38460 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Rules and Regulations 

1See 81 FR 14328 (Mar. 16, 2016). 

2 77 FR 594 (Jan. 5, 2012); 77 FR 76628 (Dec. 28, 

2012). 

3Section 610 of the Dodd-Frank Act amended the 

term ‘‘loans and extensions of credit’’ for purposes 

of the lending limits applicable to national banks 

to include any credit exposure arising from a 

derivative transaction, repurchase agreement, 

reverse repurchase agreement, securities lending 

transaction, or securities borrowing transaction. See 

Dodd-Frank Act, Pub. L. 111–203, section 610, 124 

Stat. 1376, 1611 (2010), codified at 12 U.S.C. 84(b). 

As discussed in more detail below, these types of 

transactions also are subject to the singlecounterparty credit limits of section 165(e). 12 

U.S.C. 5365(e)(3). 

FEDERAL RESERVE SYSTEM 

12 CFR Part 252 

[Regulation YY; Docket No. R–1534] 

RIN 7100–AE 48 

Single-Counterparty Credit Limits for 

Bank Holding Companies and Foreign 

Banking Organizations 

AGENCY: Board of Governors of the 

Federal Reserve System (Board). 

ACTION: Final rule. 

SUMMARY: The Board is adopting a final 

rule (final rule) to establish singlecounterparty credit limits for bank 

holding companies and foreign banking 

organizations with $250 billion or more 

in total consolidated assets, including 

any U.S. intermediate holding company 

of such a foreign banking organization 

with $50 billion or more in total 

consolidated assets, and any bank 

holding company identified as a global 

systemically important bank holding 

company under the Board’s capital 

rules. The final rule implements section 

165(e) of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

which requires the Board to impose 

limits on the amount of credit exposure 

that such a bank holding company or 

foreign banking organization can have to 

an unaffiliated company in order to 

reduce the risks arising from the 

company’s failure. 

DATES: The final rule is effective 

October 5, 2018. 

FOR FURTHER INFORMATION CONTACT: 

Laurie S. Schaffer, Associate General 

Counsel, (202) 452–2272, Benjamin W. 

McDonough, Assistant General Counsel, 

(202) 452–2036, Pamela G. Nardolilli, 

Special Counsel, (202) 452–3289, 

Christopher G. Callanan, Senior 

Attorney, (202) 452–3594, or Lucy O. 

Chang, Senior Attorney, (202) 475–6331, 

Legal Division; or Arthur Lindo, Deputy 

Director, (202) 452–2695, or Jeffery 

Zhang, Economist, (202) 736–1968, 

Division of Supervision and Regulation; 

Board of Governors of the Federal 

Reserve System, 20th and C Streets NW, 

Washington, DC 20551. For the hearing 

impaired only, Telecommunications 

Device for the Deaf (TDD) users may 

contact (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Background 

B. Notice of Proposed Rulemakings, 

General Summary of Comments, and 

Enactment of the Economic Growth, 

Regulatory Relief, and Consumer 

Protection Act 

C. Overview of the Final Rule 

II. SCCL for Covered Companies 

A. Key Terminology and Concepts 

B. Credit Exposure Limits 

C. Gross Credit Exposure 

D. Net Credit Exposure 

E. Exposures to Securitization Funds, 

Investment Funds, or Other Special 

Purpose Vehicles 

F. Aggregation of Exposures to Connected 

Counterparties 

G. Exemptions 

H. Compliance and Timing of Applicability 

III. Final Rule for Foreign Banking 

Organizations 

A. Background 

B. Summary of Comments on Proposal for 

Foreign Banking Organizations 

C. Overview of the Final Rule for Foreign 

Banking Organizations 

D. Key Terminology and Concepts 

E. Credit Exposure Limits 

F. Gross Credit Exposure 

G. Net Credit Exposure 

H. Exposures to SPVs and Aggregation of 

Exposures to Connected Counterparties 

I. Exemptions 

J. Compliance 

K. Timing of Applicability 

IV. Impact Analysis 

V. Regulatory Analysis 

A. Paperwork Reduction Act 

B. Regulatory Flexibility Act Analysis 

C. Solicitation of Comments on the Use of 

Plain Language 

I. Introduction 

A. Background 

In March 2016, the Board invited 

public comment on a notice of proposed 

rulemaking (‘‘proposal’’ or ‘‘proposed 

rule’’) to establish single-counterparty 

credit limits for domestic and foreign 

bank holding companies with $50 

billion or more in total consolidated 

assets.1 The proposed rule would have 

implemented section 165(e) of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act), which requires the Board to 

establish limits on the amount of credit 

exposure that such a U.S. or foreign 

holding company can have to an 

unaffiliated company in order to reduce 

the risks arising from the company’s 

failure. The March 2016 notice of 

proposed rulemaking followed earlier 

proposals to implement section 165(e) 

for U.S. and foreign banking 

organizations (FBOs).2

During the 2007–2009 financial crisis, 

some of the largest financial firms in the 

world collapsed or experienced material 

financial distress. Counterparties of 

failing firms were placed under severe 

strain when the failing firm could not 

meet its financial obligations, in some 

cases resulting in the counterparties’ 

inability to meet their own financial 

obligations. Similarly, weakened 

financial firms came under increased 

stress when counterparties with large 

exposures to the firms suddenly 

attempted to reduce those exposures. 

As demonstrated in the crisis, 

interconnectivity among major financial 

companies poses risks to the financial 

stability of the global financial system. 

The effect of a large financial 

institution’s failure or near collapse is 

transmitted and amplified by the 

interconnectedness of large, 

systemically important firms—that is, 

the degree to which they extend each 

other credit and serve as counterparties 

to one another. Financial distress at a 

banking organization may materially 

raise the likelihood of distress at other 

firms, given the network of bilateral 

credit exposures between large, 

systemically important firms throughout 

the financial system. Accordingly, a 

large financial firm’s systemic risk is 

likely to be related directly to its 

interconnectedness vis-a`-vis other 

financial institutions and the financial 

sector as a whole. This 

interconnectedness of financial firms 

also creates the potential for an increase 

in the likelihood of distress at nonfinancial firms that are dependent upon 

financial firms for funding. 

The financial crisis also revealed 

shortcomings in the U.S. regulatory 

approach to credit exposure limits, 

which limited only a portion of the 

interconnectedness among large 

financial companies. For example, 

certain commercial banks and U.S. 

branches and agencies of foreign 

banking organizations were subject to 

single-borrower lending and investment 

limits. However, these limits often 

excluded credit exposures generated by 

derivatives and some securities 

financing transactions, and the limits 

did not apply at the consolidated 

holding company level.3

As noted, section 165(e) of the DoddFrank Act (section 165(e)) requires the 

Board to establish single-counterparty 

credit limits (SCCL) for large U.S. and 

foreign bank holding companies and 

nonbank financial companies, in order 

to limit the risks that the failure of any 


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4See 12 U.S.C. 5365(e)(1). 

5 12 U.S.C. 5365(e)(2). 

6See id. 

7See 12 U.S.C. 5365(e)(3). 

8See 12 U.S.C. 5365(e)(5). 

9See 12 U.S.C. 5365(e)(6). Section 165(e) also 

authorizes the Board to establish singlecounterparty credit limits for nonbank financial 

companies designated by the Financial Stability 

Oversight Council (FSOC) for supervision by the 

Board. The final rule does not at this time apply to 

any such nonbank financial company. The Board 

intends to consider whether to apply similar 

requirements to these companies separately by rule 

or order at a later time. 

10See, e.g., 12 U.S.C. 24(Seventh); 12 U.S.C. 84; 

12 CFR 1 and 32; see also 12 U.S.C. 335 (applying 

the provisions of 12 U.S.C. 24(Seventh) to state 

member banks). 

11See 12 U.S.C. 24(Seventh); 12 CFR 1.3. 

12See 12 U.S.C. 84; 12 CFR 32.3. State-chartered 

banks, as well as state- and federally-chartered 

savings associations, also are subject to lending 

limits imposed by relevant state and federal law. 

13See 12 CFR 211.28. 

