708 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

1See 84 FR 13814 (April 8, 2019). 

2When the proposal was issued, a banking 

organization was an ‘‘advanced approaches banking 

organization’’ if it had total assets of at least $250 

billion, or if it had consolidated on-balance sheet 

foreign exposures of at least $10 billion, or if it was 

a subsidiary of a depository institution, bank 

holding company, savings and loan holding 

company or intermediate holding company that was 

an advanced approaches banking organization. See 

78 FR 62018, 62204 (October 11, 2013), 78 FR 

55340, 55523 (September 10, 2013). See also 12 

CFR part 3 (OCC); 12 CFR part 217 (Board); and 12 

CFR part 324 (FDIC). In November 2019, the 

agencies issued a final rule to revise the criteria for 

determining the applicability of regulatory capital 

and liquidity requirements for large U.S. banking 

organizations and the U.S. intermediate holding 

companies of certain foreign banking organizations, 

including the application of the advanced 

approaches (interagency tailoring final rule). Under 

this final rule, advanced approaches banking 

organizations include those banking organizations 

subject to Category I standards (those banking 

organizations that qualify as U.S. GSIBs) or 

Category II standards (banking organizations with 

(1) at least $700 billion in total consolidated assets 

or (2) at least $75 billion in cross-jurisdictional 

activity and more than $100 billion in total 

consolidated assets), and a subsidiary depository 

institution of such a banking organization. See 84 

FR 59230 (November 1, 2019). 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Part 3 

[Docket ID OCC–2018–0019] 

RIN 1557–AE38 

FEDERAL RESERVE SYSTEM 

12 CFR Parts 217 and 252 

[Regulation Q; Docket No. R–1655] 

RIN 7100–AF43 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 324 

RIN 3064–AE79 

Regulatory Capital Treatment for 

Investments in Certain Unsecured Debt 

Instruments of Global Systemically 

Important U.S. Bank Holding 

Companies, Certain Intermediate 

Holding Companies, and Global 

Systemically Important Foreign 

Banking Organizations; Total LossAbsorbing Capacity Requirements 

AGENCY: Office of the Comptroller of the 

Currency, Treasury (OCC); the Board of 

Governors of the Federal Reserve 

System (Board); and the Federal Deposit 

Insurance Corporation (FDIC). 

ACTION: Final rule. 

SUMMARY: The OCC, Board, and FDIC 

(collectively, the agencies) are adopting 

a final rule that applies to advanced 

approaches banking organizations with 

the aim of reducing both 

interconnectedness within the financial 

system and systemic risks. The final 

rule requires deduction from a banking 

organization’s regulatory capital for 

certain investments in unsecured debt 

instruments issued by foreign or U.S. 

global systemically important banking 

organizations (GSIBs) for the purposes 

of meeting minimum total lossabsorbing capacity (TLAC) requirements 

and, where applicable, long-term debt 

requirements, or for investments in 

unsecured debt instruments issued by 

GSIBs that are pari passu or 

subordinated to such debt instruments. 

In addition, the Board is adopting 

changes to its TLAC rules to clarify 

requirements and correct drafting errors. 

DATES: The final rule is effective on 

April 1, 2021. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Andrew Tschirhart, Risk Expert 

(202) 649–6370, Capital and Regulatory 

Policy; or Carl Kaminski, Special 

Counsel, or Jean Xiao, Attorney, Chief 

Counsel’s Office, (202) 649–5490, for 

persons who are deaf or hearing 

impaired, TTY, (202) 649–5597, Office 

of the Comptroller of the Currency, 400 

7th Street SW, Washington, DC 20219. 

Board: Constance M. Horsley, Deputy 

Associate Director, (202) 452–5239; Juan 

Climent, Assistant Director, (202) 872– 

7526; Mark Handzlik, Manager, (202) 

475–6636; Sean Healey, Lead Financial 

Institution Policy Analyst, (202) 912– 

4611; Division of Supervision and 

Regulation; or Benjamin McDonough, 

Assistant General Counsel (202) 452– 

2036; or Mark Buresh, Senior Counsel 

(202) 452–5270, Legal Division, Board of 

Governors of the Federal Reserve 

System, 20th and C Streets NW, 

Washington, DC 20551. For the hearing 

impaired only, Telecommunication 

Device for the Deaf (TDD), (202) 263– 

4869. 

FDIC: Benedetto Bosco, Chief, Capital 

Policy Section; bbosco@fdic.gov; 

Richard Smith, Capital Markets Policy 

Analyst, rismith@fdic.gov; 

regulatorycapital@fdic.gov; Capital 

Markets Branch, Division of Risk 

Management Supervision, (202) 898– 

6888; or Michael Phillips, Counsel, 

mphillips@fdic.gov; Catherine Wood, 

Counsel, cawood@fdic.gov; or Ryan 

Rappa, Counsel, rrappa@fdic.gov, Legal 

Division, Federal Deposit Insurance 

Corporation, 550 17th Street NW, 

Washington, DC 20429. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

II. Background 

A. Capital Requirements 

B. TLAC Rule 

III. Overview of the Notice of Proposed 

Rulemaking and Comments 

IV. Summary of the Final Rule 

V. Regulatory Capital Treatment for 

Advanced Approaches Banking 

Organizations’ Investments in Covered 

Debt Instruments 

A. Scope of Application 

B. Deduction From Tier 2 Capital 

C. Amendments to Definitions 

D. Investments in Covered Banking 

Organizations’ Own Covered Debt 

Instruments and Reciprocal Cross 

Holdings 

E. Significant and Non-Significant 

Investments in Covered Debt Instruments 

F. Corresponding Deduction Approach 

G. Net Long Position Calculation 

VI. Technical Amendment and Other 

Comments 

VII. Amendments to the Board’s TLAC Rule 

VIII. Changes to Regulatory Reporting 

A. Deductions From Tier 2 Capital Related 

to Investments in Covered Debt 

Instruments and Excluded Covered Debt 

Instruments 

B. Public Disclosure of Long-Term Debt 

and TLAC by Covered BHCs and 

Covered IHCs 

IX. Regulatory Analyses 

A. Paperwork Reduction Act 

B. Regulatory Flexibility Act Analysis 

C. Plain Language 

D. OCC Unfunded Mandates Reform Act of 

1995 Determination 

E. Riegle Community Development and 

Regulatory Improvement Act of 1994 

F. Congressional Review Act 

I. Introduction 

The Office of the Comptroller of the 

Currency (OCC), Board of Governors of 

the Federal Reserve System (Board), and 

Federal Deposit Insurance Corporation 

(FDIC) (together, the agencies) are 

issuing a final rule to revise the 

regulatory capital rule in a manner 

substantially consistent with a proposed 

rule issued in April 2019 (proposal).1

The final rule addresses the regulatory 

capital treatment of investments by 

advanced approaches banking 

organizations in unsecured debt 

instruments issued by foreign or U.S. 

global systemically important banking 

organizations (GSIBs) for the purposes 

of meeting minimum total lossabsorbing capacity (TLAC) requirements 

and, as applicable, long-term debt 

requirements, or of investments in 

unsecured debt instruments issued by 

GSIBs that are pari passu or 

subordinated to such debt instruments 

(covered debt instruments).2 Consistent 

with the proposal, the exposures of an 

advanced approaches banking 

organization to covered debt 

instruments generally are subject to 

deduction from the banking 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 709 

3Banking organizations subject to the agencies’ 

capital rule include national banks, state member 

banks, insured state nonmember banks, savings 

associations, and top-tier bank holding companies, 

intermediate holding companies, and savings and 

loan holding companies domiciled in the United 

States, but exclude banking organizations subject to 

the Board’s Small Bank Holding Company and 

Savings and Loan Holding Company Policy 

Statement (12 CFR part 225, appendix C), qualifying 

community banking organizations that elect to 

comply with the agencies’ community bank 

leverage ratio framework, and certain savings and 

loan holding companies that are substantially 

engaged in insurance underwriting or commercial 

activities or that are estate trusts, and bank holding 

companies and savings and loan holding companies 

that are employee stock ownership plans. 

4See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) 

(Board); and 12 CFR 324.10(a) (FDIC). In addition 

to the generally applicable leverage ratio, advanced 

approaches banking organizations are subject to a 

supplementary leverage ratio, which measures a 

banking organization’s tier 1 capital relative to its 

on-balance sheet and certain off-balance sheet 

exposures. 

5A different deduction framework applies to nonadvanced approaches banking organizations. See 84 

FR 35234 (July 22, 2019). 

6See 12 CFR 3.22(c)(1) (OCC); 12 CFR 

217.22(c)(1) (Board); and 12 CFR 324.22(c)(1) 

(FDIC). 

7See 12 CFR 3.22(c)(2) (OCC); 12 CFR 

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) 

(FDIC). 

8See 12 CFR 3.22(c)(3), (c)(5), and (c)(6) (OCC); 

12 CFR 217.22(c)(3), (c)(5), and (c)(6) (Board); and 

12 CFR 324.22(c)(3), (c)(5), and (c)(6) (FDIC). 

9See 12 CFR part 3, subparts D, E, or F, as 

applicable (OCC); 12 CFR part 217, subparts D, E, 

and F, as applicable (Board); and 12 CFR part 324, 

subparts D, E, or F, as applicable (FDIC). 

10See 12 CFR part 3, subparts D, E, or F, as 

applicable (OCC); 12 CFR part 217, subparts D, E, 

and F, as applicable (Board); and 12 CFR part 324, 

subparts D, E, or F, as applicable (FDIC). 

11See 82 FR 8266 (January 24, 2017); 12 CFR part 

252, subparts G and P. The TLAC rule’s TLAC and 

long-term debt requirements took effect on January 

1, 2019. 

12See 12 CFR 252.62 and 252.63; 12 CFR 252.162 

and 252.165. The requirements applicable under 

the TLAC rule to covered BHCs and covered IHCs 

are similar but not identical. 

13Long-term debt issued by a covered IHC to 

affiliates of the covered IHC is subject to notable 

additional requirements, including the inclusion of 

a provision allowing the Board to order the 

conversion of the debt into common equity tier 1 

capital of the covered IHC. See 12 CFR 252.163. 

14The internal debt conversion provision 

included in covered IHC long-term debt issued to 

affiliates performs a similar function outside of a 

resolution proceeding. 

organization’s regulatory capital. The 

final rule includes certain adjustments 

to the proposal in response to 

comments. The final rule aims to reduce 

both interconnectedness within the 

financial system and systemic risks. 

II. Background 

A. Capital Requirements 

The agencies’ regulatory capital rule 

(capital rule) imposes minimum capital 

requirements on banking organizations 

measured through risk-based and 

leverage capital ratios.3 These regulatory 

capital ratios consist of regulatory 

capital measures relative to riskweighted assets and total assets, 

respectively.4 The numerators of the 

regulatory capital ratios include various 

adjustments and deductions to balancesheet-based regulatory capital 

components. 

The capital rule includes two broad 

categories of deductions from regulatory 

capital related to investments in the 

capital instruments of financial 

institutions by advanced approaches 

banking organizations.5 First, it requires 

a banking organization to deduct any 

investment in its own regulatory capital 

instruments and any investment in 

regulatory capital instruments held 

reciprocally with another financial 

institution (reciprocal cross holding).6

Second, it requires a banking 

organization to deduct investments in 

capital instruments issued by 

unconsolidated financial institutions 

that would qualify as regulatory capital 

if issued by the banking organization 

itself.7 For the purpose of the latter 

deduction, a banking organization may 

be required to deduct the entire amount 

of the investment, or it may be required 

to deduct only the portion of the 

investment that exceeds a certain 

threshold.8 These deductions are 

intended to reduce interconnectedness 

and contagion risk among financial 

institutions by discouraging banking 

organizations from investing in the 

capital of other financial institutions. 

For deductions related to investments 

in the capital of unconsolidated 

financial institutions, a banking 

organization must deduct from the 

component of regulatory capital for 

which the instrument qualifies or would 

qualify if it were issued by the banking 

organization that is holding the 

exposure.9 For example, an advanced 

approaches banking organization that 

owns 10 percent or less of the common 

stock of an unconsolidated financial 

institution is said to have a ‘‘nonsignificant investment’’ in the capital of 

the unconsolidated financial institution. 

If the advanced approaches banking 

organization invests in tier 2 

instruments issued by the 

unconsolidated financial institution, 

then it must deduct from its own tier 2 

capital the amount, if any, by which the 

investment, combined with other nonsignificant investments in the capital of 

other unconsolidated financial 

institutions, exceeds 10 percent of the 

sum of the banking organization’s 

common equity tier 1 capital elements 

minus all deductions from and 

adjustments to common equity tier 1 

capital elements required under section 

__.22(a) through __.22(c)(3), net of 

associated deferred tax liabilities (DTLs) 

(10 percent threshold for non-significant 

investments). Any non-significant 

investments in the capital of 

unconsolidated financial institutions 

that are not deducted from regulatory 

capital are risk-weighted in accordance 

with the capital rule.10

B. TLAC Rule 

In December 2016, the Board issued a 

final rule to require the largest domestic 

and foreign banking organizations 

operating in the United States to 

maintain a minimum amount of total 

loss-absorbing capacity (TLAC), 

consisting of tier 1 capital (excluding 

minority interest) and certain long-term 

debt instruments (TLAC rule).11 The 

TLAC rule applies to a U.S. top-tier 

bank holding company identified under 

the Board’s rules as a global 

systemically important bank holding 

company (covered BHC) or a top-tier 

U.S. intermediate holding company 

subsidiary of a global systemically 

important foreign banking organization 

(foreign GSIB) with $50 billion or more 

in U.S. non-branch assets (covered IHC) 

(collectively, covered banking 

organizations). 

The objective of the TLAC rule is to 

enhance financial stability by reducing 

the impact of the failure of covered 

banking organizations by requiring such 

organizations to have sufficient lossabsorbing capacity on both a goingconcern and a gone-concern basis. The 

TLAC rule includes requirements that a 

covered banking organization maintain 

outstanding minimum levels of TLAC 

and long-term debt.12 TLAC is the sum 

of the tier 1 capital instruments issued 

directly by the covered banking 

organization (excluding minority 

interest) and the long-term debt issued 

directly by the covered banking 

organization. Under the TLAC rule, 

long-term debt is generally unsecured 

debt that is issued directly by a covered 

banking organization, has no features 

that would interfere with an orderly 

resolution proceeding, has a remaining 

maturity of at least one year, and is 

governed by U.S. law, among other 

provisions.13

Long-term debt instruments under the 

TLAC rule are capable of absorbing 

losses in resolution (i.e., on a goneconcern basis). This is because the debt 

holders’ claim on a banking 

organization’s assets may not receive 

full payment in a resolution, 

receivership, insolvency, or similar 

proceeding.14 This potential lossVerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\06JAR2.SGM 06JAR2

jbell on DSKJLSW7X2PROD with RULES2
710 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

15Long-term debt under the TLAC rule may also 

qualify as tier 2 capital under the capital rule, if it 

satisfies the eligibility criteria for tier 2 capital. 

16The proposal of the TLAC rule in 2015 was 

issued solely by the Board. Therefore, the proposed 

regulatory capital deductions in that proposal 

would have only applied to Board-regulated 

banking organizations, which include bank holding 

companies, intermediate holding companies, 

savings and loan holdings companies, and state 

member banks. 

17As discussed further in section V.C.2 below, 

the final rule excludes certain unsecured debt 

instruments issued by foreign GSIBs from the scope 

of the final rule. Specifically, the final rule 

generally excludes from the definition of covered 

debt instrument an unsecured debt instrument that 

cannot be written down or converted into equity 

(i.e., bailed in) under a special resolution regime. 

absorbing capacity of long-term debt is 

part of the rationale for the deduction 

approach for investments in such debt 

instruments under this final rule.15

Given the ability of long-term debt to 

absorb the losses of a covered banking 

organization in a resolution, 

receivership, insolvency, or similar 

proceeding, the Board proposed 

regulatory capital deductions for 

investments by Board-regulated banking 

organizations in long-term debt issued 

under the TLAC rule when it initially 

proposed the TLAC rule in 2015.16 The 

Board did not finalize these limitations 

when it issued the final TLAC rule 

because it needed additional time to 

work with the OCC and the FDIC to 

develop a proposed interagency 

approach regarding the regulatory 

capital treatment for investments in 

certain debt instruments issued by 

covered banking organizations. 

III. Overview of Notice of Proposed 

Rulemaking and Comments 

In April 2019, the agencies issued a 

proposal to address, for purposes of the 

capital rule, the systemic risks posed by 

an advanced approaches banking 

organization’s investments in covered 

debt instruments and to create an 

incentive for advanced approaches 

banking organizations to limit their 

exposure to GSIBs. The deductions 

required under the proposal would have 

affected the capital ratios of advanced 

approaches banking organizations. 

Without the proposed changes, 

investments in covered debt 

instruments issued by covered BHCs, 

foreign GSIBs, and covered IHCs are 

generally not subject to deduction and 

would generally be subject to a risk 

weight of 100 percent. 

An investment in a covered debt 

instrument, as defined in the proposal, 

by an advanced approaches banking 

organization would have been treated as 

an investment in a tier 2 capital 

instrument for purposes of the existing 

deduction framework. As a result, an 

investment in a covered debt instrument 

would have been subject to deduction 

from the advanced approaches banking 

organization’s own tier 2 capital. 

The existing corresponding deduction 

approach in the capital rule would have 

been amended to apply any required 

deduction by advanced approaches 

banking organizations of an investment 

in a covered debt instrument that 

exceeded certain thresholds, consistent 

with the deduction framework for 

investments in the capital of 

unconsolidated financial institutions. In 

addition, the existing deduction 

approaches under the capital rule would 

have been amended to apply to an 

advanced approaches banking 

organization’s reciprocal cross holdings 

of covered debt instruments; that is, an 

advanced approaches banking 

organization would have deducted from 

its own tier 2 capital any reciprocal 

cross holdings of covered debt 

instruments with another banking 

organization. The existing deduction 

approaches under the capital rule would 

have also been amended to apply to a 

covered BHC’s investments in its own 

covered debt instruments. Similarly, the 

existing deduction approaches under 

the capital rule would have also been 

amended to apply to a covered IHC 

subject to the advanced approaches 

(advanced approaches covered IHC) and 

its investments in its own covered debt 

instruments. 

The proposal also included certain 

exclusions from deduction. Importantly, 

the proposal would have allowed 

advanced approaches banking 

organizations to exclude from deduction 

investments in covered debt 

instruments, subject to certain 

qualifying and measurement criteria, 

that are five percent or less of the sum 

of advanced approaches banking 

organization’s common equity tier 1 

capital elements minus all deductions 

from and adjustments to common equity 

tier 1 capital elements required under 

section __.22(a) through __.22(c)(3), net 

of associated DTLs (five percent 

exclusion). As discussed in the 

preamble to the proposal, the agencies 

designed the exclusion from deduction 

to support deep and liquid markets for 

covered debt instruments issued by 

GSIBs. In the case of a U.S. GSIB, it 

would have applied the proposed 

exclusion only to ‘‘excluded covered 

debt instruments,’’ which were defined 

in the proposal as covered debt 

instruments held for 30 business days or 

less and held for the purpose of shortterm resale or with the intent of 

benefiting from actual or expected shortterm price movements, or to lock in 

arbitrage profits. This provision was 

intended to limit the five percent 

exclusion for U.S. GSIBs to covered debt 

instruments held in connection with 

market making activities. Advanced 

approaches banking organizations that 

are not U.S. GSIBs would not have been 

subject to this limit on the use of the 

five percent exclusion. Under the 

proposal’s five percent exclusion, all 

advanced approaches banking 

organizations could exclude covered 

debt instruments measured on a gross 

long basis from the deduction 

framework up to a cap of five percent 

of the banking organization’s common 

equity tier 1 capital. 

The proposal would have revised 

section __.22(c), (f), and (h) of the 

capital rule to incorporate the proposed 

deduction approach for investments in 

covered debt instruments, and added 

several new definitions to section __.2 

to effectuate these deductions. Further, 

the definition of ‘‘investment in the 

capital of an unconsolidated financial 

institution’’ would have been amended 

to correct a typographical error. 

Collectively, the agencies received ten 

public comment letters from trade 

associations, public interest groups, 

private individuals, and other interested 

parties. As further detailed below, 

commenters generally supported the 

overarching goal of the proposal to 

reduce interconnectedness by creating 

an incentive for advanced approaches 

banking organizations to limit their 

exposure to GSIBs. However, 

commenters also expressed certain 

general concerns with the proposal and 

noted specific concerns with certain 

technical aspects of it. 

The agencies are jointly finalizing a 

regulatory capital treatment for 

investments in covered debt 

instruments that applies to advanced 

approaches banking organizations. The 

final rule is substantially consistent 

with the proposal, with certain 

modifications in response to comments 

as well as some technical clarifications. 

IV. Summary of the Final Rule 

The final rule applies to advanced 

approaches banking organizations and 

generally requires deductions from 

capital for direct, indirect, and synthetic 

exposures to covered debt instruments 

and any other unsecured debt 

instruments pari passu or subordinated 

to covered debt instruments.17 Under 

the final rule, an advanced approaches 

banking organization treats investments 

in covered debt instruments as 

investments in tier 2 capital instruments 

for purposes of applying the 

corresponding deduction approach in 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 711 

18See 12 CFR 3.22(h)(2) (OCC); 12 CFR 

217.22(h)(2) (Board); 12 CFR 324.2(h)(2) (FDIC). 

19See 84 FR 59230 (November 1, 2019). 20See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 

12 CFR 324.2 (FDIC). 

the capital rule. Deduction from capital 

is required for: 

• Investments in a covered BHC’s or 

advanced approaches covered IHC’s 

own covered debt instruments, as 

applicable; 

• Reciprocal cross holdings with 

another financial institution of covered 

debt instruments; 

• Investments in covered debt 

instruments of a financial institution 

while also holding 10 percent or more 

of the financial institution’s common 

stock; and 

• Investments in covered debt 

instruments that, together with 

investments in the capital of 

unconsolidated financial institutions, 

exceed 10 percent of the investing 

advanced approaches banking 

organization’s common equity tier 1 

capital. 

• Under the final rule, an advanced 

approaches banking organization may 

exclude from deduction investments in 

certain covered debt instruments up to 

five percent of its common equity tier 1 

capital, as measured on a gross long 

basis.18 Usage of the five percent 

exclusion is tailored, depending on 

whether the advanced approaches 

banking organization is a U.S. GSIB. 

For U.S. GSIBs, only ‘‘excluded 

covered debt instruments’’ are eligible 

for the five percent exclusion in the 

final rule. Generally, ‘‘excluded covered 

debt instruments’’ in the final rule are 

investments in covered debt 

instruments that are held in accordance 

with market making activities, as 

identified using criteria from the 

regulations implementing section 13 of 

the Bank Holding Company Act 

(commonly known as the Volcker Rule) 

as discussed in more detail in section 

V.E. below. A U.S. GSIB’s direct or 

indirect exposure to a covered debt 

instrument is an excluded covered debt 

instrument if the exposure is held for 30 

or fewer business days and held in 

connection with market making-related 

activities. A U.S. GSIB’s holding of a 

synthetic exposure to a covered debt 

instrument is not limited to 30 business 

days in order to qualify as an excluded 

covered debt instrument. 

For advanced approaches banking 

organizations that are not U.S. GSIBs, 

any direct, indirect, or synthetic 

exposure to a covered debt instrument 

issued by an unconsolidated financial 

institution that is a non-significant 

investment is eligible for the five 

percent exclusion in the final rule. 

The final rule revises section __.22(c), 

(f), and (h) of the capital rule to 

incorporate the deduction approach for 

investments in covered debt 

instruments. As with the proposal, 

several new definitions are added to 

section __.2 in the final rule to 

effectuate these deductions. More 

information on these specific revisions 

to the capital rule are provided below. 

V. Regulatory Capital Treatment for 

Advanced Approaches Banking 

Organizations’ Investments in Covered 

Debt Instruments 

A. Scope of Application 

The proposal would have applied the 

deduction framework for covered debt 

instruments to advanced approaches 

banking organizations. Since the 

proposal was issued, the agencies issued 

the interagency tailoring final rule that 

included revisions to the scope of 

advanced approaches banking 

organizations.19 As a result of the 

interagency tailoring final rule, 

‘‘advanced approaches banking 

organizations’’ include those banking 

organizations subject to Category I 

standards (i.e., those banking 

organizations that qualify as U.S. 

GSIBs), Category II standards (i.e., 

banking organizations with (1) at least 

$700 billion in total consolidated assets 

or (2) at least $75 billion in crossjurisdictional activity and at least $100 

billion in total consolidated assets), or a 

subsidiary depository institution of a 

banking organization subject to Category 

I or II standards. Some commenters 

suggested that the agencies should 

apply the proposal to all banking 

organizations subject to the capital rule. 

Other commenters suggested the 

agencies apply the proposal to all 

banking organizations subject to 

Category I through IV standards, as 

defined in the interagency tailoring final 

rule.20

After considering the comments, the 

agencies are continuing to limit the 

scope of this rule to advanced 

approaches banking organizations, as 

revised by the interagency tailoring final 

rule. As explained in the proposal, the 

systemic risks associated with banking 

organizations’ investments in covered 

debt instruments is greatest for the 

banking organizations covered by the 

proposal. However, the agencies 

acknowledge the possibility of potential 

systemic risks associated with other 

banking organizations’ investments in 

covered debt instruments and will 

continue to evaluate whether additional 

steps are warranted to address such 

risks. 

B. Deduction From Tier 2 Capital 

Under the agencies’ capital rule, a 

banking organization must deduct from 

regulatory capital any investments in its 

own capital instruments and in the 

capital of other financial institutions 

that it holds reciprocally. Other 

investments in the capital of 

unconsolidated financial institutions are 

subject to deduction to the extent they 

exceed certain thresholds. 

Under the proposal, an investment in 

a covered debt instrument by an 

advanced approaches banking 

organization would have been treated as 

an investment in a tier 2 capital 

instrument for purposes of the 

deduction framework, and therefore, 

would have been subject to deduction 

from the advanced approaches banking 

organization’s own tier 2 capital. The 

existing corresponding deduction 

approach in the capital rule would have 

been amended to apply to any 

deduction by advanced approaches 

banking organizations of an investment 

in a covered debt instrument that 

exceeded certain thresholds, as if the 

covered debt instrument were a tier 2 

capital instrument. In addition, the 

existing deduction approaches under 

the capital rule would have been 

amended to apply to a covered BHC’s or 

advanced approaches covered IHC’s 

investments in its own covered debt 

instruments, and to advanced 

approaches banking organizations’ 

reciprocal cross holdings of covered 

debt instruments with other financial 

institutions. Such investments and cross 

holdings would be deducted from an 

advanced approaches banking 

organization’s own tier 2 capital, as 

applicable. 

Some commenters expressed concerns 

that deducting a covered debt 

instrument from an advanced 

approaches banking organization’s own 

tier 2 capital is insufficiently restrictive. 

As an alternative, these commenters 

recommended that advanced 

approaches banking organizations 

deduct investments in covered debt 

instruments from their own common 

equity tier 1 capital. Some commenters 

suggested that the prohibition of all 

holdings of covered debt instruments by 

advanced approaches banking 

organizations would be more 

appropriate. Other commenters 

expressed concerns that deducting a 

covered debt instrument from an 

advanced approaches banking 

organization’s own tier 2 capital is 

overly restrictive. These commenters 

asserted that a covered BHC or 

advanced approaches covered IHC 

should be able to effectuate deductions 


jbell on DSKJLSW7X2PROD with RULES2
712 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

21See 12 CFR 252.61. 

22See 12 CFR 252.161. 

23The Basel Committee’s TLAC Holdings 

standard excludes from the definition of ‘‘other 

TLAC liabilities’’ instruments that are pari passu to 

(1) excluded liabilities and (2) other instruments 

that are eligible for recognition as external TLAC by 

virtue of the exemptions to the subordination 

requirements in the Financial Stability Board’s 

TLAC term sheet. See section 66.c of the TLAC 

Holdings standard. Only a proportion of 

instruments that are eligible to be recognized as 

external TLAC by virtue of the subordination 

exemptions may be considered TLAC under the 

TLAC Holdings standard. The proportion equals the 

ratio of (1) the debt instruments issued by a GSIB 

that rank pari passu to excluded liabilities and that 

are recognized as external TLAC by the GSIB, to (2) 

the debt instruments issued by the GSIB that rank 

pari passu to excluded liabilities and that would be 

recognized as external TLAC if the subordination 

requirement was not applied. As stated in the 

proposal, the agencies believe that implementation 

of the proportional deduction approach used in the 

Basel Committee’s TLAC Holdings standard would 

have introduced too much complexity and 

operational burden to the capital rule; the final rule 

does not implement the proportional deduction 

approach. See Basel Committee for Banking 

Supervision and Regulation, ‘‘TLAC Holdings’’ 

(October 12, 2016), available at https://www.bis.org/ 

bcbs/publ/d387.pdf. (TLAC Holdings standard). 

24See Financial Stability Board, ‘‘Principles on 

Loss-absorbing and Recapitalisation Capacity of G– 

SIBs in Resolution—Total Loss-absorbing Capacity 

(TLAC) Term Sheet,’’ (November 9, 2015), available 

at https://www.fsb.org/wp-content/uploads/TLACPrinciples-and-Term-Sheet-for-publicationfinal.pdf. 

25Under the FSB’s TLAC term sheet, ‘‘excluded 

liabilities’’ do not qualify as TLAC and therefore are 

not subject to deduction under the TLAC Holdings 

from its own TLAC-eligible long-term 

debt rather than its own tier 2 capital. 

Requiring deduction of a covered debt 

instrument from tier 2 capital should be 

a sufficiently prudent and simple 

approach that discourages advanced 

approaches banking organizations’ 

investments in such instruments and 

thereby supports the objectives of 

reducing both interconnectedness 

within the financial system and 

systemic risks. Effectuating deductions 

from a covered BHC’s or advanced 

approaches covered IHC’s own TLACeligible debt, rather than own tier 2 

capital, could disproportionately favor 

the largest and most internationally 

active banking organizations. A less 

complex banking organization, such as 

a non-GSIB advanced approaches 

banking organization, would make all 

deductions related to an investment in 

a covered debt instrument from its own 

tier 2 capital, since non-GSIBs are not 

required to issue TLAC-eligible debt. 

Further, allowing covered BHCs and 

advanced approaches covered IHCs to 

deduct from their own TLAC-eligible 

debt creates additional balance sheet 

capacity for these banking organizations 

to invest in covered debt instruments 

issued by other GSIBs relative to nonGSIB advanced approaches banking 

organizations, thereby undermining a 

goal of the final rule to reduce 

interconnectedness among large and 

internationally active banking 

organizations. The disproportionate 

effects of allowing deduction from own 

TLAC-eligible debt would be further 

exacerbated if the agencies were to 

expand the scope of the final rule in the 

future as described above. 

As such, the agencies are finalizing, as 

proposed, the requirement that an 

advanced approaches banking 

organization treat an investment in a 

covered debt instrument as an 

investment in a tier 2 capital 

instrument, and therefore, deduct such 

investment from its own tier 2 capital. 

C. Amendments to Definitions 

The proposal would have added or 

amended certain definitions in section _

_.2 of the capital rule to implement the 

proposed deduction approach. 

1. Definition of ‘‘Covered Debt 

Instrument’’ for Covered BHC and 

Covered IHC Issuance 

Under the proposal, a ‘‘covered debt 

instrument’’ would have been defined to 

include an unsecured debt instrument 

that is: 

(1) Issued by a covered BHC and that 

is an ‘‘eligible debt security’’ for 

purposes of the TLAC rule,21 or that is 

pari passu or subordinated to any 

‘‘eligible debt security’’ issued by the 

covered BHC; or 

(2) Issued by a covered IHC and that 

is an ‘‘eligible Covered IHC debt 

security’’ for purposes of the TLAC 

rule,22 or that is pari passu or 

subordinated to any ‘‘eligible Covered 

IHC debt security’’ issued by the 

covered IHC. 

Under the proposal, a covered debt 

instrument would not have included a 

debt instrument that qualifies as tier 2 

capital under the capital rule. 

Some commenters requested that pari 

passu or subordinated unsecured debt 

instruments be excluded from the 

definition of ‘‘covered debt instrument.’’ 

Commenters argued that it is not 

practical to determine whether a given 

instrument is pari passu or 

subordinated to TLAC-eligible debt 

issued by a covered BHC or covered IHC 

and whether a given debt instrument 

was an eligible long-term debt 

instrument under the TLAC rule. 

Further, commenters argued that 

because the TLAC rule limits the 

amount of debt that a covered BHC or 

covered IHC can issue that is not TLACeligible but is pari passu with or 

subordinated to TLAC-eligible debt, 

significant amounts of such debt should 

not be outstanding. 

