposure.
(5) Thickness of tranche (T). T is the ratio of:
(i) The amount of the tranche that contains the Board-regulated institution's securitization exposure; to
(ii) UE.
(6) Effective number of exposures (N). (i) Unless the Board-regulated institution elects to use the formula provided in paragraph (f) of this section,
(ii) Multiple exposures to one obligor /must be treated as a single underlying exposure.
(iii) In the case of a resecuritization, the Board-regulated institution must treat each underlying exposure as a single underlying exposure and must not look through to the originally securitized underlying exposures.
(7) Exposure-weighted average loss given default (EWALGD). EWALGD is calculated as:
(f) Simplified method for computing N and EWALGD. (1) If all underlying exposures of a securitization are retail exposures, a Board-regulated institution may apply the SFA using the following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in §§ 217.143(f)(3) and (f)(4), a Board-regulated institution may employ a simplified method for calculating N and EWALGD.
(3) If C 1 is no more than 0.03, a Board-regulated institution may set EWALGD = 0.50 if none of the underlying exposures is a securitization exposure, or may set EWALGD = 1 if one or more of the underlying exposures is a securitization exposure, and may set N equal to the following amount:
(i) C m is the ratio of the sum of the amounts of the `m' largest underlying exposures to UE; and
(ii) The level of m is to be selected by the Board-regulated institution.
(4) Alternatively, if only C 1 is available and C 1 is no more than 0.03, the Board-regulated institution may set EWALGD = 0.50 if none of the underlying exposures is a securitization exposure, or may set EWALGD = 1 if one or more of the underlying exposures is a securitization exposure and may set N = 1/C 1 .
§ 217.144   Simplified supervisory formula approach (SSFA).
(a) General requirements for the SSFA. To use the SSFA to determine the risk weight for a securitization exposure, a Board-regulated institution must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the securitization require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A Board-regulated institution that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a risk weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a securitization exposure using the SSFA, a Board-regulated institution must have accurate information on the following five inputs to the SSFA calculation:
(1) K G is the weighted-average (with unpaid principal used as the weight for each exposure) total capital requirement of the underlying exposures calculated using subpart D of this part. K G is expressed as a decimal value between zero and one (that is, an average risk weight of 100 percent represents a value of K G equal to 0.08).
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in section 142(l) for n th -to-default credit derivatives, parameter A equals the ratio of the current dollar amount of underlying exposures that are subordinated to the exposure of the Board-regulated institution to the current dollar amount of underlying exposures. Any reserve account funded by the accumulated cash flows from the underlying exposures that is subordinated to the Board-regulated institution's securitization exposure may be included in the calculation of parameter A to the extent that cash is present in the account. Parameter A is expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in section 142(l) for n th -to-default credit derivatives, parameter D equals parameter A plus the ratio of the current dollar amount of the securitization exposures that are pari passu with the exposure (that is, have equal seniority with respect to credit risk) to the current dollar amount of the underlying exposures. Parameter D is expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. K G and W are used to calculate K A , the augmented value of K G , which reflects the observed credit quality of the underlying exposures. K A is defined in paragraph (d) of this section. The values of parameters A and D, relative to K A determine the risk weight assigned to a securitization exposure as described in paragraph (d) of this section. The risk weight assigned to a securitization exposure, or portion of a securitization exposure, as appropriate, is the larger of the risk weight determined in accordance with this paragraph (c), paragraph (d) of this section, and a risk weight of 20 percent.
(1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K A , the exposure must be assigned a risk weight of 1,250 percent;
(2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K A , the Board-regulated institution must calculate the risk weight in accordance with paragraph (d) of this section;
(3) When A is less than K A and D is greater than K A , the risk weight is a weighted-average of 1,250 percent and 1,250 percent times K SSFA calculated in accordance with paragraph (d) of this section. For the purpose of this weighted-average calculation:
§ 217.145   Recognition of credit risk mitigants for securitization exposures.
(a) General. An originating Board-regulated institution that has obtained a credit risk mitigant to hedge its securitization exposure to a synthetic or traditional securitization that satisfies the operational criteria in § 217.141 may recognize the credit risk mitigant, but only as provided in this section. An investing Board-regulated institution that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant, but only as provided in this section.
(b) Collateral —(1) Rules of recognition. A Board-regulated institution may recognize financial collateral in determining the Board-regulated institution's risk-weighted asset amount for a securitization exposure (other than a repo-style transaction, an eligible margin loan, or an OTC derivative contract for which the Board-regulated institution has reflected collateral in its determination of exposure amount under § 217.132) as follows. The Board-regulated institution's risk-weighted asset amount for the collateralized securitization exposure is equal to the risk-weighted asset amount for the securitization exposure as calculated under the SSFA in § 217.144 or under the SFA in § 217.143 multiplied by the ratio of adjusted exposure amount (SE*) to original exposure amount (SE),
(i) SE* = max {0, [SE−C × (1−H s −H fx )]};
(ii) SE = the amount of the securitization exposure calculated under § 217.142(e);
(iii) C = the current fair value of the collateral;
(iv) H s = the haircut appropriate to the collateral type; and
(v) H fx = the haircut appropriate for any currency mismatch between the collateral and the exposure.
(3) Standard supervisory haircuts. Unless a Board-regulated institution qualifies for use of and uses own-estimates haircuts in paragraph (b)(4) of this section:
(i) A Board-regulated institution must use the collateral type haircuts (H s ) in Table 1 to § 217.132 of this subpart;
(ii) A Board-regulated institution must use a currency mismatch haircut (H fx ) of 8 percent if the exposure and the collateral are denominated in different currencies;
(iii) A Board-regulated institution must multiply the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) of this section by the square root of 6.5 (which equals 2.549510); and
(iv) A Board-regulated institution must adjust the supervisory haircuts upward on the basis of a holding period longer than 65 business days where and as appropriate to take into account the illiquidity of the collateral.
(4) Own estimates for haircuts. With the prior written approval of the Board, a Board-regulated institution may calculate haircuts using its own internal estimates of market price volatility and foreign exchange volatility, subject to § 217.132(b)(2)(iii). The minimum holding period (T M ) for securitization exposures is 65 business days.
(c) Guarantees and credit derivatives —(1) Limitations on recognition. A Board-regulated institution may only recognize an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution's risk-weighted asset amount for a securitization exposure.
(2) ECL for securitization exposures. When a Board-regulated institution recognizes an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution's risk-weighted asset amount for a securitization exposure, the Board-regulated institution must also:
(i) Calculate ECL for the protected portion of the exposure using the same risk parameters that it uses for calculating the risk-weighted asset amount of the exposure as described in paragraph (c)(3) of this section; and
(ii) Add the exposure's ECL to the Board-regulated institution's total ECL.
(3) Rules of recognition. A Board-regulated institution may recognize an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution's risk-weighted asset amount for the securitization exposure as follows:
(i) Full coverage. If the protection amount of the eligible guarantee or eligible credit derivative equals or exceeds the amount of the securitization exposure, the Board-regulated institution may set the risk-weighted asset amount for the securitization exposure equal to the risk-weighted asset amount for a direct exposure to the eligible guarantor (as determined in the wholesale risk weight function described in § 217.131), using the Board-regulated institution's PD for the guarantor, the Board-regulated institution's LGD for the guarantee or credit derivative, and an EAD equal to the amount of the securitization exposure (as determined in § 217.142(e)).
(ii) Partial coverage. If the protection amount of the eligible guarantee or eligible credit derivative is less than the amount of the securitization exposure, the Board-regulated institution may set the risk-weighted asset amount for the securitization exposure equal to the sum of:
(A) Covered portion. The risk-weighted asset amount for a direct exposure to the eligible guarantor (as determined in the wholesale risk weight function described in § 217.131), using the Board-regulated institution's PD for the guarantor, the Board-regulated institution's LGD for the guarantee or credit derivative, and an EAD equal to the protection amount of the credit risk mitigant; and
(B) Uncovered portion. ( 1 ) 1.0 minus the ratio of the protection amount of the eligible guarantee or eligible credit derivative to the amount of the securitization exposure); multiplied by
( 2 ) The risk-weighted asset amount for the securitization exposure without the credit risk mitigant (as determined in §§ 217.142 through 146).
(4) Mismatches. The Board-regulated institution must make applicable adjustments to the protection amount as required in § 217.134(d), (e), and (f) for any hedged securitization exposure and any more senior securitization exposure that benefits from the hedge. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the Board-regulated institution must use the longest residual maturity of any of the hedged exposures as the residual maturity of all the hedged exposures.
§§ 217.146-217.150   [Reserved]
§ 217.151   Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for equity exposures that are not equity exposures to investment funds, a Board-regulated institution may apply either the Simple Risk Weight Approach (SRWA) in § 217.152 or, if it qualifies to do so, the Internal Models Approach (IMA) in § 217.153. A Board-regulated institution must use the look-through approaches provided in § 217.154 to calculate its risk-weighted asset amounts for equity exposures to investment funds.
(2) A Board-regulated institution must treat an investment in a separate account (as defined in § 217.2), as if it were an equity exposure to an investment fund as provided in § 217.154.
(3) Stable value protection. (i) Stable value protection means a contract where the provider of the contract is obligated to pay:
(A) The policy owner of a separate account an amount equal to the shortfall between the fair value and cost basis of the separate account when the policy owner of the separate account surrenders the policy, or
(B) The beneficiary of the contract an amount equal to the shortfall between the fair value and book value of a specified portfolio of assets.
(ii) A Board-regulated institution that purchases stable value protection on its investment in a separate account must treat the portion of the carrying value of its investment in the separate account attributable to the stable value protection as an exposure to the provider of the protection and the remaining portion of the carrying value of its separate account as an equity exposure to an investment fund.
(iii) A Board-regulated institution that provides stable value protection must treat the exposure as an equity derivative with an adjusted carrying value determined as the sum of § 217.151(b)(1) and (2).
(b) Adjusted carrying value. For purposes of this subpart, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the Board-regulated institution's carrying value of the exposure;
(2) For the off-balance sheet component of an equity exposure, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) for a given small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section.
(3) For unfunded equity commitments that are unconditional, the effective notional principal amount is the notional amount of the commitment. For unfunded equity commitments that are conditional, the effective notional principal amount is the Board-regulated institution's best estimate of the amount that would be funded under economic downturn conditions.
§ 217.152   Simple risk weight approach (SRWA).
(a) General. Under the SRWA, a Board-regulated institution's aggregate risk-weighted asset amount for its equity exposures is equal to the sum of the risk-weighted asset amounts for each of the Board-regulated institution's individual equity exposures (other than equity exposures to an investment fund) as determined in this section and the risk-weighted asset amounts for each of the Board-regulated institution's individual equity exposures to an investment fund as determined in § 217.154.
(b) SRWA computation for individual equity exposures. A Board-regulated institution must determine the risk-weighted asset amount for an individual equity exposure (other than an equity exposure to an investment fund) by multiplying the adjusted carrying value of the equity exposure or the effective portion and ineffective portion of a hedge pair (as defined in paragraph (c) of this section) by the lowest applicable risk weight in this section.
(1) Zero percent risk weight equity exposures. An equity exposure to an entity whose credit exposures are exempt from the 0.03 percent PD floor in § 217.131(d)(2) is assigned a zero percent risk weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a Federal Home Loan Bank or the Federal Agricultural Mortgage Corporation (Farmer Mac) is assigned a 20 percent risk weight.
(3) 100 percent risk weight equity exposures. The following equity exposures are assigned a 100 percent risk weight:
(i) Community development equity exposures. (A) For state member banks and bank holding companies, an equity exposure that qualifies as a community development investment under 12 U.S.C. 24 (Eleventh), excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a consolidated small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(B) For savings and loan holding companies, an equity exposure that is designed primarily to promote community welfare, including the welfare of low- and moderate-income communities or families, such as by providing services or employment, and excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(ii) Effective portion of hedge pairs. The effective portion of a hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding significant investments in the capital of an unconsolidated institution in the form of common stock and exposures to an investment firm that would meet the definition of a traditional securitization were it not for the Board's application of paragraph (8) of that definition in § 217.2 and has greater than immaterial leverage, to the extent that the aggregate adjusted carrying value of the exposures does not exceed 10 percent of the Board-regulated institution's total capital.
(A) To compute the aggregate adjusted carrying value of a Board-regulated institution's equity exposures for purposes of this section, the Board-regulated institution may exclude equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a Board-regulated institution does not know the actual holdings of the investment fund, the Board-regulated institution may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the Board-regulated institution must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures.