14All of the comments are available on the 

Board’s public website. A summary of comments 

received on the 2011 and 2012 proposal appears in 

the March 2016 re-proposal. See 81 FR at 14329– 

30. 

15See 81 FR at 14328. 

16See 78 FR 37930 (June 25, 2013). 

17Basel Committee on Banking Supervision, 

Supervisory framework for measuring and 

controlling large exposures (April 2014), http://

www.bis.org/press/p140415.htm. 

18See proposed rule § 252.71(cc). ‘‘Control’’ is 

defined in the Board’s Regulation YY by reference 

to the BHC Act. See 12 CFR 252.2(g); see also 12 

U.S.C. 1841 et seq. The BHC Act generally defines 

control to mean ownership or control of 25 percent 

or more of any class of voting securities; control in 

any manner over the election of a majority of the 

directors; or exercise of a controlling influence over 

management or policies. 12 U.S.C. 1841(a)(2). 

individual firm could pose to these 

firms.4 In particular, section 165(e) 

prohibits such firms from having credit 

exposure to any unaffiliated company 

that exceeds 25 percent of the capital 

stock and surplus of the firm.5 The 

Board is authorized to establish a lower 

amount to mitigate the risks to the 

financial stability of the United States.6

Credit exposure to a company is 

defined in section 165(e) to mean all 

extensions of credit to the company, 

including loans, deposits, and lines of 

credit; all repurchase agreements, 

reverse repurchase agreements, and 

securities borrowing and lending 

transactions with the company (to the 

extent that such transactions create 

credit exposure for the company); all 

guarantees, acceptances, and letters of 

credit (including endorsement or 

standby letters of credit) issued on 

behalf of the company; all purchases of, 

or investments in, securities issued by 

the company; counterparty credit 

exposure to the company in connection 

with derivative transactions between the 

covered company and the company; and 

any other similar transaction that the 

Board, by regulation, determines to be a 

credit exposure for purposes of section 

165(e).7

Section 165(e) authorizes the Board to 

issue such regulations and orders, 

including definitions consistent with 

section 165(e), as may be necessary to 

administer and carry out the section.8 In 

addition, it authorizes the Board to 

exempt transactions, in whole or in part, 

from the definition of the term ‘‘credit 

exposure,’’ if the Board finds that the 

exemption is in the public interest and 

consistent with the purposes of section 

165(e).9

The framework of SCCL established 

by the final rule is similar to and builds 

upon existing credit exposure limits for 

depository institutions, including the 

investment securities limits and the 

lending limits imposed on certain 

depository institutions by the National 

Bank Act and Federal Reserve Act.10 A 

national bank generally is limited, 

subject to certain exceptions, in the total 

amount of investment securities of any 

one obligor that it may purchase for its 

own account to no more than 10 percent 

of its capital stock and surplus.11 In 

addition, a national bank’s total 

outstanding loans and extensions of 

credit to any one borrower may not 

exceed 15 percent of the bank’s capital 

stock and surplus, plus an additional 10 

percent of the bank’s capital stock and 

surplus, if the amount that exceeds the 

bank’s 15 percent general limit is fully 

secured by readily-marketable 

collateral.12 U.S. branches of foreign 

banks are subject to similar limits, albeit 

measured against the capital stock and 

surplus of the top-tier parent foreign 

banking organization.13

The SCCL in section 165(e) operate 

separately and independently from the 

investment securities limits and lending 

limits in the National Bank Act and 

other statutes, and a covered company 

or covered foreign entity must comply 

with all of the limits that are applicable 

to it and its subsidiaries. Under the final 

rule, a covered company would be 

required to ensure that it meets the 

SCCL on a consolidated basis. Because 

of this, the final rule could affect the 

amount of a subsidiary depository 

institution’s loans and extensions of 

credit, regardless of the subsidiary 

depository institution’s applicable 

lending limits. 

B. Notices of Proposed Rulemakings, 

General Summary of Comments, and 

Enactment of the Economic Growth, 

Regulatory Relief, and Consumer 

Protection Act 

The Board received 48 comments, 

representing approximately 60 parties, 

on the 2011 proposal on section 165(e) 

relating to U.S. bank holding companies 

and 35 comments, representing over 45 

organizations, on the 2012 proposed 

rule relating to FBOs.14

In March 2016, the Board re-proposed 

a rule to implement section 165(e) 15 in 

order to take account of (1) the large 

volume of comments received on the 

earlier proposed rules; (2) the revised 

lending limits rules applicable to 

national banks; 16 (3) the introduction by 

the Basel Committee on Banking 

Supervision (BCBS) of a large exposures 

standard (large exposure standard), 

which establishes an international 

standard for the maximum amount of 

credit exposure that an internationally 

active bank is permitted to have to a 

single counterparty; 17 and (4) the 

results of quantitative impact studies 

and related analysis conducted by Board 

staff to assess the impact of section 

165(e). 

The Board received approximately 30 

comments in response to the 2016 

proposed rule. Comments were received 

from a wide range of individuals, 

banking organizations, industry and 

trade groups representing banking, 

insurance, and the broader financial 

services industry, and public interest 

groups. Board staff also met with a 

number of commenters to discuss issues 

relating to the proposed rule, and 

summaries of these meetings may be 

found on the Board’s public website. 

Certain commenters expressed 

support for the broader goals of the 

proposed rule to limit singlecounterparty concentrations at large 

financial companies. A number of 

commenters expressed concerns with 

particular aspects of the proposed rules. 

The Board received a large number of 

comments on the scope of application of 

the proposal: How to define a ‘‘covered 

company’’ and a ‘‘counterparty,’’ terms 

that form the basis for the application of 

the credit exposure limits under the 

proposed rules. The proposal would 

have defined a covered company to 

include all of its subsidiaries. 

‘‘Subsidiary’’ would have been defined 

to mean a company that is directly or 

indirectly controlled by that company 

for purposes of the Bank Holding 

Company Act of 1956 (BHC Act).18 The 

proposal defined a counterparty to 

include a company and all entities with 

respect to which the company (1) owns 

or controls 25 percent or more of a class 

of voting securities; (2) owns or controls 

25 percent or more of the total equity; 

or (3) consolidates for financial 

reporting purposes. Commenters urged 

the Board to adopt a financial 

consolidation standard to define a 

‘‘covered company’’ and 


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19See Basel Committee on Banking Supervision, 

Basel III: Finalising post-crisis reforms (Dec. 2017), 

https://www.bis.org/bcbs/publ/d424.pdf. 

20Public Law 115–174, section 401, 132 Stat. 

1296 (2018). 

‘‘counterparty.’’ Commenters contended 

that moving to a financial consolidation 

standard would capture true exposure 

risks and reduce the complexity and 

compliance costs of the final rule. 

In addition, the proposal would have 

required a covered company to 

aggregate one or more counterparties 

that were economically interdependent 

with or tied to the counterparty through 

certain control relationships. A few 

commenters expressed support for this 

aspect of the proposal. The large 

majority of commenters, however, 

contended that these tests were highly 

subjective and could be costly and 

burdensome to implement in practice 

because the tests relied on information 

that might be difficult for a covered 

company to acquire from its 

counterparty. To mitigate these 

concerns, commenters requested that 

the Board adopt a threshold for 

counterparty exposures (for example, 

the control relationship test should only 

apply if a counterparty exposure 

exceeds 5 percent of the covered 

company’s tier 1 capital). Certain 

commenters urged the Board to use a 

financial consolidation standard to 

define a counterparty and not to include 

any additional tests to aggregate one or 

more counterparties under the final 

rule. 

Commenters also objected to the 

inclusion of a natural person together 

with members of the person’s 

immediate family as a counterparty 

under the proposed rule. Commenters 

argued that the Board should exclude 

natural persons from the final rule’s 

definition of counterparty, suggesting 

that it is unlikely that a natural person 

aggregated with members of its 

immediate family would ever approach 

the applicable SCCL and that collecting 

information for this test would be 

burdensome and unjustified on a costbenefit basis. Commenters 

recommended that, at a minimum, the 

Board include a materiality threshold 

for exposures to a natural person to be 

subject to the requirements of the final 

rule and that the final rule provide a 

longer transition period for compliance 

with the requirements if natural persons 

are included in the final rule. 