Treating unsecured debt instruments 

that are pari passu or subordinated to 

TLAC-eligible debt instruments as 

‘‘covered debt instruments’’ is 

important, given that these liabilities 

will incur losses ahead of or 

proportionally with TLAC-eligible debt. 

Excluding these pari passu and 

subordinated instruments from the 

regulatory deduction treatment would 

understate the degree of risk of these 

investments. Advanced approaches 

banking organizations should be able to 

determine whether an instrument 

qualifies as TLAC under applicable 

standards, or whether an instrument is 

pari passu or subordinated to a 

company’s TLAC-eligible debt 

instruments based on public 

information and routine due diligence. 

Accordingly, the agencies are finalizing 

as proposed the above prongs of the 

definition of covered debt instrument 

for covered BHC and covered IHC debt 

issuances. 

2. Definition of ‘‘Covered Debt 

Instrument’’ for Foreign GSIB Issuance 

A ‘‘covered debt instrument’’ also 

would have included any unsecured 

debt instrument issued by a foreign 

GSIB or any of its subsidiaries, other 

than its covered IHC, for the purpose of 

absorbing losses or recapitalizing the 

issuer or any of its subsidiaries in 

connection with a resolution, 

receivership, insolvency, or similar 

proceeding of the issuer or any of its 

subsidiaries (foreign TLAC-eligible 

debt). Further, covered debt instruments 

would have also included any debt 

instrument that is pari passu or 

subordinated to any foreign TLACeligible debt, other than an unsecured 

debt instrument that is included in the 

regulatory capital of the issuer. 

Commenters suggested that the scope 

of the definition of ‘‘covered debt 

instrument’’ should be revised to 

include only foreign TLAC-eligible debt 

as determined under applicable homecountry standards.23 Commenters stated 

that the proposed scope of the definition 

is broader than necessary because the 

issuance of such liabilities is subject to 

the Financial Stability Board (FSB)’s 

TLAC term sheet’s limitation on 

issuance of excluded liabilities.24 Some 

commenters suggested that liabilities 

issued by foreign GSIBs that are 

‘‘excluded liabilities’’ under the FSB’s 

TLAC term sheet should be excluded 

from the proposal’s definition of 

covered debt instrument and therefore 

exempted from the deduction 

framework.25


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 713 

standard, even if they rank pari passu or 

subordinated to a TLAC instrument. Excluded 

liabilities include deposits, liabilities arising from 

derivatives, and structured notes, among other 

items. The TLAC rule prohibits or limits covered 

banking organizations from entering into financial 

arrangements that may compromise an orderly 

resolution process, including limiting the amount of 

liabilities to unaffiliated companies. 

26 Generally, a resolution regime that is consistent 

with the FSB’s Key Attributes of Effective 

Resolution Regimes for Financial Institutions would 

be a special resolution regime that addresses the 

failure or potential failure of a financial company. 

See Financial Stability Board, ‘‘Key Attributes of 

Effective Resolution Regimes for Financial 

Institutions,’’ (October 15, 2014), https://

www.fsb.org/wp-content/uploads/r_141015.pdf. 

Current examples of special resolution regimes that 

address the failure or potential failure of a financial 

company are those included in the International 

Swaps and Derivatives Association (ISDA) 2015 

Universal Resolution Stay Protocol and the ISDA 

2018 U.S. Resolution Stay Protocol. See ISDA 2015 

Universal Resolution Stay Protocol (November 4, 

2015), http://assets.isda.org/media/ac6b533f-3/ 

5a7c32f8-pdf; ISDA 2018 U.S. Resolution Stay 

Protocol (July 31, 2018), https://www.isda.org/a/ 

CIjEE/3431552_40ISDA-2018-U.S.-ProtocolFinal.pdf. 

27See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 

and 12 CFR 324.2 (FDIC) (‘‘investment in the capital 

of an unconsolidated financial institution,’’ 

‘‘investment in the banking organization’s own 

capital instrument,’’ ‘‘indirect exposure,’’ and 

‘‘synthetic exposure’’). 

Some commenters reiterated that it is 

not practical for banking organizations 

to determine whether a given 

instrument is pari passu or 

subordinated to foreign TLAC-eligible 

debt as such a determination requires 

complex analyses of foreign law with 

respect to insolvency regimes and 

creditor hierarchies. Commenters also 

asserted that there could be unintended 

consequences of including instruments 

that are pari passu or subordinated to 

foreign TLAC-eligible debt, including 

interference with ordinary interbank 

transactions. As a result, banking 

organizations would make conservative 

assumptions and treat all unsecured 

debt instruments issued by foreign 

GSIBs as subject to the deduction 

framework. Therefore, commenters 

suggested that the final rule should not 

include instruments pari passu or 

subordinated to foreign TLAC-eligible 

debt in the definition of ‘‘covered debt 

instruments.’’ 

For the same reasons discussed above 

with respect to instruments issued by 

covered BHCs and covered IHCs, the 

final rule defines debt instruments that 

are pari passu or subordinated to 

foreign TLAC-eligible debt as ‘‘covered 

debt instruments.’’ As discussed, such 

instruments would incur losses ahead of 

or proportionally with foreign TLACeligible debt and therefore should be 

subject to the deduction framework. 

However, the agencies recognize the 

commenters’ concerns and revise in two 

ways the definition of covered debt 

instruments issued by foreign GSIBs and 

their subsidiaries, other than covered 

IHCs. First, the final rule provides that 

an instrument is a covered debt 

instrument if it is ‘‘eligible for use to 

comply with an applicable law or 

regulation’’ requiring the issuance of a 

minimum amount of instruments to 

absorb losses or to recapitalize the 

issuer or any of its subsidiaries in 

connection with a resolution, 

receivership, insolvency, or similar 

proceeding. The proposal’s definition 

would not have explicitly considered 

whether the instrument is eligible for 

use to comply with such a law or 

regulation. 

Second, the final rule revises the 

definition of a covered debt instrument 

to exclude certain unsecured debt 

instruments from the scope of the 

definition. If the issuer may be subject 

to a special resolution regime, in its 

jurisdiction of incorporation or 

organization, that addresses the failure 

or potential failure of a financial 

company and foreign TLAC-eligible 

debt is eligible under that special 

resolution regime to be written down or 

converted into equity or any other 

capital instrument, then an instrument 

is pari passu or subordinated to foreign 

TLAC-eligible debt if that instrument is 

eligible to be written down or converted 

into equity or another capital 

instrument under that special resolution 

regime ahead of or proportionally with 

any foreign TLAC-eligible debt. These 

revisions reflect the FSB’s TLAC term 

sheet’s focus on having instruments and 

liabilities that should be readily 

available for bail-in, and that 

instruments that cannot be bailed in 

effectively rank senior to foreign TLACeligible debt in bail-in.26

These revisions should reduce the 

burden associated with determining 

whether unsecured debt instruments are 

pari passu or subordinated to foreign 

TLAC-eligible debt. For purposes of the 

final rule, an advanced approaches 

banking organization can rely on the 

terms of any special resolution regime 

and other applicable laws or regulations 

for purposes of determining the 

applicability of the final rule’s 

deduction framework for an unsecured 

debt instrument. For example, if the 

applicable law or regulation specifies 

the seniority of instruments that must be 

issued, the advanced approaches 

banking organization can rely on that 

specification of seniority in determining 

whether a different instrument is pari 

passu or subordinated to TLAC-eligible 

debt instruments. 

These revisions also address concerns 

raised by commenters that the proposal 

could have interfered with ordinary 

interbank transactions. For example, if 

the special resolution regime applicable 

to a foreign GSIB provides that deposits 

are excluded from bail-in, those 

deposits are not covered debt 

instruments subject to the final rule’s 

deduction framework. 

3. Other Definitions 

Similar to the measurement of 

investments in the capital of 

unconsolidated financial institutions, an 

‘‘investment in a covered debt 

instrument’’ would have been defined 

in the proposal as a net long position in 

a covered debt instrument, including 

direct, indirect, and synthetic exposures 

to such covered debt instruments. 

Investments in covered debt 

instruments would have excluded 

underwriting positions held for five 

business days or less. In addition, the 

proposal would have amended the 

definitions of ‘‘indirect exposure’’ and 

‘‘synthetic exposure’’ in the capital rule 

to add exposures to covered debt 

instruments.27 The agencies received no 

comments on these technical elements 

of the proposal, and are finalizing, as 

proposed, the definitions for 

‘‘investment in a covered debt 

instrument,’’ ‘‘indirect exposure,’’ and 

‘‘synthetic exposure.’’ 

D. Investments in Covered Banking 

Organizations’ Own Covered Debt 

Instruments and Reciprocal Cross 

Holdings 

Under the agencies’ capital rule, a 

banking organization must deduct from 

regulatory capital an investment in its 

own capital instruments and 

investments in the capital of other 

financial institutions that it holds 

reciprocally under sections __.22(c)(1) 

and (3), respectively. The proposal 

would have amended section 

217.22(c)(1) to require a covered BHC or 

a covered IHC to deduct from tier 2 

capital its investments in its own 

covered debt instruments. The proposal 

also would have amended section __

.22(c)(3) to require advanced approaches 

banking organizations to deduct from 

tier 2 capital any investment in a 

covered debt instrument that is held 

reciprocally with another financial 

institution. 

As described earlier, some 

commenters expressed concerns that 

deducting a covered debt instrument 

from an advanced approaches banking 

organization’s own tier 2 capital is 

overly restrictive, including in cases of 

deductions for investments in its own 

covered debt instruments, as applicable, 


jbell on DSKJLSW7X2PROD with RULES2
714 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

28See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 

12 CFR 324.2 (FDIC) (‘‘significant investment in the 

capital of an unconsolidated financial institution’’ 

and ‘‘non-significant investment in the capital of an 

unconsolidated financial institution’’). 

29See 12 CFR 3.22(c)(6) and (d)(2)(i)(C) (OCC); 12 

CFR 217.22(c)(6) and (d)(2)(i)(C) (Board); and 12 

CFR 324.22(c)(6) and (d)(2)(i)(C) (FDIC). In addition 

to the 10 percent threshold, a banking organization 

could be subject to additional deductions for 

significant investments in financial institutions in 

the form of common stock, if the amount not 

deducted under the 10 percent limit, combined 

with mortgage servicing assets and deferred tax 

assets that are not deducted, exceed 15 percent of 

the banking organization’s common equity tier 1 

capital. See 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d) 

(Board); and 12 CFR 324.22(d) (FDIC). 

30See 12 CFR 3.22(c)(5) (OCC); 12 CFR 

217.22(c)(5) (Board); and 12 CFR 324.2(c)(5) (FDIC). 

and reciprocal cross holdings with other 

financial institutions. These 

commenters asserted that a covered 

BHC or a covered IHC should be able to 

effectuate deductions from its own 

TLAC-eligible long-term debt rather 

than its own tier 2 capital for these 

investments. 

Requiring a deduction of a covered 

debt instrument from tier 2 capital for 

deductions related to investments in an 

advanced approaches banking 

organization’s own covered debt 

instruments and reciprocal cross 

holdings should be a sufficiently 

prudent and simple approach that 

discourages advanced approaches 

banking organizations’ investments in 

such instruments, as applicable, and 

thereby supports the objectives of 

reducing both interconnectedness 

within the financial system and 

systemic risks. As mentioned earlier, 

effectuating deductions from a covered 

BHC’s or a covered IHC’s own TLACeligible debt, rather than its own tier 2 

capital, could disproportionately favor 

the largest and most internationally 

active banking organizations. As such, 

the agencies are finalizing, as proposed, 

that an advanced approaches banking 

organization will generally deduct 

investments in own covered debt 

instruments, as applicable, and 

reciprocal cross holdings with other 

financial institutions in covered debt 

instruments from its own tier 2 capital. 

Commenters asked that the final rule 

include a separate deduction threshold 

for market making activities in an 

advanced approaches banking 

organization’s own covered debt 

instruments capped at five percent of a 

covered BHC’s or advanced approaches 

covered IHC’s own common equity tier 

1 capital. Commenters stated that such 

a threshold is necessary to better 

facilitate deep and liquid markets for 

TLAC-eligible debt instruments. 

Further, commenters claimed that GSIBs 

are often the biggest market makers in 

their own covered debt instruments and, 

under the U.S. GAAP accounting 

standard, their own holdings of covered 

debt instruments are not always 

eliminated in full in consolidation. In 

cases where a GSIB’s investments in its 

own covered debt instruments are not 

fully extinguished, the exposure amount 

can be greater than zero and therefore 

subject to deduction from tier 2 capital 

under the proposal. 

Commenters stated that a separate five 

percent threshold for market making in 

an advanced approaches banking 

organization’s own covered debt 

instruments in the final rule would 

prevent a capital deduction for such 

investments. However, finalizing the 

rule with a separate threshold for 

investments in an advanced approaches 

banking organization’s own covered 

debt instruments could create additional 

balance sheet capacity for covered BHCs 

and advanced approaches covered IHCs 

to increase their investments in covered 

debt instruments issued by other GSIBs. 

Such an approach would not align with 

the proposal’s goal of reducing 

interconnectedness and systemic risks 

among large and internationally active 

banking organizations. Therefore, the 

final rule does not implement this 

suggested change. 

E. Significant and Non-Significant 

Investments in Covered Debt 

Instruments 

Under sections __.22(c)(5) and (6) of 

the capital rule, an advanced 

approaches banking organization must 

deduct from regulatory capital certain 

investments in the capital of 

unconsolidated financial institutions. 

The calculation of the deduction 

depends on whether the banking 

organization has a ‘‘significant’’ or a 

‘‘non-significant’’ investment, with 

‘‘significant’’ defined as ownership of 

more than 10 percent of the common 

stock of the unconsolidated financial 

institution and ‘‘non-significant’’ 

defined as ownership of 10 percent or 

less of the common stock of the 

unconsolidated financial institution.28

When a banking organization has a 

‘‘significant investment’’ in an 

unconsolidated financial institution, the 

banking organization must deduct from 

regulatory capital any investment in the 

capital of the unconsolidated financial 

institution that is not in the form of 

common stock as measured on a net 

long basis, and the banking organization 

must also deduct from regulatory capital 

any investment in the capital of the 

unconsolidated financial institution in 

the form of common stock that exceeds 

10 percent of the advanced approaches 

banking organization’s own common 

equity tier 1 capital as measured on a 

net long basis.29 If an advanced 

approaches banking organization has 

one or more ‘‘non-significant 

investments’’ in unconsolidated 

financial institutions, it must aggregate 

such investments and deduct from 

regulatory capital any amount that 

exceeds the 10 percent threshold for 

non-significant investments, as 

measured on a net long basis.30

The proposal would have amended 

the capital rule to require an advanced 

approaches banking organization with 

an investment in a covered debt 

instrument issued by an unconsolidated 

financial institution to deduct the 

investment from tier 2 capital if the 

advanced approaches banking 

organization has a significant 

investment in the capital of the 

unconsolidated financial institution. 

The agencies received no comments on 

deductions for significant investments 

in the capital of an unconsolidated 

financial institution and are finalizing 

this aspect of the rule as proposed. 

The proposal would have amended 

the capital rule to require an advanced 

approaches banking organization with 

an investment in a covered debt 

instrument in a financial institution in 

which the advanced approaches 

banking organization does not also have 

a significant investment in the form of 

common stock to include such 

investment in the covered debt 

instrument in the aggregate amount of 

non-significant investments in the 

capital of unconsolidated financial 

institutions. As under the existing 

capital rule, the proposal would have 

required an advanced approaches 

banking organization to deduct from 

regulatory capital the amount by which 

the aggregate amount of non-significant 

investments in the capital of 

unconsolidated financial institutions 

and such covered debt instruments 

exceeds the 10 percent threshold for 

non-significant investments. Any 

investment in a covered debt instrument 

subject to deduction would have been 

deducted according to the 

corresponding deduction approach 

described below in section V.F. Any 

investment in a covered debt instrument 

not subject to deduction would have 

been included in risk-weighted assets, 

generally with a 100 percent risk 

weight. 

Some commenters suggested that the 

agencies recalibrate the 10 percent 

threshold for non-significant 

investments in consideration of the 

expanded scope of instruments that 

would be included within that 

threshold under the proposal. For 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 715 

31See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 

12 CFR 324.2 (FDIC) (‘‘synthetic exposure’’). 

32See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 

12 CFR 324.2 (FDIC) (‘‘investment in the capital of 

Continued 

example, some commenters asked the 

agencies to expand the non-significant 

investments threshold to 10 percent of 

an advanced approaches banking 

organization’s own total capital from 10 

percent of its own common equity tier 

1 capital. Changing the non-significant 

investments threshold in the manner the 

commenters suggested could undermine 

a main goal of the proposal—to reduce 

interconnectedness among large and 

internationally active banking 

organizations. Accordingly, the final 

rule requires an advanced approaches 

banking organization with an 

investment in a covered debt instrument 

in a financial institution in which the 

advanced approaches banking 

organization does not have a significant 

investment to include such investment 

in the aggregate amount of nonsignificant investments in the capital of 

unconsolidated financial institutions, as 

proposed. Further, the final rule 

requires an advanced approaches 

banking organization to deduct from 

regulatory capital the amount by which 

the aggregate amount of non-significant 

investments in the capital of 

unconsolidated financial institutions 

exceeds the 10 percent threshold for 

non-significant investments, as 

proposed. 

The proposal would have included 

limited exclusions from the 10 percent 

threshold for non-significant 

investments’ deduction approach. The 

exclusions would have depended on 

whether an advanced approaches 

banking organization is a U.S. GSIB or 

a subsidiary of a U.S. GSIB (U.S. GSIB 

banking organization). To help support 

a deep and liquid market for covered 

debt instruments, the proposal would 

have permitted U.S. GSIB banking 

organizations to exclude limited 

amounts of market making exposures 

(‘‘excluded covered debt instruments’’) 

from the 10 percent threshold for nonsignificant investments deduction. For 

example, a U.S. GSIB could have 

excluded covered debt instruments from 

the aggregate amount of non-significant 

investments in the capital of 

unconsolidated financial institutions. 

The aggregate amount of the exclusion, 

measured on a gross long basis, was 

limited to five percent of the GSIB’s 

own common equity tier 1 capital 

(market making exclusion). If the 

aggregate amount of excluded covered 

debt instruments were more than five 

percent of the common equity tier 1 

capital, then the excess over five percent 

would have been subject to deduction 

from tier 2 capital on a gross long basis. 

In addition, if an excluded covered debt 

instrument were held for more than 30 

business days or ceased to be held in 

connection with market making 

activities, then the excluded covered 

debt instrument would have been 

subject to deduction from tier 2 capital 

on a gross long basis. Finally, in order 

to dissuade regulatory arbitrage, the 

proposal would not have allowed U.S. 

GSIB banking organizations to 

subsequently move ‘‘excluded covered 

debt instruments’’ from the market 

making exclusion to the 10 percent 

threshold for non-significant 

investments. 

Commenters stressed the importance 

of derivatives to market making 

activities in securities, particularly 

covered debt instruments issued by 

GSIBs. In market making transactions, 

U.S. GSIBs will often act as financial 

intermediaries between clients, 

transferring risks related to covered debt 

instruments. This risk transfer is often 

conducted through offsetting derivative 

transactions or directly buying and 

selling covered debt instruments. 

Commenters stated that this market 

making activity supports deep and 

liquid markets for covered debt 

instruments by allowing investors to 

reduce (or gain) exposure to covered 

debt instruments without actually 

selling (or buying) the securities. 

Derivatives are essential to such 

activities because they allow market 

makers to establish and hedge these 

exposures. 

As such, these commenters asserted 

that the agencies should eliminate the 

proposed 30-business-day requirement 

because it would make the proposed 

market making exclusion unavailable 

for many market making activities that 

support the depth and liquidity of the 

markets for TLAC-eligible debt, in 

particular synthetic exposures from 

derivatives used in market making 

activities. These commenters noted that 

bona fide market making activities, 

including derivative- and hedgingrelated activities, often involve holding 

exposures for longer than 30 business 

days. Commenters further indicated that 

the 30-business-day requirement would 

also create incentives for U.S. GSIB 

banking organizations to arbitrage the 

final rule by exiting and reestablishing 

hedge positions to avoid a mandatory 

deduction from tier 2 capital if the 

position is held for more than 30 

business days. Commenters indicated 

that re-establishing hedge positions 

would result in costs to banking 

organizations and clients without 

reducing the risks associated with the 

transactions. Additionally, these 

commenters indicated that the vast 

majority of market making activity in 

covered debt instruments is in the form 

of derivative exposures. Therefore, 

retaining the 30-business-day 

requirement would arguably make the 

five percent exclusion inoperable for 

most market making activities in 

covered debt instruments. As an 

alternative to the proposed market 

making standard and the proposed 30- 

business-day requirement, commenters 

suggested the agencies use the 

regulatory framework implementing the 

Volcker Rule to identify which positions 

in covered debt instruments are held for 

market making purposes and eliminate 

the 30-business-day requirement. These 

commenters stated that this approach 

would promote effectiveness, 

simplicity, and efficiency in the 

regulation. 

After considering commenters’ 

suggestions to eliminate the proposed 

30-business-day requirement for market 

making in covered debt instruments, the 

agencies have revised the proposal by 

removing the 30-business-day 

requirement for market making in the 

form of ‘‘synthetic exposures’’ as 

defined in the agencies’ capital rule.31

Synthetic market making exposures, 

such as derivatives, may frequently be 

held for more than 30 business days. 

Removing the 30-business-day 

requirement for synthetic exposures 

would, relative to the proposal, better 

align with the proposal’s goal of 

supporting deep and liquid markets for 

covered debt instruments by allowing 

synthetic exposures arising from market 

making activities to be included in the 

market making exclusion, subject to 

limits. As discussed, this exclusion is 

limited to five percent of common 

equity tier 1 capital, measured on a 

gross long basis. These limits are 

consistent with financial stability goals 

of avoiding asset fire sales in times of 

stress, encouraging risk-mitigating 

hedges, and reducing 

interconnectedness while still 

supporting deep and liquid markets for 

TLAC-eligible debt instruments. 

Accordingly, the final rule reflects this 

change. However, the agencies continue 

to believe that the 30-business-day 

requirement is an appropriate metric to 

identify market making positions in 

‘‘direct’’ investments in covered debt 

instruments (i.e., holding the instrument 

on the banking organization’s balance 

sheet) and ‘‘indirect’’ investments in 

covered debt instruments (i.e., exposure 

to the instrument through investment 

funds).32 Direct investments in covered 


jbell on DSKJLSW7X2PROD with RULES2
716 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

an unconsolidated financial institution’’ and 

‘‘indirect exposure’’). 

33See 12 CFR 44.4 (OCC); 12 CFR 248.4 (Board); 

12 CFR 351.4 (FDIC). 

34See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h) 

(Board); 12 CFR 324.22(h) (FDIC). 

debt instruments held in connection 

with market making should turn over 

regularly and the agencies seek to disincentivize long-term direct and indirect 

exposures to covered debt instruments, 

given the risk of write-down or 

conversion to equity of such 

instruments. 

Therefore, the final rule retains the 

30-business-day requirement for 

‘‘direct’’ and ‘‘indirect’’ investments in 

excluded covered debt instruments, but 

not for ‘‘synthetic’’ investments in 

excluded covered debt instruments. 

This change from the proposal should 

balance the goals of limiting 

interconnectedness among the largest 

and most internationally active banking 

organizations and promoting the 

liquidity of TLAC-eligible debt 

instruments. Additionally, the agencies 

clarify that there is no requirement 

under the final rule to assign 

investments in covered debt 

instruments held in connection with 

market making as ‘‘excluded covered 

debt instruments.’’ To the extent a U.S. 

GSIB banking organization has available 

capacity, all investments in covered 

debt instruments could be held on a net 

long basis as non-significant 

investments in the capital of an 

unconsolidated financial institution 

subject to the 10 percent threshold for 

non-significant investments. 

After consideration of comments, the 

agencies also have revised the rule to 

use the Volcker Rule exemption for 

market making activities to identify 

covered debt instruments held for 

market making for purposes of 

qualifying for the final rule’s market 

making exclusion. Relative to the 

proposal, this change should decrease 

compliance burden by allowing banking 

organizations to use a single 

methodology for identifying market 

making activities, rather than two 

similar, but non-identical regulatory 

standards. 

This approach would capture 

essentially the same set of exposures as 

the proposal’s standard. However, the 

final rule’s definition of ‘‘excluded 

covered debt instrument’’ differs from 

the proposal by referring to the relevant 

provisions of each agency’s rule 

implementing the market making 

exemption in the Volcker Rule.33

The proposal also included a simpler 

deduction approach for advanced 

approaches banking organizations that 

are not U.S. GSIB banking organizations 

given that these banking organizations 

pose less systemic risks than U.S. 

GSIBs. Unlike a U.S. GSIB, these 

banking organizations can include any 

non-significant investments in covered 

debt instruments of unconsolidated 

financial institutions in the five percent 

exclusion (i.e., use of the exclusion is 

not restricted to only those investments 

held in connection to market making 

activities). Any amount in excess of this 

five percent exclusion would be subject 

to the 10 percent threshold for nonsignificant investments deduction on a 

net long basis. The agencies did not 

receive comments on this provision of 

the proposal. Therefore, the final rule 

implements the five percent exclusion 

for advanced approaches banking 

organizations that are not U.S. GSIBs as 

proposed. 

As noted above, an advanced 

approaches banking organization could 

exclude certain investments in covered 

debt instruments, as applicable, from 

the 10 percent threshold for nonsignificant investments calculation and 

potential deduction under section __

.22(c)(4) if the aggregate amount of 

covered debt instruments, measured by 

gross long position, were five percent or 

less of its common equity tier 1 capital. 

To achieve consistency with the TLAC 

Holdings standard and with the 

calculation of the 10 percent threshold 

for non-significant investments 

deduction, the agencies are modifying 

the calculation for determining the 

amount of covered debt instruments that 

can be omitted from the 10 percent 

threshold for non-significant 

investments calculation. Under the final 

rule, an advanced approaches banking 

organization can omit covered debt 

instruments from the 10 percent 

threshold calculation and potential 

deduction under section __.22(c)(4) if 

the aggregate amount of covered debt 

instruments, measured by gross long 

position, is five percent or less of the 

sum of the banking organization’s 

common equity tier 1 capital elements 

minus all deductions from and 

adjustments to common equity tier 1 

capital elements required under section 

__.22(a) through __.22(c)(3), net of 

associated deferred tax liabilities 

(DTLs). This includes, for example, 

deductions related to goodwill, 

intangibles, and deferred tax assets, and 

adjustments related to accumulated net 

gains and losses on cash flow hedges. 

The agencies believe that to achieve 

consistency and clarity throughout the 

deduction framework, the amount of 

covered debt instruments that can be 

omitted from the 10 percent threshold 

for non-significant investments 

calculation should be computed using 

the same basis as the 10 percent 

threshold for non-significant 

investments calculation itself. 

The agencies intend to monitor 

advanced approaches banking 

organizations’ holdings of covered debt 

instruments in the form of synthetic 

exposures to ensure that the capital held 

for these positions is commensurate 

with risk and that such holdings do not 

raise safety and soundness concerns. 

Further, to better understand advanced 

approaches banking organizations’ risk 

from exposures to the capital of 

unconsolidated financial institutions, 

the agencies may issue an information 

collection proposal to collect quarterly 

data on advanced approaches banking 

organizations’ non-significant 

investments in the capital of 

unconsolidated financial institutions 

and excluded covered debt instruments, 

as applicable. 

Some commenters disagreed with the 

proposal’s design of the exclusions for 

covered debt instruments, which 

measures positions on a gross long 

basis. These commenters suggested that 

the measurement of the exclusions for 

covered debt instruments be based on 

the ‘‘net long position,’’ in accordance 

with the agencies’ capital rule, which 

allows gross long positions to be offset 

against qualifying short positions.34 The 

commenters noted that the 10 percent 

threshold for non-significant 

investments is based on the ‘‘net long 

position’’ and suggested that the 

exclusions for covered debt instrument 

be consistent with that standard. 

Further, commenters stated that 

finalizing the exclusions for covered 

debt instruments based on a net long 

position measurement basis would 

allow advanced approaches banking 

organizations to better support the 

depth and liquidity of market making in 

TLAC-eligible debt instruments, because 

market making activities are typically 

well hedged and a ‘‘net long position’’ 

would allow more positions to qualify 

for the exclusions. 

The final rule maintains measurement 

of the exclusions for covered debt 

instruments based on the gross long 

position. Moving to a ‘‘net long 

position’’ measurement could 

undermine the agencies’ goal of 

reducing interconnectedness among 

large and internationally active banking 

organizations as it would allow such 

banking organizations to accumulate 

exposure to covered debt instruments 

significantly beyond the threshold 

envisioned in the proposal. Further, 

advanced approaches banking 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 717 

35See 12 CFR 3.22(c)(2) (OCC); 12 CFR 

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) 

(FDIC). 

36See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 

217.22(c)(2) and (f) (Board); and 12 CFR 324.22(c)(2) 

and (f) (FDIC). 

37See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) 

(Board); and 12 CFR 324.22(f) (FDIC). 

38See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR 

217.12(h)(2)(iii) (Board); and 12 CFR 324.22(h) 

(2)(iii) (FDIC). 

39See 12 CFR 3.22(h)(3) (OCC); 12 CFR 

217.12(h)(3) (Board); and 12 CFR 324.22(h)(3) 

(FDIC). 

organizations are able to assign hedged 

covered debt instrument exposures to 

the 10 percent threshold for nonsignificant investments on a net long 

basis. The optional exclusions remain 

available to support market making 

activities such as accumulating short 

term cash positions to meet customer 

demand and to acquire additional long 

positions in covered debt instruments to 

facilitate market stabilization during 

times of stress. Such an approach is 

consistent with financial stability goals 

of avoiding asset fire sales in times of 

stress, encouraging risk-mitigating 

hedges, and reducing 

interconnectedness while still 

supporting deep and liquid markets for 

TLAC-eligible debt instruments. 

F. Corresponding Deduction Approach 

Under the corresponding deduction 

approach, a banking organization must 

apply any required deduction to the 

component of capital for which the 

underlying instrument would qualify if 

it were issued by the banking 

organization.35 If the banking 

organization does not have enough of 

the component of capital to fully effect 

the deduction, the corresponding 

deduction approach provides that any 

amount of the investment that has not 

already been deducted would be 

deducted from the next, more 

subordinated component of capital.36 If, 

for example, a banking organization has 

insufficient amounts of tier 2 capital 

and additional tier 1 capital to effect a 

required deduction, the banking 

organization would need to deduct from 

common equity tier 1 capital the 

amount of the investment that exceeds 

the tier 2 and additional tier 1 capital of 

the banking organization.37 The 

proposal would have amended the 

corresponding deduction approach in 

section __.22(c)(2) of the capital rule to 

specify that an investment in a covered 

debt instrument by an advanced 

approaches banking organization would 

have been subject to the corresponding 

deduction approach, with the covered 

debt instrument treated as a tier 2 

capital instrument. Some commenters 

disagreed with this approach and, 

instead, asked the agencies to treat 

investments in covered debt 

instruments as a common equity tier 1 

capital instrument or, as applicable, 

allow deductions under the 

corresponding deduction approach from 

own TLAC-eligible debt instruments. 

As stated earlier, requiring a 

deduction of a covered debt instrument 

from tier 2 capital should serve as a 

sufficiently prudent and simple 

approach that dis-incentivizes advanced 

approaches banking organizations’ 

investments in such instruments and 

thereby supports the objectives of 

reducing both interconnectedness 

within the financial system and 

systemic risks. Accordingly, the 

agencies are finalizing the proposal’s 

amendments to the corresponding 

deduction approach in section __

.22(c)(2) of the capital rule 

G. Net Long Position Calculation 

The proposal would have followed 

the same general approach as currently 

provided under the agencies’ capital 

rule regarding the calculation of the 

amount of any deduction and the 

treatment of guarantees and indirect 

investments for purposes of the 

deductions. Under the capital rule, the 

amount of a banking organization’s 

investment in its own capital 

instrument or in the capital of an 

unconsolidated financial institution 

subject to deduction is the banking 

organization’s net long position in the 

capital instrument as calculated under 

section __.22(h) of the capital rule. 

Under section __.22(h), a banking 

organization may net certain qualifying 

short positions in a capital instrument 

against a gross long position in the same 

instrument to determine the net long 

position. 

The proposal would have modified 

section __.22(h) of the capital rule such 

that an advanced approaches banking 

organization would determine its net 

long position in an exposure to its own 

covered debt instrument, as applicable, 

or in a covered debt instrument issued 

by an unconsolidated financial 

institution in the same manner as 

currently provided for investments in an 

institution’s own capital instruments or 

investments in the capital of an 

unconsolidated financial institution, 

respectively. Consistent with the capital 

rule, the calculation of a net long 

position under the proposal would have 

taken into account direct investments in 

covered debt instruments as well as 

indirect exposures to covered debt 

instruments held through investment 

funds. 