(B) When determining which of a Board-regulated institution's equity exposures qualifies for a 100 percent risk weight under this section, a Board-regulated institution first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act, then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds).
(4) 250 percent risk weight equity exposures. Significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted from capital pursuant to § 217.22(b)(4) are assigned a 250 percent risk weight.
(5) 300 percent risk weight equity exposures. A publicly traded equity exposure (other than an equity exposure described in paragraph (b)(7) of this section and including the ineffective portion of a hedge pair) is assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure (other than an equity exposure described in paragraph (b)(7) of this section) that is not publicly traded is assigned a 400 percent risk weight.
(7) 600 percent risk weight equity exposures. An equity exposure to an investment firm that:
(i) Would meet the definition of a traditional securitization were it not for the Board's application of paragraph (8) of that definition in § 217.2; and
(ii) Has greater than immaterial leverage is assigned a 600 percent risk weight.
(c) Hedge transactions —(1) Hedge pair. A hedge pair is two equity exposures that form an effective hedge so long as each equity exposure is publicly traded or has a return that is primarily based on a publicly traded equity exposure.
(2) Effective hedge. Two equity exposures form an effective hedge if the exposures either have the same remaining maturity or each has a remaining maturity of at least three months; the hedge relationship is formally documented in a prospective manner (that is, before the Board-regulated institution acquires at least one of the equity exposures); the documentation specifies the measure of effectiveness (E) the Board-regulated institution will use for the hedge relationship throughout the life of the transaction; and the hedge relationship has an E greater than or equal to 0.8. A Board-regulated institution must measure E at least quarterly and must use one of three alternative measures of E:
(i) Under the dollar-offset method of measuring effectiveness, the Board-regulated institution must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the periodic changes in value of one equity exposure to the cumulative sum of the periodic changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals zero. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring effectiveness:
(iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then the value of E is zero.
(3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
§ 217.153   Internal models approach (IMA).
(a) General. A Board-regulated institution may calculate its risk-weighted asset amount for equity exposures using the IMA by modeling publicly traded and non-publicly traded equity exposures (in accordance with paragraph (c) of this section) or by modeling only publicly traded equity exposures (in accordance with paragraphs (c) and (d) of this section).
(b) Qualifying criteria. To qualify to use the IMA to calculate risk-weighted assets for equity exposures, a Board-regulated institution must receive prior written approval from the Board. To receive such approval, the Board-regulated institution must demonstrate to the Board's satisfaction that the Board-regulated institution meets the following criteria:
(1) The Board-regulated institution must have one or more models that:
(i) Assess the potential decline in value of its modeled equity exposures;
(ii) Are commensurate with the size, complexity, and composition of the Board-regulated institution's modeled equity exposures; and
(iii) Adequately capture both general market risk and idiosyncratic risk.
(2) The Board-regulated institution's model must produce an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99th percentile one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures comparable to the Board-regulated institution's modeled equity exposures using a long-term sample period.
(3) The number of risk factors and exposures in the sample and the data period used for quantification in the Board-regulated institution's model and benchmarking exercise must be sufficient to provide confidence in the accuracy and robustness of the Board-regulated institution's estimates.
(4) The Board-regulated institution's model and benchmarking process must incorporate data that are relevant in representing the risk profile of the Board-regulated institution's modeled equity exposures, and must include data from at least one equity market cycle containing adverse market movements relevant to the risk profile of the Board-regulated institution's modeled equity exposures. In addition, the Board-regulated institution's benchmarking exercise must be based on daily market prices for the benchmark portfolio. If the Board-regulated institution's model uses a scenario methodology, the Board-regulated institution must demonstrate that the model produces a conservative estimate of potential losses on the Board-regulated institution's modeled equity exposures over a relevant long-term market cycle. If the Board-regulated institution employs risk factor models, the Board-regulated institution must demonstrate through empirical analysis the appropriateness of the risk factors used.
(5) The Board-regulated institution must be able to demonstrate, using theoretical arguments and empirical evidence, that any proxies used in the modeling process are comparable to the Board-regulated institution's modeled equity exposures and that the Board-regulated institution has made appropriate adjustments for differences. The Board-regulated institution must derive any proxies for its modeled equity exposures and benchmark portfolio using historical market data that are relevant to the Board-regulated institution's modeled equity exposures and benchmark portfolio (or, where not, must use appropriately adjusted data), and such proxies must be robust estimates of the risk of the Board-regulated institution's modeled equity exposures.
(c) Risk-weighted assets calculation for a Board-regulated institution using the IMA for publicly traded and non-publicly traded equity exposures. If a Board-regulated institution models publicly traded and non-publicly traded equity exposures, the Board-regulated institution's aggregate risk-weighted asset amount for its equity exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i) (as determined under § 217.152) and each equity exposure to an investment fund (as determined under § 217.154); and
(2) The greater of:
(i) The estimate of potential losses on the Board-regulated institution's equity exposures (other than equity exposures referenced in paragraph (c)(1) of this section) generated by the Board-regulated institution's internal equity exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution's publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund;
(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs; and
(C) 300 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution's equity exposures that are not publicly traded, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund.
(d) Risk-weighted assets calculation for a Board-regulated institution using the IMA only for publicly traded equity exposures. If a Board-regulated institution models only publicly traded equity exposures, the Board-regulated institution's aggregate risk-weighted asset amount for its equity exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under §§ 217.152(b)(1) through (b)(3)(i) (as determined under § 217.152), each equity exposure that qualifies for a 400 percent risk weight under § 217.152(b)(5) or a 600 percent risk weight under § 217.152(b)(6) (as determined under § 217.152), and each equity exposure to an investment fund (as determined under § 217.154); and
(2) The greater of:
(i) The estimate of potential losses on the Board-regulated institution's equity exposures (other than equity exposures referenced in paragraph (d)(1) of this section) generated by the Board-regulated institution's internal equity exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution's publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund; and
(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs.
§ 217.154   Equity exposures to investment funds.
(a) Available approaches. (1) Unless the exposure meets the requirements for a community development equity exposure in § 217.152(b)(3)(i), a Board-regulated institution must determine the risk-weighted asset amount of an equity exposure to an investment fund under the full look-through approach in paragraph (b) of this section, the simple modified look-through approach in paragraph (c) of this section, or the alternative modified look-through approach in paragraph (d) of this section.
(2) The risk-weighted asset amount of an equity exposure to an investment fund that meets the requirements for a community development equity exposure in § 217.152(b)(3)(i) is its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a hedge pair and the Board-regulated institution does not use the full look-through approach, the Board-regulated institution may use the ineffective portion of the hedge pair as determined under § 217.152(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value.
(b) Full look-through approach. A Board-regulated institution that is able to calculate a risk-weighted asset amount for its proportional ownership share of each exposure held by the investment fund (as calculated under this subpart E of this part as if the proportional ownership share of each exposure were held directly by the Board-regulated institution) may either:
(1) Set the risk-weighted asset amount of the Board-regulated institution's exposure to the fund equal to the product of:
(i) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the Board-regulated institution; and
(ii) The Board-regulated institution's proportional ownership share of the fund; or
(2) Include the Board-regulated institution's proportional ownership share of each exposure held by the fund in the Board-regulated institution's IMA.
(c) Simple modified look-through approach. Under this approach, the risk-weighted asset amount for a Board-regulated institution's equity exposure to an investment fund equals the adjusted carrying value of the equity exposure multiplied by the highest risk weight assigned according to subpart D of this part that applies to any exposure the fund is permitted to hold under its prospectus, partnership agreement, or similar contract that defines the fund's permissible investments (excluding derivative contracts that are used for hedging rather than speculative purposes and that do not constitute a material portion of the fund's exposures).
(d) Alternative modified look-through approach. Under this approach, a Board-regulated institution may assign the adjusted carrying value of an equity exposure to an investment fund on a pro rata basis to different risk weight categories assigned according to subpart D of this part based on the investment limits in the fund's prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. The risk-weighted asset amount for the Board-regulated institution's equity exposure to the investment fund equals the sum of each portion of the adjusted carrying value assigned to an exposure class multiplied by the applicable risk weight. If the sum of the investment limits for all exposure types within the fund exceeds 100 percent, the Board-regulated institution must assume that the fund invests to the maximum extent permitted under its investment limits in the exposure type with the highest risk weight under subpart D of this part, and continues to make investments in order of the exposure type with the next highest risk weight under subpart D of this part until the maximum total investment level is reached. If more than one exposure type applies to an exposure, the Board-regulated institution must use the highest applicable risk weight. A Board-regulated institution may exclude derivative contracts held by the fund that are used for hedging rather than for speculative purposes and do not constitute a material portion of the fund's exposures.
§ 217.155   Equity derivative contracts.
(a) Under the IMA, in addition to holding risk-based capital against an equity derivative contract under this part, a Board-regulated institution must hold risk-based capital against the counterparty credit risk in the equity derivative contract by also treating the equity derivative contract as a wholesale exposure and computing a supplemental risk-weighted asset amount for the contract under § 217.132.
(b) Under the SRWA, a Board-regulated institution may choose not to hold risk-based capital against the counterparty credit risk of equity derivative contracts, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a Board-regulated institution using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure.
§§ 217.156-217.160   [Reserved]
§ 217.161   Qualification requirements for incorporation of operational risk mitigants.
(a) Qualification to use operational risk mitigants. A Board-regulated institution may adjust its estimate of operational risk exposure to reflect qualifying operational risk mitigants if:
(1) The Board-regulated institution's operational risk quantification system is able to generate an estimate of the Board-regulated institution's operational risk exposure (which does not incorporate qualifying operational risk mitigants) and an estimate of the Board-regulated institution's operational risk exposure adjusted to incorporate qualifying operational risk mitigants; and
(2) The Board-regulated institution's methodology for incorporating the effects of insurance, if the Board-regulated institution uses insurance as an operational risk mitigant, captures through appropriate discounts to the amount of risk mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancellation terms of the policy, where less than one year;
(iii) The policy's timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy; and
(v) Mismatches in coverage between the policy and the hedged operational loss event.
(b) Qualifying operational risk mitigants. Qualifying operational risk mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated company that the Board-regulated institution deems to have strong capacity to meet its claims payment obligations and the obligor rating category to which the Board-regulated institution assigns the company is assigned a PD equal to or less than 10 basis points;
(ii) Has an initial term of at least one year and a residual term of more than 90 days;
(iii) Has a minimum notice period for cancellation by the provider of 90 days;
(iv) Has no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed depository institution; and
(v) Is explicitly mapped to a potential operational loss event;
(2) Operational risk mitigants other than insurance for which the Board has given prior written approval. In evaluating an operational risk mitigant other than insurance, the Board will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding total capital.
§ 217.162   Mechanics of risk-weighted asset calculation.
(a) If a Board-regulated institution does not qualify to use or does not have qualifying operational risk mitigants, the Board-regulated institution's dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any).
(b) If a Board-regulated institution qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the Board-regulated institution's dollar risk-based capital requirement for operational risk is the greater of:
(1) The Board-regulated institution's operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); or
(2) 0.8 multiplied by the difference between:
(i) The Board-regulated institution's operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The Board-regulated institution's risk-weighted asset amount for operational risk equals the Board-regulated institution's dollar risk-based capital requirement for operational risk determined under sections 162(a) or (b) multiplied by 12.5.
§§ 217.163-217.170   [Reserved]
§ 217.171   Purpose and scope.
§§ 217.171 through 217.173 establish public disclosure requirements related to the capital requirements of a Board-regulated institution that is an advanced approaches Board-regulated institution.
§ 217.172   Disclosure requirements.
(a) A Board-regulated institution that is an advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to section 121(d) of subpart E of this part must publicly disclose each quarter its total and tier 1 risk-based capital ratios and their components as calculated under this subpart (that is, common equity tier 1 capital, additional tier 1 capital, tier 2 capital, total qualifying capital, and total risk-weighted assets).
(b) A Board-regulated institution that is an advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to section 121(d) of subpart E of this part must comply with paragraph (c) of this section unless it is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to these disclosure requirements or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction.