Certain commenters questioned 

whether the limit of 25 percent of tier 

1 capital that would have applied to a 

large covered company (with $250 

billion or more in total consolidated 

assets or $10 billion or more in onbalance-sheet foreign exposures) was 

authorized under the statute. 

Commenters also questioned the basis 

for the 15 percent of tier 1 capital limit 

for major covered companies’ exposures 

to major counterparties. In particular, 

commenters expressed the view that 

this lower limit may not be necessary in 

light of other post-crisis financial 

regulatory reforms adopted by the 

Board. By contrast, some commenters 

argued that the proposal would 

continue to permit an excessively high 

level of exposure. These commenters 

argued the proposed limit of 15 percent 

of a major covered company’s tier 1 

capital for exposures of the largest 

financial institutions was too low and 

did not take into account the greater 

social costs of the failure of a 

systemically important institution as 

compared to a smaller institution. 

A number of commenters expressed 

concern with the Board’s approach to 

measuring exposures resulting from 

securities financing transactions, 

including securities lending 

transactions, securities borrowing 

transactions, repurchase agreements, 

and reverse repurchase agreements. 

Under the proposal, a covered company 

would have been required to measure 

credit exposure to a counterparty in a 

securities financing transaction as the 

value of any cash and securities 

transferred to that counterparty 

(adjusted upwards by a risk-based addon) minus the value of any cash and 

securities received from that 

counterparty as collateral (adjusted 

downwards by a risk-based haircut). 

Commenters contended that the 

proposed rule’s application of collateral 

volatility haircuts on both sides of the 

transaction did not recognize the riskmitigating value of positive correlations 

between securities on loan and 

securities received as collateral. 

Commenters urged the Board to adopt a 

more risk-sensitive standardized 

approach to measuring securities 

financing transactions that has recently 

been finalized by the BCBS or afford 

securities financing transactions 

treatment similar to that provided for 

derivative transactions in the proposal 

(that is, use of any methodology 

permitted under the Board’s capital 

rules), consistent with the large 

exposure standard.19 Commenters noted 

that the significantly more risk-sensitive 

treatment of derivative transactions in 

the proposed rule would create an 

incentive for covered companies and 

their counterparties to engage in 

derivative transactions that replicate the 

economics of a securities financing 

transaction. 

The proposal contained a section 

addressing how investments in and 

exposures to securitization vehicles, 

investment funds, and other special 

purpose vehicles would be treated. This 

section of the proposal specified the 

circumstances under which a covered 

company would be required to look 

through the vehicle to the underlying 

exposures. A number of commenters 

raised concerns about the breadth and 

scope of the look-through approach and 

requested additional clarity around 

these provisions. The commenters 

recommended that the Board limit the 

application of these provisions to only 

certain types of exposures (for example, 

investments in the securitization 

vehicle). Certain commenters also 

requested that the Board not require 

aggregation of any exposure to a third 

party connected to a securitization 

vehicle, investment fund, or other 

special purpose vehicle. 

Commenters generally expressed 

support for certain of the exemptions 

and exclusions contained in the 

proposal, such as the exemption for 

trade exposures to qualifying central 

counterparties, the exclusion of certain 

sovereign issuers from the 

‘‘counterparty’’ definition, and the 

exemption for intraday exposures. Some 

commenters requested additional 

exemptions in the final rule, including 

exemptions for short-dated exposures 

arising from traditional custody 

services. A few commenters requested 

that the Board maintain flexibility in the 

final rule to provide additional 

exemptions. The Federal Home Loan 

Banks urged the Board to exempt credit 

exposures to the Federal Home Loan 

Banks. Commenters also requested a 

longer initial compliance period. 

A number of commenters asked the 

Board to consider the costs and benefits 

of the proposed rule. Commenters 

argued that certain aspects of the 

proposed rule would make it difficult to 

implement and that the Board should 

evaluate these aspects of the proposal 

on a cost-benefit basis. 

As required under the Dodd-Frank 

Act at the time, the proposed rule would 

have applied the SCCL to any U.S. BHC 

or FBO with $50 billion or more in total 

consolidated assets. The narrower scope 

of application of the final rule reflects 

the passage of the Economic Growth, 

Regulatory Relief, and Consumer 

Protection Act (EGRRCPA).20 Subject to 

an eighteen-month transition period, 

EGRRCPA recently amended section 

165 of the Dodd-Frank Act to restrict the 

scope of application of most enhanced 

prudential standards (including SCCL) 

to U.S. global systemically important 

banking organizations (GSIBs) and to 


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21EGRRCPA raised the asset thresholds for 

application of enhanced prudential standards under 

section 165 of the Dodd-Frank Act in two stages. 

Immediately on the date of enactment of EGRRCPA, 

bank holding companies with total consolidated 

assets less than $100 billion (other than any bank 

holding company that is a U.S. GSIB under the 

Board’s capital rules) were no longer subject to 

section 165. Eighteen months after the date of 

enactment of EGRRCPA, bank holding companies 

with total consolidated assets less than $250 billion 

(other than any U.S. GSIB) will no longer be subject 

to section 165 of the Dodd-Frank Act, unless the 

Board determines, by order or regulation, to apply 

any enhanced prudential standard to such firms 

after making certain statutory findings. See section 

401 of EGRRCPA. 

22The final rule applies to a U.S. intermediate 

holding company (IHC) subsidiary of such an FBO 

that has $50 billion or more in total consolidated 

assets. In some cases, these U.S. intermediate 

holding companies also may be bank holding 

companies. 

23 12 U.S.C. 5365(a)(1)(B); see also 12 U.S.C. 

5365(a)(2)(A). 

24 12 U.S.C. 5365(e); see Board of Governors of the 

Federal Reserve System, Calibrating the SingleCounterparty Credit Limit between Systemically 

Important Financial Institutions (Mar. 4, 2016), 

https://www.federalreserve.gov/aboutthefed/board

meetings/sccl-paper-20160304.pdf. 

U.S. bank holding companies (BHCs) 

and FBOs with $250 billion or more in 

total consolidated assets.21 Under 

EGRRCPA, however, the Board may 

apply an SCCL or any other enhanced 

prudential standard to U.S. BHCs or 

FBOs with between $100 billion and 

$250 billion in total consolidated assets, 

if the Board makes certain safety and 

soundness or financial stability 

findings. 

As described below in detail, the 

Board has modified the proposed rule in 

response to comments and in light of 

the enactment of EGRRCPA, while 

taking into account the need to limit the 

credit exposure of large financial firms. 

C. Overview of the SCCL 

Under the final rule, the aggregate net 

credit exposure of a U.S. GSIB (major 

covered company) and any bank 

holding company with total 

consolidated assets of $250 billion or 

more (collectively, covered companies) 

to a single counterparty is subject to one 

of two credit exposure limits that are 

tailored to the size and systemic 

footprint of the firm. As discussed 

below in more detail, the final rule does 

not apply to U.S. bank holding 

companies or FBOs with less than $250 

billion in total consolidated assets.22

The first limit under the final rule 

prohibits any covered company that is 

not a major covered company from 

having aggregate net credit exposure to 

an unaffiliated counterparty in excess of 

25 percent of its tier 1 capital. 

The second limit prohibits any major 

covered company from having aggregate 

net credit exposure in excess of 15 

percent of its tier 1 capital to a major 

counterparty and in excess of 25 percent 

of its tier 1 capital to any other 

counterparty. A ‘‘major counterparty’’ is 

defined as a global systemically 

important banking organization or a 

nonbank financial company supervised 

by the Board. This framework is 

consistent with the requirement in 

section 165(a)(1)(B) of the Dodd-Frank 

Act that the enhanced standards 

established by the Board under section 

165 increase in stringency based on 

factors such as the nature, scope, size, 

scale, concentration, 

interconnectedness, and mix of the 

activities of the company.23 The 

framework also is consistent with the 

authorization provided to the Board 

under section 165(e) to apply a lower 

limit to the extent necessary to mitigate 

risks to financial stability.24 The SCCL 

applicable to covered companies in the 

final rule are summarized in Table 1. 