A banking organization has three 

options under the capital rule to 

measure its gross long position in a 

capital instrument held indirectly 

through an investment fund.38 The 

proposal would have amended section _

_.22(h)(2)(iii) of the capital rule to 

provide the same three options to 

determine the gross long position in a 

covered debt instrument held through 

an investment fund. The agencies 

received no comments on this aspect of 

the proposal and the final rule adopts 

the changes as proposed. 

The agencies’ capital rule sets 

qualifying criteria for recognizing short 

positions that can be netted against 

gross long positions; specifically, a short 

position must be in the ‘‘same 

instrument’’ as the gross long position 

and must meet minimum maturity 

requirements, among other 

requirements.39 The proposal would not 

have changed these operational criteria 

for recognizing short positions in the 

calculation of a net long position. Some 

commenters advocated for changes to 

the capital rule’s requirements for 

recognizing a short position under 

section __.22(h)(3). These commenters 

argued that the capital rule should be 

modified to not require short positions 

to be in the ‘‘same instrument’’ as the 

gross long position when calculating the 

net long position. Instead, commenters 

recommended that the final rule allow 

recognized short positions to be in any 

instrument that is pari passu or 

subordinated to the gross long position’s 

instrument. These commenters 

recommended that this change should 

also apply to calculating the net long 

position of investments in covered debt 

instruments in the final rule. 

The agencies have consistently 

maintained that recognition of short 

positions under the net long position 

calculation are required to be in the 

‘‘same instrument’’ as a matter of 

prudent risk management and hedging 

practices. To recognize short positions 

in other than the ‘‘same instrument’’ 

would potentially undermine the 

effectiveness of risk mitigating hedges. 

Accordingly, the final rule adopts the 

calculation of the net long position as 

proposed. 

Under the proposal, for purposes of 

any deduction required for an advanced 

approaches banking organization’s 

investment in the capital of an 

unconsolidated financial institution, the 

amount of a covered debt instrument 

would have included any contractual 

obligations the advanced approaches 

banking organization has to purchase 

such covered debt instruments. The 


jbell on DSKJLSW7X2PROD with RULES2
718 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

40See 84 FR 35234 (July 22, 2019). 

41See 12 CFR 3.1(d)(1) (OCC); 12 CFR 217.1(d)(1) 

(Board); 12 CFR 324.1(d)(1) (FDIC). 42 84 FR 59230 (November 1, 2019). 43 83 FR 17317, 17322 (April 19, 2018). 

agencies received no comment on this 

aspect of the proposal, and the final rule 

adopts this change as proposed. 

VI. Technical Amendment and Other 

Comments 

The agencies proposed amending the 

definition of ‘‘investment in the capital 

of an unconsolidated financial 

institution’’ in section __.2 of the capital 

rule to correct a drafting error in that 

definition. The agencies did not receive 

any comment with regard to the 

proposed technical amendment. 

However, in the period between the 

issuance of the proposal and this final 

rule, this technical amendment was 

implemented by the agencies’ final rule 

to simplify the capital rule.40

A few commenters suggested that the 

proposal should go further in limiting 

the exposure of advanced approaches 

banking organizations to GSIBs, given 

their size and the risk their failure could 

pose to the financial system. These 

commenters argued that the final rule 

should ensure that the cost of TLAC 

debt better reflect heightened risks of 

GSIBs and that the agencies should 

require U.S. GSIBs to hold more 

common equity tier 1 capital. Other 

commenters suggested that the agencies 

consider existing elements of the 

regulatory framework—such as the 

single counterparty credit limit and the 

GSIB surcharge—when finalizing the 

deduction framework. 

Under the capital rule, each agency 

has the authority to require a banking 

organization to hold additional capital 

based on the banking organization’s risk 

profile.41 Similarly, while other 

elements of the regulatory framework 

address the systemic risks of large, 

internationally active banking 

organizations or concentrations of 

exposures to counterparties, no existing 

regulation specifically address the risks 

associated with investments in TLACeligible debt instruments. The agencies, 

therefore, are finalizing the proposal to 

establish a regulatory capital treatment 

for investments in covered debt 

instruments with certain modifications, 

as previously described. 

The proposal did not contemplate 

providing a transition period for 

implementation of the final rule by 

advanced approaches banking 

organizations. Some commenters 

requested that the agencies provide 

banking organizations with a transition 

period to ease compliance burden. 

Specifically, commenters requested that 

the agencies provide 18 months before 

banking organizations must effectuate 

the deduction treatment. These 

commenters asserted that a transition 

period would give banking 

organizations more time to build out 

systems to track which instruments are 

covered debt instruments and therefore 

subject to the deduction framework. A 

commenter requested that the agencies 

not require deduction of any unsecured 

debt instrument issued by a GSIB until 

the information necessary to determine 

whether the instrument is a covered 

debt instrument is available. 

The agencies maintain the 

supervisory expectation that large and 

internationally active banking 

organizations should be deeply 

knowledgeable of the securities 

exposures on their own balance sheets, 

if only for the purposes of prudent risk 

management. The final rule will become 

effective on April 1, 2021. The agencies 

believe this effective date provides 

sufficient time for advanced approaches 

banking organizations to evaluate 

investments in covered debt 

instruments and apply the final rule’s 

deduction treatment. 

In addition to the above, the agencies 

are making certain technical 

amendments to section __.10 of the 

capital rule to more clearly differentiate 

between requirements applicable to 

advanced approaches banking 

organizations and those applicable to 

Category III banking organizations. In 

section __.10 of the capital rule, as 

amended by the recent interagency 

tailoring rule,42 paragraphs (c)(1)–(3) 

describe the capital ratio calculations 

applicable to advanced approaches 

banking organizations, whereas 

paragraph 10(c)(4) of the capital rule 

describes the supplementary leverage 

ratio calculations applicable to both 

advanced approaches banking 

organizations and Category III banking 

organizations. To avoid confusion, the 

agencies are amending section __.10 of 

the capital rule such that paragraph (c) 

will provide only the supplementary 

leverage ratio requirements. The 

advanced approaches capital 

calculations will be moved to revised 

paragraph (d) of section __.10 of the 

capital rule. Current paragraph (d), 

Capital adequacy, will be re-designated 

as paragraph (e) of section __.10 of the 

capital rule. The agencies are also 

amending language in sections __.2 and 

__.121 of the capital rule to correct 

cross-references in light of the 

amendments described above. These 

technical amendments do not amend 

any substantive requirements applicable 

to banking organizations. 

VII. Amendments to the Board’s TLAC 

Rule 

In 2018, the Board issued a notice of 

proposed rulemaking that, among other 

items, included minor proposed 

amendments to the Board’s TLAC 

rule.43 The proposal included revisions 

to ensure that the external TLAC riskweighted buffer level, TLAC leverage 

buffer level, and the TLAC buffer level 

for covered IHCs would be amended to 

use the same haircuts applicable to LTD 

instruments that are currently used to 

calculate outstanding minimum 

required TLAC amounts, which do not 

include a 50 percent haircut on LTD 

instruments with a remaining maturity 

of between one and two years. Another 

proposed amendment was to ensure that 

the term ‘‘external TLAC risk-weighted 

buffer’’ is used consistently in the TLAC 

rule. The proposal also would have 

provided that a new covered IHC would 

always have three years to conform to 

most of the requirements of the TLAC 

rule, and to align the articulation of the 

methodology for calculating the covered 

IHC’s LTD instrument amount with the 

same methodology used for GSIBs. 

The Board received minimal 

comments on these proposed revisions 

to the TLAC rule within the comments 

received on its proposal overall and the 

comments received were supportive of 

the specific proposed revisions. As a 

result, the Board is issuing these 

revisions in the final rule without 

change from the proposal. 

VIII. Changes to Regulatory Reporting 

A. Deductions From Tier 2 Capital 

Related to Investments in Covered Debt 

Instruments and Excluded Covered Debt 

Instruments 

In the April 2019 rulemaking, the 

Board proposed to modify the 

instructions to the Consolidated 

Financial Statements for Holding 

Companies (FR Y–9C), Schedule HC–R, 

Part I and Part II, to effectuate the 

deductions from regulatory capital for 

Board-regulated advanced approaches 

banking organizations related to 

investments in covered debt 

instruments and excluded covered debt 

instruments as described in the 

proposal. 

Specifically, the Board would have 

modified the instructions of the FR Y– 

9C for Schedule HC–R, Part I, item 33, 

‘‘Tier 2 capital deductions.’’ On the FR 

Y–9C, a covered BHC would have been 

required to deduct from tier 2 capital 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 719 

44The proposed modifications would not affect 

the Consolidated Reports of Condition and Income 

for a Bank with Domestic Offices Only and Total 

Assets Less than $1 Billion (FFIEC 051) because 

banks and savings associations that are advanced 

approaches banking organizations are not eligible to 

file the FFIEC 051 report. 

45See 84 FR 53227 (October 4, 2019). 

46See 85 FR 15776 (March 19, 2020). 

47See 84 FR 13823–13824 (April 8, 2019). 48See 85 FR 15776 (March 19, 2020). 

the aggregate amount of its investments 

in covered debt instruments that, when 

combined with the banking 

organization’s other non-significant 

investments in the capital of 

unconsolidated financial institutions, 

exceed 10 percent of the common equity 

tier 1 capital of the banking 

organization. Also, if an excluded 

covered debt instrument were held by a 

covered BHC for more than 30 business 

days, or no longer held in connection 

with market making-related activities, 

the excluded covered debt instrument 

would have been deducted from tier 2 

capital. 

In addition, for purposes of the 

deduction requirements related to nonsignificant investments in the capital of 

unconsolidated financial institutions, 

Board-regulated advanced approaches 

banking organizations that are not 

covered BHCs would have been 

required to deduct from tier 2 capital 

those investments in covered debt 

instruments that exceed five percent of 

common equity tier 1 capital, and that 

also, when combined with the banking 

organization’s other non-significant 

investments in unconsolidated financial 

institutions, exceed 10 percent of the 

common equity tier 1 capital of the 

banking organization. The Board also 

would have modified the instructions 

for calculating other deduction-related 

and risk-weighted asset line items to 

incorporate investments in covered debt 

instruments and excluded covered debt 

instruments, as applicable, by Boardregulated advanced approaches banking 

organizations. 

In October 2019, the Federal Financial 

Institutions Examination Council 

(FFIEC) separately proposed to modify 

the Consolidated Reports of Condition 

and Income for a Bank with Domestic 

and Foreign Offices (FFIEC 031), 

Consolidated Reports of Condition and 

Income for a Bank with Domestic 

Offices Only (FFEIC 041) (collectively 

with the FFIEC 031, the Call Report),44

and Regulatory Capital Reporting for 

Institutions Subject to the Advanced 

Capital Adequacy Framework (FFIEC 

101) in a manner consistent with the 

changes described above to the FR Y–9C 

to effectuate the proposal’s deduction 

approach for investments in covered 

debt instruments and excluded covered 

debt instruments, as applicable.45

In March 2020, the Board separately 

proposed conforming changes to the FR 

Y–14 to effectuate the proposed 

deduction framework for investments in 

covered debt instruments.46

With respect to the FR Y–9C proposed 

changes, one commenter requested 

clarification on the sequencing of 

reporting changes related to effectuating 

deductions for covered debt instruments 

and the effective date of the final rule. 

Specifically, this commenter requested 

that the effective date of the final rule 

should precede any requirement to 

begin effectuating deductions related to 

investments in covered debt 

instruments on regulatory reports. The 

agencies confirm that the effective date 

of the final rule will precede any 

reporting requirements related to 

implementing the deduction framework 

for covered debt instruments. The Board 

received no comments on the FR Y–14 

proposed changes. 

As described above, reporting changes 

to effectuate the deduction framework 

for investments in covered debt 

instruments described in the proposal 

were proposed separately for the (1) FR 

Y–9C, (2) FFIEC 101 and Call Report, 

and (3) FR Y–14. The Board is finalizing 

as proposed, changes to the FR Y–9C 

and FR Y–14, to effectuate the 

deduction framework for investments in 

covered debt instruments in this 

Federal Register notice. The agencies 

will address comments submitted in 

connection with the FFIEC’s October 

2019 proposal when those forms and 

instructions are finalized in a separate 

Federal Register notice, consistent with 

the final rule. 

B. Public Disclosure of Long-Term Debt 

and TLAC by Covered BHCs and 

Covered IHCs 

In the April 2019 rulemaking, the 

Board also proposed to modify Schedule 

HC–R, Part I of the FR Y–9C by adding 

new data items that would publicly 

disclose: (1) The long-term debt and 

TLAC for covered BHCs and covered 

IHCs; (2) these banking organizations’ 

long-term debt and TLAC ratios to 

ensure compliance with the TLAC rule; 

(3) TLAC buffers; and (4) amendments 

to the instructions for the calculation of 

eligible retained income (item 47), 

institution-specific capital buffer (items 

46.a and 46.b), and distributions and 

discretionary bonus payments (item 48) 

for covered BHCs and covered IHCs.47

Commenters suggested that the Board 

clarify in the final rule when changes to 

FR Y–9C related to long-term debt and 

TLAC reporting disclosures will become 

effective. Reporting changes for 

deductions related to investments in 

covered debt instruments on the FR Y– 

9C will not go into effect until after the 

final rule’s effective date. 

In March 2020, the Board separately 

proposed conforming changes to the FR 

Y–14 to disclose new items related to 

long-term debt and TLAC, as described 

above.48

In response to the proposal, 

commenters requested that the Board 

clarify how U.S. GSIBs are to calculate 

the TLAC rule’s leverage ratios on the 

FR Y–9C report. More specifically, 

commenters suggested the Board clarify 

that U.S. GSIBs should not be required 

to report long-term debt and TLAC 

leverage ratios based on total assets 

because U.S. GSIBs’ applicable longterm debt and TLAC leverage 

requirement is based on the 

denominator for the supplementary 

leverage ratio. Commenters noted that 

only covered IHCs are required to report 

the long-term debt and TLAC leverage 

ratios based on total assets. The Board 

confirms that reporting of the long-term 

debt and TLAC leverage requirement for 

U.S. GSIBs will only be based upon the 

supplementary leverage ratio 

denominator, consistent with the TLAC 

rule’s leverage requirement. The Board 

received no comments on the FR Y–14 

proposed changes. 

The Board is finalizing the proposed 

changes to the FR Y–9C and FR Y–14 to 

require covered BHCs and covered IHCs 

to report their long-term debt and TLAC 

resources, with modifications in 

response to comment as described 

above, in this Federal Register notice. 

Some commenters suggested the 

Board develop a more robust disclosure 

regime related to TLAC so that the level 

of risk is appropriately priced into these 

instruments. They stated that 

disclosures will incentivize GSIBs to 

meet their TLAC requirements with 

equity rather than debt instruments. 

Commenters offered suggestions for 

improving disclosures by noting that the 

agencies should collaborate with the 

Securities and Exchange Commission to 

require plain-language warnings 

regarding risk of bail-in to investors (1) 

when purchasing a TLAC instrument in 

their brokerage account and (2) in 

offering materials published by pension 

and mutual funds that invest in TLAC 

instruments. The Board does not have 

the authority to change disclosures 

required by the Securities and Exchange 

Commission related to securities 

issuances or sales to retail investors. 

The interagency statement on retail 

sales of nondeposit investments 


jbell on DSKJLSW7X2PROD with RULES2
720 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

49See ‘‘Interagency Statement on Retail Sales of 

Nondeposit Investment Products.’’ OCC Bulletin 

1994–13 (OCC); SR 94–11 (FIS) (Board); and FIL– 

9–94 (FDIC). 

50 44 U.S.C. 3501–3521. 

products should ensure certain 

disclosures for retail sales programs 

involving mutual funds, annuities and 

other nondeposit investment 

products.49 Further, the Board does not 

have the authority to mandate 

disclosures by pension or mutual funds. 

The final rule does not incorporate these 

suggestions. 

IX. Regulatory Analyses 

A. Paperwork Reduction Act 

Certain provisions of the final rule 

contain ‘‘collection of information’’ 

within the meaning of the Paperwork 

Reduction Act of 1995 (PRA).50 In 

accordance with the requirements of the 

PRA, the agencies may not conduct or 

sponsor, and the respondent is not 

required to respond to, an information 

collection unless it displays a currentlyvalid Office of Management and Budget 

(OMB) control number. 

The final rule revises section __.22(c), 

(f), and (h) of the capital rule to 

incorporate the proposed deduction 

approach for investments in covered 

debt instruments. Several new 

definitions are added to section __.2 to 

effectuate these deductions. 

Each agency has an information 

collection related to its regulatory 

capital rules. The OMB control number 

for the OCC is 1557–0318, Board is 

7100–0313, and FDIC is 3064–0153. The 

final rule will not, however, result in 

changes to burden under these 

information collections and therefore no 

submissions will be made under section 

3507(d) of the PRA (44 U.S.C. 3507(d)) 

and section 1320.11 of the OMB’s 

implementing regulations (5 CFR 1320) 

for each of the agencies’ regulatory 

capital rules. 

In addition, the final rule requires 

changes to the Call Reports (OMB No. 

1557–0081 (OCC), 7100–0036 (Board), 

and 3064–0052 (FDIC)), and the FFIEC 

101 (OMB No. 1557–0239 (OCC), 7100– 

0319 (Board), and 3064–0159 (FDIC)), 

which will be addressed in one or more 

separate Federal Register notices. 

The final rule requires changes to the 

Consolidated Financial Statements for 

Holding Companies (FR Y–9C; OMB No. 

7100–0128) and the Capital 

Assessments and Stress Testing Reports 

(FR Y–14A/Q/M; OMB No. 7100–0341). 

The Board reviewed the final rule under 

the authority delegated to the Board by 

OMB. 

Revised Collection (Board only) 

Title of Information Collection: 

Consolidated Financial Statements for 

Holding Companies. 

Agency form number: FR Y–9C, FR Y– 

9LP, FR Y–9SP, FR Y–9ES, and FR Y– 

9CS. 

OMB control number: 7100–0128. 

Effective date: June 30, 2021. 

Frequency: Quarterly, semiannually, 

and annually. 

Affected Public: Businesses or other 

for-profit. 

Respondents: Bank holding 

companies (BHCs), savings and loan 

holding companies (SLHCs), securities 

holding companies (SHCs), and U.S. 

Intermediate Holding Companies (IHCs) 

(collectively, holding companies (HCs)). 

Estimated number of respondents: FR 

Y–9C (non-advanced approaches (AA) 

HCs community bank leverage ratio 

(CBLR)) with less than $5 billion in total 

assets—71, FR Y–9C (non AA HCs 

CBLR) with $5 billion or more in total 

assets—35, FR Y–9C (non AA HCs nonCBLR) with less than $5 billion in total 

assets—84, FR Y–9C (non AA HCs nonCBLR) with $5 billion or more in total 

assets—154, FR Y–9C (AA HCs)—19, FR 

Y–9LP—434, FR Y–9SP—3,960, FR Y– 

9ES—83, FR Y–9CS—236. 

Estimated average hours per response: 

Reporting 

FR Y–9C (non AA HCs CBLR) with 

less than $5 billion in total assets— 

29.17, FR Y–9C (non AA HCs CBLR) 

with $5 billion or more in total assets— 

35.14, FR Y–9C (non AA HCs nonCBLR) with less than $5 billion in total 

assets—41.01, FR Y–9C (non AA HCs 

non-CBLR) with $5 billion or more in 

total assets—46.98, FR Y–9C (AA 

HCs)—49.30, FR Y–9LP—5.27, FR Y– 

9SP—5.40, FR Y–9ES—0.50, FR Y– 

9CS—0.50. 

Recordkeeping 

FR Y–9C (non-advanced approaches 

HCs with less than $5 billion in total 

assets), FR Y–9C (non-advanced 

approaches HCs with $5 billion or more 

in total assets), FR Y–9C (advanced 

approaches HCs), and FR Y–9LP: 1.00 

hour; FR Y–9SP, FR Y–9ES, and FR Y– 

9CS: 0.50 hours. 

Estimated annual burden hours: 

Reporting 

FR Y–9C (non AA HCs CBLR) with 

less than $5 billion in total assets— 

8,284, FR Y–9C (non AA HCs CBLR) 

with $5 billion or more in total assets— 

4,920, FR Y–9C (non AA HCs nonCBLR) with less than $5 billion in total 

assets—13,779, FR Y–9C (non AA HCs 

non-CBLR) with $5 billion or more in 

total assets—28,940, FR Y–9C (AA 

HCs)—3,747, FR Y–9LP—9,149, FR Y– 

9SP—42,768, FR Y–9ES—42, FR Y– 

9CS—472. 

Recordkeeping 

FR Y–9C—1,452, FR Y–9LP—1,736, 

FR Y–9SP—3,960, FR Y–9ES—42, FR 

Y–9CS—472. 

General description of report: The FR 

Y–9 family of reporting forms continues 

to be the primary source of financial 

data on holding companies (HCs) on 

which examiners rely between on-site 

inspections. Financial data from these 

reporting forms is used to detect 

emerging financial problems, review 

performance, conduct pre-inspection 

analysis, monitor and evaluate capital 

adequacy, evaluate HC mergers and 

acquisitions, and analyze an HC’s 

overall financial condition to ensure the 

safety and soundness of its operations. 

The FR Y–9C serves as the standardized 

financial statements for certain 

consolidated holding companies. The 

Board requires HCs to provide 

standardized financial statements to 

fulfill the Board’s statutory obligation to 

supervise these organizations. HCs file 

the FR Y–9C on a quarterly basis. 

Legal authorization and 

confidentiality: The reporting and 

recordkeeping requirements associated 

with the FR Y–9 series of reports are 

authorized for BHCs pursuant to section 

5 of the Bank Holding Company Act 

(‘‘BHC Act’’); for SLHCs pursuant to 

section 10(b)(2) and (3) of the Home 

Owners’ Loan Act, 12 U.S.C. 1467a(b)(2) 

and (3), as amended by sections 369(8) 

and 604(h)(2) of the Dodd-Frank Wall 

Street and Consumer Protection Act 

(‘‘Dodd-Frank Act’’); for IHCs pursuant 

to section 5 of the BHC Act, as well as 

pursuant to sections 102(a)(1) and 165 

of the Dodd-Frank Act; and for 

securities holding companies pursuant 

to section 618 of the Dodd-Frank Act. 

Except for the FR Y–9CS report, which 

is expected to be collected on a 

voluntary basis, the obligation to submit 

the remaining reports in the FR Y–9 

series of reports and to comply with the 

recordkeeping requirements set forth in 

the respective instructions to each of the 

other reports, is mandatory. 

With respect to the FR Y–9C report, 

Schedule HI’s Memoranda item 7(g) 

‘‘FDIC deposit insurance assessments,’’ 

Schedule HC–P’s item 7(a) 

‘‘Representation and warranty reserves 

for 1–4 family residential mortgage 

loans sold to U.S. government agencies 

and government sponsored agencies,’’ 

and Schedule HC–P’s item 7(b) 

‘‘Representation and warranty reserves 

for 1–4 family residential mortgage 

loans sold to other parties’’ are 

considered confidential commercial and 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 721 

financial information. Such treatment is 

appropriate under exemption 4 of the 

Freedom of Information Act (‘‘FOIA’’), 

because these data items reflect 

commercial and financial information 

that is both customarily and actually 

treated as private by the submitter, and 

which the Board has previously assured 

submitters will be treated as 

confidential. It also appears that 

disclosing these data items may reveal 

confidential examination and 

supervisory information, and in such 

instances, the information also would be 

withheld pursuant to exemption 8 of the 

FOIA, which protects information 

related to the supervision or 

examination of a regulated financial 

institution. 

In addition, for both the FR Y–9C 

report and the FR Y–9SP report, 

Schedule HC’s Memoranda item 2.b., 

the name and email address of the 

external auditing firm’s engagement 

partner, is considered confidential 

commercial information and protected 

by exemption 4 of the FOIA, if the 

identity of the engagement partner is 

treated as private information by HCs. 

The Board has assured respondents that 

this information will be treated as 

confidential since the collection of this 

data item was proposed in 2004. 

Additionally, items on the FR Y–9C, 

Schedule HC–C for loans modified 

under Section 4013, data items 

Memorandum items 16.a, ‘‘Number of 

Section 4013 loans outstanding’’; and 

Memorandum items 16.b, ‘‘Outstanding 

balance of Section 4013 loans’’ are 

considered confidential. While the 

Board generally makes institution-level 

FR Y–9C report data publicly available, 

the Board is collecting Section 4013 

loan information as part of condition 

reports for the impacted HCs and the 

Board considers disclosure of these 

items at the HC level would not be in 

the public interest. Such information is 

permitted to be collected on a 

confidential basis, consistent with 5 

U.S.C. 552(b)(8). In addition, holding 

companies may be reluctant to offer 

modifications under Section 4013 if 

information on these modifications 

made by each holding company is 

publicly available, as analysts, 

investors, and other users of public FR 

Y–9C report information may penalize 

an institution for using the relief 

provided by the CARES Act. The Board 

may disclose Section 4013 loan data on 

an aggregated basis, consistent with 

confidentiality or as otherwise required 

by law. 

Aside from the data items described 

above, the remaining data items 

collected on the FR Y–9C report and the 

FR Y–9SP report are generally not 

accorded confidential treatment. The 

data items collected on FR Y–9LP, FR 

Y–9ES, and FR Y–9CS reports, are also 

generally not accorded confidential 

treatment. As provided in the Board’s 

Rules Regarding Availability of 

Information, however, a respondent may 

request confidential treatment for any 

data items the respondent believes 

should be withheld pursuant to a FOIA 

exemption. The Board will review any 

such request to determine if confidential 

treatment is appropriate, and will 

inform the respondent if the request for 

confidential treatment has been granted 

or denied. 

To the extent the instructions to the 

FR Y–9C, FR Y–9LP, FR Y–9SP, and FR 

Y–9ES reports each respectively direct 

the financial institution to retain the 

workpapers and related materials used 

in preparation of each report, such 

material would only be obtained by the 

Board as part of the examination or 

supervision of the financial institution. 

Accordingly, such information is 

considered confidential pursuant to 

exemption 8 of the FOIA. In addition, 

the workpapers and related materials 

may also be protected by exemption 4 

of the FOIA, to the extent such financial 

information is treated as confidential by 

the respondent. 

Current Actions: As discussed in 

detail in section VIII above, several 

comments were received on the 

proposed changes to the FR Y–9C. 

Commenters requested that the effective 

date of the final rule precede proposed 

changes to regulatory reports. The 

agencies confirmed that the final rule 

will be effective before changes are 

implemented to regulatory reports. The 

final rule is effective April 1, 2021, and 

the changes to the FR Y–9C are effective 

June 30, 2021. Also, commenters 

requested that the Board clarify that 

U.S. GSIBs will report long-term debt 

and TLAC leverage requirements based 

upon the supplementary leverage ratio 

denominator. The Board agreed and 

clarified this requirement. Finally, some 

commenters suggested that the Board 

develop a more robust disclosure regime 

related to TLAC, including collaborating 

with the SEC. The Board did not accept 

this comment for the reasons noted 

above. Some of the item numbers below 

have changed since the proposed rule 

due to other FR Y–9C reporting changes 

to Schedule HC–R that have been 

implemented since that time. 

To implement the reporting 

requirements of the final rule, the Board 

revises the FR Y–9C, Schedule HC–R, 

Part I, Regulatory Capital Components 

and Ratios, to amend instructions for 

line items 11, 17, 24, and 43 to 

effectuate the deductions from 

regulatory capital for advanced 

approaches holding companies related 

to investments in covered debt 

instruments and excluded covered debt 

instruments as described above. Further, 

the Board proposes to revise the FR Y– 

9C, Schedule HC–R, Part II, RiskWeighted Assets, to amend instructions 

for line items 2(a), 2(b), 7, and 8 to 

incorporate investments in covered debt 

instruments and excluded debt 

instruments, as applicable, by advanced 

approaches holding companies in their 

calculation of risk-weighted assets. 

In addition, the Board revises the FR 

Y–9C, Schedule HC–R, Part I, 

Regulatory Capital Components and 

Ratios, to create new line items and 

instructions to allow the BHCs of U.S. 

GSIBs and the IHCs of foreign GSIBs to 

publicly report their long-term debt 

(LTD) and total loss-absorbing capacity 

(TLAC) in accordance, respectively, 

with 12 CFR part 252, subpart G and 12 

CFR part 252, subpart P. Specifically, 

new line items are created to report, as 

applicable, BHCs of U.S GSIBs’ and 

IHCs of foreign GSIBs’ (1) outstanding 

eligible LTD (item 50); (2) TLAC (item 

51); (3) LTD standardized risk-weighted 

asset ratio (item 52, column A); (4) 

TLAC standardized risk-weighted asset 

ratio (item 52, column B); (5) LTD 

advanced approaches risk-weighted 

asset ratio (item 53, column A); (6) 

TLAC advanced approaches riskweighted asset ratio (item 53, column 

B); (7) IHCs of foreign GSIBs only: LTD 

leverage ratio (item 54, column A); (8) 

IHCs of foreign GSIBs only: TLAC 

leverage ratio (item 54, column B); (9) 

LTD supplementary leverage ratio (item 

55, column A); (10) TLAC 

supplementary leverage ratio (item 55, 

column B); (11) institution-specific 

TLAC risk-weighted asset buffer 

necessary to avoid limitations on 

distributions and discretionary bonus 

payments (item 57(a)); and (12) TLAC 

leverage buffer necessary to avoid 

limitations on distributions and 

discretionary bonus payments (item 

57(b)). Existing line items 50(a), 50(b), 

51, 52, and 53 are re-numbered to 56(a), 

56(b), 58, 59, and 60, respectively, and 

instructions’ references updated, to 

account for the proposed inclusion of 

the new data collection items described 

above. Finally, the instructions for renumbered line item 59, ‘‘Distributions 

and discretionary bonus payments 

during the quarter,’’ are amended for the 

BHCs of U.S. GSIBs and the IHCs of 

foreign GSIBs to reflect maximum 

payout amounts that take into account 

a firm’s TLAC risk-weighted and 

leverage buffers reported in line items 

57(a) and 57(b), respectively. The final 


jbell on DSKJLSW7X2PROD with RULES2
722 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

51SLHCs with $100 billion or more in total 

consolidated assets became members of the FR Y– 

14Q and FR Y–14M panels effective June 30, 2020, 

and will join the FR Y–14A panel effective 

December 31, 2020. See 84 FR 59032 (November 1, 

2019). 

52The estimated number of respondents for the 

FR Y–14M is lower than for the FR Y–14Q and FR 

Y– 14A because, in recent years, certain 

respondents to the FR Y–14A and FR Y–14Q have 

not met the materiality thresholds to report the FR 

Y–14M due to their lack of mortgage and credit 

activities. The Board expects this situation to 

continue for the foreseeable future. 

53On October 10, 2019, the Board issued a final 

rule that eliminated the requirement for firms 

subject to Category IV standards to conduct and 

publicly disclose the results of a company-run 

stress test. See 84 FR 59032 (Nov. 1, 2019). That 

final rule maintained the existing FR Y–14 

substantive reporting requirements for these firms 

in order to provide the Board with the data it needs 

to conduct supervisory stress testing and inform the 

Board’s ongoing monitoring and supervision of its 

supervised firms. However, as noted in the final 

rule, the Board intends to provide greater flexibility 

to banking organizations subject to Category IV 

standards in developing their annual capital plans 

and consider further change to the FR Y–14 forms 

as part of a separate proposal. See 84 FR 59032, 

59063. 54See 85 FR 15776 (March 19, 2020). 

reporting forms and instructions will 

become available in the near future on 

the Board’s public website at https://

www.federalreserve.gov/apps/ 

reportforms/review.aspx. 

Revised Collection (Board only) 

Title of Information Collection: 

Capital Assessments and Stress Testing 

Reports. 

Agency form number: FR Y–14A/Q/ 

M. 

OMB control number: 7100–0341. 

Effective date: June 30, 2021. 

Frequency: Annually, quarterly, and 

monthly. 

Respondents: These collections of 

information are applicable to bank 

holding companies (BHCs), U.S. 

intermediate holding companies (IHCs), 

and savings and loan holding 

companies (SLHCs) 51 with $100 billion 

or more in total consolidated assets, as 

based on: (i) The average of the firm’s 

total consolidated assets in the four 

most recent quarters as reported 

quarterly on the firm’s Consolidated 

Financial Statements for Holding 

Companies (FR Y–9C; OMB No. 7100– 

0128); or (ii) if the firm has not filed an 

FR Y–9C for each of the most recent four 

quarters, then the average of the firm’s 

total consolidated assets in the most 

recent consecutive quarters as reported 

quarterly on the firm’s FR Y–9Cs. 