(c)(1) A Board-regulated institution described in paragraph (b) of this section must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 217.173. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the Board-regulated institution's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the Board-regulated institution's risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the fourth calendar quarter, provided that any significant changes to these are disclosed in the interim. Management may provide all of the disclosures required by this subpart in one place on the Board-regulated institution's public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Board-regulated institution publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(2) A Board-regulated institution described in paragraph (b) of this section must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the Board-regulated institution must attest that the disclosures meet the requirements of this subpart.
(3) If a Board-regulated institution described in paragraph (b) of this section believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public information that is either proprietary or confidential in nature, the Board-regulated institution is not required to disclose those specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
(d)(1) A Board-regulated institution that meets any of the criteria in § 217.100(b)(1) before January 1, 2015, must publicly disclose each quarter its supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) as calculated under subpart B of this part, beginning with the first quarter in 2015. This disclosure requirement applies without regard to whether the Board-regulated institution has completed the parallel run process and received notification from the Board pursuant to § 217.121(d).
(2) A Board-regulated that meets any of the criteria in § 217.100(b)(1) on or after January 1, 2015, or a Category III Board-regulated institution must publicly disclose each quarter its supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) as calculated under subpart B of this part beginning with the calendar quarter immediately following the quarter in which the Board-regulated institution becomes an advanced approaches Board-regulated institution or a Category III Board-regulated institution. This disclosure requirement applies without regard to whether the Board-regulated institution has completed the parallel run process and has received notification from the Board pursuant to § 217.121(d).
§ 217.173   Disclosures by certain advanced approaches Board-regulated institutions and Category III Board-regulated institutions.
(a)(1) An advanced approaches Board-regulated institution described in § 217.172(b) must make the disclosures described in Tables 1 through 12 to § 217.173.
(2) An advanced approaches Board-regulated institution and a Category III Board-regulated institution that is required to publicly disclose its supplementary leverage ratio pursuant to § 217.172(d) must make the disclosures required under Table 13 to this section unless the Board-regulated institution is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to these disclosure requirements or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction.
(3) The disclosures described in Tables 1 through 12 to § 217.173 must be made publicly available for twelve consecutive quarters beginning on January 1, 2014, or a shorter period, as applicable, for the quarters after the Board-regulated institution has completed the parallel run process and received notification from the Board pursuant to § 217.121(d). The disclosures described in Table 13 to § 217.173 must be made publicly available for twelve consecutive quarters beginning on January 1, 2015, or a shorter period, as applicable, for the quarters after the Board-regulated institution becomes subject to the disclosure of the supplementary leverage ratio pursuant to § 217.172(d) and § 217.173(a)(2).
Table 1 to § 217.173—Scope of Application
1 Such entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority equity investments in insurance, financial and commercial entities.
Table 2 to § 217.173—Capital Structure
Table 3 to § 217.173—Capital Adequacy
Table 4 to § 217.173—Capital Conservation and Countercyclical Capital Buffers
(b) General qualitative disclosure requirement. For each separate risk area described in Tables 5 through 12 to § 217.173, the Board-regulated institution must describe its risk management objectives and policies, including:
(1) Strategies and processes;
(2) The structure and organization of the relevant risk management function;
(3) The scope and nature of risk reporting and/or measurement systems; and
(4) Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.
Table 5 1 to § 217.173—Credit Risk: General Disclosures
1 Table 5 to § 217.173 does not cover equity exposures, which should be reported in Table 9.
2 See, for example, ASC Topic 815-10 and 210-20 as they may be amended from time to time.
3 Geographical areas may comprise individual countries, groups of countries, or regions within countries. A Board-regulated institution might choose to define the geographical areas based on the way the company's portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified.
4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.
Table 6 to § 217.173—Credit Risk: Disclosures for Portfolios Subject to IRB Risk-Based Capital Formulas
1 This disclosure item does not require a detailed description of the model in full—it should provide the reader with a broad overview of the model approach, describing definitions of the variables and methods for estimating and validating those variables set out in the quantitative risk disclosures below. This should be done for each of the four category/subcategories. The Board-regulated institution must disclose any significant differences in approach to estimating these variables within each category/subcategories.
2 The PD, LGD and EAD disclosures in Table 6 (c) to § 217.173 should reflect the effects of collateral, qualifying master netting agreements, eligible guarantees and eligible credit derivatives as defined under this part. Disclosure of each PD grade should include the exposure-weighted average PD for each grade. Where a Board-regulated institution aggregates PD grades for the purposes of disclosure, this should be a representative breakdown of the distribution of PD grades used for regulatory capital purposes.
3 Outstanding loans and EAD on undrawn commitments can be presented on a combined basis for these disclosures.
4 These disclosures are a way of further informing the reader about the reliability of the information provided in the “quantitative disclosures: Risk assessment” over the long run. The disclosures are requirements from year-end 2010; in the meantime, early adoption is encouraged. The phased implementation is to allow a Board-regulated institution sufficient time to build up a longer run of data that will make these disclosures meaningful.
5 This disclosure item is not intended to be prescriptive about the period used for this assessment. Upon implementation, it is expected that a Board-regulated institution would provide these disclosures for as long a set of data as possible—for example, if a Board-regulated institution has 10 years of data, it might choose to disclose the average default rates for each PD grade over that 10-year period. Annual amounts need not be disclosed.
6 A Board-regulated institution must provide this further decomposition where it will allow users greater insight into the reliability of the estimates provided in the “quantitative disclosures: Risk assessment.” In particular, it must provide this information where there are material differences between its estimates of PD, LGD or EAD compared to actual outcomes over the long run. The Board-regulated institution must also provide explanations for such differences.
Table 7 to § 217.173—General Disclosure for Counterparty Credit Risk of OTC Derivative Contracts, Repo-Style Transactions, and Eligible Margin Loans
1 Net unsecured credit exposure is the credit exposure after considering the benefits from legally enforceable netting agreements and collateral arrangements, without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
Table 8 To § 217.173—Credit Risk Mitigation 1 2
1 At a minimum, a Board-regulated institution must provide the disclosures in Table 8 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, Board-regulated institutions are encouraged to give further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives and other credit mitigation that are treated for the purposes of this subpart as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures (in Table 8 to § 217.173) and included within those relating to securitization (in Table 9 to § 217.173).
Table 9 to § 217.173—Securitization
1 The Board-regulated institution must describe the structure of resecuritizations in which it participates; this description must be provided for the main categories of resecuritization products in which the Board-regulated institution is active.
2 For example, these roles would include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider.
3 For example, money market mutual funds should be listed individually, and personal and private trusts, should be noted collectively.
4 “Exposures securitized” include underlying exposures originated by the bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the bank's balance sheet and underlying exposures acquired by the bank from third-party entities) in which the originating bank does not retain any securitization exposure should be shown separately but need only be reported for the year of inception.
5 A Board-regulated institution is required to disclose exposures regardless of whether there is a capital charge under this part.
6 A Board-regulated institution must include credit-related other than temporary impairment (OTTI).
7 For example, charge-offs/allowances (if the assets remain on the bank's balance sheet) or credit-related OTTI of I/O strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the bank with respect to securitized assets.
Table 10 to § 217.173—Operational Risk
Table 11 to § 217.173—Equities Not Subject to Subpart F of This Part
1 Unrealized gains (losses) recognized in the balance sheet but not through earnings.
2 Unrealized gains (losses) not recognized either in the balance sheet or through earnings.
3 This disclosure must include a breakdown of equities that are subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400 percent, and 600 percent risk weights, as applicable.
Table 12 to § 217.173—Interest Rate Risk for Non-Trading Activities
(c) Except as provided in § 217.172(b), a Board-regulated institution described in § 217.172(d) must make the disclosures described in Table 13 to § 217.173; provided, however, the disclosures required under this paragraph are required without regard to whether the Board-regulated institution has completed the parallel run process and has received notification from the Board pursuant to § 217.121(d). The Board-regulated institution must make these disclosures publicly available beginning on January 1, 2015.
Table 13 to § 217.173—Supplementary Leverage Ratio
§§ 217.174-217.200   [Reserved]
§ 217.201   Purpose, applicability, and reservation of authority.
(a) Purpose. This subpart F establishes risk-based capital requirements for Board-regulated institutions with significant exposure to market risk, provides methods for these Board-regulated institutions to calculate their standardized measure for market risk and, if applicable, advanced measure for market risk, and establishes public disclosure requirements.
(b) Applicability. (1) This subpart applies to any Board-regulated institution with aggregate trading assets and trading liabilities (as reported in the Board-regulated institution's most recent quarterly Call Report, for a state member bank, or FR Y-9C, for a bank holding company or savings and loan holding company, as applicable, any savings and loan holding company that does not file the FR Y-9C should follow the instructions to the FR Y-9C) equal to:
(i) 10 percent or more of quarter-end total assets as reported on the most recent quarterly [Call Report or FR Y-9C]; or
(ii) $1 billion or more.
(2) The Board may apply this subpart to any Board-regulated institution if the Board deems it necessary or appropriate because of the level of market risk of the Board-regulated institution or to ensure safe and sound banking practices.
(3) The Board may exclude a Board-regulated institution that meets the criteria of paragraph (b)(1) of this section from application of this subpart if the Board determines that the exclusion is appropriate based on the level of market risk of the Board-regulated institution and is consistent with safe and sound banking practices.
(c) Reservation of authority (1) The Board may require a Board-regulated institution to hold an amount of capital greater than otherwise required under this subpart if the Board determines that the Board-regulated institution's capital requirement for market risk as calculated under this subpart is not commensurate with the market risk of the Board-regulated institution's covered positions. In making determinations under paragraphs (c)(1) through (c)(3) of this section, the Board will apply notice and response procedures generally in the same manner as the notice and response procedures set forth in 12 CFR 263.202.
(2) If the Board determines that the risk-based capital requirement calculated under this subpart by the Board-regulated institution for one or more covered positions or portfolios of covered positions is not commensurate with the risks associated with those positions or portfolios, the Board may require the Board-regulated institution to assign a different risk-based capital requirement to the positions or portfolios that more accurately reflects the risk of the positions or portfolios.
(3) The Board may also require a Board-regulated institution to calculate risk-based capital requirements for specific positions or portfolios under this subpart, or under subpart D or subpart E of this part, as appropriate, to more accurately reflect the risks of the positions.
(4) Nothing in this subpart limits the authority of the Board under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law.
§ 217.202   Definitions.
(a) Terms set forth in § 217.2 and used in this subpart have the definitions assigned thereto in § 217.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Backtesting means the comparison of a Board-regulated institution's internal estimates with actual outcomes during a sample period not used in model development. For purposes of this subpart, backtesting is one form of out-of-sample testing.
Commodity position means a position for which price risk arises from changes in the price of a commodity.
Corporate debt position means a debt position that is an exposure to a company that is not a sovereign entity, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, a multilateral development bank, a depository institution, a foreign bank, a credit union, a public sector entity, a GSE, or a securitization.
Correlation trading position means:
(1) A securitization position for which all or substantially all of the value of the underlying exposures is based on the credit quality of a single company for which a two-way market exists, or on commonly traded indices based on such exposures for which a two-way market exists on the indices; or
(2) A position that is not a securitization position and that hedges a position described in paragraph (1) of this definition; and
(3) A correlation trading position does not include:
(i) A resecuritization position;
(ii) A derivative of a securitization position that does not provide a pro rata share in the proceeds of a securitization tranche; or
(iii) A securitization position for which the underlying assets or reference exposures are retail exposures, residential mortgage exposures, or commercial mortgage exposures.
Covered position means the following positions:
(1) A trading asset or trading liability (whether on- or off-balance sheet), 32 as reported on Schedule RC-D of the Call Report or Schedule HC-D of the FR Y-9C (any savings and loan holding companies that does not file the FR Y-9C should follow the instructions to the FR Y-9C), that meets the following conditions:
32 Securities subject to repurchase and lending agreements are included as if they are still owned by the lender.
(i) The position is a trading position or hedges another covered position; 33 and
33 A position that hedges a trading position must be within the scope of the bank's hedging strategy as described in paragraph (a)(2) of section 203 of this subpart.