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

Category of covered company Applicable credit exposure limit 

Covered companies that are not major covered 

companies.

Aggregate net credit exposure to a counterparty cannot exceed 25 percent of a covered company’s tier 1 capital. 

Major covered companies (U.S. GSIBs) ............ Aggregate net credit exposure to a major counterparty cannot exceed 15 percent of a major 

covered company’s tier 1 capital. 

Aggregate net credit exposure to any other counterparty cannot exceed 25 percent of a major 

covered company’s tier 1 capital. 

As discussed below, tier 1 capital 

provides a superior capital base relative 

to capital stock and surplus as it has 

greater loss-absorbing capacity. In 

addition, the 15 percent of tier 1 capital 

limit is based on the heightened 

systemic risk presented by exposures 

between GSIBs. 

In contrast to the proposal, the final 

rule applies only to FBOs with $250 

billion or more in total global 

consolidated assets, and their subsidiary 

U.S. intermediate holding companies 

(IHCs) with total assets of $50 billion or 

more (together, ‘‘covered foreign 

entities’’). The proposal would have 

applied the SCCL to the combined U.S. 

operations of any FBO with $50 billion 

or more in total global consolidated 

assets and separately to any FBO’s U.S. 

IHC with $50 billion or more in total 

consolidated assets. Unlike in the 

proposal, an FBO subject to the final 

rule can comply with the combined U.S. 

operations SCCL by certifying to the 

Board that it meets, on a consolidated 

basis, an SCCL established by its home 

country supervisor that is consistent 

with the large exposure standard. The 

SCCL for U.S. IHCs that are covered 

foreign entities are largely unchanged 

from the proposal and fall into three 

tailored tiers. These limits are 

summarized in Table 2 below. 

TABLE 2—SINGLE-COUNTERPARTY CREDIT LIMITS APPLICABLE TO U.S. IHCS

Category of U.S. IHC Applicable credit exposure limit 

U.S. IHCs that have total consolidated assets of 

at least $50 billion but less than $250 billion.

Aggregate net credit exposure of the U.S. IHC to a counterparty cannot exceed 25 percent of 

the IHC’s total regulatory capital plus the balance of its allowance for loan and lease losses 

(ALLL) not included in tier 2 capital under the capital adequacy guidelines in 12 CFR part 

252. 

U.S. IHCs that have $250 billion or more in total 

consolidated assets but are not major U.S. 

IHCs.

Aggregate net credit exposure of the U.S. IHC to a counterparty cannot exceed 25 percent of 

the IHC’s tier 1 capital. 


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25See final rule § 252.71(gg). 

26See final rule § 252.71(r). 

27See proposed rule § 252.71(f). 

28See proposed rule § 252.71(cc). 

29See section 252.2(g) of the Board’s Regulation 

YY (12 CFR 252.2(g)). Control under the BHC Act 

is defined to mean a company (1) owns, controls, 

or has the power to vote 25 percent or more of any 

class of voting securities of another company; (2) 

controls in any manner the election of a majority 

of trustees of the other company; or (3) the Board 

determines, after notice and opportunity for 

hearing, that the company indirectly exercises a 

controlling influence over the management or 

policies of the other company. 12 U.S.C. 1841(a)(2). 

TABLE 2—SINGLE-COUNTERPARTY CREDIT LIMITS APPLICABLE TO U.S. IHCS—Continued 

Category of U.S. IHC Applicable credit exposure limit 

U.S. IHCs that have $500 billion or more in total 

consolidated assets (major U.S. IHCs).

Aggregate net credit exposure of a major U.S. IHC to a major counterparty cannot exceed 15 

percent of the IHC’s tier 1 capital. 

Aggregate net credit exposure of a major U.S. IHC to any other counterparty cannot exceed 

25 percent of the IHC’s tier 1 capital. 

The SCCL in the final rule apply to 

the credit exposures of a covered 

company on a consolidated basis, 

including any subsidiaries, to any 

unaffiliated counterparty. As discussed 

below, subsidiary of a covered company 

under the final rule is defined to mean 

a company that is consolidated on the 

financial statements of the covered 

company.25 A counterparty includes a 

company (including any consolidated 

affiliates of the company, as discussed 

below); a natural person (including the 

person’s immediate family) where the 

exposure to the natural person exceeds 

5 percent of the covered company’s tier 

1 capital; a U.S. state (including all of 

its agencies, instrumentalities, and 

political subdivisions); certain foreign 

sovereign entities (including their 

agencies and instrumentalities); and 

political subdivisions of foreign 

sovereign entities (including their 

agencies and instrumentalities). 

As noted, the SCCL in the final rule 

apply to a covered company’s aggregate 

net credit exposure, rather than 

aggregate gross credit exposure, to a 

counterparty. The key difference 

between gross credit exposure and net 

credit exposure is that a company’s net 

credit exposure takes into account any 

available credit risk mitigants—for 

example, collateral, guarantees, credit or 

equity derivatives, and other hedges— 

provided the credit risk mitigants meet 

certain requirements in the rule, as 

discussed more fully below. To 

illustrate, if a covered company had 

$100 in gross credit exposure to a 

counterparty with respect to a particular 

credit transaction, and the counterparty 

pledged collateral with an adjusted 

market value of $50, the full amount of 

which qualified as ‘‘eligible collateral’’ 

under the final rule, the covered 

company’s net credit exposure to the 

counterparty on the transaction would 

be $50, provided that the other $50 

would be ‘‘risk-shifted’’ to the eligible 

collateral issuer, as described below. 

In order to calculate its aggregate net 

credit exposure to a counterparty, a 

covered company first must calculate its 

gross credit exposure to the 

counterparty on each credit transaction 

in accordance with certain valuation 

and other requirements under the final 

rule. Second, the covered company 

must reduce its gross credit exposure 

amount based on eligible credit risk 

mitigants to determine its net credit 

exposure for each credit transaction 

with the counterparty. Third and 

finally, the covered company must sum 

all of its net credit exposures to the 

counterparty to calculate the covered 

company’s aggregate net credit exposure 

to the counterparty. It is this final 

amount, the aggregate net credit 

exposure, that is subject to the SCCL 

under the final rule. 

The final rule applies a ‘‘risk-shifting’’ 

approach with respect to a credit 

exposure involving eligible collateral or 

an eligible guarantor. In general, any 

reduction in the exposure amount to the 

original counterparty relating to the 

eligible collateral or eligible guarantor 

would result in a dollar-for-dollar 

increase in exposure to the eligible 

collateral issuer or eligible guarantor (as 

applicable). For example, in the case 

discussed above where a covered 

company had $100 in gross credit 

exposure to a counterparty and the 

counterparty pledged collateral with an 

adjusted market value of $50, the 

covered company would have net credit 

exposure to the counterparty on the 

transaction of $50 and net credit 

exposure to the issuer of the collateral 

of $50. In no case, however, would riskshifting result in credit exposure to a 

counterparty that is any larger than the 

credit exposure being mitigated. As a 

specific example, in the foregoing 

example, if the exposure was 

overcollateralized with $150 in 

collateral, the exposure to the issuer of 

the collateral would be capped at $100 

while the exposure to the counterparty 

would be reduced to $0. 

In cases where a covered company 

hedges its exposure to an entity that is 

not a ‘‘financial entity’’ (a non-financial 

entity) using an eligible credit or equity 

derivative, and the underlying exposure 

is subject to the Board’s market risk 

capital rule (12 CFR part 217, subpart 

F), the covered company must calculate 

its exposure to the eligible guarantor 

using a methodology that it is permitted 

to use under the Board’s risk-based 

capital rules. For these purposes, a 

‘‘financial entity’’ includes regulated 

U.S. financial institutions, such as 

holding companies, insurance 

companies, broker-dealers, banks, 

thrifts, and futures commission 

merchants, as well as foreign banking 

organizations and non-U.S.-based 

securities firms and non-U.S.-based 

insurance companies subject to 

consolidated supervision and regulation 

comparable to that imposed on U.S. 

depository institutions, securities 

broker-dealers, or insurance 

companies.26

II. SCCL for Covered Companies 

A. Key Terminology and Concepts 

The terms ‘‘covered company’’ and 

‘‘counterparty’’ form the basis for 

application of the SCCL in the final rule. 