Reporting is required as of the first day 

of the quarter immediately following the 

quarter in which the respondent meets 

this asset threshold, unless otherwise 

directed by the Board. 

Estimated number of respondents: FR 

Y–14A/Q: 36; FR Y–14M: 34.52

Estimated average hours per response: 

FR Y–14A: 929 hours; FR Y–14Q: 2,201 

hours; FR Y–14M: 1,072 hours. 

On-going Automation Revisions: 480 

hours; FR Y–14 Attestation On-going 

Attestation: 2,560 hours. 

Estimated annual burden hours: FR 

Y–14A: 33,444 hours; FR Y–14Q: 

316,944 hours; FR Y–14M: 437,376 

hours; FR Y–14 On-going Automation 

Revisions: 17,280 hours; FR Y–14 

Attestation On-going Attestation: 33,280 

hours. 

General description of report: This 

family of information collections is 

composed of the following three reports: 

• The FR Y–14A collects quantitative 

projections of balance sheet, income, 

losses, and capital across a range of 

macroeconomic scenarios and 

qualitative information on 

methodologies used to develop internal 

projections of capital across scenarios.53

• The quarterly FR Y–14Q collects 

granular data on various asset classes, 

including loans, securities, trading 

assets, and PPNR for the reporting 

period. 

• The monthly FR Y–14M is 

comprised of three retail portfolio- and 

loan-level schedules, and one detailed 

address-matching schedule to 

supplement two of the portfolio and 

loan-level schedules. 

The data collected through the FR Y– 

14A/Q/M reports provide the Board 

with the information needed to help 

ensure that large firms have strong, firmwide risk measurement and 

management processes supporting their 

internal assessments of capital adequacy 

and that their capital resources are 

sufficient given their business focus, 

activities, and resulting risk exposures. 

The reports are used to support the 

Board’s annual Comprehensive Capital 

Analysis and Review (CCAR) and Dodd 

Frank Act Stress Test (DFAST) 

exercises, which complement other 

Board supervisory efforts aimed at 

enhancing the continued viability of 

large firms, including continuous 

monitoring of firms’ planning and 

management of liquidity and funding 

resources, as well as regular assessments 

of credit, market and operational risks, 

and associated risk management 

practices. Information gathered in this 

data collection is also used in the 

supervision and regulation of 

respondent financial institutions. 

Respondent firms are currently required 

to complete and submit up to 17 filings 

each year: One annual FR Y–14A filing, 

four quarterly FR Y–14Q filings, and 12 

monthly FR Y–14M filings. Compliance 

with the information collection is 

mandatory. 

Current actions: On March 19, 2020, 

the Board proposed to revise the FR Y– 

14 reports to collect TLAC and LTD 

information.54 The Board did not 

receive any comments on the proposed 

TLAC and LTD revisions. The Board has 

modified the Capital Assessments and 

Stress Testing (FR Y–14A and Q; OMB 

No. 7100–0341) in a manner consistent 

with the changes described above to the 

FR Y–9C. In addition, the Board has 

renumbered items in the FR Y–14A, 

Schedule A.1.d (Capital) instructions to 

correspond with related items on the FR 

Y–9C. The Board has adopted, as 

proposed, the following revisions to FR 

Y–14A, Schedule A.1.d, and FR Y–14Q, 

Schedule D, effective for the June 30, 

2021, as of date: 

FR Y–14A, Schedule A.1.d (Capital) 

In order to align Schedule A.1.d with 

the FR Y–9C, the Board has added the 

following items to Schedule A.1.d: 

• ‘‘Outstanding eligible long-term 

debt’’; 

• ‘‘Total loss-absorbing capacity’’; 

• ‘‘LTD and TLAC total risk-weighted 

assets ratios’’; 

• ‘‘IHCs of foreign GSIBs only: LTD 

and TLAC leverage ratios’’; 

• ‘‘LTD and TLAC supplementary 

leverage ratios’’; 

• ‘‘Institution-specific TLAC buffer 

necessary to avoid limitations on 

distributions discretionary bonus 

payments’’; 

• ‘‘TLAC risk-weighted buffer’’; and 

• ‘‘TLAC leverage buffer.’’ 

FR Y–14Q, Schedule D (Regulatory 

Capital) 

The Board has revised the 

instructions for item 1 (‘‘Aggregate 

amount of non-significant investments 

in the capital of unconsolidated 

financial institutions’’) to require 

banking organizations subject to 

Category I and II standards to include 

covered debt instruments. 

B. Regulatory Flexibility Act Analysis 

OCC: The Regulatory Flexibility Act, 

5 U.S.C. 601 et seq., (RFA), requires an 

agency either to provide a final 

regulatory flexibility analysis with a 

final rule for which a general notice of 

proposed rulemaking is required or to 

certify that the final rule will not have 

a significant, economic impact on a 

substantial number of small entities. 

The Small Business Administration 

(SBA) establishes size standards that 

define which entities are small 

businesses for purposes of the RFA to 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 723 

55The OCC calculated the number of small 

entities using the SBA’s size thresholds for 

commercial banks and savings institutions, and 

trust companies, which are $600 million and $41.5 

million, respectively. Consistent with the General 

Principles of Affiliation, 13 CFR 121.103(a), the 

OCC counted the assets of affiliated financial 

institutions when determining whether to classify 

a national bank or Federal savings association as a 

small entity. 

56See 13 CFR 121.201. Effective August 19, 2019, 

the SBA revised the size standards for banking 

organizations to $600 million in assets from $550 

million in assets. 84 FR 34261 (July 18, 2019). 

57 5 U.S.C. 605(b). 

58With respect to the revisions to the Board’s 

total loss-absorbing capacity rule, the scope of 

impacted institutions is different—Covered BHCs 

and Covered IHCs—but also only applies to 

institutions significantly above the threshold to be 

considered a ‘‘small entity.’’ 

59 5 U.S.C. 601 et seq. 

60The SBA defines a small banking organization 

as having $600 million or less in assets, where ‘‘a 

financial institution’s assets are determined by 

averaging the assets reported on its four quarterly 

financial statements for the preceding year.’’ See 13 

CFR 121.201 (as amended, effective August 19, 

2019). ‘‘SBA counts the receipts, employees, or 

other measure of size of the concern whose size is 

at issue and all of its domestic and foreign 

affiliates.’’ See 13 CFR 121.103. Following these 

regulations, the FDIC uses a covered entity’s 

affiliated and acquired assets, averaged over the 

preceding four quarters, to determine whether the 

covered entity is ‘‘small’’ for the purposes of RFA. 

61FDIC-supervised institutions are set forth in 12 

U.S.C. 1813(q)(2). 

62Call Report data, June 30, 2020. 

63Call Report data, June 30, 2020. 

64Public Law 106–102, section 722, 113 Stat. 

1338, 1471 (1999). 

include commercial banks and savings 

institutions with total assets of $600 

million or less and trust companies with 

total assets of $41.5 million of less) or 

to certify that the final rule would not 

have a significant economic impact on 

a substantial number of small entities. 

As of December 31, 2019, the OCC 

supervises 745 small entities.55

As part of the OCC’s analysis, we 

consider whether the final rule will 

have a significant economic impact on 

a substantial number of small entities, 

pursuant to the RFA Because the final 

rule only applies to advanced 

approaches banking organizations it will 

not impact any OCC-supervised small 

entities. Therefore, the final rule will 

not have a significant economic impact 

on a substantial number of small 

entities. 

Therefore, the OCC certifies that the 

final rule will not have a significant 

economic impact on a substantial 

number of OCC-supervised small 

entities. 

Board: The Regulatory Flexibility Act 

(RFA) generally requires that, in 

connection with a final rulemaking, an 

agency prepare and make available for 

public comment a final regulatory 

flexibility analysis describing the 

impact of the proposed rule on small 

entities. However, a final regulatory 

flexibility analysis is not required if the 

agency certifies that the final rule will 

not have a significant economic impact 

on a substantial number of small 

entities. The Small Business 

Administration (SBA) has defined 

‘‘small entities’’ to include banking 

organizations with total assets of less 

than or equal to $600 million that are 

independently owned and operated or 

owned by a holding company with less 

than or equal to $600 million in total 

assets.56 For the reasons described 

below and under section 605(b) of the 

RFA, the Board certifies that the final 

rule will not have a significant 

economic impact on a substantial 

number of small entities.57 As of 

December 31, 2019, there were 2,799 

bank holding companies, 171 savings 

and loan holding companies, and 497 

state member banks that would fit the 

SBA’s current definition of ‘‘small 

entity’’ for purposes of the RFA. 

The Board has considered the 

potential impact of the final rule on 

small entities in accordance with the 

RFA. Based on its analysis and for the 

reasons stated below, the Board believes 

that this final rule will not have a 

significant economic impact on a 

substantial number of small entities. 

As discussed in detail above, the final 

rule amends the capital rule to require 

advanced approaches banking 

organizations to deduct exposures to 

covered debt instruments issued by 

covered BHCs, covered IHCs, and 

foreign GSIBs and their subsidiaries. 

These deductions are subject to 

regulatory thresholds, as described 

above. Deductions related to 

investments in and exposures to 

covered debt instruments are effectuated 

by deduction from tier 2 capital 

according to the corresponding 

deduction approach, subject to 

applicable deduction thresholds. 

However, the assets of institutions 

subject to this final rule substantially 

exceed the $600 million asset threshold 

under which a banking organization is 

considered a ‘‘small entity’’ under SBA 

regulations.58 Because the final rule is 

not likely to apply to any depository 

institution or company with assets of 

$600 million or less, it is not expected 

to apply to any small entity for purposes 

of the RFA. In light of the foregoing, the 

Board certifies that the final rule will 

not have a significant economic impact 

on a substantial number of small entities 

supervised. 

FDIC: The Regulatory Flexibility Act 

(RFA), 5 U.S.C. 601 et seq., generally 

requires an agency, in connection with 

a final rule, to prepare and make 

available for public comment a final 

regulatory flexibility analysis that 

describes the impact of a final rule on 

small entities.59 However, a regulatory 

flexibility analysis is not required if the 

agency certifies that the rule will not 

have a significant economic impact on 

a substantial number of small entities. 

The Small Business Administration 

(SBA) has defined ‘‘small entities’’ to 

include banking organizations with total 

assets of less than or equal to $600 

million who are independently owned 

and operated or owned by a holding 

company with less than $600 million in 

total assets.60 Generally, the FDIC 

considers a significant effect to be a 

quantified effect in excess of 5 percent 

of total annual salaries and benefits per 

institution, or 2.5 percent of total 

noninterest expenses. The FDIC believes 

that effects in excess of these thresholds 

typically represent significant effects for 

FDIC-supervised institutions. For the 

reasons described below and under 

section 605(b) of the RFA, the FDIC 

certifies that the final rule will not have 

a significant economic impact on a 

substantial number of small entities. 

The FDIC supervises 3,270 

institutions,61 of which 2,492 are 

considered small entities for the 

purposes of RFA.62

This final rule will affect all 

institutions subject to the Category I and 

Category II capital standards, and their 

subsidiaries. The FDIC supervises one 

institution that is a subsidiary of an 

institution that is subject to the Category 

I capital standards, and no FDICsupervised institutions are subsidiaries 

of institutions that are subject to the 

Category II capital standards.63 The one 

FDIC-supervised institution that would 

be subject to this final rule is not 

considered a small entity for the 

purposes of the RFA since it is owned 

by a holding company with over $600 

million in total assets. Since this final 

rule does not affect any FDIC-supervised 

institutions that are defined as small 

entities for the purposes of the RFA, the 

FDIC certifies that the final rule will not 

have a significant economic impact on 

a substantial number of small entities. 

C. Plain Language 

Section 722 of the Gramm-LeachBliley Act 64 requires the Federal 

banking agencies to use plain language 

in all proposed and final rules 

published after January 1, 2000. The 

agencies have sought to present the final 

rule in a simple and straightforward 

manner and did not receive any 


jbell on DSKJLSW7X2PROD with RULES2
724 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

65 2 U.S.C. 1532. 

66Based on available supervisory information, the 

OCC determined that no OCC-supervised advanced 

approaches institutions currently hold TLAC 

instruments. Thus, there would no cost of capital 

associated with the implementation of this 

proposal. The OCC estimates that, if implemented, 

non-mandated, but anticipated compliance costs 

associated with activities such as modifying 

procedures and internal audit would be less than 

$1 million. 

67 12 U.S.C. 4802(a). 

68 12 U.S.C. 4802. 

69 5 U.S.C. 801 et seq. 

70 5 U.S.C. 801(a)(3). 

71 5 U.S.C. 804(2). 

comments on the use of plain language 

in the proposed rule. 

D. OCC Unfunded Mandates Reform Act 

of 1995 Determination 

The OCC analyzed the proposed rule 

under the factors set forth in the 

Unfunded Mandates Reform Act of 1995 

(UMRA).65 Under this analysis, the OCC 

considered whether the final rule 

includes a Federal mandate that may 

result in the expenditure by State, local, 

and Tribal governments, in the 

aggregate, or by the private sector, of 

$100 million or more in any one year 

(adjusted for inflation). Because the rule 

does not specifically require banks to 

modify their policies and procedures, 

the OCC has determined that there are 

no expenditures for the purposes of 

UMRA. Therefore, the OCC concludes 

that this final rule will not result in 

expenditures of $100 million or more 

annually by State, local, and Tribal 

governments, or by the private sector.66

E. Riegle Community Development and 

Regulatory Improvement Act of 1994 

Pursuant to section 302(a) of the 

Riegle Community Development and 

Regulatory Improvement Act 

(RCDRIA),67 in determining the effective 

date and administrative compliance 

requirements for new regulations that 

impose additional reporting, disclosure, 

or other requirements on insured 

depository institutions (IDIs), each 

Federal banking agency must consider, 

consistent with principles of safety and 

soundness and the public interest, any 

administrative burdens that such 

regulations would place on depository 

institutions, including small depository 

institutions, and customers of 

depository institutions, as well as the 

benefits of such regulations. In addition, 

section 302(b) of RCDRIA requires new 

regulations and amendments to 

regulations that impose additional 

reporting, disclosures, or other new 

requirements on IDIs generally to take 

effect on the first day of a calendar 

quarter that begins on or after the date 

on which the regulations are published 

in final form.68

The Federal banking agencies 

considered the administrative burdens 

and benefits of the final rule and its 

elective framework in determining its 

effective date and administrative 

compliance requirements. As such, the 

final rule will be effective on April 1, 

2021. 

F. Congressional Review Act 

For purposes of Congressional Review 

Act, the OMB makes a determination as 

to whether a final rule constitutes a 

‘‘major’’ rule.69 If a rule is deemed a 

‘‘major rule’’ by the Office of 

Management and Budget (OMB), the 

Congressional Review Act generally 

provides that the rule may not take 

effect until at least 60 days following its 

publication.70

The Congressional Review Act defines 

a ‘‘major rule’’ as any rule that the 

Administrator of the Office of 

Information and Regulatory Affairs of 

the OMB finds has resulted in or is 

likely to result in (A) an annual effect 

on the economy of $100,000,000 or 

more; (B) a major increase in costs or 

prices for consumers, individual 

industries, Federal, State, or local 

government agencies or geographic 

regions, or (C) significant adverse effects 

on competition, employment, 

investment, productivity, innovation, or 

on the ability of United States-based 

enterprises to compete with foreignbased enterprises in domestic and 

export markets.71 As required by the 

Congressional Review Act, the agencies 

will submit the final rule and other 

appropriate reports to Congress and the 

Government Accountability Office for 

review. 

List of Subjects 

12 CFR Part 3 

Administrative practice and 

procedure, Capital, National banks, 

Risk. 

12 CFR Part 217 

Administrative practice and 

procedure, Banks, Banking, Capital, 

Federal Reserve System, Holding 

companies. 

12 CFR Part 252 

Administrative practice and 

procedure, Banks, banking, Credit, 

Federal Reserve System, Holding 

companies, Investments, Qualified 

financial contracts, Reporting and 

recordkeeping requirements, Securities. 

12 CFR Part 324 

Administrative practice and 

procedure, Banks, banking, Capital 

adequacy, Reporting and recordkeeping 

requirements, Savings associations, 

State non-member banks. 

Office of the Comptroller of the 

Currency 

For the reasons set out in the joint 

preamble, the OCC amends 12 CFR part 

3 as follows. 

PART 3—CAPITAL ADEQUACY 

STANDARDS 

■ 1. The authority citation for part 3 

continues to read as follows: 

Authority: 12 U.S.C. 93a, 161, 1462, 

1462a, 1463, 1464, 1818, 1828(n), 1828 note, 

1831n note, 1835, 3907, 3909, 5412(b)(2)(B), 

and Pub. L. 116–136, 134 Stat. 281. 

■ 2. In § 3.2: 

■ a. Add definitions in alphabetical 

order for ‘‘Covered debt instrument’’ 

and ‘‘Excluded covered debt 

instrument’’; 

■ b. In the definition of ‘‘Fiduciary or 

custodial and safekeeping accounts’’, 

remove ‘‘§ 3.10(c)(4)(ii)(J)’’ and add 

‘‘§ 3.10(c)(2)(x)’’ in its place; 

■ c. Revise the definition of ‘‘Indirect 

exposure’’; 

■ d. Add a definition in alphabetical 

order for ‘‘Investment in a covered debt 

instrument’’; 

■ e. Revise the definition of ‘‘Synthetic 

exposure’’; and 

■ f. In the definition of ‘‘Total leverage 

exposure’’, remove ‘‘§ 3.10(c)(4)(ii)’’ and 

add ‘‘§ 3.10(c)(2)’’ in its place. 

The additions and revisions read as 

follows: 

§ 3.2 Definitions. 

* * * * * 

Covered debt instrument means an 

unsecured debt instrument that is: 

(1) Issued by a global systemically 

important BHC, as defined in 12 CFR 

217.2, and that is an eligible debt 

security, as defined in 12 CFR 252.61, 

or that is pari passu or subordinated to 

any eligible debt security issued by the 

global systemically important BHC; or 

(2) Issued by a Covered IHC, as 

defined in 12 CFR 252.161, and that is 

an eligible Covered IHC debt security, as 

defined in 12 CFR 252.161, or that is 

pari passu or subordinated to any 

eligible Covered IHC debt security 

issued by the Covered IHC; or 

(3) Issued by a global systemically 

important banking organization, as 

defined in 12 CFR 252.2 other than a 

global systemically important BHC, as 

defined in 12 CFR 217.2; or issued by 

a subsidiary of a global systemically 

important banking organization that is 

not a global systemically important 

BHC, other than a Covered IHC, as 

defined in 12 CFR 252.161; and where 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 725 

(i) The instrument is eligible for use 

to comply with an applicable law or 

regulation requiring the issuance of a 

minimum amount of instruments to 

absorb losses or recapitalize the issuer 

or any of its subsidiaries in connection 

with a resolution, receivership, 

insolvency, or similar proceeding of the 

issuer or any of its subsidiaries; or 

(ii) The instrument is pari passu or 

subordinated to any instrument 

described in paragraph (3)(i) of this 

definition; for purposes of this 

paragraph (3)(ii) of this definition, if the 

issuer may be subject to a special 

resolution regime, in its jurisdiction of 

incorporation or organization, that 

addresses the failure or potential failure 

of a financial company and any 

instrument described in paragraph (3)(i) 

of this definition is eligible under that 

special resolution regime to be written 

down or converted into equity or any 

other capital instrument, then an 

instrument is pari passu or 

subordinated to any instrument 

described in paragraph (3)(i) of this 

definition if that instrument is eligible 

under that special resolution regime to 

be written down or converted into 

equity or any other capital instrument 

ahead of or proportionally with any 

instrument described in paragraph (3)(i) 

of this definition; and 

(4) Provided that, for purposes of this 

definition, covered debt instrument does 

not include a debt instrument that 

qualifies as tier 2 capital pursuant to 12 

CFR 3.20(d) or that is otherwise treated 

as regulatory capital by the primary 

supervisor of the issuer. 

* * * * * 

Excluded covered debt instrument 

means an investment in a covered debt 

instrument held by a national bank or 

Federal savings association that is a 

subsidiary of a global systemically 

important BHC, as defined in 12 CFR 

252.2, that: 

(1) Is held in connection with market 

making-related activities permitted 

under 12 CFR 44.4, provided that a 

direct exposure or an indirect exposure 

to a covered debt instrument is held for 

30 business days or less; and 

(2) Has been designated as an 

excluded covered debt instrument by 

the national bank or Federal savings 

association that is a subsidiary of a 

global systemically important BHC, as 

defined in 12 CFR 252.2, pursuant to 12 

CFR 3.22(c)(5)(iv)(A). 

* * * * * 

Indirect exposure means an exposure 

that arises from the national bank’s or 

Federal savings association’s investment 

in an investment fund which holds an 

investment in the national bank’s or 

Federal savings association’s own 

capital instrument, or an investment in 

the capital of an unconsolidated 

financial institution. For an advanced 

approaches national bank or Federal 

savings association, indirect exposure 

also includes an investment in an 

investment fund that holds a covered 

debt instrument. 

* * * * * 

Investment in a covered debt 

instrument means a national bank’s or 

Federal savings association’s net long 

position calculated in accordance with 

§ 3.22(h) in a covered debt instrument, 

including direct, indirect, and synthetic 

exposures to the debt instrument, 

excluding any underwriting positions 

held by the national bank or Federal 

savings association for five or fewer 

business days. 

* * * * * 

Synthetic exposure means an 

exposure whose value is linked to the 

value of an investment in the national 

bank or Federal savings association’s 

own capital instrument or to the value 

of an investment in the capital of an 

unconsolidated financial institution. For 

an advanced approaches national bank 

or Federal savings association, synthetic 

exposure includes an exposure whose 

value is linked to the value of an 

investment in a covered debt 

instrument. 

* * * * * 

■ 3. Section 3.10 is amended by: 

■ a. Revising paragraph (c); 

■ b. Redesignating paragraph (d) as (e); 

and 

■ c. Adding new paragraph (d). 

The revision and addition read as 

follows: 

§ 3.10 Minimum capital requirements. 

* * * * * 

(c) Supplementary leverage ratio. (1) 

A Category III national bank or Federal 

savings association or advanced 

approaches national bank or Federal 

savings association must determine its 

supplementary leverage ratio in 

accordance with this paragraph, 

beginning with the calendar quarter 

immediately following the quarter in 

which the national bank or Federal 

savings association is identified as a 

Category III national bank or Federal 

savings association. An advanced 

approaches national bank’s or Federal 

savings association’s or a Category III 

national bank’s or Federal savings 

association’s supplementary leverage 

ratio is the ratio of its tier 1 capital to 

total leverage exposure, the latter of 

which is calculated as the sum of: 

(i) The mean of the on-balance sheet 

assets calculated as of each day of the 

reporting quarter; and 

(ii) The mean of the off-balance sheet 

exposures calculated as of the last day 

of each of the most recent three months, 

minus the applicable deductions under 

§ 3.22(a), (c), and (d). 

(2) For purposes of this part, total 

leverage exposure means the sum of the 

items described in paragraphs (c)(2)(i) 

through (viii) of this section, as adjusted 

pursuant to paragraph (c)(2)(ix) of this 

section for a clearing member national 

bank and Federal savings association 

and paragraph (c)(2)(x) of this section 

for a custody bank: 

(i) The balance sheet carrying value of 

all of the national bank or Federal 

savings association’s on-balance sheet 

assets, plus the value of securities sold 

under a repurchase transaction or a 

securities lending transaction that 

qualifies for sales treatment under 

GAAP, less amounts deducted from tier 

1 capital under § 3.22(a), (c), and (d), 

and less the value of securities received 

in security-for-security repo-style 

transactions, where the national bank or 

Federal savings association acts as a 

securities lender and includes the 

securities received in its on-balance 

sheet assets but has not sold or rehypothecated the securities received, 

and, for a national bank or Federal 

savings association that uses the 

standardized approach for counterparty 

credit risk under § 3.132(c) for its 

standardized risk-weighted assets, less 

the fair value of any derivative 

contracts; 

(ii)(A) For a national bank or Federal 

savings association that uses the current 

exposure methodology under § 3.34(b) 

for its standardized risk-weighted assets, 

the potential future credit exposure 

(PFE) for each derivative contract or 

each single-product netting set of 

derivative contracts (including a cleared 

transaction except as provided in 

paragraph (c)(2)(ix) of this section and, 

at the discretion of the national bank or 

Federal savings association, excluding a 

forward agreement treated as a 

derivative contract that is part of a 

repurchase or reverse repurchase or a 

securities borrowing or lending 

transaction that qualifies for sales 

treatment under GAAP), to which the 

national bank or Federal savings 

association is a counterparty as 

determined under § 3.34, but without 

regard to § 3.34(c), provided that: 

(1) A national bank or Federal savings 

association may choose to exclude the 

PFE of all credit derivatives or other 

similar instruments through which it 

provides credit protection when 

calculating the PFE under § 3.34, but 


jbell on DSKJLSW7X2PROD with RULES2
726 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

without regard to § 3.34(c), provided 

that it does not adjust the net-to-gross 

ratio (NGR); and 

(2) A national bank or Federal savings 

association that chooses to exclude the 

PFE of credit derivatives or other similar 

instruments through which it provides 

credit protection pursuant to this 

paragraph (c)(2)(ii)(A) must do so 

consistently over time for the 

calculation of the PFE for all such 

instruments; or 

(B)(1) For a national bank or Federal 

savings association that uses the 

standardized approach for counterparty 

credit risk under section § 3.132(c) for 

its standardized risk-weighted assets, 

the PFE for each netting set to which the 

national bank or Federal savings 

association is a counterparty (including 

cleared transactions except as provided 

in paragraph (c)(2)(ix) of this section 

and, at the discretion of the national 

bank or Federal savings association, 

excluding a forward agreement treated 

as a derivative contract that is part of a 

repurchase or reverse repurchase or a 

securities borrowing or lending 

transaction that qualifies for sales 

treatment under GAAP), as determined 

under § 3.132(c)(7), in which the term C 

in § 3.132(c)(7)(i) equals zero, and, for 

any counterparty that is not a 

commercial end-user, multiplied by 1.4. 

For purposes of this paragraph 

(c)(2)(ii)(B)(1), a national bank or 

Federal savings association may set the 

value of the term C in § 3.132(c)(7)(i) 

equal to the amount of collateral posted 

by a clearing member client of the 

national bank or Federal savings 

association in connection with the 

client-facing derivative transactions 

within the netting set; and 

(2) A national bank or Federal savings 

association may choose to exclude the 

PFE of all credit derivatives or other 

similar instruments through which it 

provides credit protection when 

calculating the PFE under § 3.132(c), 

provided that it does so consistently 

over time for the calculation of the PFE 

for all such instruments; 

(iii)(A)(1) For a national bank or 

Federal savings association that uses the 

current exposure methodology under 

§ 3.34(b) for its standardized riskweighted assets, the amount of cash 

collateral that is received from a 

counterparty to a derivative contract 

and that has offset the mark-to-fair value 

of the derivative asset, or cash collateral 

that is posted to a counterparty to a 

derivative contract and that has reduced 

the national bank or Federal savings 

association’s on-balance sheet assets, 

unless such cash collateral is all or part 

of variation margin that satisfies the 

conditions in paragraphs (c)(2)(iii)(C) 

through (G) of this section; and 

(2) The variation margin is used to 

reduce the current credit exposure of 

the derivative contract, calculated as 

described in § 3.34(b), and not the PFE; 

and 

(3) For the purpose of the calculation 

of the NGR described in 

§ 3.34(b)(2)(ii)(B), variation margin 

described in paragraph (c)(2)(iii)(A)(2) 

of this section may not reduce the net 

current credit exposure or the gross 

current credit exposure; or 

(B)(1) For a national bank or Federal 

savings association that uses the 

standardized approach for counterparty 

credit risk under § 3.132(c) for its 

standardized risk-weighted assets, the 

replacement cost of each derivative 

contract or single product netting set of 

derivative contracts to which the 

national bank or Federal savings 

association is a counterparty, calculated 

according to the following formula, and, 

for any counterparty that is not a 

commercial end-user, multiplied by 1.4: 

Replacement Cost = max{V¥CVMr + 

CVMp;0} 

Where: 

V equals the fair value for each derivative 

contract or each single-product netting set of 

derivative contracts (including a cleared 

transaction except as provided in paragraph 

(c)(2)(ix) of this section and, at the discretion 

of the national bank or Federal savings 

association, excluding a forward agreement 

treated as a derivative contract that is part of 

a repurchase or reverse repurchase or a 

securities borrowing or lending transaction 

that qualifies for sales treatment under 

GAAP); 

CVMr equals the amount of cash collateral 

received from a counterparty to a derivative 

contract and that satisfies the conditions in 

paragraphs (c)(2)(iii)(C) through (G) of this 

section, or, in the case of a client-facing 

derivative transaction, the amount of 

collateral received from the clearing member 

client; and 

CVMp equals the amount of cash collateral 

that is posted to a counterparty to a 

derivative contract and that has not offset the 

fair value of the derivative contract and that 

satisfies the conditions in paragraphs 

(c)(2)(iii)(C) through (G) of this section, or, in 

the case of a client-facing derivative 

transaction, the amount of collateral posted 

to the clearing member client; 

(2) Notwithstanding paragraph 

(c)(2)(iii)(B)(1) of this section, where multiple 

netting sets are subject to a single variation 

margin agreement, a national bank or Federal 

savings association must apply the formula 

for replacement cost provided in 

§ 3.132(c)(10)(i), in which the term CMA may 

only include cash collateral that satisfies the 

conditions in paragraphs (c)(2)(iii)(C) through 

(G) of this section; and 

(3) For purposes of paragraph 

(c)(2)(iii)(B)(1), a national bank or Federal 

savings association must treat a derivative 

contract that references an index as if it were 

multiple derivative contracts each 

referencing one component of the index if the 

national bank or Federal savings association 

elected to treat the derivative contract as 

multiple derivative contracts under 

§ 3.132(c)(5)(vi); 

(C) For derivative contracts that are not 

cleared through a QCCP, the cash collateral 

received by the recipient counterparty is not 

segregated (by law, regulation, or an 

agreement with the counterparty); 

(D) Variation margin is calculated and 

transferred on a daily basis based on the 

mark-to-fair value of the derivative contract; 

(E) The variation margin transferred under 

the derivative contract or the governing rules 

of the CCP or QCCP for a cleared transaction 

is the full amount that is necessary to fully 

extinguish the net current credit exposure to 

the counterparty of the derivative contracts, 

subject to the threshold and minimum 

transfer amounts applicable to the 

counterparty under the terms of the 

derivative contract or the governing rules for 

a cleared transaction; 

(F) The variation margin is in the form of 

cash in the same currency as the currency of 

settlement set forth in the derivative contract, 

provided that for the purposes of this 

paragraph (c)(2)(iii)(F), currency of 

settlement means any currency for settlement 

specified in the governing qualifying master 

netting agreement and the credit support 

annex to the qualifying master netting 

agreement, or in the governing rules for a 

cleared transaction; and 

(G) The derivative contract and the 

variation margin are governed by a qualifying 

master netting agreement between the legal 

entities that are the counterparties to the 

derivative contract or by the governing rules 

for a cleared transaction, and the qualifying 

master netting agreement or the governing 

rules for a cleared transaction must explicitly 

stipulate that the counterparties agree to 

settle any payment obligations on a net basis, 

taking into account any variation margin 

received or provided under the contract if a 

credit event involving either counterparty 

occurs; 

(iv) The effective notional principal 

amount (that is, the apparent or stated 

notional principal amount multiplied by any 

multiplier in the derivative contract) of a 

credit derivative, or other similar instrument, 

through which the national bank or Federal 

savings association provides credit 

protection, provided that: 

(A) The national bank or Federal savings 

association may reduce the effective notional 

principal amount of the credit derivative by 

the amount of any reduction in the mark-tofair value of the credit derivative if the 

reduction is recognized in common equity 

tier 1 capital; 

(B) The national bank or Federal savings 

association may reduce the effective notional 

principal amount of the credit derivative by 

the effective notional principal amount of a 

purchased credit derivative or other similar 

instrument, provided that the remaining 

maturity of the purchased credit derivative is 

equal to or greater than the remaining 

maturity of the credit derivative through 

which the national bank or Federal savings 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 727 

association provides credit protection and 

that: 

(1) With respect to a credit derivative that 

references a single exposure, the reference 

exposure of the purchased credit derivative 

is to the same legal entity and ranks pari 

passu with, or is junior to, the reference 

exposure of the credit derivative through 

which the national bank or Federal savings 

association provides credit protection; or 

(2) With respect to a credit derivative that 

references multiple exposures, the reference 

exposures of the purchased credit derivative 

are to the same legal entities and rank pari 

passu with the reference exposures of the 

credit derivative through which the national 

bank or Federal savings association provides 

credit protection, and the level of seniority of 

the purchased credit derivative ranks pari 

passu to the level of seniority of the credit 

derivative through which the national bank 

or Federal savings association provides credit 

protection; 