(ii) The position is free of any restrictive covenants on its tradability or the Board-regulated institution is able to hedge the material risk elements of the position in a two-way market;
(2) A foreign exchange or commodity position, regardless of whether the position is a trading asset or trading liability (excluding any structural foreign currency positions that the Board-regulated institution chooses to exclude with prior supervisory approval); and
(3) Notwithstanding paragraphs (1) and (2) of this definition, a covered position does not include:
(i) An intangible asset, including any servicing asset;
(ii) Any hedge of a trading position that the Board determines to be outside the scope of the Board-regulated institution's hedging strategy required in paragraph (a)(2) of § 217.203;
(iii) Any position that, in form or substance, acts as a liquidity facility that provides support to asset-backed commercial paper;
(iv) A credit derivative the Board-regulated institution recognizes as a guarantee for risk-weighted asset amount calculation purposes under subpart D or subpart E of this part;
(v) Any position that is recognized as a credit valuation adjustment hedge under § 217.132(e)(5) or § 217.132(e)(6), except as provided in § 217.132(e)(6)(vii);
(vi) Any equity position that is not publicly traded, other than a derivative that references a publicly traded equity and other than a position in an investment company as defined in and registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. ), provided that all the underlying equities held by the investment company are publicly traded;
(vii) Any equity position that is not publicly traded, other than a derivative that references a publicly traded equity and other than a position in an entity not domiciled in the United States (or a political subdivision thereof) that is supervised and regulated in a manner similar to entities described in paragraph (3)(vi) of this definition;
(viii) Any position a Board-regulated institution holds with the intent to securitize; or
(ix) Any direct real estate holding.
Debt position means a covered position that is not a securitization position or a correlation trading position and that has a value that reacts primarily to changes in interest rates or credit spreads.
Default by a sovereign entity has the same meaning as the term sovereign default under § 217.2.
Equity position means a covered position that is not a securitization position or a correlation trading position and that has a value that reacts primarily to changes in equity prices.
Event risk means the risk of loss on equity or hybrid equity positions as a result of a financial event, such as the announcement or occurrence of a company merger, acquisition, spin-off, or dissolution.
Foreign exchange position means a position for which price risk arises from changes in foreign exchange rates.
General market risk means the risk of loss that could result from broad market movements, such as changes in the general level of interest rates, credit spreads, equity prices, foreign exchange rates, or commodity prices.
Hedge means a position or positions that offset all, or substantially all, of one or more material risk factors of another position.
Idiosyncratic risk means the risk of loss in the value of a position that arises from changes in risk factors unique to that position.
Incremental risk means the default risk and credit migration risk of a position. Default risk means the risk of loss on a position that could result from the failure of an obligor to make timely payments of principal or interest on its debt obligation, and the risk of loss that could result from bankruptcy, insolvency, or similar proceeding. Credit migration risk means the price risk that arises from significant changes in the underlying credit quality of the position.
Market risk means the risk of loss on a position that could result from movements in market prices.
Resecuritization position means a covered position that is:
(1) An on- or off-balance sheet exposure to a resecuritization; or
(2) An exposure that directly or indirectly references a resecuritization exposure in paragraph (1) of this definition.
Securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties;
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches that reflect different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities);
(5) For non-synthetic securitizations, the underlying exposures are not owned by an operating company;
(6) The underlying exposures are not owned by a small business investment company described in section 302 of the Small Business Investment Act;
(7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under section 24(Eleventh) of the National Bank Act;
(8) The Board may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a securitization based on the transaction's leverage, risk profile, or economic substance;
(9) The Board may deem an exposure to a transaction that meets the definition of a securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a securitization based on the transaction's leverage, risk profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as defined in 12 CFR 208.34.
(iii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of ERISA, a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction; or
(iv) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. ) or foreign equivalents thereof.
Securitization position means a covered position that is:
(1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a securitization (including a resecuritization); or
(2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition.
Sovereign debt position means a direct exposure to a sovereign entity.
Specific risk means the risk of loss on a position that could result from factors other than broad market movements and includes event risk, default risk, and idiosyncratic risk.
Structural position in a foreign currency means a position that is not a trading position and that is:
(1) Subordinated debt, equity, or minority interest in a consolidated subsidiary that is denominated in a foreign currency;
(2) Capital assigned to foreign branches that is denominated in a foreign currency;
(3) A position related to an unconsolidated subsidiary or another item that is denominated in a foreign currency and that is deducted from the Board-regulated institution's tier 1 or tier 2 capital; or
(4) A position designed to hedge a Board-regulated institution's capital ratios or earnings against the effect on paragraphs (1), (2), or (3) of this definition of adverse exchange rate movements.
Term repo-style transaction means a repo-style transaction that has an original maturity in excess of one business day.
Trading position means a position that is held by the Board-regulated institution for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
Two-way market means a market where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time frame conforming to trade custom.
Value-at-Risk (VaR) means the estimate of the maximum amount that the value of one or more positions could decline due to market price or rate movements during a fixed holding period within a stated confidence interval.
§ 217.203   Requirements for application of this subpart F.
(a) Trading positions —(1) Identification of trading positions. A Board-regulated institution must have clearly defined policies and procedures for determining which of its trading assets and trading liabilities are trading positions and which of its trading positions are correlation trading positions. These policies and procedures must take into account:
(i) The extent to which a position, or a hedge of its material risks, can be marked-to-market daily by reference to a two-way market; and
(ii) Possible impairments to the liquidity of a position or its hedge.
(2) Trading and hedging strategies. A Board-regulated institution must have clearly defined trading and hedging strategies for its trading positions that are approved by senior management of the Board-regulated institution.
(i) The trading strategy must articulate the expected holding period of, and the market risk associated with, each portfolio of trading positions.
(ii) The hedging strategy must articulate for each portfolio of trading positions the level of market risk the Board-regulated institution is willing to accept and must detail the instruments, techniques, and strategies the Board-regulated institution will use to hedge the risk of the portfolio.
(b) Management of covered positions —(1) Active management. A Board-regulated institution must have clearly defined policies and procedures for actively managing all covered positions. At a minimum, these policies and procedures must require:
(i) Marking positions to market or to model on a daily basis;
(ii) Daily assessment of the Board-regulated institution's ability to hedge position and portfolio risks, and of the extent of market liquidity;
(iii) Establishment and daily monitoring of limits on positions by a risk control unit independent of the trading business unit;
(iv) Daily monitoring by senior management of information described in paragraphs (b)(1)(i) through (b)(1)(iii) of this section;
(v) At least annual reassessment of established limits on positions by senior management; and
(vi) At least annual assessments by qualified personnel of the quality of market inputs to the valuation process, the soundness of key assumptions, the reliability of parameter estimation in pricing models, and the stability and accuracy of model calibration under alternative market scenarios.
(2) Valuation of covered positions. The Board-regulated institution must have a process for prudent valuation of its covered positions that includes policies and procedures on the valuation of positions, marking positions to market or to model, independent price verification, and valuation adjustments or reserves. The valuation process must consider, as appropriate, unearned credit spreads, close-out costs, early termination costs, investing and funding costs, liquidity, and model risk.
(c) Requirements for internal models. (1) A Board-regulated institution must obtain the prior written approval of the Board before using any internal model to calculate its risk-based capital requirement under this subpart.
(2) A Board-regulated institution must meet all of the requirements of this section on an ongoing basis. The Board-regulated institution must promptly notify the Board when:
(i) The Board-regulated institution plans to extend the use of a model that the Board has approved under this subpart to an additional business line or product type;
(ii) The Board-regulated institution makes any change to an internal model approved by the Board under this subpart that would result in a material change in the Board-regulated institution's risk-weighted asset amount for a portfolio of covered positions; or
(iii) The Board-regulated institution makes any material change to its modeling assumptions.
(3) The Board may rescind its approval of the use of any internal model (in whole or in part) or of the determination of the approach under § 217.209(a)(2)(ii) for a Board-regulated institution's modeled correlation trading positions and determine an appropriate capital requirement for the covered positions to which the model would apply, if the Board determines that the model no longer complies with this subpart or fails to reflect accurately the risks of the Board-regulated institution's covered positions.
(4) The Board-regulated institution must periodically, but no less frequently than annually, review its internal models in light of developments in financial markets and modeling technologies, and enhance those models as appropriate to ensure that they continue to meet the Board's standards for model approval and employ risk measurement methodologies that are most appropriate for the Board-regulated institution's covered positions.
(5) The Board-regulated institution must incorporate its internal models into its risk management process and integrate the internal models used for calculating its VaR-based measure into its daily risk management process.
(6) The level of sophistication of a Board-regulated institution's internal models must be commensurate with the complexity and amount of its covered positions. A Board-regulated institution's internal models may use any of the generally accepted approaches, including but not limited to variance-covariance models, historical simulations, or Monte Carlo simulations, to measure market risk.
(7) The Board-regulated institution's internal models must properly measure all the material risks in the covered positions to which they are applied.
(8) The Board-regulated institution's internal models must conservatively assess the risks arising from less liquid positions and positions with limited price transparency under realistic market scenarios.
(9) The Board-regulated institution must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal models to ensure continued applicability and relevance.
(10) If a Board-regulated institution uses internal models to measure specific risk, the internal models must also satisfy the requirements in paragraph (b)(1) of § 217.207.
(d) Control, oversight, and validation mechanisms. (1) The Board-regulated institution must have a risk control unit that reports directly to senior management and is independent from the business trading units.
(2) The Board-regulated institution must validate its internal models initially and on an ongoing basis. The Board-regulated institution's validation process must be independent of the internal models' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the internal models;
(ii) An ongoing monitoring process that includes verification of processes and the comparison of the Board-regulated institution's model outputs with relevant internal and external data sources or estimation techniques; and
(iii) An outcomes analysis process that includes backtesting. For internal models used to calculate the VaR-based measure, this process must include a comparison of the changes in the Board-regulated institution's portfolio value that would have occurred were end-of-day positions to remain unchanged (therefore, excluding fees, commissions, reserves, net interest income, and intraday trading) with VaR-based measures during a sample period not used in model development.
(3) The Board-regulated institution must stress test the market risk of its covered positions at a frequency appropriate to each portfolio, and in no case less frequently than quarterly. The stress tests must take into account concentration risk (including but not limited to concentrations in single issuers, industries, sectors, or markets), illiquidity under stressed market conditions, and risks arising from the Board-regulated institution's trading activities that may not be adequately captured in its internal models.
(4) The Board-regulated institution must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the Board-regulated institution's market risk measurement systems, including the activities of the business trading units and independent risk control unit, compliance with policies and procedures, and calculation of the Board-regulated institution's measures for market risk under this subpart. At least annually, the internal audit function must report its findings to the Board-regulated institution's board of directors (or a committee thereof).
(e) Internal assessment of capital adequacy. The Board-regulated institution must have a rigorous process for assessing its overall capital adequacy in relation to its market risk. The assessment must take into account risks that may not be captured fully in the VaR-based measure, including concentration and liquidity risk under stressed market conditions.
(f) Documentation. The Board-regulated institution must adequately document all material aspects of its internal models, management and valuation of covered positions, control, oversight, validation and review processes and results, and internal assessment of capital adequacy.
§ 217.204   Measure for market risk.
(a) General requirement. (1) A Board-regulated institution must calculate its standardized measure for market risk by following the steps described in paragraph (a)(2) of this section. An advanced approaches Board-regulated institution also must calculate an advanced measure for market risk by following the steps in paragraph (a)(2) of this section.
(2) Measure for market risk. A Board-regulated institution must calculate the standardized measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures all as defined under this paragraph (a)(2), (except, that the Board-regulated institution may not use the SFA in section 210(b)(2)(vii)(B) of this subpart for purposes of this calculation)[, plus any additional capital requirement established by the Board]. An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notifications from the Board pursuant to § 217.121(d) also must calculate the advanced measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures as defined under this paragraph (a)(2) [, plus any additional capital requirement established by the Board].
(i) VaR-based capital requirement. A Board-regulated institution's VaR-based capital requirement equals the greater of:
(A) The previous day's VaR-based measure as calculated under § 217.205; or
(B) The average of the daily VaR-based measures as calculated under § 217.205 for each of the preceding 60 business days multiplied by three, except as provided in paragraph (b) of this section.
(ii) Stressed VaR-based capital requirement. A Board-regulated institution's stressed VaR-based capital requirement equals the greater of:
(A) The most recent stressed VaR-based measure as calculated under § 217.206; or
(B) The average of the stressed VaR-based measures as calculated under § 217.206 for each of the preceding 12 weeks multiplied by three, except as provided in paragraph (b) of this section.
(iii) Specific risk add-ons. A Board-regulated institution's specific risk add-ons equal any specific risk add-ons that are required under § 217.207 and are calculated in accordance with § 217.210.
