BOARD OF GOVERNORS

OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20881
DIVISION OF BANKING
SUPERVISION AND
REGULATION

August 29, 2007

Mark J. Welshimer, Esq.
Sullivan & Cromwell LLP
125 Broad Street

New York, NY 10004-2498

Dear Mr. Welshimer:

This is in response to your letter dated August 2, 2007 (the “request”), regarding
the regulatory capital treatment of the Regulation T margin debits ("Reg. T margin
loans") of the registered U.S. broker-dealer subsidiaries of Wachovia Corporation
("Wachovia").' You ask that Wachovia be granted an exception to the Board's risk-based
capital adequacy guidelines for bank holding companies (the "guidelines") (12 CFR part
225, App. A), which require a 100 percent risk weight for Reg. T margin loans.
Specifically, you ask for an exception to the guidelines to permit Wachovia to assign a 10
percent risk weight to its Reg. T margin loans, consistent with the capital treatment that
the Board approved for Citigroup Inc. (“Citigroup”) in a letter dated June 15, 2007.

In the request, you contend that the risk-based capital requirement for such loans
is excessive and represent that Wachovia has a de minimis internal economic capital
charge for credit risk on Reg. T margin loans.

A margin account at a broker-dealer registered with the Securities and Exchange
Commission ("SEC") is a leveraged account, through which securities can be purchased,
sold short, carried, or traded using a loan from the broker-dealer and a deposit of cash or
securities by the customer. The amount of leverage available to a customer is limited by
the Board's Regulation T (12 CFR part 220), the margin-maintenance rule of the New
York Stock Exchange (NYSE Rule 431), and the lender's internal margin-maintenance

' Wachovia’s Reg. T margin loans are primarily originated by First Clearing, LLC.


requirements.” The request also explains that Wachovia generally applies internal
margin-maintenance requirements that exceed those in Regulation T or NYSE Rule 431.

As noted above, Reg. T margin loans held by U.S. bank holding companies
("BHCs") currently are assigned to the 100 percent risk weight category under the
guidelines, resulting in a risk-based capital requirement of 8 percent. In contrast, other
domestic and foreign firms, including foreign banking organizations that own U.S.
broker-dealers, as well as U.S. broker-dealers and consolidated supervised entities
("CSEs") regulated by the SEC, are currently required to hold either no or de minimis
regulatory capital against Reg. T margin loans.

After carefully considering the request, and subject to the conditions listed below,
the Board has approved an exception to the guidelines that permits Wachovia to treat
Reg. T margin loans in a manner that differs from that set forth in the guidelines.
Specifically, the Board will allow Wachovia to apply a 10 percent risk weight to its
Reg. T margin loans. The Board has approved this exception under the reservation-of-
authority provision contained in the guidelines (12 CFR part 225, App. A, § III-A). This
provision permits the Board, on a case-by-case basis, to determine the appropriate risk
weight for any asset or off-balance-sheet item that imposes risks on a BHC that are
incommensurate with the risk weight otherwise specified in the guidelines.

To qualify for the capital treatment outlined above, Wachovia's Reg. T margin loans
must meet the following conditions:

1. The securities collateral for the Reg. T margin loans is liquid and readily
marketable;

2. The Reg. T margin loans and associated collateral are marked to market each
business day;

3. The Reg. T margin loans are subject to initial margin requirements under
Regulation T and daily margin-maintenance requirements under NYSE Rule 431;
and

4. Wachovia has a reasonable basis for concluding that it would be able to liquidate
the collateral for the Reg. T margin loans without undue delay, even in the case of
bankruptcy or insolvency of the borrower.

The Board believes that the capital treatment approved above for Wachovia's Reg. T
margin loans provides a more risk-sensitive treatment for these transactions than their
treatment under the guidelines. The combination of initial margin requirements under
Regulation T, ongoing margin-maintenance requirements under NYSE regulations,
generally higher ongoing margin-maintenance requirements under Wachovia's internal

? If the broker-dealer is not a member of the NYSE, the margin-maintenance rule of the
NASD (NASD Rule 2520) generally would apply instead. Both rules impose the same
leverage limitations.


policies, Wachovia's daily mark-to-market and margin-call policies, the high liquidity of
the collateral, Wachovia's typical right to terminate the loan at any time, and Wachovia's
general protection from the automatic stay in bankruptcy makes these loans a low-credit-
risk product that warrants a 10 percent risk weight.

This exception accommodates Wachovia's broker-dealer activities in a risk-sensitive
manner, helps remove an artificial constraint on certain of Wachovia's securities-based
lending operations, and brings Wachovia's risk-based capital requirement for Reg. T
margin loans more in accord with the capital requirement for such loans that the SEC
imposes on broker-dealers and CSEs. Wachovia should be aware, however, that the
Board may in the future impose a regulatory capital treatment for Reg. T margin loans
that differs from the treatment described in the request, depending in part on the outcome
of the current efforts to implement the Basel II Capital Accord in the United States.

This determination is conditioned on Wachovia's compliance with all of the
commitments and representations it has made to the Board in connection with the request.
These commitments and representations are deemed to be conditions imposed in writing
by the Board in connection with granting the request and, as such, may be enforced in
proceedings under applicable law. Further, this determination is based on the specific
facts and circumstances described in the request and in your discussions with Federal
Reserve staff. Any material change in those facts and circumstances or any failure by
Wachovia to observe any of its commitments or representations may result in a different
view or in a revocation of the regulatory capital treatment permitted under this
determination.

If you have any questions with regard to this letter, please direct them to Norah
Barger, Associate Director, at (202) 452-2402, or Juan C. Climent, Supervisory Financial
Analyst, at (202) 872-7526, in the Division of Banking Supervision and Regulation; or
Mark E. Van Der Weide, Senior Counsel, at (202) 452-2263, or April Snyder, Senior
Attorney, at (202) 452-3099, in the Legal Division.

Sincerely,

lent oe

Roger T. Cole
Director