The final rule contains modifications 

from the proposal to these and other 

definitions in response to concerns 

raised by commenters. 

1. Covered Company and Counterparty 

Under the proposal, ‘‘covered 

company’’ would have been defined to 

mean any bank holding company (other 

than a foreign banking organization that 

is subject to subpart Q of the Board’s 

Regulation YY) that has $50 billion or 

more in total consolidated assets and all 

of its subsidiaries.27 The term 

‘‘subsidiary’’ of a specified company 

would have been defined under the 

proposal to mean a company that is 

directly or indirectly controlled by the 

specified company.28 The applicable 

definition of ‘‘control’’ was defined by 

reference to section 2(a) of the BHC 

Act.29

In addition, the proposal would have 

defined ‘‘counterparty’’ to mean a 

natural person and members of the 


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30 ‘‘State’’ would have been defined by reference 

to the enhanced prudential standards to mean any 

state, commonwealth, territory, or possession of the 

United States, the District of Columbia, the 

Commonwealth of Puerto Rico, the Commonwealth 

of the Northern Mariana Islands, American Samoa, 

Guam, or the United States Virgin Islands. See 12 

CFR 252.2(r). 31See proposed rule § 252.71(e). 32See proposed rule § 252.71(e)(2). The preamble 

to the proposal explained that, to the extent that 

one or more of these conditions are met with 

respect to a company’s relationship to an 

investment fund or vehicle, exposures to such fund 

or vehicle would need to be aggregated with that 

counterparty. See 81 FR at 14,332. 

33These commenters also contended that the 

economic interdependence and control tests to 

aggregate counterparty exposures should be 

eliminated as described further below. 

34See final rule § 252.71(b) & (gg). 

person’s immediate family; a state 30

including all of its agencies, 

instrumentalities, and political 

subdivisions (including municipalities); 

certain foreign sovereign entities and all 

of their agencies and instrumentalities; 

and political subdivisions of a foreign 

sovereign entity such as states, 

provinces, and municipalities.31 Under 

the proposal, a counterparty also would 

have included any company and all 

persons that the counterparty (1) owns, 

controls, or holds with the power to 

vote 25 percent or more of a class of 

voting securities; (2) owns, controls, or 

holds 25 percent or more of the total 

equity; or (3) consolidates for financial 

reporting purposes.32

The definitions of ‘‘covered 

company’’ and ‘‘counterparty’’ were two 

of the most commented upon aspects of 

the proposal. A large number of 

commenters urged the Board to use 

financial consolidation for aggregating a 

covered company and its subsidiaries 

instead of BHC Act control. These 

commenters argued that a standard 

based on financial consolidation would 

bring within the scope of the final rule 

those exposures that actually put a 

covered company’s capital at risk. 

Commenters contended that the 

financial reporting consolidation 

approach would more accurately 

capture true economic exposures of 

covered companies to their 

counterparties. 

Commenters contended that basing 

the definition of ‘‘covered company’’ on 

control, as defined under the BHC Act, 

would introduce significant complexity 

into a covered company’s management 

of its credit limits. This approach also 

would capture exposures that are not 

likely to be material to a covered 

company, including exposures of 

subsidiaries for which a covered 

company does not have operational 

control to actually monitor, measure, 

and conform credit exposures to the 

limits of the final rule. Commenters 

indicated that opportunities to use such 

a subsidiary to evade the final rule 

would be limited because a covered 

company would not exercise 

operational control of the subsidiary. 

Some commenters suggested that, to the 

extent evasion remains a concern, the 

final rule could include an explicit 

reservation of authority for the Board to 

address such concerns, and one 

commenter suggested the Board could 

use its supervisory authority to address 

any potential evasion of the final rule. 

Commenters also contended that using 

BHC Act control would impose 

significant compliance costs to capture 

risks that are not likely to be material to 

a covered company (i.e., that 

compliance costs would exceed the 

limited incremental risk mitigation 

benefits). 

Commenters also argued that using 

the BHC Act to define a ‘‘covered 

company’’ could result in some entities 

being included as part of both the 

covered company and the counterparty 

at the same time (i.e., in the case of 

certain joint venture subsidiaries). 

Commenters argued that if financial 

consolidation is not used to define 

‘‘covered company,’’ the final rule must 

clarify the treatment of joint ventures 

that could fall within the scope of being 

both a covered company and 

counterparty using BHC Act control. In 

the alternative to financial 

consolidation, these commenters 

suggested certain targeted modifications 

to the definition of covered company 

and counterparty to ensure that a joint 

venture that is controlled due to BHC 

Act control (for example, where the 

covered company owns 51 percent and 

the counterparty owns 49 percent) 

would not be considered both part of a 

covered company and of a counterparty 

under the final rule. 

Commenters urged that, if the final 

rule does not adopt a financial 

consolidation standard to define 

subsidiaries of a covered company, the 

final rule should define subsidiaries of 

covered companies based on a simple 

percentage ownership test like the 2011 

proposal and the counterparty 

definition (i.e., ownership of 25 percent 

or more of the voting securities and 

ownership of 25 percent or more of the 

total equity). Under either this 

alternative or reference to BHC Act 

control, commenters requested 

categorical exemptions for funds or 

investments that are not consolidated 

for financial reporting purposes. In 

particular, commenters urged the Board 

to provide exemptions for registered 

investment companies and foreign 

public funds including during the 

seeding period; certain covered funds as 

defined in section 13 of the BHC Act, 

also known as the Volcker Rule, and 

implementing regulations, including 

during the seeding period; certain 

merchant banking portfolio companies; 

companies acquired in the ordinary 

course of collecting a debt previously 

contracted; small business investment 

companies and community 

development investments; and bank 

collective investment trusts. 

Similar to the comments on the 

definition of covered company, a 

number of commenters urged the Board 

to define ‘‘counterparty’’ with respect to 

a company based on financial reporting 

consolidation and to eliminate the 

additional tests based on percentage 

ownership.33 These commenters 

asserted that the 25 percent ownership 

tests added additional and unnecessary 

complexity to aggregating counterparty 

exposure and would be inconsistent 

with the large exposure standard. As 

with the definition of ‘‘covered 

company,’’ commenters argued that 

aggregation of connected counterparties 

based on financial consolidation would 

capture true connected exposure risks 

consistent with the purposes of section 

165(e) of the Dodd-Frank Act. A few 

commenters also indicated that 

financial consolidation would address 

joint venture issues. Other commenters 

requested that particular entities not be 

treated as part of a counterparty for 

purposes of the final rule even if they 

would be consolidated with the 

counterparty, including a sponsored or 

advised registered fund (e.g., during the 

seeding period) and special purpose 

vehicles. 

To address the concerns raised by 

commenters and to reduce the burden of 

complying with the final rule, the Board 

has modified the definitions of ‘‘covered 

company,’’ ‘‘counterparty,’’ and 

‘‘subsidiary,’’ and has added a new term 

‘‘affiliate.’’ The purpose of these 

modifications is to apply a financial 

consolidation standard to define both 

the bank holding companies that are 

subject to the final rule and to define the 

counterparty exposures that are subject 

to the SCCL in the final rule. Under the 

final rule, a ‘‘subsidiary’’ is defined to 

include a company that is consolidated 

with the covered company under 

applicable accounting standards, and an 

‘‘affiliate’’ is defined to include any 

subsidiary of the company and any 

other company that is consolidated with 

the company under applicable 

accounting standards.34 For example, a 

subsidiary of a covered company under 

the final rule includes an insured 

depository institution that the covered 


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35 Id. 

36This change took effect on the date of 

enactment of EGRRCPA for U.S. BHCs with total 

consolidated assets of less than $100 billion, and 

will take effect 18 months after enactment for all 

other firms. See section 401(d)(1) of EGRRCPA. 

Notwithstanding this change, the enhanced 

prudential standards required under section 165, 

including the SCCL, continue to apply to U.S. 