(iv) Incremental risk capital requirement. A Board-regulated institution's incremental risk capital requirement equals any incremental risk capital requirement as calculated under section 208 of this subpart.
(v) Comprehensive risk capital requirement. A Board-regulated institution's comprehensive risk capital requirement equals any comprehensive risk capital requirement as calculated under section 209 of this subpart.
(vi) Capital requirement for de minimis exposures. A Board-regulated institution's capital requirement for de minimis exposures equals:
(A) The absolute value of the fair value of those de minimis exposures that are not captured in the Board-regulated institution's VaR-based measure or under paragraph (a)(2)(vi)(B) of this section; and
(B) With the prior written approval of the Board, the capital requirement for any de minimis exposures using alternative techniques that appropriately measure the market risk associated with those exposures.
(b) Backtesting. A Board-regulated institution must compare each of its most recent 250 business days' trading losses (excluding fees, commissions, reserves, net interest income, and intraday trading) with the corresponding daily VaR-based measures calibrated to a one-day holding period and at a one-tail, 99.0 percent confidence level. A Board-regulated institution must begin backtesting as required by this paragraph (b) no later than one year after the later of January 1, 2014 and the date on which the Board-regulated institution becomes subject to this subpart. In the interim, consistent with safety and soundness principles, a Board-regulated institution subject to this subpart as of January 1, 2014 should continue to follow backtesting procedures in accordance with the Board's supervisory expectations.
(1) Once each quarter, the Board-regulated institution must identify the number of exceptions (that is, the number of business days for which the actual daily net trading loss, if any, exceeds the corresponding daily VaR-based measure) that have occurred over the preceding 250 business days.
(2) A Board-regulated institution must use the multiplication factor in Table 1 to § 217.204 that corresponds to the number of exceptions identified in paragraph (b)(1) of this section to determine its VaR-based capital requirement for market risk under paragraph (a)(2)(i) of this section and to determine its stressed VaR-based capital requirement for market risk under paragraph (a)(2)(ii) of this section until it obtains the next quarter's backtesting results, unless the Board notifies the Board-regulated institution in writing that a different adjustment or other action is appropriate.
Table 1 to § 217.204—Multiplication Factors Based on Results of Backtesting
§ 217.205   VaR-based measure.
(a) General requirement. A Board-regulated institution must use one or more internal models to calculate daily a VaR-based measure of the general market risk of all covered positions. The daily VaR-based measure also may reflect the Board-regulated institution's specific risk for one or more portfolios of debt and equity positions, if the internal models meet the requirements of paragraph (b)(1) of § 217.207. The daily VaR-based measure must also reflect the Board-regulated institution's specific risk for any portfolio of correlation trading positions that is modeled under § 217.209. A Board-regulated institution may elect to include term repo-style transactions in its VaR-based measure, provided that the Board-regulated institution includes all such term repo-style transactions consistently over time.
(1) The Board-regulated institution's internal models for calculating its VaR-based measure must use risk factors sufficient to measure the market risk inherent in all covered positions. The market risk categories must include, as appropriate, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk. For material positions in the major currencies and markets, modeling techniques must incorporate enough segments of the yield curve—in no case less than six—to capture differences in volatility and less than perfect correlation of rates along the yield curve.
(2) The VaR-based measure may incorporate empirical correlations within and across risk categories, provided the Board-regulated institution validates and demonstrates the reasonableness of its process for measuring correlations. If the VaR-based measure does not incorporate empirical correlations across risk categories, the Board-regulated institution must add the separate measures from its internal models used to calculate the VaR-based measure for the appropriate market risk categories (interest rate risk, credit spread risk, equity price risk, foreign exchange rate risk, and/or commodity price risk) to determine its aggregate VaR-based measure.
(3) The VaR-based measure must include the risks arising from the nonlinear price characteristics of options positions or positions with embedded optionality and the sensitivity of the fair value of the positions to changes in the volatility of the underlying rates, prices, or other material risk factors. A Board-regulated institution with a large or complex options portfolio must measure the volatility of options positions or positions with embedded optionality by different maturities and/or strike prices, where material.
(4) The Board-regulated institution must be able to justify to the satisfaction of the Board the omission of any risk factors from the calculation of its VaR-based measure that the Board-regulated institution uses in its pricing models.
(5) The Board-regulated institution must demonstrate to the satisfaction of the Board the appropriateness of any proxies used to capture the risks of the Board-regulated institution's actual positions for which such proxies are used.
(b) Quantitative requirements for VaR-based measure. (1) The VaR-based measure must be calculated on a daily basis using a one-tail, 99.0 percent confidence level, and a holding period equivalent to a 10-business-day movement in underlying risk factors, such as rates, spreads, and prices. To calculate VaR-based measures using a 10-business-day holding period, the Board-regulated institution may calculate 10-business-day measures directly or may convert VaR-based measures using holding periods other than 10 business days to the equivalent of a 10-business-day holding period. A Board-regulated institution that converts its VaR-based measure in such a manner must be able to justify the reasonableness of its approach to the satisfaction of the Board.
(2) The VaR-based measure must be based on a historical observation period of at least one year. Data used to determine the VaR-based measure must be relevant to the Board-regulated institution's actual exposures and of sufficient quality to support the calculation of risk-based capital requirements. The Board-regulated institution must update data sets at least monthly or more frequently as changes in market conditions or portfolio composition warrant. For a Board-regulated institution that uses a weighting scheme or other method for the historical observation period, the Board-regulated institution must either:
(i) Use an effective observation period of at least one year in which the average time lag of the observations is at least six months; or
(ii) Demonstrate to the Board that its weighting scheme is more effective than a weighting scheme with an average time lag of at least six months representing the volatility of the Board-regulated institution's trading portfolio over a full business cycle. A Board-regulated institution using this option must update its data more frequently than monthly and in a manner appropriate for the type of weighting scheme.
(c) A Board-regulated institution must divide its portfolio into a number of significant subportfolios approved by the Board for subportfolio backtesting purposes. These subportfolios must be sufficient to allow the Board-regulated institution and the Board to assess the adequacy of the VaR model at the risk factor level; the Board will evaluate the appropriateness of these subportfolios relative to the value and composition of the Board-regulated institution's covered positions. The Board-regulated institution must retain and make available to the Board the following information for each subportfolio for each business day over the previous two years (500 business days), with no more than a 60-day lag:
(1) A daily VaR-based measure for the subportfolio calibrated to a one-tail, 99.0 percent confidence level;
(2) The daily profit or loss for the subportfolio (that is, the net change in price of the positions held in the portfolio at the end of the previous business day); and
(3) The p-value of the profit or loss on each day (that is, the probability of observing a profit that is less than, or a loss that is greater than, the amount reported for purposes of paragraph (c)(2) of this section based on the model used to calculate the VaR-based measure described in paragraph (c)(1) of this section).
§ 217.206   Stressed VaR-based measure.
(a) General requirement. At least weekly, a Board-regulated institution must use the same internal model(s) used to calculate its VaR-based measure to calculate a stressed VaR-based measure.
(b) Quantitative requirements for stressed VaR-based measure. (1) A Board-regulated institution must calculate a stressed VaR-based measure for its covered positions using the same model(s) used to calculate the VaR-based measure, subject to the same confidence level and holding period applicable to the VaR-based measure under § 217.205, but with model inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate to the Board-regulated institution's current portfolio.
(2) The stressed VaR-based measure must be calculated at least weekly and be no less than the Board-regulated institution's VaR-based measure.
(3) A Board-regulated institution must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the Board-regulated institution's stressed VaR-based measure under this section and must be able to provide empirical support for the period used. The Board-regulated institution must obtain the prior approval of the Board for, and notify the Board if the Board-regulated institution makes any material changes to, these policies and procedures. The policies and procedures must address:
(i) How the Board-regulated institution links the period of significant financial stress used to calculate the stressed VaR-based measure to the composition and directional bias of its current portfolio; and
(ii) The Board-regulated institution's process for selecting, reviewing, and updating the period of significant financial stress used to calculate the stressed VaR-based measure and for monitoring the appropriateness of the period to the Board-regulated institution's current portfolio.
(4) Nothing in this section prevents the Board from requiring a Board-regulated institution to use a different period of significant financial stress in the calculation of the stressed VaR-based measure.
§ 217.207   Specific risk.
(a) General requirement. A Board-regulated institution must use one of the methods in this section to measure the specific risk for each of its debt, equity, and securitization positions with specific risk.
(b) Modeled specific risk. A Board-regulated institution may use models to measure the specific risk of covered positions as provided in paragraph (a) of section 205 of this subpart (therefore, excluding securitization positions that are not modeled under section 209 of this subpart). A Board-regulated institution must use models to measure the specific risk of correlation trading positions that are modeled under § 217.209.
(1) Requirements for specific risk modeling. (i) If a Board-regulated institution uses internal models to measure the specific risk of a portfolio, the internal models must:
(A) Explain the historical price variation in the portfolio;
(B) Be responsive to changes in market conditions;
(C) Be robust to an adverse environment, including signaling rising risk in an adverse environment; and
(D) Capture all material components of specific risk for the debt and equity positions in the portfolio. Specifically, the internal models must:
( 1 ) Capture event risk and idiosyncratic risk; and
( 2 ) Capture and demonstrate sensitivity to material differences between positions that are similar but not identical and to changes in portfolio composition and concentrations.
(ii) If a Board-regulated institution calculates an incremental risk measure for a portfolio of debt or equity positions under section 208 of this subpart, the Board-regulated institution is not required to capture default and credit migration risks in its internal models used to measure the specific risk of those portfolios.
(2) Specific risk fully modeled for one or more portfolios. If the Board-regulated institution's VaR-based measure captures all material aspects of specific risk for one or more of its portfolios of debt, equity, or correlation trading positions, the Board-regulated institution has no specific risk add-on for those portfolios for purposes of paragraph (a)(2)(iii) of § 217.204.
(c) Specific risk not modeled. (1) If the Board-regulated institution's VaR-based measure does not capture all material aspects of specific risk for a portfolio of debt, equity, or correlation trading positions, the Board-regulated institution must calculate a specific-risk add-on for the portfolio under the standardized measurement method as described in § 217.210.
(2) A Board-regulated institution must calculate a specific risk add-on under the standardized measurement method as described in § 217.210 for all of its securitization positions that are not modeled under § 217.209.
§ 217.208   Incremental risk.
(a) General requirement. A Board-regulated institution that measures the specific risk of a portfolio of debt positions under § 217.207(b) using internal models must calculate at least weekly an incremental risk measure for that portfolio according to the requirements in this section. The incremental risk measure is the Board-regulated institution's measure of potential losses due to incremental risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions. With the prior approval of the Board, a Board-regulated institution may choose to include portfolios of equity positions in its incremental risk model, provided that it consistently includes such equity positions in a manner that is consistent with how the Board-regulated institution internally measures and manages the incremental risk of such positions at the portfolio level. If equity positions are included in the model, for modeling purposes default is considered to have occurred upon the default of any debt of the issuer of the equity position. A Board-regulated institution may not include correlation trading positions or securitization positions in its incremental risk measure.
(b) Requirements for incremental risk modeling. For purposes of calculating the incremental risk measure, the incremental risk model must:
(1) Measure incremental risk over a one-year time horizon and at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions.
(i) A constant level of risk assumption means that the Board-regulated institution rebalances, or rolls over, its trading positions at the beginning of each liquidity horizon over the one-year horizon in a manner that maintains the Board-regulated institution's initial risk level. The Board-regulated institution must determine the frequency of rebalancing in a manner consistent with the liquidity horizons of the positions in the portfolio. The liquidity horizon of a position or set of positions is the time required for a Board-regulated institution to reduce its exposure to, or hedge all of its material risks of, the position(s) in a stressed market. The liquidity horizon for a position or set of positions may not be less than the shorter of three months or the contractual maturity of the position.
(ii) A constant position assumption means that the Board-regulated institution maintains the same set of positions throughout the one-year horizon. If a Board-regulated institution uses this assumption, it must do so consistently across all portfolios.
(iii) A Board-regulated institution's selection of a constant position or a constant risk assumption must be consistent between the Board-regulated institution's incremental risk model and its comprehensive risk model described in section 209 of this subpart, if applicable.
(iv) A Board-regulated institution's treatment of liquidity horizons must be consistent between the Board-regulated institution's incremental risk model and its comprehensive risk model described in section 209, if applicable.