(3) Where a national bank or Federal 

savings association has reduced the effective 

notional amount of a credit derivative 

through which the national bank or Federal 

savings association provides credit protection 

in accordance with paragraph (c)(2)(iv)(A) of 

this section, the national bank or Federal 

savings association must also reduce the 

effective notional principal amount of a 

purchased credit derivative used to offset the 

credit derivative through which the national 

bank or Federal savings association provides 

credit protection, by the amount of any 

increase in the mark-to-fair value of the 

purchased credit derivative that is recognized 

in common equity tier 1 capital; and 

(4) Where the national bank or Federal 

savings association purchases credit 

protection through a total return swap and 

records the net payments received on a credit 

derivative through which the national bank 

or Federal savings association provides credit 

protection in net income, but does not record 

offsetting deterioration in the mark-to-fair 

value of the credit derivative through which 

the national bank or Federal savings 

association provides credit protection in net 

income (either through reductions in fair 

value or by additions to reserves), the 

national bank or Federal savings association 

may not use the purchased credit protection 

to offset the effective notional principal 

amount of the related credit derivative 

through which the national bank or Federal 

savings association provides credit 

protection; 

(v) Where a national bank or Federal 

savings association acting as a principal has 

more than one repo-style transaction with the 

same counterparty and has offset the gross 

value of receivables due from a counterparty 

under reverse repurchase transactions by the 

gross value of payables under repurchase 

transactions due to the same counterparty, 

the gross value of receivables associated with 

the repo-style transactions less any onbalance sheet receivables amount associated 

with these repo-style transactions included 

under paragraph (c)(2)(i) of this section, 

unless the following criteria are met: 

(A) The offsetting transactions have the 

same explicit final settlement date under 

their governing agreements; 

(B) The right to offset the amount owed to 

the counterparty with the amount owed by 

the counterparty is legally enforceable in the 

normal course of business and in the event 

of receivership, insolvency, liquidation, or 

similar proceeding; and 

(C) Under the governing agreements, the 

counterparties intend to settle net, settle 

simultaneously, or settle according to a 

process that is the functional equivalent of 

net settlement, (that is, the cash flows of the 

transactions are equivalent, in effect, to a 

single net amount on the settlement date), 

where both transactions are settled through 

the same settlement system, the settlement 

arrangements are supported by cash or 

intraday credit facilities intended to ensure 

that settlement of both transactions will 

occur by the end of the business day, and the 

settlement of the underlying securities does 

not interfere with the net cash settlement; 

(vi) The counterparty credit risk of a repostyle transaction, including where the 

national bank or Federal savings association 

acts as an agent for a repo-style transaction 

and indemnifies the customer with respect to 

the performance of the customer’s 

counterparty in an amount limited to the 

difference between the fair value of the 

security or cash its customer has lent and the 

fair value of the collateral the borrower has 

provided, calculated as follows: 

(A) If the transaction is not subject to a 

qualifying master netting agreement, the 

counterparty credit risk (E*) for transactions 

with a counterparty must be calculated on a 

transaction by transaction basis, such that 

each transaction i is treated as its own netting 

set, in accordance with the following 

formula, where Ei is the fair value of the 

instruments, gold, or cash that the national 

bank or Federal savings association has lent, 

sold subject to repurchase, or provided as 

collateral to the counterparty, and Ci is the 

fair value of the instruments, gold, or cash 

that the national bank or Federal savings 

association has borrowed, purchased subject 

to resale, or received as collateral from the 

counterparty: 

Ei* = max {0, [Ei ¥ Ci]}; and 

(B) If the transaction is subject to a 

qualifying master netting agreement, the 

counterparty credit risk (E*) must be 

calculated as the greater of zero and the total 

fair value of the instruments, gold, or cash 

that the national bank or Federal savings 

association has lent, sold subject to 

repurchase or provided as collateral to a 

counterparty for all transactions included in 

the qualifying master netting agreement (SEi), 

less the total fair value of the instruments, 

gold, or cash that the national bank or 

Federal savings association borrowed, 

purchased subject to resale or received as 

collateral from the counterparty for those 

transactions (SCi), in accordance with the 

following formula: 

E* = max {0, [SEi ¥ SCi]} 

(vii) If a national bank or Federal savings 

association acting as an agent for a repo-style 

transaction provides a guarantee to a 

customer of the security or cash its customer 

has lent or borrowed with respect to the 

performance of the customer’s counterparty 

and the guarantee is not limited to the 

difference between the fair value of the 

security or cash its customer has lent and the 

fair value of the collateral the borrower has 

provided, the amount of the guarantee that is 

greater than the difference between the fair 

value of the security or cash its customer has 

lent and the value of the collateral the 

borrower has provided; 

(viii) The credit equivalent amount of all 

off-balance sheet exposures of the national 

bank or Federal savings association, 

excluding repo-style transactions, repurchase 

or reverse repurchase or securities borrowing 

or lending transactions that qualify for sales 

treatment under GAAP, and derivative 

transactions, determined using the applicable 

credit conversion factor under § 3.33(b), 

provided, however, that the minimum credit 

conversion factor that may be assigned to an 

off-balance sheet exposure under this 

paragraph is 10 percent; and 

(ix) For a national bank or Federal savings 

association that is a clearing member: 

(A) A clearing member national bank or 

Federal savings association that guarantees 

the performance of a clearing member client 

with respect to a cleared transaction must 

treat its exposure to the clearing member 

client as a derivative contract for purposes of 

determining its total leverage exposure; 

(B) A clearing member national bank or 

Federal savings association that guarantees 

the performance of a CCP with respect to a 

transaction cleared on behalf of a clearing 

member client must treat its exposure to the 

CCP as a derivative contract for purposes of 

determining its total leverage exposure; 

(C) A clearing member national bank or 

Federal savings association that does not 

guarantee the performance of a CCP with 

respect to a transaction cleared on behalf of 

a clearing member client may exclude its 

exposure to the CCP for purposes of 

determining its total leverage exposure; 

(D) A national bank or Federal savings 

association that is a clearing member may 

exclude from its total leverage exposure the 

effective notional principal amount of credit 

protection sold through a credit derivative 

contract, or other similar instrument, that it 

clears on behalf of a clearing member client 

through a CCP as calculated in accordance 

with paragraph (c)(2)(iv) of this section; and 

(E) Notwithstanding paragraphs 

(c)(2)(ix)(A) through (C) of this section, a 

national bank or Federal savings association 

may exclude from its total leverage exposure 

a clearing member’s exposure to a clearing 

member client for a derivative contract, if the 

clearing member client and the clearing 

member are affiliates and consolidated for 

financial reporting purposes on the national 

bank’s or Federal savings association’s 

balance sheet. 

(x) A custodial bank shall exclude from its 

total leverage exposure the lesser of: 

(A) The amount of funds that the custody 

bank has on deposit at a qualifying central 

bank; and 

(B) The amount of funds that the custody 

bank’s clients have on deposit at the custody 

bank that are linked to fiduciary or custodial 

and safekeeping accounts. For purposes of 

this paragraph (c)(2)(x), a deposit account is 

linked to a fiduciary or custodial and 

safekeeping account if the deposit account is 

provided to a client that maintains a 


jbell on DSKJLSW7X2PROD with RULES2
728 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

23The national bank or Federal savings 

association must calculate amounts deducted under 

paragraphs (c) through (f) of this section after it 

calculates the amount of ALLL or AACL, as 

applicable, includable in tier 2 capital under 

§ 3.20(d)(3). 

fiduciary or custodial and safekeeping 

account with the custody bank, and the 

deposit account is used to facilitate the 

administration of the fiduciary or custody 

and safekeeping account. 

(d) Advanced approaches capital ratio 

calculations. An advanced approaches 

national bank or Federal savings association 

that has completed the parallel run process 

and received notification from the OCC 

pursuant to § 3.121(d) must determine its 

regulatory capital ratios as described in 

paragraphs (d)(1) through (3) of this section. 

(1) Common equity tier 1 capital ratio. The 

national bank’s or Federal savings 

association’s common equity tier 1 capital 

ratio is the lower of: 

(i) The ratio of the national bank’s or 

Federal savings association’s common equity 

tier 1 capital to standardized total riskweighted assets; and 

(ii) The ratio of the national bank’s or 

Federal savings association’s common equity 

tier 1 capital to advanced approaches total 

risk-weighted assets. 

(2) Tier 1 capital ratio. The national bank’s 

or Federal savings association’s tier 1 capital 

ratio is the lower of: 

(i) The ratio of the national bank’s or 

Federal savings association’s tier 1 capital to 

standardized total risk-weighted assets; and 

(ii) The ratio of the national bank’s or 

Federal savings association’s tier 1 capital to 

advanced approaches total risk-weighted 

assets. 

(3) Total capital ratio. The national bank’s 

or Federal savings association’s total capital 

ratio is the lower of: 

(i) The ratio of the national bank’s or 

Federal savings association’s total capital to 

standardized total risk-weighted assets; and 

(ii) The ratio of the national bank’s or 

Federal savings association’s advancedapproaches-adjusted total capital to advanced 

approaches total risk-weighted assets. A 

national bank’s or Federal savings 

association’s advanced-approaches-adjusted 

total capital is the national bank’s or Federal 

savings association’s total capital after being 

adjusted as follows: 

(A) An advanced approaches national bank 

or Federal savings association must deduct 

from its total capital any allowance for loan 

and lease losses or adjusted allowance for 

credit losses, as applicable, included in its 

tier 2 capital in accordance with § 3.20(d)(3); 

and 

(B) An advanced approaches national bank 

or Federal savings association must add to its 

total capital any eligible credit reserves that 

exceed the national bank’s or Federal savings 

association’s total expected credit losses to 

the extent that the excess reserve amount 

does not exceed 0.6 percent of the national 

bank’s or Federal savings association’s credit 

risk-weighted assets. 

(4) Federal savings association tangible 

capital ratio. A Federal savings association’s 

tangible capital ratio is the ratio of the 

Federal savings association’s core capital (tier 

1 capital) to average total assets as calculated 

under this subpart B. For purposes of this 

paragraph (d)(4), the term ‘‘total assets’’ 

means ‘‘total assets’’ as defined in part 6, 

subpart A of this chapter, subject to subpart 

G of this part. 

* * * * * 

■ 4. In § 3.22, revise paragraphs (c), (f), 

and (h) to read as follows: 

§ 3.22 Regulatory capital adjustments and 

deductions. 

* * * * * 

(c) Deductions from regulatory capital 

related to investments in capital 

instruments or covered debt 

instruments 23—(1) Investment in the 

national bank’s or Federal savings 

association’s own capital instruments. A 

national bank or Federal savings 

association must deduct an investment 

in the national bank’s or Federal savings 

association’s own capital instruments, 

as follows: 

(i) A national bank or Federal savings 

association must deduct an investment 

in the national bank’s or Federal savings 

association’s own common stock 

instruments from its common equity tier 

1 capital elements to the extent such 

instruments are not excluded from 

regulatory capital under § 3.20(b)(1); 

(ii) A national bank or Federal savings 

association must deduct an investment 

in the national bank’s or Federal savings 

association’s own additional tier 1 

capital instruments from its additional 

tier 1 capital elements; and 

(iii) A national bank or Federal 

savings association must deduct an 

investment in the national bank’s or 

Federal savings association’s own tier 2 

capital instruments from its tier 2 

capital elements. 

(2) Corresponding deduction 

approach. For purposes of subpart C of 

this part, the corresponding deduction 

approach is the methodology used for 

the deductions from regulatory capital 

related to reciprocal cross holdings (as 

described in paragraph (c)(3) of this 

section), investments in the capital of 

unconsolidated financial institutions for 

a national bank or Federal savings 

association that is not an advanced 

approaches national bank or Federal 

savings association (as described in 

paragraph (c)(4) of this section), nonsignificant investments in the capital of 

unconsolidated financial institutions for 

an advanced approaches national bank 

or Federal savings association (as 

described in paragraph (c)(5) of this 

section), and non-common stock 

significant investments in the capital of 

unconsolidated financial institutions for 

an advanced approaches national bank 

or Federal savings association (as 

described in paragraph (c)(6) of this 

section). Under the corresponding 

deduction approach, a national bank or 

Federal savings association must make 

deductions from the component of 

capital for which the underlying 

instrument would qualify if it were 

issued by the national bank or Federal 

savings association itself, as described 

in paragraphs (c)(2)(i) through (iii) of 

this section. If the national bank or 

Federal savings association does not 

have a sufficient amount of a specific 

component of capital to effect the 

required deduction, the shortfall must 

be deducted according to paragraph (f) 

of this section. 

(i) If an investment is in the form of 

an instrument issued by a financial 

institution that is not a regulated 

financial institution, the national bank 

or Federal savings association must treat 

the instrument as: 

(A) A common equity tier 1 capital 

instrument if it is common stock or 

represents the most subordinated claim 

in a liquidation of the financial 

institution; and 

(B) An additional tier 1 capital 

instrument if it is subordinated to all 

creditors of the financial institution and 

is senior in liquidation only to common 

shareholders. 

(ii) If an investment is in the form of 

an instrument issued by a regulated 

financial institution and the instrument 

does not meet the criteria for common 

equity tier 1, additional tier 1 or tier 2 

capital instruments under § 3.20, the 

national bank or Federal savings 

association must treat the instrument as: 

(A) A common equity tier 1 capital 

instrument if it is common stock 

included in GAAP equity or represents 

the most subordinated claim in 

liquidation of the financial institution; 

(B) An additional tier 1 capital 

instrument if it is included in GAAP 

equity, subordinated to all creditors of 

the financial institution, and senior in a 

receivership, insolvency, liquidation, or 

similar proceeding only to common 

shareholders; 

(C) A tier 2 capital instrument if it is 

not included in GAAP equity but 

considered regulatory capital by the 

primary supervisor of the financial 

institution; and 

(D) For an advanced approaches 

national bank or Federal savings 

association, a tier 2 capital instrument if 

it is a covered debt instrument. 

(iii) If an investment is in the form of 

a non-qualifying capital instrument (as 

defined in § 3.300(c)), the national bank 

or Federal savings association must treat 

the instrument as: 

(A) An additional tier 1 capital 

instrument if such instrument was 

included in the issuer’s tier 1 capital 

prior to May 19, 2010; or 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 729 

24With the prior written approval of the OCC, for 

the period of time stipulated by the OCC, a national 

bank or Federal savings association is not required 

to deduct a non-significant investment in the 

capital instrument of an unconsolidated financial 

institution or an investment in a covered debt 

instrument pursuant to this paragraph if the 

financial institution is in distress and if such 

investment is made for the purpose of providing 

financial support to the financial institution, as 

determined by the OCC. 

25Any non-significant investments in the capital 

of an unconsolidated financial institution that is not 

required to be deducted under this paragraph (c)(4) 

or otherwise under this section must be assigned 

the appropriate risk weight under subparts D, E, or 

F of this part, as applicable. 

26With the prior written approval of the OCC, for 

the period of time stipulated by the OCC, an 

advanced approaches a national bank or Federal 

savings association is not required to deduct a nonsignificant investment in the capital instrument of 

an unconsolidated financial institution or an 

investment in a covered debt instrument pursuant 

to this paragraph if the financial institution is in 

distress and if such investment is made for the 

purpose of providing financial support to the 

financial institution, as determined by the OCC. 

27Any non-significant investment in the capital 

of an unconsolidated financial institution or any 

investment in a covered debt instrument that is not 

required to be deducted under this paragraph (c)(4) 

or otherwise under this section must be assigned 

the appropriate risk weight under subpart D, E, or 

F of this part, as applicable. 

(B) A tier 2 capital instrument if such 

instrument was included in the issuer’s 

tier 2 capital (but not includable in tier 

1 capital) prior to May 19, 2010. 

(3) Reciprocal cross holdings in the 

capital of financial institutions. (i) A 

national bank or Federal savings 

association must deduct an investment 

in the capital of other financial 

institutions that it holds reciprocally 

with another financial institution, 

where such reciprocal cross holdings 

result from a formal or informal 

arrangement to swap, exchange, or 

otherwise intend to hold each other’s 

capital instruments, by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section. 

(ii) An advanced approaches national 

bank or Federal savings association 

must deduct an investment in any 

covered debt instrument that the 

institution holds reciprocally with 

another financial institution, where 

such reciprocal cross holdings result 

from a formal or informal arrangement 

to swap, exchange, or otherwise intend 

to hold each other’s capital or covered 

debt instruments, by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section. 

(4) Investments in the capital of 

unconsolidated financial institutions. A 

national bank or Federal savings 

association that is not an advanced 

approaches national bank or Federal 

savings association must deduct its 

investments in the capital of 

unconsolidated financial institutions (as 

defined in § 3.2) that exceed 25 percent 

of the sum of the national bank or 

Federal savings association’s common 

equity tier 1 capital elements minus all 

deductions from and adjustments to 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section.24 The 

deductions described in this section are 

net of associated DTLs in accordance 

with paragraph (e) of this section. In 

addition, with the prior written 

approval of the OCC, a national bank or 

Federal savings association that 

underwrites a failed underwriting, for 

the period of time stipulated by the 

OCC, is not required to deduct an 

investment in the capital of an 

unconsolidated financial institution 

pursuant to this paragraph (c) to the 

extent the investment is related to the 

failed underwriting.25

(5) Non-significant investments in the 

capital of unconsolidated financial 

institutions. (i) An advanced approaches 

national bank or Federal savings 

association must deduct its nonsignificant investments in the capital of 

unconsolidated financial institutions (as 

defined in § 3.2) that, in the aggregate 

and together with any investment in a 

covered debt instrument (as defined in 

§ 3.2) issued by a financial institution in 

which the national bank or Federal 

savings association does not have a 

significant investment in the capital of 

the unconsolidated financial institution 

(as defined in § 3.2), exceeds 10 percent 

of the sum of the advanced approaches 

national bank’s or Federal savings 

association’s common equity tier 1 

capital elements minus all deductions 

from and adjustments to common equity 

tier 1 capital elements required under 

paragraphs (a) through (c)(3) of this 

section (the 10 percent threshold for 

non-significant investments) by 

applying the corresponding deduction 

approach in paragraph (c)(2) of this 

section.26 The deductions described in 

this paragraph are net of associated 

DTLs in accordance with paragraph (e) 

of this section. In addition, with the 

prior written approval of the OCC, an 

advanced approaches national bank or 

Federal savings association that 

underwrites a failed underwriting, for 

the period of time stipulated by the 

OCC, is not required to deduct from 

capital a non-significant investment in 

the capital of an unconsolidated 

financial institution or an investment in 

a covered debt instrument pursuant to 

this paragraph (c)(5) to the extent the 

investment is related to the failed 

underwriting.27 For any calculation 

under this paragraph (c)(5)(i), an 

advanced approaches national bank or 

Federal savings association may exclude 

the amount of an investment in a 

covered debt instrument under 

paragraph (c)(5)(iii) or (iv) of this 

section, as applicable. 

(ii) For an advanced approaches 

national bank or Federal savings 

association, the amount to be deducted 

under this paragraph (c)(5) from a 

specific capital component is equal to: 

(A) The advanced approaches 

national bank’s or Federal savings 

association’s aggregate non-significant 

investments in the capital of an 

unconsolidated financial institution 

and, if applicable, any investments in a 

covered debt instrument subject to 

deduction under this paragraph (c)(5), 

exceeding the 10 percent threshold for 

non-significant investments, multiplied 

by 

(B) The ratio of the advanced 

approaches national bank’s or Federal 

savings association’s aggregate nonsignificant investments in the capital of 

an unconsolidated financial institution 

(in the form of such capital component) 

to the national bank’s or Federal savings 

association’s total non-significant 

investments in unconsolidated financial 

institutions, with an investment in a 

covered debt instrument being treated as 

tier 2 capital for this purpose. 

(iii) For purposes of applying the 

deduction under paragraph (c)(5)(i) of 

this section, an advanced approaches 

national bank or Federal savings 

association that is not a subsidiary of a 

global systemically important banking 

organization, as defined in 12 CFR 

252.2, may exclude from the deduction 

the amount of the national bank’s or 

Federal savings association’s gross long 

position, in accordance with 

§ 3.22(h)(2), in investments in covered 

debt instruments issued by financial 

institutions in which the national bank 

or Federal savings association does not 

have a significant investment in the 

capital of the unconsolidated financial 

institutions up to an amount equal to 5 

percent of the sum of the national 

bank’s or Federal savings association’s 

common equity tier 1 capital elements 

minus all deductions from and 

adjustments to common equity tier 1 

capital elements required under 

paragraphs (a) through (c)(3) of this 

section, net of associated DTLs in 

accordance with paragraph (e) of this 

section. 

(iv) Prior to applying the deduction 

under paragraph (c)(5)(i) of this section: 

(A) A national bank or Federal savings 

association that is a subsidiary of a 

global systemically important BHC, as 

defined in 12 CFR 252.2, may designate 


jbell on DSKJLSW7X2PROD with RULES2
730 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

28With prior written approval of the OCC, for the 

period of time stipulated by the OCC, an advanced 

approaches national bank or Federal savings 

association is not required to deduct an investment 

in a covered debt instrument under this paragraph 

(c)(5) or otherwise under this section if such 

investment is made for the purpose of providing 

financial support to the financial institution as 

determined by the OCC. 

any investment in a covered debt 

instrument as an excluded covered debt 

instrument, as defined in § 3.2. 

(B) A national bank or Federal savings 

association that is a subsidiary of a 

global systemically important BHC, as 

defined in 12 CFR 252.2, must deduct 

according to the corresponding 

deduction approach in paragraph (c)(2) 

of this section, its gross long position, 

calculated in accordance with paragraph 

(h)(2) of this section, in a covered debt 

instrument that was originally 

designated as an excluded covered debt 

instrument, in accordance with 

paragraph (c)(5)(iv)(A) of this section, 

but no longer qualifies as an excluded 

covered debt instrument. 

(C) A national bank or Federal savings 

association that is a subsidiary of a 

global systemically important BHC, as 

defined in 12 CFR 252.2, must deduct 

according to the corresponding 

deduction approach in paragraph (c)(2) 

of this section the amount of its gross 

long position, calculated in accordance 

with paragraph (h)(2) of this section, in 

a direct or indirect investment in a 

covered debt instrument that was 

originally designated as an excluded 

covered debt instrument, in accordance 

with paragraph (c)(5)(iv)(A) of this 

section, and has been held for more than 

thirty business days. 

(D) A national bank or Federal savings 

association that is a subsidiary of a 

global systemically important BHC, as 

defined in 12 CFR 252.2, must deduct 

according to the corresponding 

deduction approach in paragraph (c)(2) 

of this section its gross long position, 

calculated in accordance with paragraph 

(h)(2) of this section, of its aggregate 

investment in excluded covered debt 

instruments that exceeds 5 percent of 

the sum of the national bank’s or 

Federal savings association’s common 

equity tier 1 capital elements minus all 

deductions from and adjustments to 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section, net of associated 

DTLs in accordance with paragraph (e) 

of this section. 

(6) Significant investments in the 

capital of unconsolidated financial 

institutions that are not in the form of 

common stock. If an advanced 

approaches national bank or Federal 

savings association has a significant 

investment in the capital of an 

unconsolidated financial institution, the 

advanced approaches national bank or 

Federal savings association must deduct 

from capital any such investment issued 

by the unconsolidated financial 

institution that is held by the national 

bank or Federal savings association 

other than an investment in the form of 

common stock, as well as any 

investment in a covered debt instrument 

issued by the unconsolidated financial 

institution, by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section.28 The 

deductions described in this section are 

net of associated DTLs in accordance 

with paragraph (e) of this section. In 

addition, with the prior written 

approval of the OCC, for the period of 

time stipulated by the OCC, an 

advanced approaches national bank or 

Federal savings association that 

underwrites a failed underwriting is not 

required to deduct the significant 

investment in the capital of an 

unconsolidated financial institution or 

an investment in a covered debt 

instrument pursuant to this paragraph 

(c)(6) if such investment is related to 

such failed underwriting. 

* * * * * 

(f) Insufficient amounts of a specific 

regulatory capital component to effect 

deductions. Under the corresponding 

deduction approach, if a national bank 

or Federal savings association does not 

have a sufficient amount of a specific 

component of capital to effect the full 

amount of any deduction from capital 

required under paragraph (d) of this 

section, the national bank or Federal 

savings association must deduct the 

shortfall amount from the next higher 

(that is, more subordinated) component 

of regulatory capital. Any investment by 

an advanced approaches national bank 

or Federal savings association in a 

covered debt instrument must be treated 

as an investment in the tier 2 capital for 

purposes of this paragraph. 

Notwithstanding any other provision of 

this section, a qualifying community 

banking organization (as defined in 

§ 3.12) that has elected to use the 

community bank leverage ratio 

framework pursuant to § 3.12 is not 

required to deduct any shortfall of tier 

2 capital from its additional tier 1 

capital or common equity tier 1 capital. 

* * * * * 

(h) Net long position—(1) In general. 

For purposes of calculating the amount 

of a national bank’s or Federal savings 

association’s investment in the national 

bank’s or Federal savings association’s 

own capital instrument, investment in 

the capital of an unconsolidated 

financial institution, and investment in 

a covered debt instrument under this 

section, the institution’s net long 

position is the gross long position in the 

underlying instrument determined in 

accordance with paragraph (h)(2) of this 

section, as adjusted to recognize any 

short position by the national bank or 

Federal savings association in the same 

instrument subject to paragraph (h)(3) of 

this section. 

(2) Gross long position. A gross long 

position is determined as follows: 

(i) For an equity exposure that is held 

directly by the national bank or Federal 

savings association, the adjusted 

carrying value of the exposure as that 

term is defined in § 3.51(b); 

(ii) For an exposure that is held 

directly and that is not an equity 

exposure or a securitization exposure, 

the exposure amount as that term is 

defined in § 3.2; 

(iii) For each indirect exposure, the 

national bank’s or Federal savings 

association’s carrying value of its 

investment in an investment fund or, 

alternatively: 

(A) A national bank or Federal savings 

association may, with the prior approval 

of the OCC, use a conservative estimate 

of the amount of its indirect investment 

in the national bank’s or Federal savings 

association’s own capital instruments, 

its indirect investment in the capital of 

an unconsolidated financial institution, 

or its indirect investment in a covered 

debt instrument held through a position 

in an index, as applicable; or 

(B) A national bank or Federal savings 

association may calculate the gross long 

position for an indirect exposure to the 

national bank’s or Federal savings 

association’s own capital the capital in 

an unconsolidated financial institution, 

or a covered debt instrument by 

multiplying the national bank’s or 

Federal savings association’s carrying 

value of its investment in the 

investment fund by either: 

(1) The highest stated investment 

limit (in percent) for an investment in 

the national bank’s or Federal savings 

association’s own capital instruments, 

an investment in the capital of an 

unconsolidated financial institution, or 

an investment in a covered debt 

instrument, as applicable, as stated in 

the prospectus, partnership agreement, 

or similar contract defining permissible 

investments of the investment fund; or 

(2) The investment fund’s actual 

holdings (in percent) of the investment 

in the national bank’s or Federal savings 

association’s own capital instruments, 

investment in the capital of an 

unconsolidated financial institution, or 

investment in a covered debt 

instrument, as applicable; and 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 731 

(iv) For a synthetic exposure, the 

amount of the national bank’s or Federal 

savings association’s loss on the 

exposure if the reference capital 

instrument or covered debt instrument 

were to have a value of zero. 

(3) Adjustments to reflect a short 

position. In order to adjust the gross 

long position to recognize a short 

position in the same instrument under 

paragraph (h)(1) of this section, the 

following criteria must be met: 

(i) The maturity of the short position 

must match the maturity of the long 

position, or the short position must have 

a residual maturity of at least one year 

(maturity requirement); or 

(ii) For a position that is a trading 

asset or trading liability (whether on- or 

off-balance sheet) as reported on the 

national bank’s or Federal savings 

association’s Call Report, if the national 

bank or Federal savings association has 

a contractual right or obligation to sell 

the long position at a specific point in 

time and the counterparty to the 

contract has an obligation to purchase 

the long position if the national bank or 

Federal savings association exercises its 

right to sell, this point in time may be 

treated as the maturity of the long 

position such that the maturity of the 

long position and short position are 

deemed to match for purposes of the 

maturity requirement, even if the 

maturity of the short position is less 

than one year; and 

(iii) For an investment in a national 

bank’s or Federal savings association’s 

own capital instrument under paragraph 

(c)(1) of this section, an investment in 

the capital of an unconsolidated 

financial institution under paragraphs 

(c)(4) through (6) and (d) of this section 

(as applicable), and an investment in a 

covered debt instrument under 

paragraphs (c)(1), (5), and (6) of this 

section: 

(A) The national bank or Federal 

savings association may only net a short 

position against a long position in an 

investment in the national bank’s or 

Federal savings association’s own 

capital instrument under paragraph 

(c)(1) of this section if the short position 

involves no counterparty credit risk; 

(B) A gross long position in an 

investment in the national bank’s or 

Federal savings association’s own 

capital instrument, an investment in the 

capital of an unconsolidated financial 

institution, or an investment in a 

covered debt instrument due to a 

position in an index may be netted 

against a short position in the same 

index; 

(C) Long and short positions in the 

same index without maturity dates are 

considered to have matching maturities; 

and 

(D) A short position in an index that 

is hedging a long cash or synthetic 

position in an investment in the 

national bank’s or Federal savings 

association’s own capital instrument, an 

investment in the capital instrument of 

an unconsolidated financial institution, 

or an investment in a covered debt 

instrument can be decomposed to 

provide recognition of the hedge. More 

specifically, the portion of the index 

that is composed of the same underlying 

instrument that is being hedged may be 

used to offset the long position if both 

the long position being hedged and the 

short position in the index are reported 

as a trading asset or trading liability 

(whether on- or off-balance sheet) on the 

national bank’s or Federal savings 

association’s Call Report, and the hedge 

is deemed effective by the national 

bank’s or Federal savings association’s 

internal control processes, which have 

not been found to be inadequate by the 

OCC. 

§ 3.121 [Amended] 

■ 5. Section 3.121 is amended by 

removing ‘‘§ 3.10(c)(1) through (3)’’ and 

adding ‘‘§ 3.10(d)(1) through (3)’’ in its 

place in paragraph (c). 

§ 3.132 [Amended] 

■ 6. Section 3.132 is amended by 

removing ‘‘§ 3.10(c)(4)(ii)(B)’’ and 

adding ‘‘§ 3.10(c)(2)(ii)(B)’’ in 

paragraphs (c)(7)(iii) and (iv). 

§ 3.304 [Amended] 

■ 7. Section 3.304 is amended by: 

■ a. Removing ‘‘§ 3.10(c)(4)’’ and adding 

in its place ‘‘§ 3.10(d)’’ in paragraph (a) 

introductory text; and 

■ b. Removing ‘‘§ 3.10(c)(4)(ii)(J)(1)’’ and 

adding in its place ‘‘§ 3.10(c)(2)(x)(A)’’ 

in paragraph (e). 

Board of Governors of the Federal 

Reserve System 

For the reasons set forth in the joint 

preamble, the Board amends part 217 of 

chapter II of title 12 of the Code of 

Federal Regulations as follows: 

PART 217—CAPITAL ADEQUACY OF 

BANK HOLDING COMPANIES, 

SAVINGS AND LOAN HOLDING 

COMPANIES, AND STATE MEMBER 

BANKS (REGULATION Q). 

■ 8. The authority citation for part 217 

continues to read as follows: 

Authority: 12 U.S.C. 248(a), 321–338a, 

481–486, 1462a, 1467a, 1818, 1828, 1831n, 

1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 

3904, 3906–3909, 4808, 5365, 5368, 5371, 

and 5371 note; Pub. L. 116–136, 134 Stat. 

281. 

■ 9. In § 217.2: 

■ a. Add definitions in alphabetical 

order for ‘‘Covered debt instrument’’ 

and ‘‘Excluded covered debt 

instrument’’; 

■ b. In the definition of ‘‘Fiduciary or 

custodial and safekeeping accounts’’, 

remove ‘‘§ 217.10(c)(4)(ii)(J)’’ and add 

‘‘§ 217.10(c)(2)(x)’’ in its place; 

■ c. Revise the definition of ‘‘Indirect 

exposure’’; 

■ d. Add a definition in alphabetical 

order for ‘‘Investment in a covered debt 

instrument’’; 

■ e. Revise the definition of ‘‘Synthetic 

exposure’’; and 

■ f. In the definition of ‘‘Total leverage 

exposure’’, remove ‘‘§ 217.10(c)(4)(ii)’’ 

and add ‘‘§ 217.10(c)(2)’’ in its place. 

The additions and revisions read as 

follows: 

§ 217.2 Definitions. 