GSIBs, regardless of asset size. See section 401(f) of 

EGRRCPA. In addition and as noted, the Board may 

determine to apply the SCCL, or any other 

enhanced prudential standard, to U.S. BHCs or 

FBOs with between $100 billion and $250 billion 

in total consolidated assets, if the Board makes 

certain safety and soundness or financial stability 

findings. 

37See final rule § 252.76. 

38See final rule § 252.71(e); 12 U.S.C. 

5365(b)(1)(B)(iv). 

39See final rule § 252.71(e); 12 CFR part 217, 

subpart D. The final rule would not apply to 

exposures of a U.S. IHC or of the combined U.S. 

operations of an FBO to the FBO’s home country 

sovereign entity, regardless of the risk weight 

assigned to that sovereign entity under the Board’s 

capital rules (12 CFR part 217). See section III.D.4 

infra. 

40 12 U.S.C. 5365(b)(1)(B). 

41 12 U.S.C. 1844. 

42 12 U.S.C. 1844(c)(2). 

company consolidates for financial 

reporting purposes. Similarly, an 

affiliate of a counterparty under the 

final rule includes a parent company of 

the counterparty, as well as any other 

firm that is consolidated with the 

counterparty under applicable 

accounting standards. Applicable 

accounting standards can include U.S. 

Generally Accepted Accounting 

Principles, the International Financial 

Reporting Standards, or other similar 

standards. ‘‘Subsidiary’’ and ‘‘affiliate’’ 

would also include a company that is 

not subject to such principles or 

standards, if consolidation would have 

occurred if such principles or standards 

had applied.35

Using financial accounting standards 

for purposes of the final rule, rather 

than the control test in the BHC Act, 

should address many of the concerns 

raised by commenters and serve to 

reduce burden and complexity and 

mitigate costs of complying with the 

requirements of the final rule, without 

allowing evasion of the SCCL. Although 

consolidation tests under relevant 

accounting standards must also be 

applied on a case-by-case basis, like the 

proposed rule’s control tests, the 

analysis already has been performed for 

companies that prepare their financial 

statements in accordance with relevant 

accounting standards. For companies 

that do not prepare these statements, 

industry participants should be more 

familiar with the relevant accounting 

standards and tests, and they will be 

less burdensome to apply. Additionally, 

the accounting consolidation standard 

typically results in consolidation at a 

higher level of ownership than the 25 

percent voting interest standard that 

applies under the BHC Act control test, 

which is responsive to commenters’ 

concerns that the proposed definitions 

were overly inclusive. 

This change in the final rule should 

also address the concerns raised by 

commenters with respect to investment 

funds. Investment funds generally are 

not consolidated with the asset manager 

other than during the seeding period or 

other periods in which the manager 

holds an outsize portion of the fund’s 

interest, although this may depend on 

the facts and circumstances. During 

these periods, when a covered company 

may own up to 100 percent of the 

ownership interest of an investment 

fund, the investment fund should be 

treated as a subsidiary. Similarly, 

merchant banking portfolio companies 

and companies held pursuant to debt 

previously contracted authorities would 

be treated as part of the covered 

company if consolidated with the 

covered company. 

Joint ventures that are consolidated 

with the covered company are treated as 

part of a covered company even if a 

counterparty also has an investment in 

such joint venture. If a covered 

company invests in a minority-owned 

joint venture that is not consolidated, 

the final rule requires the covered 

company to treat that joint venture as a 

counterparty and recognize exposures to 

the joint venture. 

The final rule also has adjusted the 

asset threshold for covered companies. 

As noted, EGRRCPA raised the 

threshold, from $50 billion to $250 

billion in total consolidated assets, for 

the application of the SCCL and other 

enhanced prudential standards to a 

bank holding company in two stages.36

EGRRCPA also provides the Board with 

18 months to determine whether to 

apply the SCCL or other enhanced 

prudential standards to BHCs with 

between $100 billion and $250 billion 

in total consolidated assets. 

Accordingly, the final rule defines a 

‘‘covered company’’ to mean any U.S. 

GSIB and any BHC (other than an FBO 

that is subject to the SCCL under 

subpart Q of Regulation YY) that has 

$250 billion or more in total 

consolidated assets. The Board is 

developing a comprehensive proposal 

on application of enhanced prudential 

standards to U.S. BHCs and FBOs with 

total consolidated assets of $100 billion 

but less than $250 billion. In connection 

with this proposal and other tailoring 

and implementation efforts related to 

EGRRCPA, the Board may make 

amendments to the SCCL framework in 

this final rule. 

Additionally, the final rule maintains 

the economic interdependence and 

aggregation due to control relationships 

for covered companies as described 

below.37 These additional tests require a 

covered company to aggregate 

counterparties in certain cases and 

further allow the Board to aggregate 

counterparties. Specifically, these tests 

provide for the aggregation of 

counterparties where the failure, 

default, insolvency, or material financial 

distress of one counterparty would 

cause the failure, default, insolvency, or 

material financial distress of the other 

counterparty or due to the presence of 

significant control relationships. 

The final rule retains individuals and 

certain governmental entities within the 

definition of a ‘‘counterparty,’’ because 

credit exposures to such entities can 

create risks to the covered company that 

are similar to those created by large 

exposures to companies.38 The severe 

distress or failure of an individual, U.S. 

state or municipality, sovereign entity, 

or political subdivision of a sovereign 

entity, could have effects on a covered 

company that are comparable to those 

caused by the failure of a financial firm 

or nonfinancial corporation to which 

the covered company has a large credit 

exposure. With respect to sovereign 

entities, these risks are most acute in the 

case of sovereigns that present greater 

credit risk. Therefore, the Board believes 

that it is appropriate to extend the SCCL 

to foreign sovereign entities that do not 

receive a zero percent risk weight under 

the standardized approach of the 

Board’s risk-based capital rule in the 

same manner as credit exposures to 

companies.39

The Board is extending the SCCL to 

individuals, U.S. states and 

municipalities, and certain foreign 

sovereigns using two legal authorities. 

First, under section 165(b)(1)(B) of the 

Dodd-Frank Act, the Board may impose 

such additional enhanced prudential 

standards as the Board of Governors 

determines are appropriate.40 Second, 

under section 5(b) of the BHC Act, the 

Board may issue such regulations as 

may be necessary to enable it to 

administer and carry out the purposes of 

this chapter and prevent evasions 

thereof.41 Such purposes include 

examining the financial, operational, 

and other risks within the bank holding 

company system that may pose a threat 

to (1) the safety and soundness of the 

bank holding company or of any 

depository institution subsidiary of the 

bank holding company; or (2) the 

stability of the financial system of the 

United States.42 The final rule would 


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43See final rule § 252.71(e)(2). 

44See final rule § 252.71(e). 

45See final rule § 252.71(u). 

46See 12 CFR 252.2(r). 

47The economic interdependence and control 

aggregation tests are described further in Section 

II.F infra. 

48See final rule § 252.71(e)(3). 

49See proposed rule § 252.71(e)(4). ‘‘Sovereign 

entity’’ would have been defined under the 

proposal to mean a central national government or 

an agency, department, ministry, or central bank, 

but not including any political governmental 

subdivision such as a state, province or 

municipality. See proposed rule § 252.71(bb). 