(2) Recognize the impact of correlations between default and migration events among obligors.
(3) Reflect the effect of issuer and market concentrations, as well as concentrations that can arise within and across product classes during stressed conditions.
(4) Reflect netting only of long and short positions that reference the same financial instrument.
(5) Reflect any material mismatch between a position and its hedge.
(6) Recognize the effect that liquidity horizons have on dynamic hedging strategies. In such cases, a Board-regulated institution must:
(i) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions;
(ii) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement;
(iii) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and
(iv) Capture in the incremental risk model any residual risks arising from such hedging strategies.
(7) Reflect the nonlinear impact of options and other positions with material nonlinear behavior with respect to default and migration changes.
(8) Maintain consistency with the Board-regulated institution's internal risk management methodologies for identifying, measuring, and managing risk.
(c) Calculation of incremental risk capital requirement. The incremental risk capital requirement is the greater of:
(1) The average of the incremental risk measures over the previous 12 weeks; or
(2) The most recent incremental risk measure.
§ 217.209   Comprehensive risk.
(a) General requirement. (1) Subject to the prior approval of the Board, a Board-regulated institution may use the method in this section to measure comprehensive risk, that is, all price risk, for one or more portfolios of correlation trading positions.
(2) A Board-regulated institution that measures the price risk of a portfolio of correlation trading positions using internal models must calculate at least weekly a comprehensive risk measure that captures all price risk according to the requirements of this section. The comprehensive risk measure is either:
(i) The sum of:
(A) The Board-regulated institution's modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; and
(B) A surcharge for the Board-regulated institution's modeled correlation trading positions equal to the total specific risk add-on for such positions as calculated under section 210 of this subpart multiplied by 8.0 percent; or
(ii) With approval of the Board and provided the Board-regulated institution has met the requirements of this section for a period of at least one year and can demonstrate the effectiveness of the model through the results of ongoing model validation efforts including robust benchmarking, the greater of:
(A) The Board-regulated institution's modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; or
(B) The total specific risk add-on that would apply to the bank's modeled correlation trading positions as calculated under section 210 of this subpart multiplied by 8.0 percent.
(b) Requirements for modeling all price risk. If a Board-regulated institution uses an internal model to measure the price risk of a portfolio of correlation trading positions:
(1) The internal model must measure comprehensive risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions.
(2) The model must capture all material price risk, including but not limited to the following:
(i) The risks associated with the contractual structure of cash flows of the position, its issuer, and its underlying exposures;
(ii) Credit spread risk, including nonlinear price risks;
(iii) The volatility of implied correlations, including nonlinear price risks such as the cross-effect between spreads and correlations;
(iv) Basis risk;
(v) Recovery rate volatility as it relates to the propensity for recovery rates to affect tranche prices; and
(vi) To the extent the comprehensive risk measure incorporates the benefits of dynamic hedging, the static nature of the hedge over the liquidity horizon must be recognized. In such cases, a Board-regulated institution must:
(A) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions;
(B) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement;
(C) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and
(D) Capture in the comprehensive risk model any residual risks arising from such hedging strategies;
(3) The Board-regulated institution must use market data that are relevant in representing the risk profile of the Board-regulated institution's correlation trading positions in order to ensure that the Board-regulated institution fully captures the material risks of the correlation trading positions in its comprehensive risk measure in accordance with this section; and
(4) The Board-regulated institution must be able to demonstrate that its model is an appropriate representation of comprehensive risk in light of the historical price variation of its correlation trading positions.
(c) Requirements for stress testing. (1) A Board-regulated institution must at least weekly apply specific, supervisory stress scenarios to its portfolio of correlation trading positions that capture changes in:
(i) Default rates;
(ii) Recovery rates;
(iii) Credit spreads;
(iv) Correlations of underlying exposures; and
(v) Correlations of a correlation trading position and its hedge.
(2) Other requirements. (i) A Board-regulated institution must retain and make available to the Board the results of the supervisory stress testing, including comparisons with the capital requirements generated by the Board-regulated institution's comprehensive risk model.
(ii) A Board-regulated institution must report to the Board promptly any instances where the stress tests indicate any material deficiencies in the comprehensive risk model.
(d) Calculation of comprehensive risk capital requirement. The comprehensive risk capital requirement is the greater of:
(1) The average of the comprehensive risk measures over the previous 12 weeks; or
(2) The most recent comprehensive risk measure.
§ 217.210   Standardized measurement method for specific risk.
(a) General requirement. A Board-regulated institution must calculate a total specific risk add-on for each portfolio of debt and equity positions for which the Board-regulated institution's VaR-based measure does not capture all material aspects of specific risk and for all securitization positions that are not modeled under § 217.209. A Board-regulated institution must calculate each specific risk add-on in accordance with the requirements of this section. Notwithstanding any other definition or requirement in this subpart, a position that would have qualified as a debt position or an equity position but for the fact that it qualifies as a correlation trading position under paragraph (2) of the definition of correlation trading position in § 217.2, shall be considered a debt position or an equity position, respectively, for purposes of this section 210 of this subpart.
(1) The specific risk add-on for an individual debt or securitization position that represents sold credit protection is capped at the notional amount of the credit derivative contract. The specific risk add-on for an individual debt or securitization position that represents purchased credit protection is capped at the current fair value of the transaction plus the absolute value of the present value of all remaining payments to the protection seller under the transaction. This sum is equal to the value of the protection leg of the transaction.
(2) For debt, equity, or securitization positions that are derivatives with linear payoffs, a Board-regulated institution must assign a specific risk-weighting factor to the fair value of the effective notional amount of the underlying instrument or index portfolio, except for a securitization position for which the Board-regulated institution directly calculates a specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this section. A swap must be included as an effective notional position in the underlying instrument or portfolio, with the receiving side treated as a long position and the paying side treated as a short position. For debt, equity, or securitization positions that are derivatives with nonlinear payoffs, a Board-regulated institution must risk weight the fair value of the effective notional amount of the underlying instrument or portfolio multiplied by the derivative's delta.
(3) For debt, equity, or securitization positions, a Board-regulated institution may net long and short positions (including derivatives) in identical issues or identical indices. A Board-regulated institution may also net positions in depositary receipts against an opposite position in an identical equity in different markets, provided that the Board-regulated institution includes the costs of conversion.
(4) A set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge has a specific risk add-on of zero if:
(i) The debt or securitization position is fully hedged by a total return swap (or similar instrument where there is a matching of swap payments and changes in fair value of the debt or securitization position);
(ii) There is an exact match between the reference obligation of the swap and the debt or securitization position;
(iii) There is an exact match between the currency of the swap and the debt or securitization position; and
(iv) There is either an exact match between the maturity date of the swap and the maturity date of the debt or securitization position; or, in cases where a total return swap references a portfolio of positions with different maturity dates, the total return swap maturity date must match the maturity date of the underlying asset in that portfolio that has the latest maturity date.
(5) The specific risk add-on for a set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge that does not meet the criteria of paragraph (a)(4) of this section is equal to 20.0 percent of the capital requirement for the side of the transaction with the higher specific risk add-on when:
(i) The credit risk of the position is fully hedged by a credit default swap or similar instrument;
(ii) There is an exact match between the reference obligation of the credit derivative hedge and the debt or securitization position;
(iii) There is an exact match between the currency of the credit derivative hedge and the debt or securitization position; and
(iv) There is either an exact match between the maturity date of the credit derivative hedge and the maturity date of the debt or securitization position; or, in the case where the credit derivative hedge has a standard maturity date:
(A) The maturity date of the credit derivative hedge is within 30 business days of the maturity date of the debt or securitization position; or
(B) For purchased credit protection, the maturity date of the credit derivative hedge is later than the maturity date of the debt or securitization position, but is no later than the standard maturity date for that instrument that immediately follows the maturity date of the debt or securitization position. The maturity date of the credit derivative hedge may not exceed the maturity date of the debt or securitization position by more than 90 calendar days.
(6) The specific risk add-on for a set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge that does not meet the criteria of either paragraph (a)(4) or (a)(5) of this section, but in which all or substantially all of the price risk has been hedged, is equal to the specific risk add-on for the side of the transaction with the higher specific risk add-on.
(b) Debt and securitization positions. (1) The total specific risk add-on for a portfolio of debt or securitization positions is the sum of the specific risk add-ons for individual debt or securitization positions, as computed under this section. To determine the specific risk add-on for individual debt or securitization positions, a Board-regulated institution must multiply the absolute value of the current fair value of each net long or net short debt or securitization position in the portfolio by the appropriate specific risk-weighting factor as set forth in paragraphs (b)(2)(i) through (b)(2)(vii) of this section.
(2) For the purpose of this section, the appropriate specific risk-weighting factors include:
(i) Sovereign debt positions. (A) In accordance with Table 1 to § 217.210, a Board-regulated institution must assign a specific risk-weighting factor to a sovereign debt position based on the CRC applicable to the sovereign, and, as applicable, the remaining contractual maturity of the position, or if there is no CRC applicable to the sovereign, based on whether the sovereign entity is a member of the OECD. Notwithstanding any other provision in this subpart, sovereign debt positions that are backed by the full faith and credit of the United States are treated as having a CRC of 0.
Table 1 to § 217.210—Specific Risk-Weighting Factors for Sovereign Debt Positions
(B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a Board-regulated institution may assign to a sovereign debt position a specific risk-weighting factor that is lower than the applicable specific risk-weighting factor in Table 1 to § 217.210 if:
( 1 ) The position is denominated in the sovereign entity's currency;
( 2 ) The Board-regulated institution has at least an equivalent amount of liabilities in that currency; and
( 3 ) The sovereign entity allows banks under its jurisdiction to assign the lower specific risk-weighting factor to the same exposures to the sovereign entity.
(C) A Board-regulated institution must assign a 12.0 percent specific risk-weighting factor to a sovereign debt position immediately upon determination a default has occurred; or if a default has occurred within the previous five years.
(D) A Board-regulated institution must assign a 0.0 percent specific risk-weighting factor to a sovereign debt position if the sovereign entity is a member of the OECD and does not have a CRC assigned to it, except as provided in paragraph (b)(2)(i)(C) of this section.
(E) A Board-regulated institution must assign an 8.0 percent specific risk-weighting factor to a sovereign debt position if the sovereign is not a member of the OECD and does not have a CRC assigned to it, except as provided in paragraph (b)(2)(i)(C) of this section.
(ii) Certain supranational entity and multilateral development bank debt positions. A Board-regulated institution may assign a 0.0 percent specific risk-weighting factor to a debt position that is an exposure to the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, or an MDB.
(iii) GSE debt positions. A Board-regulated institution must assign a 1.6 percent specific risk-weighting factor to a debt position that is an exposure to a GSE. Notwithstanding the foregoing, a Board-regulated institution must assign an 8.0 percent specific risk-weighting factor to preferred stock issued by a GSE.
(iv) Depository institution, foreign bank, and credit union debt positions. (A) Except as provided in paragraph (b)(2)(iv)(B) of this section, a Board-regulated institution must assign a specific risk-weighting factor to a debt position that is an exposure to a depository institution, a foreign bank, or a credit union, in accordance with Table 2 to § 217.210, based on the CRC that corresponds to that entity's home country or the OECD membership status of that entity's home country if there is no CRC applicable to the entity's home country, and, as applicable, the remaining contractual maturity of the position.
Table 2 to § 217.210—Specific Risk-Weighting Factors for Depository Institution, Foreign Bank, and Credit Union Debt Positions
(B) A Board-regulated institution must assign a specific risk-weighting factor of 8.0 percent to a debt position that is an exposure to a depository institution or a foreign bank that is includable in the depository institution's or foreign bank's regulatory capital and that is not subject to deduction as a reciprocal holding under § 217.22.
(C) A Board-regulated institution must assign a 12.0 percent specific risk-weighting factor to a debt position that is an exposure to a foreign bank immediately upon determination that a default by the foreign bank's home country has occurred or if a default by the foreign bank's home country has occurred within the previous five years.
(v) PSE debt positions. (A) Except as provided in paragraph (b)(2)(v)(B) of this section, a Board-regulated institution must assign a specific risk-weighting factor to a debt position that is an exposure to a PSE in accordance with Tables 3 and 4 to § 217.210 depending on the position's categorization as a general obligation or revenue obligation based on the CRC that corresponds to the PSE's home country or the OECD membership status of the PSE's home country if there is no CRC applicable to the PSE's home country, and, as applicable, the remaining contractual maturity of the position, as set forth in Tables 3 and 4 of this section.