* * * * * 

Covered debt instrument means an 

unsecured debt instrument that is: 

(1) Issued by a global systemically 

important BHC and that is an eligible 

debt security, as defined in 12 CFR 

252.61, or that is pari passu or 

subordinated to any eligible debt 

security issued by the global 

systemically important BHC; or 

(2) Issued by a Covered IHC, as 

defined in 12 CFR 252.161, and that is 

an eligible Covered IHC debt security, as 

defined in 12 CFR 252.161, or that is 

pari passu or subordinated to any 

eligible Covered IHC debt security 

issued by the Covered IHC; or 

(3) Issued by a global systemically 

important banking organization, as 

defined in 12 CFR 252.2 other than a 

global systemically important BHC; or 

issued by a subsidiary of a global 

systemically important banking 

organization that is not a global 

systemically important BHC, other than 

a Covered IHC, as defined in 12 CFR 

252.161; and where, 

(i) The instrument is eligible for use 

to comply with an applicable law or 

regulation requiring the issuance of a 

minimum amount of instruments to 

absorb losses or recapitalize the issuer 

or any of its subsidiaries in connection 

with a resolution, receivership, 

insolvency, or similar proceeding of the 

issuer or any of its subsidiaries; or 

(ii) The instrument is pari passu or 

subordinated to any instrument 

described in paragraph (3)(i) of this 

definition; for purposes of this 

paragraph (3)(ii) of this definition, if the 

issuer may be subject to a special 

resolution regime, in its jurisdiction of 

incorporation or organization, that 

addresses the failure or potential failure 

of a financial company and any 


jbell on DSKJLSW7X2PROD with RULES2
732 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

instrument described in paragraph (3)(i) 

of this definition is eligible under that 

special resolution regime to be written 

down or converted into equity or any 

other capital instrument, then an 

instrument is pari passu or 

subordinated to any instrument 

described in paragraph (3)(i) of this 

definition if that instrument is eligible 

under that special resolution regime to 

be written down or converted into 

equity or any other capital instrument 

ahead of or proportionally with any 

instrument described in paragraph (3)(i) 

of this definition; and 

(4) Provided that, for purposes of this 

definition, covered debt instrument does 

not include a debt instrument that 

qualifies as tier 2 capital pursuant to 12 

CFR 217.20(d) or that is otherwise 

treated as regulatory capital by the 

primary supervisor of the issuer. 

* * * * * 

Excluded covered debt instrument 

means an investment in a covered debt 

instrument held by a global systemically 

important BHC or a Board-regulated 

institution that is a subsidiary of a 

global systemically important BHC that: 

(1) Is held in connection with market 

making-related activities permitted 

under 12 CFR 248.4, provided that a 

direct exposure or an indirect exposure 

to a covered debt instrument is held for 

30 business days or less; and 

(2) Has been designated as an 

excluded covered debt instrument by 

the global systemically important BHC 

or the subsidiary of a global 

systemically important BHC pursuant to 

12 CFR 217.22(c)(5)(iv)(A). 

* * * * * 

Indirect exposure means an exposure 

that arises from the Board-regulated 

institution’s investment in an 

investment fund which holds an 

investment in the Board-regulated 

institution’s own capital instrument or 

an investment in the capital of an 

unconsolidated financial institution. For 

an advanced approaches Boardregulated institution, indirect exposure 

also includes an investment in an 

investment fund that holds a covered 

debt instrument. 

* * * * * 

Investment in a covered debt 

instrument means a Board-regulated 

institution’s net long position calculated 

in accordance with § 217.22(h) in a 

covered debt instrument, including 

direct, indirect, and synthetic exposures 

to the debt instrument, excluding any 

underwriting positions held by the 

Board-regulated institution for five or 

fewer business days. 

* * * * * 

Synthetic exposure means an 

exposure whose value is linked to the 

value of an investment in the Boardregulated institution’s own capital 

instrument or to the value of an 

investment in the capital of an 

unconsolidated financial institution. For 

an advanced approaches Boardregulated institution, synthetic exposure 

includes an exposure whose value is 

linked to the value of an investment in 

a covered debt instrument. 

* * * * * 

■ 10. Section 217.10 is amended by: 

■ a. Revising paragraph (c); 

■ b. Redesignating paragraph (d) as (e); 

and 

■ c. Adding new paragraph (d). 

The revision and addition read as 

follows: 

§ 217.10 Minimum capital requirements. 

* * * * * 

(c) Supplementary leverage ratio. (1) 

A Category III Board-regulated 

institution or advanced approaches 

Board-regulated institution must 

determine its supplementary leverage 

ratio in accordance with this paragraph, 

beginning with the calendar quarter 

immediately following the quarter in 

which the Board-regulated institution is 

identified as a Category III Boardregulated institution. An advanced 

approaches Board-regulated institution’s 

or a Category III Board-regulated 

institution’s supplementary leverage 

ratio is the ratio of its tier 1 capital to 

total leverage exposure, the latter of 

which is calculated as the sum of: 

(i) The mean of the on-balance sheet 

assets calculated as of each day of the 

reporting quarter; and 

(ii) The mean of the off-balance sheet 

exposures calculated as of the last day 

of each of the most recent three months, 

minus the applicable deductions under 

§ 217.22(a), (c), and (d). 

(2) For purposes of this part, total 

leverage exposure means the sum of the 

items described in paragraphs (c)(2)(i) 

through (viii) of this section, as adjusted 

pursuant to paragraph (c)(2)(ix) of this 

section for a clearing member Boardregulated institution and paragraph 

(c)(2)(x) of this section for a custodial 

banking organization: 

(i) The balance sheet carrying value of 

all of the Board-regulated institution’s 

on-balance sheet assets, plus the value 

of securities sold under a repurchase 

transaction or a securities lending 

transaction that qualifies for sales 

treatment under GAAP, less amounts 

deducted from tier 1 capital under 

§ 217.22(a), (c), and (d), and less the 

value of securities received in securityfor-security repo-style transactions, 

where the Board-regulated institution 

acts as a securities lender and includes 

the securities received in its on-balance 

sheet assets but has not sold or rehypothecated the securities received, 

and, for a Board-regulated institution 

that uses the standardized approach for 

counterparty credit risk under 

§ 217.132(c) for its standardized riskweighted assets, less the fair value of 

any derivative contracts; 

(ii)(A) For a Board-regulated 

institution that uses the current 

exposure methodology under 

§ 217.34(b) for its standardized riskweighted assets, the potential future 

credit exposure (PFE) for each 

derivative contract or each singleproduct netting set of derivative 

contracts (including a cleared 

transaction except as provided in 

paragraph (c)(2)(ix) of this section and, 

at the discretion of the Board-regulated 

institution, excluding a forward 

agreement treated as a derivative 

contract that is part of a repurchase or 

reverse repurchase or a securities 

borrowing or lending transaction that 

qualifies for sales treatment under 

GAAP), to which the Board-regulated 

institution is a counterparty as 

determined under § 217.34, but without 

regard to § 217.34(c), provided that: 

(1) A Board-regulated institution may 

choose to exclude the PFE of all credit 

derivatives or other similar instruments 

through which it provides credit 

protection when calculating the PFE 

under § 217.34, but without regard to 

§ 217.34(c), provided that it does not 

adjust the net-to-gross ratio (NGR); and 

(2) A Board-regulated institution that 

chooses to exclude the PFE of credit 

derivatives or other similar instruments 

through which it provides credit 

protection pursuant to paragraph 

(c)(2)(ii)(A) of this section must do so 

consistently over time for the 

calculation of the PFE for all such 

instruments; or 

(B)(1) For a Board-regulated 

institution that uses the standardized 

approach for counterparty credit risk 

under section § 217.132(c) for its 

standardized risk-weighted assets, the 

PFE for each netting set to which the 

Board-regulated institution is a 

counterparty (including cleared 

transactions except as provided in 

paragraph (c)(2)(ix) of this section and, 

at the discretion of the Board-regulated 

institution, excluding a forward 

agreement treated as a derivative 

contract that is part of a repurchase or 

reverse repurchase or a securities 

borrowing or lending transaction that 

qualifies for sales treatment under 

GAAP), as determined under 

§ 217.132(c)(7), in which the term C in 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 733 

§ 217.132(c)(7)(i) equals zero, and, for 

any counterparty that is not a 

commercial end-user, multiplied by 1.4. 

For purposes of this paragraph 

(c)(2)(ii)(B)(1), a Board-regulated 

institution may set the value of the term 

C in § 217.132(c)(7)(i) equal to the 

amount of collateral posted by a clearing 

member client of the Board-regulated 

institution in connection with the 

client-facing derivative transactions 

within the netting set; and 

(2) A Board-regulated institution may 

choose to exclude the PFE of all credit 

derivatives or other similar instruments 

through which it provides credit 

protection when calculating the PFE 

under § 217.132(c), provided that it does 

so consistently over time for the 

calculation of the PFE for all such 

instruments; 

(iii)(A)(1) For a Board-regulated 

institution that uses the current 

exposure methodology under 

§ 217.34(b) for its standardized riskweighted assets, the amount of cash 

collateral that is received from a 

counterparty to a derivative contract 

and that has offset the mark-to-fair value 

of the derivative asset, or cash collateral 

that is posted to a counterparty to a 

derivative contract and that has reduced 

the Board-regulated institution’s onbalance sheet assets, unless such cash 

collateral is all or part of variation 

margin that satisfies the conditions in 

paragraphs (c)(2)(iii)(C) through (G) of 

this section; and 

(2) The variation margin is used to 

reduce the current credit exposure of 

the derivative contract, calculated as 

described in § 217.34(b), and not the 

PFE; and 

(3) For the purpose of the calculation 

of the NGR described in 

§ 217.34(b)(2)(ii)(B), variation margin 

described in paragraph (c)(2)(iii)(A)(2) 

of this section may not reduce the net 

current credit exposure or the gross 

current credit exposure; or 

(B)(1) For a Board-regulated 

institution that uses the standardized 

approach for counterparty credit risk 

under § 217.132(c) for its standardized 

risk-weighted assets, the replacement 

cost of each derivative contract or single 

product netting set of derivative 

contracts to which the Board-regulated 

institution is a counterparty, calculated 

according to the following formula, and, 

for any counterparty that is not a 

commercial end-user, multiplied by 1.4: 

Replacement Cost = max{V¥CVMr + 

CVMp;0} 

Where: 

V equals the fair value for each derivative 

contract or each single-product netting set of 

derivative contracts (including a cleared 

transaction except as provided in paragraph 

(c)(2)(ix) of this section and, at the discretion 

of the Board-regulated institution, excluding 

a forward agreement treated as a derivative 

contract that is part of a repurchase or reverse 

repurchase or a securities borrowing or 

lending transaction that qualifies for sales 

treatment under GAAP); 

CVMr equals the amount of cash collateral 

received from a counterparty to a derivative 

contract and that satisfies the conditions in 

paragraphs (c)(2)(iii)(C) through (G) of this 

section, or, in the case of a client-facing 

derivative transaction, the amount of 

collateral received from the clearing member 

client; and 

CVMp equals the amount of cash collateral 

that is posted to a counterparty to a 

derivative contract and that has not offset the 

fair value of the derivative contract and that 

satisfies the conditions in paragraphs 

(c)(2)(iii)(C) through (G) of this section, or, in 

the case of a client-facing derivative 

transaction, the amount of collateral posted 

to the clearing member client; 

(2) Notwithstanding paragraph 

(c)(2)(iii)(B)(1) of this section, where multiple 

netting sets are subject to a single variation 

margin agreement, a Board-regulated 

institution must apply the formula for 

replacement cost provided in 

§ 217.132(c)(10)(i), in which the term CMA

may only include cash collateral that satisfies 

the conditions in paragraphs (c)(2)(iii)(C) 

through (G) of this section; and 

(3) For purposes of paragraph 

(c)(2)(iii)(B)(1), a Board-regulated institution 

must treat a derivative contract that 

references an index as if it were multiple 

derivative contracts each referencing one 

component of the index if the Boardregulated institution elected to treat the 

derivative contract as multiple derivative 

contracts under § 217.132(c)(5)(vi); 

(C) For derivative contracts that are not 

cleared through a QCCP, the cash collateral 

received by the recipient counterparty is not 

segregated (by law, regulation, or an 

agreement with the counterparty); 

(D) Variation margin is calculated and 

transferred on a daily basis based on the 

mark-to-fair value of the derivative contract; 

(E) The variation margin transferred under 

the derivative contract or the governing rules 

of the CCP or QCCP for a cleared transaction 

is the full amount that is necessary to fully 

extinguish the net current credit exposure to 

the counterparty of the derivative contracts, 

subject to the threshold and minimum 

transfer amounts applicable to the 

counterparty under the terms of the 

derivative contract or the governing rules for 

a cleared transaction; 

(F) The variation margin is in the form of 

cash in the same currency as the currency of 

settlement set forth in the derivative contract, 

provided that for the purposes of this 

paragraph (c)(2)(iii)(F), currency of 

settlement means any currency for settlement 

specified in the governing qualifying master 

netting agreement and the credit support 

annex to the qualifying master netting 

agreement, or in the governing rules for a 

cleared transaction; and 

(G) The derivative contract and the 

variation margin are governed by a qualifying 

master netting agreement between the legal 

entities that are the counterparties to the 

derivative contract or by the governing rules 

for a cleared transaction, and the qualifying 

master netting agreement or the governing 

rules for a cleared transaction must explicitly 

stipulate that the counterparties agree to 

settle any payment obligations on a net basis, 

taking into account any variation margin 

received or provided under the contract if a 

credit event involving either counterparty 

occurs; 

(iv) The effective notional principal 

amount (that is, the apparent or stated 

notional principal amount multiplied by any 

multiplier in the derivative contract) of a 

credit derivative, or other similar instrument, 

through which the Board-regulated 

institution provides credit protection, 

provided that: 

(A) The Board-regulated institution may 

reduce the effective notional principal 

amount of the credit derivative by the 

amount of any reduction in the mark-to-fair 

value of the credit derivative if the reduction 

is recognized in common equity tier 1 

capital; 

(B) The Board-regulated institution may 

reduce the effective notional principal 

amount of the credit derivative by the 

effective notional principal amount of a 

purchased credit derivative or other similar 

instrument, provided that the remaining 

maturity of the purchased credit derivative is 

equal to or greater than the remaining 

maturity of the credit derivative through 

which the Board-regulated institution 

provides credit protection and that: 

(1) With respect to a credit derivative that 

references a single exposure, the reference 

exposure of the purchased credit derivative 

is to the same legal entity and ranks pari 

passu with, or is junior to, the reference 

exposure of the credit derivative through 

which the Board-regulated institution 

provides credit protection; or 

(2) With respect to a credit derivative that 

references multiple exposures, the reference 

exposures of the purchased credit derivative 

are to the same legal entities and rank pari 

passu with the reference exposures of the 

credit derivative through which the Boardregulated institution provides credit 

protection, and the level of seniority of the 

purchased credit derivative ranks pari passu 

to the level of seniority of the credit 

derivative through which the Board-regulated 

institution provides credit protection; 

(3) Where a Board-regulated institution has 

reduced the effective notional amount of a 

credit derivative through which the Boardregulated institution provides credit 

protection in accordance with paragraph 

(c)(2)(iv)(A) of this section, the Boardregulated institution must also reduce the 

effective notional principal amount of a 

purchased credit derivative used to offset the 

credit derivative through which the Boardregulated institution provides credit 

protection, by the amount of any increase in 

the mark-to-fair value of the purchased credit 

derivative that is recognized in common 

equity tier 1 capital; and 

(4) Where the Board-regulated institution 

purchases credit protection through a total 

return swap and records the net payments 


jbell on DSKJLSW7X2PROD with RULES2
734 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

received on a credit derivative through which 

the Board-regulated institution provides 

credit protection in net income, but does not 

record offsetting deterioration in the mark-tofair value of the credit derivative through 

which the Board-regulated institution 

provides credit protection in net income 

(either through reductions in fair value or by 

additions to reserves), the Board-regulated 

institution may not use the purchased credit 

protection to offset the effective notional 

principal amount of the related credit 

derivative through which the Board-regulated 

institution provides credit protection; 

(v) Where a Board-regulated institution 

acting as a principal has more than one repostyle transaction with the same counterparty 

and has offset the gross value of receivables 

due from a counterparty under reverse 

repurchase transactions by the gross value of 

payables under repurchase transactions due 

to the same counterparty, the gross value of 

receivables associated with the repo-style 

transactions less any on-balance sheet 

receivables amount associated with these 

repo-style transactions included under 

paragraph (c)(2)(i) of this section, unless the 

following criteria are met: 

(A) The offsetting transactions have the 

same explicit final settlement date under 

their governing agreements; 

(B) The right to offset the amount owed to 

the counterparty with the amount owed by 

the counterparty is legally enforceable in the 

normal course of business and in the event 

of receivership, insolvency, liquidation, or 

similar proceeding; and 

(C) Under the governing agreements, the 

counterparties intend to settle net, settle 

simultaneously, or settle according to a 

process that is the functional equivalent of 

net settlement, (that is, the cash flows of the 

transactions are equivalent, in effect, to a 

single net amount on the settlement date), 

where both transactions are settled through 

the same settlement system, the settlement 

arrangements are supported by cash or 

intraday credit facilities intended to ensure 

that settlement of both transactions will 

occur by the end of the business day, and the 

settlement of the underlying securities does 

not interfere with the net cash settlement; 

(vi) The counterparty credit risk of a repostyle transaction, including where the Boardregulated institution acts as an agent for a 

repo-style transaction and indemnifies the 

customer with respect to the performance of 

the customer’s counterparty in an amount 

limited to the difference between the fair 

value of the security or cash its customer has 

lent and the fair value of the collateral the 

borrower has provided, calculated as follows: 

(A) If the transaction is not subject to a 

qualifying master netting agreement, the 

counterparty credit risk (E*) for transactions 

with a counterparty must be calculated on a 

transaction by transaction basis, such that 

each transaction i is treated as its own netting 

set, in accordance with the following 

formula, where Ei is the fair value of the 

instruments, gold, or cash that the Boardregulated institution has lent, sold subject to 

repurchase, or provided as collateral to the 

counterparty, and Ci is the fair value of the 

instruments, gold, or cash that the Boardregulated institution has borrowed, 

purchased subject to resale, or received as 

collateral from the counterparty: 

Ei* = max {0, [Ei ¥ Ci]}; and 

(B) If the transaction is subject to a 

qualifying master netting agreement, the 

counterparty credit risk (E*) must be 

calculated as the greater of zero and the total 

fair value of the instruments, gold, or cash 

that the Board-regulated institution has lent, 

sold subject to repurchase or provided as 

collateral to a counterparty for all 

transactions included in the qualifying 

master netting agreement (SEi), less the total 

fair value of the instruments, gold, or cash 

that the Board-regulated institution 

borrowed, purchased subject to resale or 

received as collateral from the counterparty 

for those transactions (SCi), in accordance 

with the following formula: 

E* = max {0, [SEi ¥ SCi]} 

(vii) If a Board-regulated institution acting 

as an agent for a repo-style transaction 

provides a guarantee to a customer of the 

security or cash its customer has lent or 

borrowed with respect to the performance of 

the customer’s counterparty and the 

guarantee is not limited to the difference 

between the fair value of the security or cash 

its customer has lent and the fair value of the 

collateral the borrower has provided, the 

amount of the guarantee that is greater than 

the difference between the fair value of the 

security or cash its customer has lent and the 

value of the collateral the borrower has 

provided; 

(viii) The credit equivalent amount of all 

off-balance sheet exposures of the Boardregulated institution, excluding repo-style 

transactions, repurchase or reverse 

repurchase or securities borrowing or lending 

transactions that qualify for sales treatment 

under GAAP, and derivative transactions, 

determined using the applicable credit 

conversion factor under § 217.33(b), 

provided, however, that the minimum credit 

conversion factor that may be assigned to an 

off-balance sheet exposure under this 

paragraph is 10 percent; and 

(ix) For a Board-regulated institution that 

is a clearing member: 

(A) A clearing member Board-regulated 

institution that guarantees the performance of 

a clearing member client with respect to a 

cleared transaction must treat its exposure to 

the clearing member client as a derivative 

contract for purposes of determining its total 

leverage exposure; 

(B) A clearing member Board-regulated 

institution that guarantees the performance of 

a CCP with respect to a transaction cleared 

on behalf of a clearing member client must 

treat its exposure to the CCP as a derivative 

contract for purposes of determining its total 

leverage exposure; 

(C) A clearing member Board-regulated 

institution that does not guarantee the 

performance of a CCP with respect to a 

transaction cleared on behalf of a clearing 

member client may exclude its exposure to 

the CCP for purposes of determining its total 

leverage exposure; 

(D) A Board-regulated institution that is a 

clearing member may exclude from its total 

leverage exposure the effective notional 

principal amount of credit protection sold 

through a credit derivative contract, or other 

similar instrument, that it clears on behalf of 

a clearing member client through a CCP as 

calculated in accordance with paragraph 

(c)(2)(iv) of this section; and 

(E) Notwithstanding paragraphs 

(c)(2)(ix)(A) through (C) of this section, a 

Board-regulated institution may exclude from 

its total leverage exposure a clearing 

member’s exposure to a clearing member 

client for a derivative contract, if the clearing 

member client and the clearing member are 

affiliates and consolidated for financial 

reporting purposes on the Board-regulated 

institution’s balance sheet. 

(x) A custodial banking organization shall 

exclude from its total leverage exposure the 

lesser of: 

(A) The amount of funds that the custodial 

banking organization has on deposit at a 

qualifying central bank; and 

(B) The amount of funds in deposit 

accounts at the custodial banking 

organization that are linked to fiduciary or 

custodial and safekeeping accounts at the 

custodial banking organization. For purposes 

of this paragraph (c)(2)(x), a deposit account 

is linked to a fiduciary or custodial and 

safekeeping account if the deposit account is 

provided to a client that maintains a 

fiduciary or custodial and safekeeping 

account with the custodial banking 

organization, and the deposit account is used 

to facilitate the administration of the 

fiduciary or custodial and safekeeping 

account. 

(d) Advanced approaches capital ratio 

calculations. An advanced approaches 

Board-regulated institution that has 

completed the parallel run process and 

received notification from the Board 

pursuant to § 217.121(d) must determine its 

regulatory capital ratios as described in 

paragraphs (d)(1) through (3) of this section. 

(1) Common equity tier 1 capital ratio. The 

Board-regulated institution’s common equity 

tier 1 capital ratio is the lower of: 

(i) The ratio of the Board-regulated 

institution’s common equity tier 1 capital to 

standardized total risk-weighted assets; and 

(ii) The ratio of the Board-regulated 

institution’s common equity tier 1 capital to 

advanced approaches total risk-weighted 

assets. 

(2) Tier 1 capital ratio. The Boardregulated institution’s tier 1 capital ratio is 

the lower of: 

(i) The ratio of the Board-regulated 

institution’s tier 1 capital to standardized 

total risk-weighted assets; and 

(ii) The ratio of the Board-regulated 

institution’s tier 1 capital to advanced 

approaches total risk-weighted assets. 

(3) Total capital ratio. The Board-regulated 

institution’s total capital ratio is the lower of: 

(i) The ratio of the Board-regulated 

institution’s total capital to standardized total 

risk-weighted assets; and 

(ii) The ratio of the Board-regulated 

institution’s advanced-approaches-adjusted 

total capital to advanced approaches total 

risk-weighted assets. A Board-regulated 

institution’s advanced-approaches-adjusted 

total capital is the Board-regulated 

institution’s total capital after being adjusted 

as follows: 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 735 

(A) An advanced approaches Boardregulated institution must deduct from its 

total capital any allowance for loan and lease 

losses or adjusted allowance for credit losses, 

as applicable, included in its tier 2 capital in 

accordance with § 217.20(d)(3); and 

(B) An advanced approaches Boardregulated institution must add to its total 

capital any eligible credit reserves that 

exceed the Board-regulated institution’s total 

expected credit losses to the extent that the 

excess reserve amount does not exceed 0.6 

percent of the Board-regulated institution’s 

credit risk-weighted assets. 

* * * * * 

■ 11. In § 217.22, revise paragraphs (c), 

(f) and (h) to read as follows: 

§ 217.22 Regulatory capital adjustments 

and deductions. 

* * * * * 

(c) Deductions from regulatory capital 

related to investments in capital 

instruments or covered debt 

instruments 23—(1) Investment in the 

Board-regulated institution’s own 

capital or covered debt instruments. A 

Board-regulated institution must deduct 

an investment in the Board-regulated 

institution’s own capital instruments, 

and an advanced approaches Boardregulated institution also must deduct 

an investment in the Board-regulated 

institution’s own covered debt 

instruments, as follows: 

23The Board-regulated institution must 

calculate amounts deducted under 

paragraphs (c) through (f) of this section after 

it calculates the amount of ALLL or AACL, 

as applicable, includable in tier 2 capital 

under § 217.20(d)(3). 

(i) A Board-regulated institution must 

deduct an investment in the Boardregulated institution’s own common 

stock instruments from its common 

equity tier 1 capital elements to the 

extent such instruments are not 

excluded from regulatory capital under 

§ 217.20(b)(1); 

(ii) A Board-regulated institution must 

deduct an investment in the Boardregulated institution’s own additional 

tier 1 capital instruments from its 

additional tier 1 capital elements; 

(iii) A Board-regulated institution 

must deduct an investment in the 

Board-regulated institution’s own tier 2 

capital instruments from its tier 2 

capital elements; and 

(iv) An advanced approaches Boardregulated institution must deduct an 

investment in the institution’s own 

covered debt instruments from its tier 2 

capital elements, as applicable. If the 

advanced approaches Board-regulated 

institution does not have a sufficient 

amount of tier 2 capital to effect this 

deduction, the institution must deduct 

the shortfall amount from the next 

higher (that is, more subordinated) 

component of regulatory capital. 

(2) Corresponding deduction 

approach. For purposes of subpart C of 

this part, the corresponding deduction 

approach is the methodology used for 

the deductions from regulatory capital 

related to reciprocal cross holdings (as 

described in paragraph (c)(3) of this 

section), investments in the capital of 

unconsolidated financial institutions for 

a Board-regulated institution that is not 

an advanced approaches Boardregulated institution (as described in 

paragraph (c)(4) of this section), nonsignificant investments in the capital of 

unconsolidated financial institutions for 

an advanced approaches Boardregulated institution (as described in 

paragraph (c)(5) of this section), and 

non-common stock significant 

investments in the capital of 

unconsolidated financial institutions for 

an advanced approaches Boardregulated institution (as described in 

paragraph (c)(6) of this section). Under 

the corresponding deduction approach, 

a Board-regulated institution must make 

deductions from the component of 

capital for which the underlying 

instrument would qualify if it were 

issued by the Board-regulated 

institution itself, as described in 

paragraphs (c)(2)(i) through (iii) of this 

section. If the Board-regulated 

institution does not have a sufficient 

amount of a specific component of 

capital to effect the required deduction, 

the shortfall must be deducted 

according to paragraph (f) of this 

section. 

(i) If an investment is in the form of 

an instrument issued by a financial 

institution that is not a regulated 

financial institution, the Boardregulated institution must treat the 

instrument as: 

(A) A common equity tier 1 capital 

instrument if it is common stock or 

represents the most subordinated claim 

in a liquidation of the financial 

institution; and 

(B) An additional tier 1 capital 

instrument if it is subordinated to all 

creditors of the financial institution and 

is senior in liquidation only to common 

shareholders. 

(ii) If an investment is in the form of 

an instrument issued by a regulated 

financial institution and the instrument 

does not meet the criteria for common 

equity tier 1, additional tier 1 or tier 2 

capital instruments under § 217.20, the 

Board-regulated institution must treat 

the instrument as: 

(A) A common equity tier 1 capital 

instrument if it is common stock 

included in GAAP equity or represents 

the most subordinated claim in 

liquidation of the financial institution; 

(B) An additional tier 1 capital 

instrument if it is included in GAAP 

equity, subordinated to all creditors of 

the financial institution, and senior in a 

receivership, insolvency, liquidation, or 

similar proceeding only to common 

shareholders; 

(C) A tier 2 capital instrument if it is 

not included in GAAP equity but 

considered regulatory capital by the 

primary supervisor of the financial 

institution; and 

(D) For an advanced approaches 

Board-regulated institution, a tier 2 

capital instrument if it is a covered debt 

instrument. 

(iii) If an investment is in the form of 

a non-qualifying capital instrument (as 

defined in § 217.300(c)), the Boardregulated institution must treat the 

instrument as: 

(A) An additional tier 1 capital 

instrument if such instrument was 

included in the issuer’s tier 1 capital 

prior to May 19, 2010; or 

(B) A tier 2 capital instrument if such 

instrument was included in the issuer’s 

tier 2 capital (but not includable in tier 

1 capital) prior to May 19, 2010. 

(3) Reciprocal cross holdings in the 

capital of financial institutions. (i) A 

Board-regulated institution must deduct 

an investment in the capital of other 

financial institutions that it holds 

reciprocally, where such reciprocal 

cross holdings result from a formal or 

informal arrangement to swap, 

exchange, or otherwise intend to hold 

each other’s capital instruments, by 

applying the corresponding deduction 

approach in paragraph (c)(2) of this 

section. 

(ii) An advanced approaches Boardregulated institution must deduct an 

investment in any covered debt 

instrument that the institution holds 

reciprocally with another financial 

institution, where such reciprocal cross 

holdings result from a formal or 

informal arrangement to swap, 

exchange, or otherwise intend to hold 

each other’s capital or covered debt 

instruments, by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section. 

(4) Investments in the capital of 

unconsolidated financial institutions. A 

Board-regulated institution that is not 

an advanced approaches Boardregulated institution must deduct its 

investments in the capital of 

unconsolidated financial institutions (as 

defined in § 217.2) that exceed 25 

percent of the sum of the Boardregulated institution’s common equity 

tier 1 capital elements minus all 

deductions from and adjustments to 


jbell on DSKJLSW7X2PROD with RULES2
736 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section.24 The 

deductions described in this section are 

net of associated DTLs in accordance 

with paragraph (e) of this section. In 

addition, with the prior written 

approval of the Board, a Board-regulated 

institution that underwrites a failed 

underwriting, for the period of time 

stipulated by the Board, is not required 

to deduct an investment in the capital 

of an unconsolidated financial 

institution pursuant to this paragraph 

(c) to the extent the investment is 

related to the failed underwriting.25

24 With the prior written approval of the 

Board, for the period of time stipulated by 

the Board, a Board-regulated institution that 

is not an advanced approaches Boardregulated institution is not required to deduct 

an investment in the capital of an 

unconsolidated financial institution pursuant 

to this paragraph if the financial institution 

is in distress and if such investment is made 

for the purpose of providing financial 

support to the financial institution, as 

determined by the Board. 

25 Any investments in the capital of 

unconsolidated financial institutions that do 

not exceed the 25 percent threshold for 

investments in the capital of unconsolidated 

financial institutions under this section must 

be assigned the appropriate risk weight under 

subparts D or F of this part, as applicable. 

(5) Non-significant investments in the 

capital of unconsolidated financial 

institutions. (i) An advanced approaches 

Board-regulated institution must deduct 

its non-significant investments in the 

capital of unconsolidated financial 

institutions (as defined in § 217.2) that, 

in the aggregate and together with any 

investment in a covered debt instrument 

(as defined in § 217.2) issued by a 

financial institution in which the Boardregulated institution does not have a 

significant investment in the capital of 

the unconsolidated financial institution 

(as defined in § 217.2), exceeds 10 

percent of the sum of the advanced 

approaches Board-regulated institution’s 

common equity tier 1 capital elements 

minus all deductions from and 

adjustments to common equity tier 1 

capital elements required under 

paragraphs (a) through (c)(3) of this 

section (the 10 percent threshold for 

non-significant investments) by 

applying the corresponding deduction 

approach in paragraph (c)(2) of this 

section.26 The deductions described in 

this paragraph are net of associated 

DTLs in accordance with paragraph (e) 

of this section. In addition, with the 

prior written approval of the Board, an 

advanced approaches Board-regulated 

institution that underwrites a failed 

underwriting, for the period of time 

stipulated by the Board, is not required 

to deduct from capital a non-significant 

investment in the capital of an 

unconsolidated financial institution or 

an investment in a covered debt 

instrument pursuant to this paragraph 

(c)(5) to the extent the investment is 

related to the failed underwriting.27 For 

any calculation under this paragraph 

(c)(5)(i), an advanced approaches Boardregulated institution may exclude the 

amount of an investment in a covered 

debt instrument under paragraph 

(c)(5)(iii) or (iv) of this section, as 

applicable. 

26With the prior written approval of the 

Board, for the period of time stipulated by 

the Board, an advanced approaches Boardregulated institution is not required to deduct 

a non-significant investment in the capital of 

an unconsolidated financial institution or an 

investment in a covered debt instrument 

pursuant to this paragraph if the financial 

institution is in distress and if such 

investment is made for the purpose of 

providing financial support to the financial 

institution, as determined by the Board. 