50See proposed rule § 252.71(e)(5). 

help to promote the safety and 

soundness of a covered company and 

mitigate risks to financial stability by 

limiting a covered company’s maximum 

credit exposure to an individual, U.S. 

state, foreign sovereign entity, or 

political subdivision of a foreign 

sovereign entity, and thereby reduce the 

risk that the failure of such individual 

or entity could cause the failure or 

material financial distress of a covered 

company. 

i. Companies as Counterparties 

To address the concerns raised by 

commenters and reduce burden on 

covered companies, the Board has 

modified the definition of 

‘‘counterparty’’ with respect to a 

company. Under the final rule, a 

counterparty that is a company includes 

the company and all its affiliates.43 As 

noted, the final rule applies a financial 

consolidation test with respect to the 

definition of counterparty to address 

concerns raised by commenters and to 

reduce the cost of complying with the 

final rule for the same reasons as 

described above with respect to covered 

company. 

ii. Natural Persons as Counterparties 

As noted, the proposal would have 

included in the definition of 

‘‘counterparty’’ a natural person and 

members of the person’s immediate 

family as a counterparty. Commenters 

urged the Board to exclude natural 

persons from the credit exposure limits 

of the final rule. These commenters 

argued that a natural person, even when 

aggregated with the person’s immediate 

family, would be unlikely to approach 

25 percent of a covered company’s 

eligible capital base. Commenters 

argued that it would be impossible for 

such exposures to pose the types of 

systemic interconnectivity risks that the 

Dodd-Frank Act was meant to address 

and that section 165(e) prohibits a 

covered company from having credit 

exposure to an ‘‘unaffiliated company,’’ 

which indicates that Congress did not 

intend to cover exposures to natural 

persons. Further, commenters 

contended that collecting information 

that would be required to monitor 

exposures to natural persons aggregated 

with their immediate family and 

developing systems to monitor and track 

these relationships across millions of 

individual customers may not be 

possible and could not be justified on a 

cost-benefit basis. Commenters 

suggested that if exposure to a natural 

person is included in the final rule and 

required to be aggregated with 

immediate family members for purposes 

of the exposure limits under the final 

rule, a threshold of 5 percent of a 

covered company’s eligible capital base 

should apply. Commenters pointed out 

that such a threshold would mitigate the 

need to engage in an analysis of every 

individual that might require 

aggregation and thereby reduce the 

burden of complying with the final rule. 

The final rule continues to cover 

exposures to natural persons, together 

with members of the person’s 

immediate family, as counterparties, 

subject to a threshold discussed 

below.44 ‘‘Immediate family’’ is defined 

under the final rule in the same manner 

as under the proposal to mean the 

spouse of an individual, the individual’s 

minor children, and any of the 

individual’s children (including adults) 

residing in the individual’s home.45 To 

address concerns raised by commenters, 

the final rule only requires a covered 

company to aggregate a natural person 

with members of the person’s 

immediate family if the exposure of the 

covered company to the natural person 

exceeds 5 percent of the company’s tier 

1 capital. This modification should 

reduce burden and address concerns 

raised by commenters. 

iii. Governmental Entities as 

Counterparties 

a. States 

As noted, the proposal would have 

included a State, collectively with all of 

its agencies, instrumentalities and 

political subdivisions (including 

municipalities) as a counterparty.46

Commenters argued that the proposal 

provided no basis for the aggregation of 

states and political subdivisions, 

ignored the different credit profiles that 

exist among a State and its subdivisions, 

and is at odds with historical default 

experience. As a result, certain 

commenters urged the Board to use the 

economic interdependence and control 

aggregation tests to determine if a 

covered company must aggregate its 

exposures to a State with exposures to 

its political subdivisions subject to a 

threshold of 5 percent or 10 percent of 

eligible capital.47 These commenters 

argued that at a minimum, municipal 

revenue bonds, which are generally 

issued to finance public projects, should 

not be aggregated together with a State 

and its agencies, instrumentalities, and 

political subdivisions as these bonds are 

contractually supported by a specific 

stream of revenue derived from the 

relevant project, which is expressly 

recognized in Chapter 9 of the U.S. 

Bankruptcy Code. 

The events that would render a State 

incapable of repaying a loan or bond 

would likely be highly correlated to the 

economic performance of the State and 

would have similar effects on the 

revenue streams underlying municipal 

revenue bonds. Accordingly, the final 

rule, like the proposal, treats a State and 

all of its agencies, instrumentalities, and 

political subdivisions (including any 

municipalities), collectively, as a 

counterparty.48 In addition, the final 

rule requires that a covered company 

aggregate municipal revenue bonds with 

other types of municipal bonds, as well 

as exposures of the State and its 

agencies, instrumentalities, and other 

political subdivisions. Similarly, the 

Board has declined to adopt a 5 percent 

threshold for aggregating States with 

their agencies, instrumentalities, and 

political subdivisions. The Board 

believes that a covered company should 

limits its exposure to such entities to no 

more than 25 percent of its tier 1 capital 

given the high likelihood of correlation 

in the economic performance of these 

entities. 

b. Foreign Sovereigns 

The proposal would have included as 

a counterparty, a foreign sovereign 

entity and all of its agencies and 

instrumentalities (not including any 

political subdivision) that is not 

assigned a zero percent risk weight 

under the standardized approach in the 

Board’s capital rules (12 CFR part 217, 

subpart D).49 In addition, under the 

proposal, a covered company would 

have been required to treat a political 

subdivision of a foreign sovereign 

entity, together with its agencies and 

instrumentalities, as a single 

counterparty.50

A few commenters opposed the 

exemption for zero risk-weight 

sovereign exposures on the basis that 

such exposures can be risky. Other 

commenters urged that the carve-out for 

exposures to zero risk-weight foreign 

sovereign entities should be extended to 

their zero risk-weight public sector 

entities (PSEs), because they similarly 

pose little risk of default, and this 


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51See final rule § 252.71(e)(5). 

52See proposed rule § 252.72(c). 

53See proposed rule § 252.71(v). 

54The Financial Stability Board maintains and 

periodically publishes a list of entities that have the 

characteristics of a global systemically important 

banking organization on its website, http://

www.fsb.org. 

55See 12 CFR part 217, subpart H. 

56 ‘‘Top-tier foreign banking organization,’’ with 

respect to a foreign banking organization, means the 

top-tier foreign banking organization or, 

alternatively, a subsidiary of the top-tier foreign 

banking organization designated by the Board. 12 

CFR 252.2(aa). 

treatment would align the treatment of 

such PSEs with the determination of 

risk weights under the risk-based capital 

rules. 

Some commenters urged the Board 

not to aggregate foreign sovereign 

entities with their agencies and 

instrumentalities. These commenters 

recommended an approach that foreign 

sovereign entities only be aggregated 

with their agencies and 

instrumentalities if the entities meet the 

economic interdependence test, 

including the 5 percent of a covered 

company’s eligible capital base 

threshold. 

One commenter argued that the final 

rule should exempt exposures of foreign 

subsidiaries of covered companies to the 

respective sovereign entity of the 

jurisdiction in which such subsidiary is 

incorporated, regardless of the risk 

weight assigned to the sovereign entity. 

This commenter argued that foreign 

subsidiaries of covered companies need 

to retain these exposures as part of the 

transactions in a host country in order 

to manage their liquidity risk, to have 

access to intra-day liquidity facilities 

provided by central banks, and to have 

collateral to pledge at local central 

counterparties. Finally, this commenter 

urged the Board to treat each political 

subdivision of a foreign sovereign entity 

as a separate counterparty from any 

other political subdivision, as is the case 

for U.S. states, and urged that entities 

owned by a foreign government with 

their own revenue sources and without 

government guarantees should be 

treated as different counterparties since 

each poses its own credit risk 

characteristics. 

The final rule retains the proposed 

approach to sovereign entities without 

modification. The final rule continues to 

include certain governmental entities 

within the definition of a 

‘‘counterparty’’ because credit 

exposures to such entities create risks to 

the covered company that are similar to 

those created by large exposures to 

companies. The severe distress or 

failure of a sovereign entity could have 

effects on a covered company that are 

comparable to those caused by the 

failure of a financial firm or 

nonfinancial corporation to which the 

covered company has a large credit 

exposure. These risks are most acute in 

the case of sovereign entities that 

present greater credit risk, as evidenced 

by the risk weight that applies to the 

sovereign entity under the Board’s 

capital rules. 

In response to commenters who 

requested that the Board treat each 

political subdivision of a foreign 

sovereign entity as a separate 

counterparty from any other political 

subdivision, as is the case for the states 

of the U.S., the Board is confirming that 

each political subdivision of a foreign 

sovereign entity (together with any 

agencies and instrumentalities of the 

political subdivision, collectively) 

would be treated as a separate 

counterparty.51 This treatment is 

appropriate because the events that 

would render a political subdivision 

incapable of repaying a loan or bond 

would likely be highly correlated to the 

economic performance of the agencies 

and instrumentalities within the 

political subdivision. 