(B) A Board-regulated institution may assign a lower specific risk-weighting factor than would otherwise apply under Tables 3 and 4 of this section to a debt position that is an exposure to a foreign PSE if:
( 1 ) The PSE's home country allows banks under its jurisdiction to assign a lower specific risk-weighting factor to such position; and
( 2 ) The specific risk-weighting factor is not lower than the risk weight that corresponds to the PSE's home country in accordance with Tables 3 and 4 of this section.
(C) A Board-regulated institution must assign a 12.0 percent specific risk-weighting factor to a PSE debt position immediately upon determination that a default by the PSE's home country has occurred or if a default by the PSE's home country has occurred within the previous five years.
Table 3 to § 217.210—Specific Risk-Weighting Factors for PSE General Obligation Debt Positions
Table 4 to § 217.210—Specific Risk-Weighting Factors for PSE Revenue Obligation Debt Positions
(vi) Corporate debt positions. Except as otherwise provided in paragraph (b)(2)(vi)(B) of this section, a Board-regulated institution must assign a specific risk-weighting factor to a corporate debt position in accordance with the investment grade methodology in paragraph (b)(2)(vi)(A) of this section.
(A) Investment grade methodology. ( 1 ) For corporate debt positions that are exposures to entities that have issued and outstanding publicly traded instruments, a Board-regulated institution must assign a specific risk-weighting factor based on the category and remaining contractual maturity of the position, in accordance with Table 5 to § 217.210. For purposes of this paragraph (b)(2)(vi)(A)( 1 ), the Board-regulated institution must determine whether the position is in the investment grade or not investment grade category.
Table 5 to § 217.210—Specific Risk-Weighting Factors for Corporate Debt Positions Under the Investment Grade Methodology
( 2 ) A Board-regulated institution must assign an 8.0 percent specific risk-weighting factor for corporate debt positions that are exposures to entities that do not have publicly traded instruments outstanding.
(B) Limitations. ( 1 ) A Board-regulated institution must assign a specific risk-weighting factor of at least 8.0 percent to an interest-only mortgage-backed security that is not a securitization position.
( 2 ) A Board-regulated institution shall not assign a corporate debt position a specific risk-weighting factor that is lower than the specific risk-weighting factor that corresponds to the CRC of the issuer's home country, if applicable, in table 1 of this section.
(vii) Securitization positions —(A) General requirements. ( 1 ) A Board-regulated institution that is not an advanced approaches Board-regulated institution or is a U.S. intermediate holding company that is required to be established or designated pursuant to 12 CFR 252.153 and that is not calculating risk-weighted assets according to Subpart E must assign a specific risk-weighting factor to a securitization position using either the simplified supervisory formula approach (SSFA) in paragraph (b)(2)(vii)(C) of this section (and § 217.211) or assign a specific risk-weighting factor of 100 percent to the position.
( 2 ) A Board-regulated institution that is an advanced approaches Board-regulated institution or is a U.S. intermediate holding company that is required to be established or designated pursuant to 12 CFR 252.153 and that is calculating risk-weighted assets according to Subpart E must calculate a specific risk add-on for a securitization position in accordance with paragraph (b)(2)(vii)(B) of this section if the Board-regulated institution and the securitization position each qualifies to use the SFA in § 217.143. A Board-regulated institution that is an advanced approaches Board-regulated institution or is a U.S. intermediate holding company that is required to be established or designated pursuant to 12 CFR 252.153 and that is calculating risk-weighted assets according to Subpart E with a securitization position that does not qualify for the SFA under paragraph (b)(2)(vii)(B) of this section may assign a specific risk-weighting factor to the securitization position using the SSFA in accordance with paragraph (b)(2)(vii)(C) of this section or assign a specific risk-weighting factor of 100 percent to the position.
( 3 ) A Board-regulated institution must treat a short securitization position as if it is a long securitization position solely for calculation purposes when using the SFA in paragraph (b)(2)(vii)(B) of this section or the SSFA in paragraph (b)(2)(vii)(C) of this section.
(B) SFA. To calculate the specific risk add-on for a securitization position using the SFA, a Board-regulated institution that is an advanced approaches Board-regulated institution must set the specific risk add-on for the position equal to the risk-based capital requirement as calculated under § 217.143.
(C) SSFA. To use the SSFA to determine the specific risk-weighting factor for a securitization position, a Board-regulated institution must calculate the specific risk-weighting factor in accordance with § 217.211.
(D) N th -to-default credit derivatives. A Board-regulated institution must determine a specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this section, or assign a specific risk-weighting factor using the SSFA in paragraph (b)(2)(vii)(C) of this section to an n th -to-default credit derivative in accordance with this paragraph (b)(2)(vii)(D), regardless of whether the Board-regulated institution is a net protection buyer or net protection seller. A Board-regulated institution must determine its position in the n th -to-default credit derivative as the largest notional amount of all the underlying exposures.
( 1 ) For purposes of determining the specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this section or the specific risk-weighting factor for an n th -to-default credit derivative using the SSFA in paragraph (b)(2)(vii)(C) of this section the Board-regulated institution must calculate the attachment point and detachment point of its position as follows:
( i ) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the Board-regulated institution's position to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter A is expressed as a decimal value between zero and one. For purposes of using the SFA in paragraph (b)(2)(vii)(B) of this section to calculate the specific add-on for its position in an n th -to-default credit derivative, parameter A must be set equal to the credit enhancement level (L) input to the SFA formula in section 143 of this subpart. In the case of a first-to-default credit derivative, there are no underlying exposures that are subordinated to the Board-regulated institution's position. In the case of a second-or-subsequent-to-default credit derivative, the smallest (n-1) notional amounts of the underlying exposure(s) are subordinated to the Board-regulated institution's position.
( ii ) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the Board-regulated institution's position in the n th -to-default credit derivative to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter A is expressed as a decimal value between zero and one. For purposes of using the SFA in paragraph (b)(2)(vii)(B) of this section to calculate the specific risk add-on for its position in an n th -to-default credit derivative, parameter D must be set to equal the L input plus the thickness of tranche T input to the SFA formula in § 217.143 of this subpart.
( 2 ) A Board-regulated institution that does not use the SFA in paragraph (b)(2)(vii)(B) of this section to determine a specific risk-add on, or the SSFA in paragraph (b)(2)(vii)(C) of this section to determine a specific risk-weighting factor for its position in an n th -to-default credit derivative must assign a specific risk-weighting factor of 100 percent to the position.
(c) Modeled correlation trading positions. For purposes of calculating the comprehensive risk measure for modeled correlation trading positions under either paragraph (a)(2)(i) or (a)(2)(ii) of § 217.209, the total specific risk add-on is the greater of:
(1) The sum of the Board-regulated institution's specific risk add-ons for each net long correlation trading position calculated under this section; or
(2) The sum of the Board-regulated institution's specific risk add-ons for each net short correlation trading position calculated under this section.
(d) Non-modeled securitization positions. For securitization positions that are not correlation trading positions and for securitizations that are correlation trading positions not modeled under § 217.209, the total specific risk add-on is the greater of:
(1) The sum of the Board-regulated institution's specific risk add-ons for each net long securitization position calculated under this section; or
(2) The sum of the Board-regulated institution's specific risk add-ons for each net short securitization position calculated under this section.
(e) Equity positions. The total specific risk add-on for a portfolio of equity positions is the sum of the specific risk add-ons of the individual equity positions, as computed under this section. To determine the specific risk add-on of individual equity positions, a Board-regulated institution must multiply the absolute value of the current fair value of each net long or net short equity position by the appropriate specific risk-weighting factor as determined under this paragraph (e):
(1) The Board-regulated institution must multiply the absolute value of the current fair value of each net long or net short equity position by a specific risk-weighting factor of 8.0 percent. For equity positions that are index contracts comprising a well-diversified portfolio of equity instruments, the absolute value of the current fair value of each net long or net short position is multiplied by a specific risk-weighting factor of 2.0 percent. 34
34 A portfolio is well-diversified if it contains a large number of individual equity positions, with no single position representing a substantial portion of the portfolio's total fair value.
(2) For equity positions arising from the following futures-related arbitrage strategies, a Board-regulated institution may apply a 2.0 percent specific risk-weighting factor to one side (long or short) of each position with the opposite side exempt from an additional capital requirement:
(i) Long and short positions in exactly the same index at different dates or in different market centers; or
(ii) Long and short positions in index contracts at the same date in different, but similar indices.
(3) For futures contracts on main indices that are matched by offsetting positions in a basket of stocks comprising the index, a Board-regulated institution may apply a 2.0 percent specific risk-weighting factor to the futures and stock basket positions (long and short), provided that such trades are deliberately entered into and separately controlled, and that the basket of stocks is comprised of stocks representing at least 90.0 percent of the capitalization of the index. A main index refers to the Standard & Poor's 500 Index, the FTSE All-World Index, and any other index for which the Board-regulated institution can demonstrate to the satisfaction of the Board that the equities represented in the index have liquidity, depth of market, and size of bid-ask spreads comparable to equities in the Standard & Poor's 500 Index and FTSE All-World Index.
(f) Due diligence requirements for securitization positions. (1) A Board-regulated institution must demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a securitization position that would materially affect the performance of the position by conducting and documenting the analysis set forth in paragraph (f)(2) of this section. The Board-regulated institution's analysis must be commensurate with the complexity of the securitization position and the materiality of the position in relation to capital.
(2) A Board-regulated institution must demonstrate its comprehensive understanding for each securitization position by:
(i) Conducting an analysis of the risk characteristics of a securitization position prior to acquiring the position and document such analysis within three business days after acquiring position, considering:
(A) Structural features of the securitization that would materially impact the performance of the position, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization positions, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures.
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (f)(1) of this section for each securitization position.
§ 217.211   Simplified supervisory formula approach (SSFA).
(a) General requirements. To use the SSFA to determine the specific risk-weighting factor for a securitization position, a Board-regulated institution must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the securitization require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A Board-regulated institution that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a specific risk-weighting factor of 100 percent to the position.
(b) SSFA parameters. To calculate the specific risk-weighting factor for a securitization position using the SSFA, a Board-regulated institution must have accurate information on the five inputs to the SSFA calculation described in paragraphs (b)(1) through (b)(5) of this section.
(1) K G is the weighted-average (with unpaid principal used as the weight for each exposure) total capital requirement of the underlying exposures calculated using subpart D. K G is expressed as a decimal value between zero and one (that is, an average risk weight of 100 percent represents a value of K G equal to 0.08).
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the position, which represents the threshold at which credit losses will first be allocated to the position. Except as provided in § 217.210(b)(2)(vii)(D) for n th -to-default credit derivatives, parameter A equals the ratio of the current dollar amount of underlying exposures that are subordinated to the position of the Board-regulated institution to the current dollar amount of underlying exposures. Any reserve account funded by the accumulated cash flows from the underlying exposures that is subordinated to the position that contains the Board-regulated institution's securitization exposure may be included in the calculation of parameter A to the extent that cash is present in the account. Parameter A is expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the position, which represents the threshold at which credit losses of principal allocated to the position would result in a total loss of principal. Except as provided in § 217.210(b)(2)(vii)(D) for n th -to-default credit derivatives, parameter D equals parameter A plus the ratio of the current dollar amount of the securitization positions that are pari passu with the position (that is, have equal seniority with respect to credit risk) to the current dollar amount of the underlying exposures. Parameter D is expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization positions that are not resecuritization positions and equal to 1.5 for resecuritization positions.
(c) Mechanics of the SSFA. K G and W are used to calculate K A , the augmented value of K G , which reflects the observed credit quality of the underlying exposures. K A is defined in paragraph (d) of this section. The values of parameters A and D, relative to K A determine the specific risk-weighting factor assigned to a position as described in this paragraph (c) and paragraph (d) of this section. The specific risk-weighting factor assigned to a securitization position, or portion of a position, as appropriate, is the larger of the specific risk-weighting factor determined in accordance with this paragraph (c), paragraph (d) of this section, and a specific risk-weighting factor of 1.6 percent.
(1) When the detachment point, parameter D, for a securitization position is less than or equal to K A , the position must be assigned a specific risk-weighting factor of 100 percent.
(2) When the attachment point, parameter A, for a securitization position is greater than or equal to K A , the Board-regulated institution must calculate the specific risk-weighting factor in accordance with paragraph (d) of this section.