27Any non-significant investment in the 

capital of an unconsolidated financial 

institution or any investment in a covered 

debt instrument that is not required to be 

deducted under this paragraph (c)(5) or 

otherwise under this section must be 

assigned the appropriate risk weight under 

subparts D, E, or F of this part, as applicable. 

(ii) For an advanced approaches 

Board-regulated institution, the amount 

to be deducted under this paragraph 

(c)(5) from a specific capital component 

is equal to: 

(A) The advanced approaches Boardregulated institution’s aggregate nonsignificant investments in the capital of 

an unconsolidated financial institution 

and, if applicable, any investments in a 

covered debt instrument subject to 

deduction under this paragraph (c)(5), 

exceeding the 10 percent threshold for 

non-significant investments, multiplied 

by 

(B) The ratio of the advanced 

approaches Board-regulated institution’s 

aggregate non-significant investments in 

the capital of an unconsolidated 

financial institution (in the form of such 

capital component) to the advanced 

approaches Board-regulated institution’s 

total non-significant investments in 

unconsolidated financial institutions, 

with an investment in a covered debt 

instrument being treated as tier 2 capital 

for this purpose. 

(iii) For purposes of applying the 

deduction under paragraph (c)(5)(i) of 

this section, an advanced approaches 

Board-regulated institution that is not a 

global systemically important BHC or a 

subsidiary of a global systemically 

important banking organization, as 

defined in 12 CFR 252.2, may exclude 

from the deduction the amount of the 

Board-regulated institution’s gross long 

position, in accordance with 

§ 217.22(h)(2), in investments in 

covered debt instruments issued by 

financial institutions in which the 

Board-regulated institution does not 

have a significant investment in the 

capital of the unconsolidated financial 

institutions up to an amount equal to 5 

percent of the sum of the Boardregulated institution’s common equity 

tier 1 capital elements minus all 

deductions from and adjustments to 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section, net of associated 

DTLs in accordance with paragraph (e) 

of this section. 

(iv) Prior to applying the deduction 

under paragraph (c)(5)(i) of this section: 

(A) A global systemically important 

BHC or a Board-regulated institution 

that is a subsidiary of a global 

systemically important BHC may 

designate any investment in a covered 

debt instrument as an excluded covered 

debt instrument, as defined in § 217.2. 

(B) A global systemically important 

BHC or a Board-regulated institution 

that is a subsidiary of a global 

systemically important BHC must 

deduct, according to the corresponding 

deduction approach in paragraph (c)(2) 

of this section, its gross long position, 

calculated in accordance with paragraph 

(h)(2) of this section, in a covered debt 

instrument that was originally 

designated as an excluded covered debt 

instrument, in accordance with 

paragraph (c)(5)(iv)(A) of this section, 

but no longer qualifies as an excluded 

covered debt instrument. 

(C) A global systemically important 

BHC or a Board-regulated institution 

that is a subsidiary of a global 

systemically important BHC must 

deduct according to the corresponding 

deduction approach in paragraph (c)(2) 

of this section the amount of its gross 

long position, calculated in accordance 

with paragraph (h)(2) of this section, in 

a direct or indirect investment in a 

covered debt instrument that was 

originally designated as an excluded 

covered debt instrument, in accordance 

with paragraph (c)(5)(iv)(A) of this 

section, and has been held for more than 

thirty business days. 

(D) A global systemically important 

BHC or a Board-regulated institution 

that is a subsidiary of a global 

systemically important BHC must 

deduct according to the corresponding 

deduction approach in paragraph (c)(2) 

of this section its gross long position, 

calculated in accordance with paragraph 

(h)(2) of this section, of its aggregate 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 737 

position in excluded covered debt 

instruments that exceeds 5 percent of 

the sum of the Board-regulated 

institution’s common equity tier 1 

capital elements minus all deductions 

from and adjustments to common equity 

tier 1 capital elements required under 

paragraphs (a) through (c)(3) of this 

section, net of associated DTLs in 

accordance with paragraph (e) of this 

section. 

(6) Significant investments in the 

capital of unconsolidated financial 

institutions that are not in the form of 

common stock. If an advanced 

approaches Board-regulated institution 

has a significant investment in the 

capital of an unconsolidated financial 

institution, the advanced approaches 

Board-regulated institution must deduct 

from capital any such investment issued 

by the unconsolidated financial 

institution that is held by the Boardregulated institution other than an 

investment in the form of common 

stock, as well as any investment in a 

covered debt instrument issued by the 

unconsolidated financial institution, by 

applying the corresponding deduction 

approach in paragraph (c)(2) of this 

section.28 The deductions described in 

this section are net of associated DTLs 

in accordance with paragraph (e) of this 

section. In addition, with the prior 

written approval of the Board, for the 

period of time stipulated by the Board, 

an advanced approaches Boardregulated institution that underwrites a 

failed underwriting is not required to 

deduct the significant investment in the 

capital of an unconsolidated financial 

institution or an investment in a 

covered debt instrument pursuant to 

this paragraph (c)(6) if such investment 

is related to such failed underwriting. 

28With prior written approval of the Board, 

for the period of time stipulated by the 

Board, an advanced approaches Boardregulated institution is not required to deduct 

a significant investment in the capital of an 

unconsolidated financial institution, 

including an investment in a covered debt 

instrument, under this paragraph (c)(6) or 

otherwise under this section if such 

investment is made for the purpose of 

providing financial support to the financial 

institution as determined by the Board. 

* * * * * 

(f) Insufficient amounts of a specific 

regulatory capital component to effect 

deductions. Under the corresponding 

deduction approach, if a Boardregulated institution does not have a 

sufficient amount of a specific 

component of capital to effect the full 

amount of any deduction from capital 

required under paragraph (d) of this 

section, the Board-regulated institution 

must deduct the shortfall amount from 

the next higher (that is, more 

subordinated) component of regulatory 

capital. Any investment by an advanced 

approaches Board-regulated institution 

in a covered debt instrument must be 

treated as an investment in the tier 2 

capital for purposes of this paragraph 

(f). Notwithstanding any other provision 

of this section, a qualifying community 

banking organization (as defined in 

§ 217.12) that has elected to use the 

community bank leverage ratio 

framework pursuant to § 217.12 is not 

required to deduct any shortfall of tier 

2 capital from its additional tier 1 

capital or common equity tier 1 capital. 

* * * * * 

(h) Net long position—(1) In general. 

For purposes of calculating the amount 

of a Board-regulated institution’s 

investment in the Board regulated 

institution’s own capital instrument, 

investment in the capital of an 

unconsolidated financial institution, 

and investment in a covered debt 

instrument under this section, the 

institution’s net long position is the 

gross long position in the underlying 

instrument determined in accordance 

with paragraph (h)(2) of this section, as 

adjusted to recognize any short position 

by the Board-regulated institution in the 

same instrument subject to paragraph 

(h)(3) of this section. 

(2) Gross long position. A gross long 

position is determined as follows: 

(i) For an equity exposure that is held 

directly by the Board-regulated 

institution, the adjusted carrying value 

of the exposure as that term is defined 

in § 217.51(b); 

(ii) For an exposure that is held 

directly and that is not an equity 

exposure or a securitization exposure, 

the exposure amount as that term is 

defined in § 217.2; 

(iii) For each indirect exposure, the 

Board-regulated institution’s carrying 

value of its investment in an investment 

fund or, alternatively: 

(A) A Board-regulated institution 

may, with the prior approval of the 

Board, use a conservative estimate of the 

amount of its indirect investment in the 

Board-regulated institution’s own 

capital instruments, its indirect 

investment in the capital of an 

unconsolidated financial institution, or 

its indirect investment in a covered debt 

instrument held through a position in 

an index, as applicable; or 

(B) A Board-regulated institution may 

calculate the gross long position for an 

indirect exposure to the Board-regulated 

institution’s own capital instruments, 

the capital of an unconsolidated 

financial institution, or a covered debt 

instrument by multiplying the Boardregulated institution’s carrying value of 

its investment in the investment fund by 

either: 

(1) The highest stated investment 

limit (in percent) for an investment in 

the Board-regulated institution’s own 

capital instruments, an investment in 

the capital of an unconsolidated 

financial institution, or an investment in 

a covered debt instrument, as 

applicable, as stated in the prospectus, 

partnership agreement, or similar 

contract defining permissible 

investments of the investment fund; or 

(2) The investment fund’s actual 

holdings (in percent) of the investment 

in the Board-regulated institution’s own 

capital instruments, investment in the 

capital of an unconsolidated financial 

institution, or investment in a covered 

debt instrument, as applicable; and 

(iv) For a synthetic exposure, the 

amount of the Board-regulated 

institution’s loss on the exposure if the 

reference capital or covered debt 

instrument were to have a value of zero. 

(3) Adjustments to reflect a short 

position. In order to adjust the gross 

long position to recognize a short 

position in the same instrument under 

paragraph (h)(1) of this section, the 

following criteria must be met: 

(i) The maturity of the short position 

must match the maturity of the long 

position, or the short position must have 

a residual maturity of at least one year 

(maturity requirement); or 

(ii) For a position that is a trading 

asset or trading liability (whether on- or 

off-balance sheet) as reported on the 

Board-regulated institution’s Call 

Report, for a state member bank, or FR 

Y–9C, for a bank holding company, 

savings and loan holding company, or 

intermediate holding company, as 

applicable, if the Board-regulated 

institution has a contractual right or 

obligation to sell the long position at a 

specific point in time and the 

counterparty to the contract has an 

obligation to purchase the long position 

if the Board-regulated institution 

exercises its right to sell, this point in 

time may be treated as the maturity of 

the long position such that the maturity 

of the long position and short position 

are deemed to match for purposes of the 

maturity requirement, even if the 

maturity of the short position is less 

than one year; and 

(iii) For an investment in a Boardregulated institution’s own capital 

instrument under paragraph (c)(1) of 

this section, an investment in the capital 

of an unconsolidated financial 

institution under paragraphs (c)(4) 

through (6) and (d) of this section (as 

applicable), and an investment in a 

covered debt instrument under 


jbell on DSKJLSW7X2PROD with RULES2
738 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

paragraphs (c)(1), (5), and (6) of this 

section: 

(A) The Board-regulated institution 

may only net a short position against a 

long position in an investment in the 

Board-regulated institution’s own 

capital instrument or own covered debt 

instrument under paragraph (c)(1) of 

this section if the short position 

involves no counterparty credit risk; 

(B) A gross long position in an 

investment in the Board-regulated 

institution’s own capital instrument, an 

investment in the capital of an 

unconsolidated financial institution, or 

an investment in a covered debt 

instrument due to a position in an index 

may be netted against a short position 

in the same index; 

(C) Long and short positions in the 

same index without maturity dates are 

considered to have matching maturities; 

and 

(D) A short position in an index that 

is hedging a long cash or synthetic 

position in an investment in the Boardregulated institution’s own capital 

instrument, an investment in the capital 

instrument of an unconsolidated 

financial institution, or an investment in 

a covered debt instrument can be 

decomposed to provide recognition of 

the hedge. More specifically, the portion 

of the index that is composed of the 

same underlying instrument that is 

being hedged may be used to offset the 

long position if both the long position 

being hedged and the short position in 

the index are reported as a trading asset 

or trading liability (whether on- or offbalance sheet) on the Board-regulated 

institution’s Call Report, for a state 

member bank, or FR Y–9C, for a bank 

holding company, savings and loan 

holding company, or intermediate 

holding company, as applicable, and the 

hedge is deemed effective by the Boardregulated institution’s internal control 

processes, which have not been found to 

be inadequate by the Board. 

§ 217.121 [Amended] 

■ 12. Section 217.121 is amended by 

removing ‘‘§ 217.10(c)(1) through (3)’’ 

and adding ‘‘§ 217.10(d)(1) through (3)’’ 

in paragraph (c). 

§ 217.132 [Amended] 

■ 13. Section 217.132 is amended by 

removing ‘‘§ 217.10(c)(4)(ii)(B)(2)’’ and 

adding ‘‘§ 217.10(c)(2)(ii)(B)’’ in 

paragraphs (c)(7)(iii) and (iv). 

§ 217.303 [Amended] 

■ 14. Section 217.303 is amended by: 

■ a. Removing ‘‘§ 217.10(c)(4)’’ and 

adding in its place ‘‘§ 217.10(c)’’ in 

paragraph (a); and 

■ b. Removing ‘‘§ 217.10(c)(4)(ii)(J)(1)’’ 

and adding in its place 

‘‘§ 217.10(c)(2)(x)(A)’’ in paragraph (e). 

PART 252—ENHANCED PRUDENTIAL 

STANDARDS (REGULATION YY) 

■ 15. The authority citation for part 252 

continues to read as follows: 

Authority: 12 U.S.C. 321–338a, 481–486, 

1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 

1831w, 1835, 1844(b), 1844(c), 3101 et seq., 

3101 note, 3904, 3906–3909, 4808, 5361, 

5362, 5365, 5366, 5367, 5368, 5371. 

Subpart G—External Long-Term Debt 

Requirement, External Total LossAbsorbing Capacity Requirement and 

Buffer, and Restrictions on Corporate 

Practices for U.S. Global Systemically 

Important Banking Organizations 

■ 16. In § 252.61, remove the definition 

of ‘‘External TLAC buffer’’ and add a 

definition for ‘‘External TLAC riskweighted buffer’’ in alphabetical order. 

The addition reads as follows: 

§ 252.61 Definitions. 

* * * * * 

External TLAC risk-weighted buffer 

means, with respect to a global 

systemically important BHC, the sum of 

2.5 percent, any applicable 

countercyclical capital buffer under 12 

CFR 217.11(b) (expressed as a 

percentage), and the global systemically 

important BHC’s method 1 capital 

surcharge. 

* * * * * 

■ 17. In § 252.63, revise paragraphs 

(c)(3)(i)(C) and (c)(5)(iii)(A)(2) to read as 

follows: 

§ 252.63 External total loss-absorbing 

capacity requirement and buffer. 

* * * * * 

(c) * * * 

(3) * * * 

(i) * * * 

(C) The ratio (expressed as a 

percentage) of the global systemically 

important BHC’s outstanding eligible 

external long-term debt amount plus 50 

percent of the amount of unpaid 

principal of outstanding eligible debt 

securities issued by the global 

systemically important BHC due to be 

paid in, as calculated in § 252.62(b)(2), 

greater than or equal to 365 days (one 

year) but less than 730 days (two years) 

to total risk-weighted assets. 

* * * * * 

(5) * * * 

(iii) * * * 

(A) * * * 

(2) The ratio (expressed as a 

percentage) of the global systemically 

important BHC’s outstanding eligible 

external long-term debt amount plus 50 

percent of the amount of unpaid 

principal of outstanding eligible debt 

securities issued by the global 

systemically important BHC due to be 

paid in in, as calculated in 

§ 252.62(b)(2), greater than or equal to 

365 days (one year) but less than 730 

days (two years) to total leverage 

exposure. 

* * * * * 

Subpart P—Covered IHC Long-Term 

Debt Requirement, Covered IHC Total 

Loss-Absorbing Capacity Requirement 

and Buffer, and Restrictions on 

Corporate Practices for Intermediate 

Holding Companies of Global 

Systemically Important Foreign 

Banking Organizations 

■ 18. In § 252.160, revise paragraph 

(b)(2) to read as follows: 

§ 252.160 Applicability. 

* * * * * 

(b) * * * 

(2) 1095 days (three years) after the 

later of the date on which: 

(i) The U.S. non-branch assets of the 

global systemically important foreign 

banking organization that controls the 

Covered IHC equaled or exceeded $50 

billion; and 

(ii) The foreign banking organization 

that controls the Covered IHC became a 

global systemically important foreign 

banking organization. 

* * * * * 

■ 19. In § 252.162, revise paragraph 

(b)(1) to read as follows: 

§ 252.162 Covered IHC long-term debt 

requirement. 

* * * * * 

(b) * * * 

(1) A Covered IHC’s outstanding 

eligible Covered IHC long-term debt 

amount is the sum of: 

(i) One hundred (100) percent of the 

amount due to be paid of unpaid 

principal of the outstanding eligible 

Covered IHC debt securities issued by 

the Covered IHC in greater than or equal 

to 730 days (two years); and 

(ii) Fifty (50) percent of the amount 

due to be paid of unpaid principal of the 

outstanding eligible Covered IHC debt 

securities issued by the Covered IHC in 

greater than or equal to 365 days (one 

year) and less than 730 days (two years); 

and 

(iii) Zero (0) percent of the amount 

due to be paid of unpaid principal of the 

outstanding eligible Covered IHC debt 

securities issued by the Covered IHC in 

less than 365 days (one year). 

* * * * * 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 739 

■ 20. In § 252.165, revise paragraph 

(d)(3)(i)(C) to read as follows: 

§ 252.165 Covered IHC total lossabsorbing capacity requirement and buffer. 

* * * * * 

(d) * * * 

(3) * * * 

(i) * * * 

(C) The ratio (expressed as a 

percentage) of the Covered IHC’s 

outstanding eligible Covered IHC longterm debt amount plus 50 percent of the 

amount of unpaid principal of 

outstanding eligible Covered IHC debt 

securities issued by the Covered IHC 

due to be paid in, as calculated in 

§ 252.162(b)(2), greater than or equal to 

365 days (one year) but less than 730 

days (two years) to total risk-weighted 

assets. 

* * * * * 

12 CFR Part 324 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

For the reasons set out in the joint 

preamble, the FDIC amends 12 CFR part 

324 as follows. 

PART 324—CAPITAL ADEQUACY OF 

FDIC–SUPERVISED INSTITUTIONS 

■ 21. The authority citation for part 324 

continues to read as follows: 

Authority: 12 U.S.C. 1815(a), 1815(b), 

1816, 1818(a), 1818(b), 1818(c), 1818(t), 

1819(Tenth), 1828(c), 1828(d), 1828(i), 

1828(n), 1828(o), 1831o, 1835, 3907, 3909, 

4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 

1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. 

L. 102–242, 105 Stat. 2236, 2355, as amended 

by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 

U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 

2236, 2386, as amended by Pub. L. 102–550, 

106 Stat. 3672, 4089 (12 U.S.C. 1828 note); 

Pub. L. 111–203, 124 Stat. 1376, 1887 (15 

U.S.C. 78o–7 note), Pub. L. 115–174; section 

4014, Pub. L. 116–136, 134 Stat. 281 (15 

U.S.C. 9052). 

■ 22. In § 324.2: 

■ a. Add in alphabetical order 

definitions for ‘‘Covered debt 

instrument’’ and ‘‘Excluded covered 

debt instrument’’; 

■ b. Revise the definitions of ‘‘Fiduciary 

or custodial and safekeeping account’’ 

and ‘‘Indirect exposure’’; 

■ c. Add in alphabetical order and 

definition for ‘‘Investment in a covered 

debt instrument’’; and 

■ d. Revise the definitions of ‘‘Synthetic 

exposure’’ and ‘‘Total leverage 

exposure’’. 

The additions and revisions read as 

follows: 

§ 324.2 Definitions. 

* * * * * 

Covered debt instrument means an 

unsecured debt instrument that is: 

(1) Issued by a global systemically 

important BHC, as defined in 12 CFR 

217.2, and that is an eligible debt 

security, as defined in 12 CFR 252.61, 

or that is pari passu or subordinated to 

any eligible debt security issued by the 

global systemically important BHC; or 

(2) Issued by a Covered IHC, as 

defined in 12 CFR 252.161, and that is 

an eligible Covered IHC debt security, as 

defined in 12 CFR 252.161, or that is 

pari passu or subordinated to any 

eligible Covered IHC debt security 

issued by the Covered IHC; or 

(3) Issued by a global systemically 

important banking organization, as 

defined in 12 CFR 252.2 other than a 

global systemically important BHC, as 

defined in 12 CFR 217.2; or issued by 

a subsidiary of a global systemically 

important banking organization that is 

not a global systemically important 

BHC, other than a Covered IHC, as 

defined in 12 CFR 252.161; and where, 

(i) The instrument is eligible for use 

to comply with an applicable law or 

regulation requiring the issuance of a 

minimum amount of instruments to 

absorb losses or recapitalize the issuer 

or any of its subsidiaries in connection 

with a resolution, receivership, 

insolvency, or similar proceeding of the 

issuer or any of its subsidiaries; or 

(ii) The instrument is pari passu or 

subordinated to any instrument 

described in paragraph (3)(i) of this 

definition; for purposes of this 

paragraph (3)(ii) of this definition, if the 

issuer may be subject to a special 

resolution regime, in its jurisdiction of 

incorporation or organization, that 

addresses the failure or potential failure 

of a financial company and any 

instrument described in paragraph (3)(i) 

of this definition is eligible under that 

special resolution regime to be written 

down or converted into equity or any 

other capital instrument, then an 

instrument is pari passu or 

subordinated to any instrument 

described in paragraph (3)(i) of this 

definition if that instrument is eligible 

under that special resolution regime to 

be written down or converted into 

equity or any other capital instrument 

ahead of or proportionally with any 

instrument described in paragraph (3)(i) 

of this definition; and 

(4) Provided that, for purposes of this 

definition, covered debt instrument does 

not include a debt instrument that 

qualifies as tier 2 capital pursuant to 12 

CFR 324.20(d) or that is otherwise 

treated as regulatory capital by the 

primary supervisor of the issuer. 

* * * * * 

Excluded covered debt instrument 

means an investment in a covered debt 

instrument held by an FDIC-supervised 

institution that is a subsidiary of a 

global systemically important BHC, as 

defined in 12 CFR 252.2, that: 

(1) Is held in connection with market 

making-related activities permitted 

under 12 CFR 351.4, provided that a 

direct exposure or an indirect exposure 

to a covered debt instrument is held for 

30 business days or less; and 

(2) Has been designated as an 

excluded covered debt instrument by 

the FDIC-supervised institution that is a 

subsidiary of a global systemically 

important BHC, as defined in 12 CFR 

252.2, pursuant to 12 CFR 

324.22(c)(5)(iv)(A). 

* * * * * 

Fiduciary or custodial and 

safekeeping account means, for 

purposes of § 324.10(c)(2)(x), an account 

administered by a custody bank for 

which the custody bank provides 

fiduciary or custodial and safekeeping 

services, as authorized by applicable 

Federal or state law. 

* * * * * 

Indirect exposure means an exposure 

that arises from the FDIC-supervised 

institution’s investment in an 

investment fund which holds an 

investment in the FDIC-supervised 

institution’s own capital instrument or 

an investment in the capital of an 

unconsolidated financial institution. For 

an advanced approaches FDICsupervised institution, indirect 

exposure also includes an investment in 

an investment fund that holds a covered 

debt instrument. 

* * * * * 

Investment in a covered debt 

instrument means an FDIC-supervised 

institution’s net long position calculated 

in accordance with § 324.22(h) in a 

covered debt instrument, including 

direct, indirect, and synthetic exposures 

to the debt instrument, excluding any 

underwriting positions held by the 

FDIC-supervised institution for five or 

fewer business days. 

* * * * * 

Synthetic exposure means an 

exposure whose value is linked to the 

value of an investment in the FDICsupervised institution’s own capital 

instrument or to the value of an 

investment in the capital of an 

unconsolidated financial institution. For 

an advanced approaches FDICsupervised institution, synthetic 

exposure includes an exposure whose 

value is linked to the value of an 

investment in a covered debt 

instrument. 

* * * * * 


jbell on DSKJLSW7X2PROD with RULES2
740 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

Total leverage exposure is defined in 

§ 324.10(c)(2). 

* * * * * 

■ 23. Section 324.10 is amended by: 

■ a. Revising paragraph (c); 

■ b. Redesignating paragraph (d) as (e); 

and 

■ c. Adding new paragraph (d). 

The revision and addition read as 

follows: 

§ 324.10 Minimum capital requirements. 

* * * * * 

(c) Supplementary leverage ratio. (1) 

A Category III FDIC-supervised 

institution or advanced approaches 

FDIC-supervised institution must 

determine its supplementary leverage 

ratio in accordance with this paragraph, 

beginning with the calendar quarter 

immediately following the quarter in 

which the FDIC-supervised institution 

is identified as a Category III FDICsupervised institution. An advanced 

approaches FDIC-supervised 

institution’s or a Category III FDICsupervised institution’s supplementary 

leverage ratio is the ratio of its tier 1 

capital to total leverage exposure, the 

latter of which is calculated as the sum 

of: 

(i) The mean of the on-balance sheet 

assets calculated as of each day of the 

reporting quarter; and 

(ii) The mean of the off-balance sheet 

exposures calculated as of the last day 

of each of the most recent three months, 

minus the applicable deductions under 

§ 324.22(a), (c), and (d). 

(2) For purposes of this part, total 

leverage exposure means the sum of the 

items described in paragraphs (c)(2)(i) 

through (viii) of this section, as adjusted 

pursuant to paragraph (c)(2)(ix) of this 

section for a clearing member FDICsupervised institution and paragraph 

(c)(2)(x) of this section for a custody 

bank: 

(i) The balance sheet carrying value of 

all of the FDIC-supervised institution’s 

on-balance sheet assets, plus the value 

of securities sold under a repurchase 

transaction or a securities lending 

transaction that qualifies for sales 

treatment under GAAP, less amounts 

deducted from tier 1 capital under 

§ 324.22(a), (c), and (d), and less the 

value of securities received in securityfor-security repo-style transactions, 

where the FDIC-supervised institution 

acts as a securities lender and includes 

the securities received in its on-balance 

sheet assets but has not sold or rehypothecated the securities received, 

and, for an FDIC-supervised institution 

that uses the standardized approach for 

counterparty credit risk under 

§ 324.132(c) for its standardized riskweighted assets, less the fair value of 

any derivative contracts; 

(ii)(A) For an FDIC-supervised 

institution that uses the current 

exposure methodology under 

§ 324.34(b) for its standardized riskweighted assets, the potential future 

credit exposure (PFE) for each 

derivative contract or each singleproduct netting set of derivative 

contracts (including a cleared 

transaction except as provided in 

paragraph (c)(2)(ix) of this section and, 

at the discretion of the FDIC-supervised 

institution, excluding a forward 

agreement treated as a derivative 

contract that is part of a repurchase or 

reverse repurchase or a securities 

borrowing or lending transaction that 

qualifies for sales treatment under 

GAAP), to which the FDIC-supervised 

institution is a counterparty as 

determined under § 324.34, but without 

regard to § 324.34(c), provided that: 

(1) An FDIC-supervised institution 

may choose to exclude the PFE of all 

credit derivatives or other similar 

instruments through which it provides 

credit protection when calculating the 

PFE under § 324.34, but without regard 

to § 324.34(c), provided that it does not 

adjust the net-to-gross ratio (NGR); and 

(2) An FDIC-supervised institution 

that chooses to exclude the PFE of credit 

derivatives or other similar instruments 

through which it provides credit 

protection pursuant to this paragraph 

(c)(2)(ii)(A) must do so consistently over 

time for the calculation of the PFE for 

all such instruments; or 

(B)(1) For an FDIC-supervised 

institution that uses the standardized 

approach for counterparty credit risk 

under section § 324.132(c) for its 

standardized risk-weighted assets, the 

PFE for each netting set to which the 

FDIC-supervised institution is a 

counterparty (including cleared 

transactions except as provided in 

paragraph (c)(2)(ix) of this section and, 

at the discretion of the FDIC-supervised 

institution, excluding a forward 

agreement treated as a derivative 

contract that is part of a repurchase or 

reverse repurchase or a securities 

borrowing or lending transaction that 

qualifies for sales treatment under 

GAAP), as determined under 

§ 324.132(c)(7), in which the term C in 

§ 324.132(c)(7)(i) equals zero, and, for 

any counterparty that is not a 

commercial end-user, multiplied by 1.4. 

For purposes of this paragraph 

(c)(2)(ii)(B)(1), an FDIC-supervised 

institution may set the value of the term 

C in § 324.132(c)(7)(i) equal to the 

amount of collateral posted by a clearing 

member client of the FDIC-supervised 

institution in connection with the 

client-facing derivative transactions 

within the netting set; and 

(2) An FDIC-supervised institution 

may choose to exclude the PFE of all 

credit derivatives or other similar 

instruments through which it provides 

credit protection when calculating the 

PFE under § 324.132(c), provided that it 

does so consistently over time for the 

calculation of the PFE for all such 

instruments; 

(iii)(A)(1) For an FDIC-supervised 

institution that uses the current 

exposure methodology under 

§ 324.34(b) for its standardized riskweighted assets, the amount of cash 

collateral that is received from a 

counterparty to a derivative contract 

and that has offset the mark-to-fair value 

of the derivative asset, or cash collateral 

that is posted to a counterparty to a 

derivative contract and that has reduced 

the FDIC-supervised institution’s onbalance sheet assets, unless such cash 

collateral is all or part of variation 

margin that satisfies the conditions in 

paragraphs (c)(2)(iii)(C) through (G) of 

this section; and 

(2) The variation margin is used to 

reduce the current credit exposure of 

the derivative contract, calculated as 

described in § 324.34(b), and not the 

PFE; and 

(3) For the purpose of the calculation 

of the NGR described in 

§ 324.34(b)(2)(ii)(B), variation margin 

described in paragraph (c)(2)(iii)(A)(2) 

of this section may not reduce the net 

current credit exposure or the gross 

current credit exposure; or 

(B)(1) For an FDIC-supervised 

institution that uses the standardized 

approach for counterparty credit risk 

under § 324.132(c) for its standardized 

risk-weighted assets, the replacement 

cost of each derivative contract or single 

product netting set of derivative 

contracts to which the FDIC-supervised 

institution is a counterparty, calculated 

according to the following formula, and, 

for any counterparty that is not a 

commercial end-user, multiplied by 1.4: 

Replacement Cost = max{V¥CVMr + 

CVMp; 0} 

Where: 

V equals the fair value for each derivative 

contract or each single-product netting set of 

derivative contracts (including a cleared 

transaction except as provided in paragraph 

(c)(2)(ix) of this section and, at the discretion 

of the FDIC-supervised institution, excluding 

a forward agreement treated as a derivative 

contract that is part of a repurchase or reverse 

repurchase or a securities borrowing or 

lending transaction that qualifies for sales 

treatment under GAAP); 

CVMr equals the amount of cash collateral 

received from a counterparty to a derivative 

contract and that satisfies the conditions in 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 741 

paragraphs (c)(2)(iii)(C) through (G) of this 

section, or, in the case of a client-facing 

derivative transaction on behalf of a clearing 

member client, the amount of collateral 

received from the clearing member client; 

and 

CVMp equals the amount of cash collateral 

that is posted to a counterparty to a 

derivative contract and that has not offset the 

fair value of the derivative contract and that 

satisfies the conditions in paragraphs 

(c)(2)(iii)(C) through (G) of this section, or, in 

the case of a client-facing derivative 

transaction on behalf of a clearing member 

client, the amount of collateral posted to the 

clearing member client; 

(2) Notwithstanding paragraph 

(c)(2)(iii)(B)(1) of this section, where multiple 

netting sets are subject to a single variation 

margin agreement, an FDIC-supervised 

institution must apply the formula for 

replacement cost provided in 

§ 324.132(c)(10)(i), in which the term CMA

may only include cash collateral that satisfies 

the conditions in paragraphs (c)(2)(iii)(C) 

through (G) of this section; and 

(3) For purposes of paragraph 

(c)(2)(iii)(B)(1), an FDIC-supervised 

institution must treat a derivative contract 

that references an index as if it were multiple 

derivative contracts each referencing one 

component of the index if the FDICsupervised institution elected to treat the 

derivative contract as multiple derivative 

contracts under § 324.132(c)(5)(vi); 

(C) For derivative contracts that are not 

cleared through a QCCP, the cash collateral 

received by the recipient counterparty is not 

segregated (by law, regulation, or an 

agreement with the counterparty); 

(D) Variation margin is calculated and 

transferred on a daily basis based on the 

mark-to-fair value of the derivative contract; 

(E) The variation margin transferred under 

the derivative contract or the governing rules 

of the CCP or QCCP for a cleared transaction 

is the full amount that is necessary to fully 

extinguish the net current credit exposure to 

the counterparty of the derivative contracts, 

subject to the threshold and minimum 

transfer amounts applicable to the 

counterparty under the terms of the 

derivative contract or the governing rules for 

a cleared transaction; 

(F) The variation margin is in the form of 

cash in the same currency as the currency of 

settlement set forth in the derivative contract, 

provided that for the purposes of this 

paragraph (c)(2)(iii)(F), currency of 

settlement means any currency for settlement 

specified in the governing qualifying master 

netting agreement and the credit support 

annex to the qualifying master netting 

agreement, or in the governing rules for a 

cleared transaction; and 

(G) The derivative contract and the 

variation margin are governed by a qualifying 

master netting agreement between the legal 

entities that are the counterparties to the 

derivative contract or by the governing rules 

for a cleared transaction, and the qualifying 

master netting agreement or the governing 

rules for a cleared transaction must explicitly 

stipulate that the counterparties agree to 

settle any payment obligations on a net basis, 

taking into account any variation margin 

received or provided under the contract if a 

credit event involving either counterparty 

occurs; 