(3) When A is less than K A and D is greater than K A , the specific risk-weighting factor is a weighted-average of 1.00 and K SSFA calculated under paragraphs (c)(3)(i) and (c)(3)(ii) of this section. For the purpose of this calculation:
(i) The weight assigned to 1.00 equals
§ 217.212   Market risk disclosures.
(a) Scope. A Board-regulated institution must comply with this section unless it is a consolidated subsidiary of a bank holding company or a depository institution that is subject to these requirements or of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction. A Board-regulated institution must make timely public disclosures each calendar quarter. If a significant change occurs, such that the most recent reporting amounts are no longer reflective of the Board-regulated institution's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be provided as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter may be disclosed annually, provided any significant changes are disclosed in the interim. If a Board-regulated institution believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public certain information that is either proprietary or confidential in nature, the Board-regulated institution is not required to disclose these specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. The Board-regulated institution's management may provide all of the disclosures required by this section in one place on the Board-regulated institution's public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Board-regulated institution publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(b) Disclosure policy. The Board-regulated institution must have a formal disclosure policy approved by the board of directors that addresses the Board-regulated institution's approach for determining its market risk disclosures. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management must ensure that appropriate verification of the disclosures takes place and that effective internal controls and disclosure controls and procedures are maintained. One or more senior officers of the Board-regulated institution must attest that the disclosures meet the requirements of this subpart, and the board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this section.
(c) Quantitative disclosures. (1) For each material portfolio of covered positions, the Board-regulated institution must provide timely public disclosures of the following information at least quarterly:
(i) The high, low, and mean VaR-based measures over the reporting period and the VaR-based measure at period-end;
(ii) The high, low, and mean stressed VaR-based measures over the reporting period and the stressed VaR-based measure at period-end;
(iii) The high, low, and mean incremental risk capital requirements over the reporting period and the incremental risk capital requirement at period-end;
(iv) The high, low, and mean comprehensive risk capital requirements over the reporting period and the comprehensive risk capital requirement at period-end, with the period-end requirement broken down into appropriate risk classifications (for example, default risk, migration risk, correlation risk);
(v) Separate measures for interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk used to calculate the VaR-based measure; and
(vi) A comparison of VaR-based estimates with actual gains or losses experienced by the Board-regulated institution, with an analysis of important outliers.
(2) In addition, the Board-regulated institution must disclose publicly the following information at least quarterly:
(i) The aggregate amount of on-balance sheet and off-balance sheet securitization positions by exposure type; and
(ii) The aggregate amount of correlation trading positions.
(d) Qualitative disclosures. For each material portfolio of covered positions, the Board-regulated institution must provide timely public disclosures of the following information at least annually after the end of the fourth calendar quarter, or more frequently in the event of material changes for each portfolio:
(1) The composition of material portfolios of covered positions;
(2) The Board-regulated institution's valuation policies, procedures, and methodologies for covered positions including, for securitization positions, the methods and key assumptions used for valuing such positions, any significant changes since the last reporting period, and the impact of such change;
(3) The characteristics of the internal models used for purposes of this subpart. For the incremental risk capital requirement and the comprehensive risk capital requirement, this must include:
(i) The approach used by the Board-regulated institution to determine liquidity horizons;
(ii) The methodologies used to achieve a capital assessment that is consistent with the required soundness standard; and
(iii) The specific approaches used in the validation of these models;
(4) A description of the approaches used for validating and evaluating the accuracy of internal models and modeling processes for purposes of this subpart;
(5) For each market risk category (that is, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk), a description of the stress tests applied to the positions subject to the factor;
(6) The results of the comparison of the Board-regulated institution's internal estimates for purposes of this subpart with actual outcomes during a sample period not used in model development;
(7) The soundness standard on which the Board-regulated institution's internal capital adequacy assessment under this subpart is based, including a description of the methodologies used to achieve a capital adequacy assessment that is consistent with the soundness standard;
(8) A description of the Board-regulated institution's processes for monitoring changes in the credit and market risk of securitization positions, including how those processes differ for resecuritization positions; and
(9) A description of the Board-regulated institution's policy governing the use of credit risk mitigation to mitigate the risks of securitization and resecuritization positions.
§§ 217.213-217.299   [Reserved]
§ 217.300   Transitions.
(a) Capital conservation and countercyclical capital buffer. (1) From January 1, 2014 through December 31, 2015, a Board-regulated institution is not subject to limits on distributions and discretionary bonus payments under § 217.11 of subpart B of this part notwithstanding the amount of its capital conservation buffer or any applicable countercyclical capital buffer amount.
(2) Notwithstanding § 217.11, beginning January 1, 2016 through December 31, 2018 a Board-regulated institution's maximum payout ratio shall be determined as set forth in Table 1 to § 217.300.
Table 1 to § 217.300
(b) [Reserved]
(c) Non-qualifying capital instruments —(1) Depository institution holding companies with total consolidated assets of more than $15 billion as of December 31, 2009 that were not mutual holding companies prior to May 19, 2010. The transition provisions in this paragraph (c)(1) apply to debt or equity instruments that do not meet the criteria for additional tier 1 or tier 2 capital instruments in § 217.20, but that were issued and included in tier 1 or tier 2 capital, respectively (or, in the case of a savings and loan holding company, would have been included in tier 1 or tier 2 capital if the savings and loan holding company had been subject to the general risk-based capital rules under 12 CFR part 225, appendix A), prior to May 19, 2010 (non-qualifying capital instruments), and that were issued by a depository institution holding company with total consolidated assets greater than or equal to $15 billion as of December 31, 2009 that was not a mutual holding company prior to May 19, 2010 (2010 MHC) (depository institution holding company of $15 billion or more).
(i) A depository institution holding company of $15 billion or more may include in tier 1 and tier 2 capital non-qualifying capital instruments up to the applicable percentage set forth in Table 8 to § 217.300 of the aggregate outstanding principal amounts of non-qualifying tier 1 and tier 2 capital instruments, respectively, that are outstanding as of January 1, 2014, beginning January 1, 2014, for a depository institution holding company of $15 billion or more that is an advanced approaches Board-regulated institution that is not a savings and loan holding company, and beginning January 1, 2015, for all other depository institution holding companies of $15 billion or more.
(ii) A depository institution holding company of $15 billion or more must apply the applicable percentages set forth in Table 8 to § 217.300 separately to the aggregate amounts of its tier 1 and tier 2 non-qualifying capital instruments.
(iii) The amount of non-qualifying capital instruments that must be excluded from additional tier 1 capital in accordance with this section may be included in tier 2 capital without limitation, provided the instruments meet the criteria for tier 2 capital set forth in § 217.20(d).
(iv) Non-qualifying capital instruments that do not meet the criteria for tier 2 capital set forth in § 217.20(d) may be included in tier 2 capital as follows:
(A) A depository institution holding company of $15 billion or more that is not an advanced approaches Board-regulated institution may include non-qualifying capital instruments that have been phased-out of tier 1 capital in tier 2 capital, and
(B) During calendar years 2014 and 2015, a depository institution holding company of $15 billion or more that is an advanced approaches Board-regulated institution may include non-qualifying capital instruments in tier 2 capital that have been phased out of tier 1 capital in accordance with Table 8 to § 217.300. Beginning January 1, 2016, a depository institution holding company of $15 billion or more that is an advanced approaches Board-regulated institution may include non-qualifying capital instruments in tier 2 capital that have been phased out of tier 1 capital in accordance with Table 8, up to the applicable percentages set forth in Table 9 to § 217.300.
(2) Mergers and acquisitions. (i) A depository institution holding company of $15 billion or more that acquires after December 31, 2013 either a depository institution holding company with total consolidated assets of less than $15 billion as of December 31, 2009 (depository institution holding company under $15 billion) or a depository institution holding company that is a 2010 MHC, may include in regulatory capital the non-qualifying capital instruments issued by the acquired organization up to the applicable percentages set forth in Table 8 to § 217.300.
(ii) If a depository institution holding company under $15 billion acquires after December 31, 2013 a depository institution holding company under $15 billion or a 2010 MHC, and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization's FR Y-9C for the period in which the transaction occurred, the resulting organization may include in regulatory capital non-qualifying instruments of the resulting organization up to the applicable percentages set forth in Table 8 to § 217.300.
Table 8 to § 217.300
(3) Depository institution holding companies under $15 billion and 2010 MHCs. (i) Non-qualifying capital instruments issued by depository institution holding companies under $15 billion and 2010 MHCs prior to May 19, 2010, may be included in additional tier 1 or tier 2 capital if the instrument was included in tier 1 or tier 2 capital, respectively, as of January 1, 2014.
(ii) Non-qualifying capital instruments includable in tier 1 capital are subject to a limit of 25 percent of tier 1 capital elements, excluding any non-qualifying capital instruments and after applying all regulatory capital deductions and adjustments to tier 1 capital.
(iii) Non-qualifying capital instruments that are not included in tier 1 as a result of the limitation in paragraph (c)(3)(ii) of this section are includable in tier 2 capital.
(4) Depository institutions. (i) Beginning on January 1, 2014, a depository institution that is an advanced approaches Board-regulated institution, and beginning on January 1, 2015, all other depository institutions, may include in regulatory capital debt or equity instruments issued prior to September 12, 2010 that do not meet the criteria for additional tier 1 or tier 2 capital instruments in § 217.20 but that were included in tier 1 or tier 2 capital respectively as of September 12, 2010 (non-qualifying capital instruments issued prior to September 12, 2010) up to the percentage of the outstanding principal amount of such non-qualifying capital instruments as of January 1, 2014 in accordance with Table 9 to § 217.300.
(ii) Table 9 to § 217.300 applies separately to tier 1 and tier 2 non-qualifying capital instruments.
(iii) The amount of non-qualifying capital instruments that cannot be included in additional tier 1 capital under this section may be included in tier 2 capital without limitation, provided that the instruments meet the criteria for tier 2 capital instruments under § 217.20(d).
Table 9 to § 217.300
(d) [Reserved]
(e) Prompt corrective action. For purposes of 12 CFR part 208, subpart D, a Board-regulated institution must calculate its capital measures and tangible equity ratio in accordance with the transition provisions in this section.
(f) Until July 21, 2015, this part will not apply to any bank holding company subsidiary of a foreign banking organization that is currently relying on Supervision and Regulation Letter SR 01-01 issued by the Board (as in effect on May 19, 2010).
(g) A Board-regulated institution that is not an advanced approaches Board-regulated institution may apply the treatment under §§ 217.21 and 217.22(c)(2), (5), (6), and (d)(2) applicable to an advanced approaches Board-regulated institution during the calendar quarter beginning January 1, 2020. During the quarter beginning January 1, 2020, a Board-regulated institution that makes such an election must deduct 80 percent of the amount otherwise required to be deducted under § 217.22(d)(2) and must apply a 100 percent risk weight to assets not deducted under § 217.22(d)(2). In addition, during the quarter beginning January 1, 2020, a Board-regulated institution that makes such an election must include in its regulatory capital 20 percent of any minority interest that exceeds the amount of minority interest includable in regulatory capital under § 217.21 as it applies to an advanced approaches Board-regulated institution. A Board-regulated institution that is not an advanced approaches Board-regulated institution must apply the treatment under §§ 217.21 and 217.22 applicable to a Board-regulated institution that is not an advanced approaches Board-regulated institution beginning April 1, 2020, and thereafter.
(h) SA-CCR. An advanced approaches Board-regulated institution may use CEM rather than SA-CCR for purposes of §§ 217.34(a) and 217.132(c) until January 1, 2022. A Board-regulated institution must provide prior notice to the Board if it decides to begin using SA-CCR before January 1, 2022. On January 1, 2022, and thereafter, an advanced approaches Board-regulated institution must use SA-CCR for purposes of §§ 217.34(a), 217.132(c), and 217.135(d). Once an advanced approaches Board-regulated institution has begun to use SA-CCR, the advanced approaches Board-regulated institution may not change to use CEM.
(i) Default fund contributions. Prior to January 1, 2022, a Board-regulated institution that calculates the exposure amounts of its derivative contracts under the standardized approach for counterparty credit risk in § 217.132(c) may calculate the risk-weighted asset amount for a default fund contribution to a QCCP under either method 1 under § 217.35(d)(3)(i) or method 2 under § 217.35(d)(3)(ii), rather than under § 217.133(d).