(iv) The effective notional principal 

amount (that is, the apparent or stated 

notional principal amount multiplied by any 

multiplier in the derivative contract) of a 

credit derivative, or other similar instrument, 

through which the FDIC-supervised 

institution provides credit protection, 

provided that: 

(A) The FDIC-supervised institution may 

reduce the effective notional principal 

amount of the credit derivative by the 

amount of any reduction in the mark-to-fair 

value of the credit derivative if the reduction 

is recognized in common equity tier 1 

capital; 

(B) The FDIC-supervised institution may 

reduce the effective notional principal 

amount of the credit derivative by the 

effective notional principal amount of a 

purchased credit derivative or other similar 

instrument, provided that the remaining 

maturity of the purchased credit derivative is 

equal to or greater than the remaining 

maturity of the credit derivative through 

which the FDIC-supervised institution 

provides credit protection and that: 

(1) With respect to a credit derivative that 

references a single exposure, the reference 

exposure of the purchased credit derivative 

is to the same legal entity and ranks pari 

passu with, or is junior to, the reference 

exposure of the credit derivative through 

which the FDIC-supervised institution 

provides credit protection; or 

(2) With respect to a credit derivative that 

references multiple exposures, the reference 

exposures of the purchased credit derivative 

are to the same legal entities and rank pari 

passu with the reference exposures of the 

credit derivative through which the FDICsupervised institution provides credit 

protection, and the level of seniority of the 

purchased credit derivative ranks pari passu 

to the level of seniority of the credit 

derivative through which the FDICsupervised institution provides credit 

protection; 

(3) Where an FDIC-supervised institution 

has reduced the effective notional amount of 

a credit derivative through which the FDICsupervised institution provides credit 

protection in accordance with paragraph 

(c)(2)(iv)(A) of this section, the FDICsupervised institution must also reduce the 

effective notional principal amount of a 

purchased credit derivative used to offset the 

credit derivative through which the FDICsupervised institution provides credit 

protection, by the amount of any increase in 

the mark-to-fair value of the purchased credit 

derivative that is recognized in common 

equity tier 1 capital; and 

(4) Where the FDIC-supervised institution 

purchases credit protection through a total 

return swap and records the net payments 

received on a credit derivative through which 

the FDIC-supervised institution provides 

credit protection in net income, but does not 

record offsetting deterioration in the mark-tofair value of the credit derivative through 

which the FDIC-supervised institution 

provides credit protection in net income 

(either through reductions in fair value or by 

additions to reserves), the FDIC-supervised 

institution may not use the purchased credit 

protection to offset the effective notional 

principal amount of the related credit 

derivative through which the FDICsupervised institution provides credit 

protection; 

(v) Where an FDIC-supervised institution 

acting as a principal has more than one repostyle transaction with the same counterparty 

and has offset the gross value of receivables 

due from a counterparty under reverse 

repurchase transactions by the gross value of 

payables under repurchase transactions due 

to the same counterparty, the gross value of 

receivables associated with the repo-style 

transactions less any on-balance sheet 

receivables amount associated with these 

repo-style transactions included under 

paragraph (c)(2)(i) of this section, unless the 

following criteria are met: 

(A) The offsetting transactions have the 

same explicit final settlement date under 

their governing agreements; 

(B) The right to offset the amount owed to 

the counterparty with the amount owed by 

the counterparty is legally enforceable in the 

normal course of business and in the event 

of receivership, insolvency, liquidation, or 

similar proceeding; and 

(C) Under the governing agreements, the 

counterparties intend to settle net, settle 

simultaneously, or settle according to a 

process that is the functional equivalent of 

net settlement, (that is, the cash flows of the 

transactions are equivalent, in effect, to a 

single net amount on the settlement date), 

where both transactions are settled through 

the same settlement system, the settlement 

arrangements are supported by cash or 

intraday credit facilities intended to ensure 

that settlement of both transactions will 

occur by the end of the business day, and the 

settlement of the underlying securities does 

not interfere with the net cash settlement; 

(vi) The counterparty credit risk of a repostyle transaction, including where the FDICsupervised institution acts as an agent for a 

repo-style transaction and indemnifies the 

customer with respect to the performance of 

the customer’s counterparty in an amount 

limited to the difference between the fair 

value of the security or cash its customer has 

lent and the fair value of the collateral the 

borrower has provided, calculated as follows: 

(A) If the transaction is not subject to a 

qualifying master netting agreement, the 

counterparty credit risk (E*) for transactions 

with a counterparty must be calculated on a 

transaction by transaction basis, such that 

each transaction i is treated as its own netting 

set, in accordance with the following 

formula, where Ei is the fair value of the 

instruments, gold, or cash that the FDICsupervised institution has lent, sold subject 

to repurchase, or provided as collateral to the 

counterparty, and Ci is the fair value of the 

instruments, gold, or cash that the FDICsupervised institution has borrowed, 

purchased subject to resale, or received as 

collateral from the counterparty: 

Ei* = max {0, [Ei ¥ Ci]}; and 

(B) If the transaction is subject to a 

qualifying master netting agreement, the 

counterparty credit risk (E*) must be 

calculated as the greater of zero and the total 


jbell on DSKJLSW7X2PROD with RULES2
742 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

23The FDIC-supervised institution must calculate 

amounts deducted under paragraphs (c) through (f) 

of this section after it calculates the amount of 

ALLL or AACL, as applicable, includable in tier 2 

capital under § 324.20(d)(3). 

fair value of the instruments, gold, or cash 

that the FDIC-supervised institution has lent, 

sold subject to repurchase or provided as 

collateral to a counterparty for all 

transactions included in the qualifying 

master netting agreement (SEi), less the total 

fair value of the instruments, gold, or cash 

that the FDIC-supervised institution 

borrowed, purchased subject to resale or 

received as collateral from the counterparty 

for those transactions (SCi), in accordance 

with the following formula: 

E* = max {0, [SEi ¥ SCi]} 

(vii) If an FDIC-supervised institution 

acting as an agent for a repo-style transaction 

provides a guarantee to a customer of the 

security or cash its customer has lent or 

borrowed with respect to the performance of 

the customer’s counterparty and the 

guarantee is not limited to the difference 

between the fair value of the security or cash 

its customer has lent and the fair value of the 

collateral the borrower has provided, the 

amount of the guarantee that is greater than 

the difference between the fair value of the 

security or cash its customer has lent and the 

value of the collateral the borrower has 

provided; 

(viii) The credit equivalent amount of all 

off-balance sheet exposures of the FDICsupervised institution, excluding repo-style 

transactions, repurchase or reverse 

repurchase or securities borrowing or lending 

transactions that qualify for sales treatment 

under GAAP, and derivative transactions, 

determined using the applicable credit 

conversion factor under § 324.33(b), 

provided, however, that the minimum credit 

conversion factor that may be assigned to an 

off-balance sheet exposure under this 

paragraph is 10 percent; and 

(ix) For an FDIC-supervised institution that 

is a clearing member: 

(A) A clearing member FDIC-supervised 

institution that guarantees the performance of 

a clearing member client with respect to a 

cleared transaction must treat its exposure to 

the clearing member client as a derivative 

contract for purposes of determining its total 

leverage exposure; 

(B) A clearing member FDIC-supervised 

institution that guarantees the performance of 

a CCP with respect to a transaction cleared 

on behalf of a clearing member client must 

treat its exposure to the CCP as a derivative 

contract for purposes of determining its total 

leverage exposure; 

(C) A clearing member FDIC-supervised 

institution that does not guarantee the 

performance of a CCP with respect to a 

transaction cleared on behalf of a clearing 

member client may exclude its exposure to 

the CCP for purposes of determining its total 

leverage exposure; 

(D) An FDIC-supervised institution that is 

a clearing member may exclude from its total 

leverage exposure the effective notional 

principal amount of credit protection sold 

through a credit derivative contract, or other 

similar instrument, that it clears on behalf of 

a clearing member client through a CCP as 

calculated in accordance with paragraph 

(c)(2)(iv) of this section; and 

(E) Notwithstanding paragraphs 

(c)(2)(ix)(A) through (C) of this section, an 

FDIC-supervised institution may exclude 

from its total leverage exposure a clearing 

member’s exposure to a clearing member 

client for a derivative contract, if the clearing 

member client and the clearing member are 

affiliates and consolidated for financial 

reporting purposes on the FDIC-supervised 

institution’s balance sheet. 

(x) A custody bank shall exclude from its 

total leverage exposure the lesser of: 

(A) The amount of funds that the custody 

bank has on deposit at a qualifying central 

bank; and 

(B) The amount of funds in deposit 

accounts at the custody bank that are linked 

to fiduciary or custodial and safekeeping 

accounts at the custody bank. For purposes 

of this paragraph (c)(2)(x), a deposit account 

is linked to a fiduciary or custodial and 

safekeeping account if the deposit account is 

provided to a client that maintains a 

fiduciary or custodial and safekeeping 

account with the custody bank, and the 

deposit account is used to facilitate the 

administration of the fiduciary or custodial 

and safekeeping account. 

(d) Advanced approaches capital ratio 

calculations. An advanced approaches FDICsupervised institution that has completed the 

parallel run process and received notification 

from the FDIC pursuant to § 324.121(d) must 

determine its regulatory capital ratios as 

described in paragraphs (d)(1) through (3) of 

this section. 

(1) Common equity tier 1 capital ratio. The 

FDIC-supervised institution’s common equity 

tier 1 capital ratio is the lower of: 

(i) The ratio of the FDIC-supervised 

institution’s common equity tier 1 capital to 

standardized total risk-weighted assets; and 

(ii) The ratio of the FDIC-supervised 

institution’s common equity tier 1 capital to 

advanced approaches total risk-weighted 

assets. 

(2) Tier 1 capital ratio. The FDICsupervised institution’s tier 1 capital ratio is 

the lower of: 

(i) The ratio of the FDIC-supervised 

institution’s tier 1 capital to standardized 

total risk-weighted assets; and 

(ii) The ratio of the FDIC-supervised 

institution’s tier 1 capital to advanced 

approaches total risk-weighted assets. 

(3) Total capital ratio. The FDICsupervised institution’s total capital ratio is 

the lower of: 

(i) The ratio of the FDIC-supervised 

institution’s total capital to standardized total 

risk-weighted assets; and 

(ii) The ratio of the FDIC-supervised 

institution’s advanced-approaches-adjusted 

total capital to advanced approaches total 

risk-weighted assets. An FDIC-supervised 

institution’s advanced-approaches-adjusted 

total capital is the FDIC-supervised 

institution’s total capital after being adjusted 

as follows: 

(A) An advanced approaches FDICsupervised institution must deduct from its 

total capital any allowance for loan and lease 

losses or adjusted allowance for credit losses, 

as applicable, included in its tier 2 capital in 

accordance with § 324.20(d)(3); and 

(B) An advanced approaches FDICsupervised institution must add to its total 

capital any eligible credit reserves that 

exceed the FDIC-supervised institution’s total 

expected credit losses to the extent that the 

excess reserve amount does not exceed 0.6 

percent of the FDIC-supervised institution’s 

credit risk-weighted assets. 

(4) State savings association tangible 

capital ratio. (i) Until January 1, 2014, a state 

savings association shall determine its 

tangible capital ratio in accordance with 12 

CFR 390.468. 

(ii) As of January 1, 2014, a state savings 

association’s tangible capital ratio is the ratio 

of the state savings association’s core capital 

(tier 1 capital) to total assets. For purposes of 

this paragraph, the term total assets shall 

have the meaning provided in 12 CFR 

324.401(g). 

* * * * * 

■ 24. In § 324.22, revise paragraphs (c), 

(f), and (h) to read as follows: 

§ 324.22 Regulatory capital adjustments 

and deductions. 

* * * * * 

(c) Deductions from regulatory capital 

related to investments in capital 

instruments or covered debt 

instruments 23—(1) Investment in the 

FDIC-supervised institution’s own 

capital instruments. An FDICsupervised institution must deduct an 

investment in its own capital 

instruments, as follows: 

(i) An FDIC-supervised institution 

must deduct an investment in the FDICsupervised institution’s own common 

stock instruments from its common 

equity tier 1 capital elements to the 

extent such instruments are not 

excluded from regulatory capital under 

§ 324.20(b)(1); 

(ii) An FDIC-supervised institution 

must deduct an investment in the FDICsupervised institution’s own additional 

tier 1 capital instruments from its 

additional tier 1 capital elements; and 

(iii) An FDIC-supervised institution 

must deduct an investment in the FDICsupervised institution’s own tier 2 

capital instruments from its tier 2 

capital elements. 

(2) Corresponding deduction 

approach. For purposes of subpart C of 

this part, the corresponding deduction 

approach is the methodology used for 

the deductions from regulatory capital 

related to reciprocal cross holdings (as 

described in paragraph (c)(3) of this 

section), investments in the capital of 

unconsolidated financial institutions for 

an FDIC-supervised institution that is 

not an advanced approaches FDICsupervised institution (as described in 

paragraph (c)(4) of this section), nonsignificant investments in the capital of 

unconsolidated financial institutions for 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 743 

24With the prior written approval of the FDIC, for 

the period of time stipulated by the FDIC, an FDICsupervised institution that is not an advanced 

approaches FDIC-supervised institution, is not 

required to deduct an investment in the capital of 

an unconsolidated financial institution pursuant to 

this paragraph if the financial institution is in 

distress and if such investment is made for the 

purpose of providing financial support to the 

financial institution, as determined by the FDIC. 

25Any investments in the capital of an 

unconsolidated financial institution that do not 

exceed the 25 percent threshold for investments in 

the capital of unconsolidated financial institutions 

under this section must be assigned the appropriate 

risk weight under subparts D or F of this part, as 

applicable. 

26With the prior written approval of the FDIC, for 

the period of time stipulated by the FDIC, an 

advanced approaches FDIC-supervised institution is 

not required to deduct a non-significant investment 

in the capital of an unconsolidated financial 

institution or an investment in a covered debt 

instrument pursuant to this paragraph if the 

financial institution is in distress and if such 

investment is made for the purpose of providing 

financial support to the financial institution, as 

determined by the FDIC. 

an advanced approaches FDICsupervised institution (as described in 

paragraph (c)(5) of this section), and 

non-common stock significant 

investments in the capital of 

unconsolidated financial institutions for 

an advanced approaches FDICsupervised institution (as described in 

paragraph (c)(6) of this section). Under 

the corresponding deduction approach, 

an FDIC-supervised institution must 

make deductions from the component of 

capital for which the underlying 

instrument would qualify if it were 

issued by the FDIC-supervised 

institution itself, as described in 

paragraphs (c)(2)(i) through (iii) of this 

section. If the FDIC-supervised 

institution does not have a sufficient 

amount of a specific component of 

capital to effect the required deduction, 

the shortfall must be deducted 

according to paragraph (f) of this 

section. 

(i) If an investment is in the form of 

an instrument issued by a financial 

institution that is not a regulated 

financial institution, the FDICsupervised institution must treat the 

instrument as: 

(A) A common equity tier 1 capital 

instrument if it is common stock or 

represents the most subordinated claim 

in a liquidation of the financial 

institution; and 

(B) An additional tier 1 capital 

instrument if it is subordinated to all 

creditors of the financial institution and 

is senior in liquidation only to common 

shareholders. 

(ii) If an investment is in the form of 

an instrument issued by a regulated 

financial institution and the instrument 

does not meet the criteria for common 

equity tier 1, additional tier 1 or tier 2 

capital instruments under § 324.20, the 

FDIC-supervised institution must treat 

the instrument as: 

(A) A common equity tier 1 capital 

instrument if it is common stock 

included in GAAP equity or represents 

the most subordinated claim in 

liquidation of the financial institution; 

(B) An additional tier 1 capital 

instrument if it is included in GAAP 

equity, subordinated to all creditors of 

the financial institution, and senior in a 

receivership, insolvency, liquidation, or 

similar proceeding only to common 

shareholders; 

(C) A tier 2 capital instrument if it is 

not included in GAAP equity but 

considered regulatory capital by the 

primary supervisor of the financial 

institution; and 

(D) For an advanced approaches 

FDIC-supervised institution, a tier 2 

capital instrument if it is a covered debt 

instrument. 

(iii) If an investment is in the form of 

a non-qualifying capital instrument (as 

defined in § 324.300(c)), the FDICsupervised institution must treat the 

instrument as: 

(A) An additional tier 1 capital 

instrument if such instrument was 

included in the issuer’s tier 1 capital 

prior to May 19, 2010; or 

(B) A tier 2 capital instrument if such 

instrument was included in the issuer’s 

tier 2 capital (but not includable in tier 

1 capital) prior to May 19, 2010. 

(3) Reciprocal cross holdings in the 

capital of financial institutions. (i) An 

FDIC-supervised institution must 

deduct an investment in the capital of 

other financial institutions that it holds 

reciprocally, where such reciprocal 

cross holdings result from a formal or 

informal arrangement to swap, 

exchange, or otherwise intend to hold 

each other’s capital instruments, by 

applying the corresponding deduction 

approach in paragraph (c)(2) of this 

section. 

(ii) An advanced approaches FDICsupervised institution must deduct an 

investment in any covered debt 

instrument that the institution holds 

reciprocally with another financial 

institution, where such reciprocal cross 

holdings result from a formal or 

informal arrangement to swap, 

exchange, or otherwise intend to hold 

each other’s capital or covered debt 

instruments, by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section. 

(4) Investments in the capital of 

unconsolidated financial institutions. 

An FDIC-supervised institution that is 

not an advanced approaches FDICsupervised institution must deduct its 

investments in the capital of 

unconsolidated financial institutions (as 

defined in § 324.2) that exceed 25 

percent of the sum of the FDICsupervised institution’s common equity 

tier 1 capital elements minus all 

deductions from and adjustments to 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section.24 The 

deductions described in this section are 

net of associated DTLs in accordance 

with paragraph (e) of this section. In 

addition, with the prior written 

approval of the FDIC, an FDICsupervised institution that underwrites 

a failed underwriting, for the period of 

time stipulated by the FDIC, is not 

required to deduct an investment in the 

capital of an unconsolidated financial 

institution pursuant to this paragraph 

(c) to the extent the investment is 

related to the failed underwriting.25

(5) Non-significant investments in the 

capital of unconsolidated financial 

institutions. (i) An advanced approaches 

FDIC-supervised institution must 

deduct its non-significant investments 

in the capital of unconsolidated 

financial institutions (as defined in 

§ 324.2) that, in the aggregate and 

together with any investment in a 

covered debt instrument (as defined in 

§ 324.2) issued by a financial institution 

in which the FDIC-supervised 

institution does not have a significant 

investment in the capital of the 

unconsolidated financial institution (as 

defined in § 324.2), exceeds 10 percent 

of the sum of the advanced approaches 

FDIC-supervised institution’s common 

equity tier 1 capital elements minus all 

deductions from and adjustments to 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section (the 10 percent 

threshold for non-significant 

investments) by applying the 

corresponding deduction approach in 

paragraph (c)(2) of this section.26 The 

deductions described in this paragraph 

are net of associated DTLs in accordance 

with paragraph (e) of this section. In 

addition, with the prior written 

approval of the FDIC, an advanced 

approaches FDIC-supervised institution 

that underwrites a failed underwriting, 

for the period of time stipulated by the 

FDIC, is not required to deduct from 

capital a non-significant investment in 

the capital of an unconsolidated 

financial institution or an investment in 

a covered debt instrument pursuant to 

this paragraph (c)(5) to the extent the 

investment is related to the failed 


jbell on DSKJLSW7X2PROD with RULES2
744 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

27Any non-significant investment in the capital 

of an unconsolidated financial institution or any 

investment in a covered debt instrument that is not 

required to be deducted under this paragraph (c)(5) 

or otherwise under this section must be assigned 

the appropriate risk weight under subparts D, E, or 

F of this part, as applicable. 

28With prior written approval of the FDIC, for the 

period of time stipulated by the FDIC, an advanced 

approaches FDIC-supervised institution is not 

required to deduct a significant investment in the 

capital of an unconsolidated financial institution, 

including an investment in a covered debt 

instrument, under this paragraph (c)(6) or otherwise 

under this section if such investment is made for 

the purpose of providing financial support to the 

financial institution as determined by the FDIC. 

underwriting.27 For any calculation 

under this paragraph (c)(5)(i), an 

advanced approaches FDIC-supervised 

institution may exclude the amount of 

an investment in a covered debt 

instrument under paragraph (c)(5)(iii) or 

(iv) of this section, as applicable. 

(ii) For an advanced approaches FDICsupervised institution, the amount to be 

deducted under this paragraph (c)(5) 

from a specific capital component is 

equal to: 

(A) The advanced approaches FDICsupervised institution’s aggregate nonsignificant investments in the capital of 

an unconsolidated financial institution 

and, if applicable, any investments in a 

covered debt instrument subject to 

deduction under this paragraph (c)(5), 

exceeding the 10 percent threshold for 

non-significant investments, multiplied 

by 

(B) The ratio of the advanced 

approaches FDIC-supervised 

institution’s aggregate non-significant 

investments in the capital of an 

unconsolidated financial institution (in 

the form of such capital component) to 

the advanced approaches FDICsupervised institution’s total nonsignificant investments in 

unconsolidated financial institutions, 

with an investment in a covered debt 

instrument being treated as tier 2 capital 

for this purpose. 

(iii) For purposes of applying the 

deduction under paragraph (c)(5)(i) of 

this section, an advanced approaches 

FDIC-supervised institution that is not a 

subsidiary of a global systemically 

important banking organization, as 

defined in 12 CFR 252.2, may exclude 

from the deduction the amount of the 

FDIC-supervised institution’s gross long 

position, in accordance with 

§ 324.22(h)(2), in investments in 

covered debt instruments issued by 

financial institutions in which the FDICsupervised institution does not have a 

significant investment in the capital of 

the unconsolidated financial 

institutions up to an amount equal to 5 

percent of the sum of the FDICsupervised institution’s common equity 

tier 1 capital elements minus all 

deductions from and adjustments to 

common equity tier 1 capital elements 

required under paragraphs (a) through 

(c)(3) of this section, net of associated 

DTLs in accordance with paragraph (e) 

of this section. 

(iv) Prior to applying the deduction 

under paragraph (c)(5)(i) of this section: 

(A) An FDIC-supervised institution 

that is a subsidiary of a global 

systemically important BHC, as defined 

in 12 CFR 252.2, may designate any 

investment in a covered debt instrument 

as an excluded covered debt instrument, 

as defined in § 324.2. 

(B) An FDIC-supervised institution 

that is a subsidiary of a global 

systemically important BHC, as defined 

in 12 CFR 252.2, must deduct, according 

to the corresponding deduction 

approach in paragraph (c)(2) of this 

section, its gross long position, 

calculated in accordance with paragraph 

(h)(2) of this section, in a covered debt 

instrument that was originally 

designated as an excluded covered debt 

instrument, in accordance with 

paragraph (c)(5)(iv)(A) of this section, 

but no longer qualifies as an excluded 

covered debt instrument. 

(C) An FDIC-supervised institution 

that is a subsidiary of a global 

systemically important BHC, as defined 

in 12 CFR 252.2, must deduct according 

to the corresponding deduction 

approach in paragraph (c)(2) of this 

section the amount of its gross long 

position, calculated in accordance with 

paragraph (h)(2) of this section, in a 

direct or indirect investment in a 

covered debt instrument that was 

originally designated as an excluded 

covered debt instrument, in accordance 

with paragraph (c)(5)(iv)(A) of this 

section, and has been held for more than 

thirty business days. 

(D) An FDIC-supervised institution 

that is a subsidiary of a global 

systemically important BHC, as defined 

in 12 CFR 252.2, must deduct according 

to the corresponding deduction 

approach in paragraph (c)(2) of this 

section its gross long position, 

calculated in accordance with paragraph 

(h)(2) of this section, of its aggregate 

position in excluded covered debt 

instruments that exceeds 5 percent of 

the sum of the FDIC-supervised 

institution’s common equity tier 1 

capital elements minus all deductions 

from and adjustments to common equity 

tier 1 capital elements required under 

paragraphs (a) through (c)(3) of this 

section, net of associated DTLs in 

accordance with paragraph (e) of this 

section. 

(6) Significant investments in the 

capital of unconsolidated financial 

institutions that are not in the form of 

common stock. If an advanced 

approaches FDIC-supervised institution 

has a significant investment in the 

capital of an unconsolidated financial 

institution, the advanced approaches 

FDIC-supervised institution must 

deduct from capital any such 

investment issued by the 

unconsolidated financial institution that 

is held by the FDIC-supervised 

institution other than an investment in 

the form of common stock, as well as 

any investment in a covered debt 

instrument issued by the 

unconsolidated financial institution, by 

applying the corresponding deduction 

approach in paragraph (c)(2) of this 

section.28 The deductions described in 

this section are net of associated DTLs 

in accordance with paragraph (e) of this 

section. In addition, with the prior 

written approval of the FDIC, for the 

period of time stipulated by the FDIC, 

an advanced approaches FDICsupervised institution that underwrites 

a failed underwriting is not required to 

deduct the significant investment in the 

capital of an unconsolidated financial 

institution or an investment in a 

covered debt instrument pursuant to 

this paragraph (c)(6) if such investment 

is related to such failed underwriting. 

* * * * * 

(f) Insufficient amounts of a specific 

regulatory capital component to effect 

deductions. Under the corresponding 

deduction approach, if an FDICsupervised institution does not have a 

sufficient amount of a specific 

component of capital to effect the full 

amount of any deduction from capital 

required under paragraph (d) of this 

section, the FDIC-supervised institution 

must deduct the shortfall amount from 

the next higher (that is, more 

subordinated) component of regulatory 

capital. Any investment by an advanced 

approaches FDIC-supervised institution 

in a covered debt instrument must be 

treated as an investment in the tier 2 

capital for purposes of this paragraph 

(f). Notwithstanding any other provision 

of this section, a qualifying community 

banking organization (as defined in 

§ 324.12) that has elected to use the 

community bank leverage ratio 

framework pursuant to § 324.12 is not 

required to deduct any shortfall of tier 

2 capital from its additional tier 1 

capital or common equity tier 1 capital. 

* * * * * 

(h) Net long position—(1) In general. 

For purposes of calculating the amount 

of an FDIC-supervised institution’s 

investment in the FDIC-supervised 


jbell on DSKJLSW7X2PROD with RULES2
Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 745 

institution’s own capital instrument, 

investment in the capital of an 

unconsolidated financial institution, 

and investment in a covered debt 

instrument under this section, the 

institution’s net long position is the 

gross long position in the underlying 

instrument determined in accordance 

with paragraph (h)(2) of this section, as 

adjusted to recognize any short position 

by the FDIC-supervised institution in 

the same instrument subject to 

paragraph (h)(3) of this section. 

(2) Gross long position. A gross long 

position is determined as follows: 

(i) For an equity exposure that is held 

directly by the FDIC-supervised 

institution, the adjusted carrying value 

of the exposure as that term is defined 

in § 324.51(b); 

(ii) For an exposure that is held 

directly and that is not an equity 

exposure or a securitization exposure, 

the exposure amount as that term is 

defined in § 324.2; 

(iii) For each indirect exposure, the 

FDIC-supervised institution’s carrying 

value of its investment in an investment 

fund or, alternatively: 

(A) An FDIC-supervised institution 

may, with the prior approval of the 

FDIC, use a conservative estimate of the 

amount of its indirect investment in the 

FDIC-supervised institution’s own 

capital instruments, its indirect 

investment in the capital of an 

unconsolidated financial institution, or 

its indirect investment in a covered debt 

instrument held through a position in 

an index, as applicable; or 

(B) An FDIC-supervised institution 

may calculate the gross long position for 

an indirect exposure to the FDICsupervised institution’s own capital 

instruments, the capital of an 

unconsolidated financial institution, or 

a covered debt instrument by 

multiplying the FDIC-supervised 

institution’s carrying value of its 

investment in the investment fund by 

either: 

(1) The highest stated investment 

limit (in percent) for an investment in 

the FDIC-supervised institution’s own 

capital instruments, an investment in 

the capital of an unconsolidated 

financial institution, or an investment in 

a covered debt instrument, as 

applicable, as stated in the prospectus, 

partnership agreement, or similar 

contract defining permissible 

investments of the investment fund; or 

(2) The investment fund’s actual 

holdings (in percent) of the investment 

in the FDIC-supervised institution’s 

own capital instruments, investment in 

the capital of an unconsolidated 

financial institution, or investment in a 

covered debt instrument, as applicable; 

and 

(iv) For a synthetic exposure, the 

amount of the FDIC-supervised 

institution’s loss on the exposure if the 

reference capital or covered debt 

instrument were to have a value of zero. 

(3) Adjustments to reflect a short 

position. In order to adjust the gross 

long position to recognize a short 

position in the same instrument under 

paragraph (h)(1) of this section, the 

following criteria must be met: 

(i) The maturity of the short position 

must match the maturity of the long 

position, or the short position must have 

a residual maturity of at least one year 

(maturity requirement); or 

(ii) For a position that is a trading 

asset or trading liability (whether on- or 

off-balance sheet) as reported on the 

FDIC-supervised institution’s Call 

Report, if the FDIC-supervised 

institution has a contractual right or 

obligation to sell the long position at a 

specific point in time and the 

counterparty to the contract has an 

obligation to purchase the long position 

if the FDIC-supervised institution 

exercises its right to sell, this point in 

time may be treated as the maturity of 

the long position such that the maturity 

of the long position and short position 

are deemed to match for purposes of the 

maturity requirement, even if the 

maturity of the short position is less 

than one year; and 

(iii) For an investment in an FDICsupervised institution’s own capital 

instrument under paragraph (c)(1) of 

this section, an investment in the capital 

of an unconsolidated financial 

institution under paragraphs (c)(4) 

through (6) and (d) of this section (as 

applicable), and an investment in a 

covered debt instrument under 

paragraphs (c)(1), (5), and (6) of this 

section: 

(A) The FDIC-supervised institution 

may only net a short position against a 

long position in an investment in the 

FDIC-supervised institution’s own 

capital instrument under paragraph 

(c)(1) of this section if the short position 

involves no counterparty credit risk; 

(B) A gross long position in an 

investment in the FDIC-supervised 

institution’s own capital instrument, an 

investment in the capital of an 

unconsolidated financial institution, or 

an investment in a covered debt 

instrument due to a position in an index 

may be netted against a short position 

in the same index; 

(C) Long and short positions in the 

same index without maturity dates are 

considered to have matching maturities; 

and 

(D) A short position in an index that 

is hedging a long cash or synthetic 

position in an investment in the FDICsupervised institution’s own capital 

instrument, an investment in the capital 

instrument of an unconsolidated 

financial institution, or an investment in 

a covered debt instrument can be 

decomposed to provide recognition of 

the hedge. More specifically, the portion 

of the index that is composed of the 

same underlying instrument that is 

being hedged may be used to offset the 

long position if both the long position 

being hedged and the short position in 

the index are reported as a trading asset 

or trading liability (whether on- or offbalance sheet) on the FDIC-supervised 

institution’s Call Report, and the hedge 

is deemed effective by the FDICsupervised institution’s internal control 

processes, which have not been found to 

be inadequate by the FDIC. 

§ 324.121 [Amended] 

■ 25. Section 324.121 is amended by 

removing ‘‘§ 324.10(c)(1) through (3)’’ 

and adding ‘‘§ 324.10(d)(1) through (3)’’ 

in paragraph (c). 

§ 324.132 [Amended] 

■ 6. Section 324.132 is amended by 

removing ‘‘§ 324.10(c)(4)(ii)(B)’’ and 

adding ‘‘§ 324.10(c)(2)(ii)(B)’’ in 

paragraph (c)(7)(iii) and (iv). 

§ 324.304 [Amended] 

■ 27. Section 324.304 is amended by: 

■ a. Removing ‘‘§ 324.10(c)(4)’’ and 

adding in its place ‘‘§ 324.10(c)’’ in 

paragraph (a) introductory text; and 

■ b. Removing ‘‘§ 324.10(c)(4)(ii)(J)(1)’’ 

and adding in its place 

‘‘§ 324.10(c)(2)(x)(A)’’ in paragraph (e). 

Brian P. Brooks, 

Acting Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System. 

Ann E. Misback, 

Secretary of the Board. 

Federal Deposit Insurance Corporation. 

By order of the Board of Directors. 

Dated at Washington, DC, on or about 

October 20, 2020. 

James P. Sheesley, 

Assistant Executive Secretary. 

[FR Doc. 2020–27046 Filed 1–5–21; 8:45 am] 

BILLING CODE 4810–33–6210–01–6714–01–P 


jbell on DSKJLSW7X2PROD with RULES2