2. Major Company and Major 

Counterparty 

The requirements of the proposal 

would have provided that no ‘‘major 

covered company,’’ defined as a covered 

company that is a U.S. global 

systemically important banking 

organization and all of its subsidiaries, 

could have aggregate net credit exposure 

to a major counterparty in excess of 15 

percent of the major covered company’s 

tier 1 capital.52 A ‘‘major counterparty’’ 

was defined as (1) any major covered 

company and all of its subsidiaries, 

collectively; (2) any foreign banking 

organization and all of its subsidiaries, 

collectively, that would be considered a 

global systemically important foreign 

banking organization; and (3) any 

nonbank financial company supervised 

by the Board.53

Under the proposal, a foreign banking 

organization would have been 

considered to be a global systemically 

important foreign banking organization 

if (1) the foreign banking organization 

has the characteristics of a global 

systemically important banking 

organization under the global 

methodology; or (2) the Board, using 

any relevant information determines 

that the foreign banking organization 

would be a GSIB under the global 

methodology; that the top-tier foreign 

banking organization, if it were subject 

to the Board’s capital rules would be 

identified as a GSIB; or that the U.S. 

IHC, if it were subject to the Board’s 

capital rules, would be identified as a 

GSIB. 

No comments were received on the 

definition of ‘‘major covered company’’ 

under the proposal. In terms of the 

identification of a ‘‘major counterparty,’’ 

commenters urged the Board to make 

this determination by reference to the 

annual FSB Report listing GSIBs 

identified by the BCBS.54 Commenters 

indicated this approach to identifying 

major counterparties would harmonize 

with the BCBS approach and allow 

reliance upon and integration with preexisting data sources. 

The methodology in the Board’s GSIB 

surcharge rule identifies the most 

systemically important U.S. banking 

organizations.55 This methodology 

evaluates a banking organization’s 

systemic importance on the basis of its 

size, interconnectedness, crossjurisdictional activity, substitutability, 

and complexity. The firms that score 

highest on these attributes are classified 

as GSIBs. While the GSIB surcharge rule 

itself applies only to U.S bank holding 

companies, its methodology is equally 

well suited to evaluating the systemic 

importance of foreign banking 

organizations. Moreover, the method 1 

methodology in the GSIB surcharge rule 

for identifying GSIBs is consistent with 

the methodology developed by the 

BCBS to identify GSIBs; foreign 

jurisdictions collect information from 

banking organizations in connection 

with that framework that parallels the 

information collected by the Board for 

purposes of the Board’s GSIB surcharge 

rule. 

Given that the global methodology 

and the method 1 methodology in the 

GSIB surcharge rule to identify GSIBs 

are virtually identical, the two 

methodologies should lead to the same 

outcomes, and the requirements in the 

final rule to identify whether a foreign 

banking organization is a GSIB should 

entail minimal additional burden for 

foreign banking organizations. 

Accordingly, the final rule generally 

adopts the same methodology as the 

proposal for determining whether a 

foreign banking organization and all of 

its subsidiaries, collectively, would be 

considered a global systemically 

important foreign banking organization, 

with minor changes to clarify that this 

determination applies at the top-tier 

foreign banking organization.56

The final rule applies certain notice 

requirements to foreign banking 

organizations subject to the final rule. 

First, each top-tier foreign banking 

organization that controls a U.S. IHC is 

required to submit to the Board by 


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Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Rules and Regulations 38469 

57See, e.g., 12 CFR 252.153(b)(4). 

58See proposed rule § 252.71(f) & (cc); see also 

§ 252.2(g) of the Board’s Regulation YY, 12 CFR 

252.2(g). 

59See final rule § 252.71(c). ‘‘Net credit 

exposure’’ also is a defined term under the final 

rule. ‘‘Net credit exposure’’ is defined to mean, with 

respect to any credit transaction, the gross credit 

exposure of a covered company and all its 

subsidiaries calculated under § 252.73, as adjusted 

in accordance with § 252.74. See final rule 

§ 252.71(aa). 

60See proposed rule § 252.71(q). 

61 Id. 

62 12 CFR 252.71(r). 

63See proposed rule § 252.71(k); see also 12 CFR 

252.2(p) (defining ‘‘publicly traded’’). 

64See proposed rule § 252.74. 

January 1 of each calendar year notice 

of whether the home country supervisor 

(or other appropriate home country 

regulatory authority) of the top-tier 

foreign banking organization of the U.S. 

IHC has adopted standards consistent 

with the global methodology. In 

addition, these firms are required to 

provide notice of whether the top-tier 

foreign banking organization prepares 

the indicators used by the global 

methodology to identify a banking 

organization as a global systemically 

important banking organization and, if it 

does, whether the top-tier foreign 

banking organization has determined 

that it has the characteristics of a global 

systemically important banking 

organization under the global 

methodology. This section also provides 

that a top-tier foreign banking 

organization, which controls a U.S. IHC 

and prepares or reports for any purpose 

the indicator amounts necessary to 

determine whether the top-tier foreign 

banking organization is a global 

systemically important banking 

organization under the global 

methodology, must use the data to 

determine whether the top-tier foreign 

banking organization has the 

characteristics of a global systemically 

important banking organization under 

the global methodology. These 

requirements mirror requirements in 

other Board regulations to identify 

foreign GSIBs, and an FBO is not 

expected to provide separate notice to 

the Board for purposes of the final rule 

if the FBO has already provided notice 

related to other regulatory 

requirements.57

3. Aggregate Net Credit Exposure 

As noted, aggregate net credit 

exposure is the credit exposure amount 

to which the SCCL apply. The proposal 

would have defined aggregate net credit 

exposure to mean the sum of all net 

credit exposures of a covered company 

to a single counterparty. Under the 

proposal, ‘‘covered company’’ would 

have been defined to include all of the 

company’s subsidiaries (that is, 

companies that were under common 

control of the covered company for 

purposes of section 2 of the BHC Act).58

As noted, the definitions of ‘‘covered 

company’’ and ‘‘subsidiary’’ in the final 

rule have been revised to incorporate 

financial consolidation principles, and 

‘‘subsidiary’’ is no longer part of the 

definition of ‘‘covered company.’’ 

Under the final rule, ‘‘aggregate net 

credit exposure’’ is defined to mean the 

sum of all net credit exposures of a 

covered company and its subsidiaries to 

a single counterparty as calculated 

under the final rule.59 The purpose of 

this modification is to make clear that, 

notwithstanding the changes to the 

definition of ‘‘covered company’’ and 

‘‘subsidiary’’ from the proposal to the 

final rule, a covered company must still 

aggregate exposures of its subsidiaries 

for purposes of the final rule. 

4. Financial Entity 

Under the proposal, a covered 

company would not have been required 

to include the notional amount of an 

eligible credit or equity derivative for a 

hedged transaction where the 

counterparty is not a financial entity. A 

‘‘financial entity’’ would have included 

regulated U.S. financial institutions, 

such as insurance companies, brokerdealers, bank holding companies, banks, 

thrifts, and futures commission 

merchants, as well as foreign banking 

organizations and certain non-U.S.- 

based securities firms or non-U.S.-based 

insurance companies.60 A ‘‘financial 

entity’’ also would have included a 

company whose primary business 

includes the management of financial 

assets, lending, factoring, leasing, 

provision of credit enhancements, 

securitization, investments, financial 

custody, central counterparty services, 

proprietary trading, insurance, and 

other financial services.61

In order to achieve additional clarity, 

the definition of ‘‘financial entity’’ in 

the final rule has been modified from 

the proposal to provide a list of discrete 

entities that would constitute financial 

entities for purposes of the final rule.62

In developing this definition of 

‘‘financial entity,’’ the Board sought to 

provide certainty and clarity to covered 

companies regarding the types of 

financial firms that would require 

notional amount treatment of eligible 

credit and equity derivatives and those 

that would not (that is, where the 

counterparty on the underlying hedged 

transaction is not a financial entity). The 

approach in the final rule is intended to 

strike a balance between the desire to 

capture all financial entities, without 

being overly broad and capturing 

commercial firms and sovereign entities. 

5. Eligible Collateral 

Under the proposal, ‘‘eligible 

collateral’’ would have been defined to 

include cash on deposit with a covered 

company (including cash held for the 

covered company by a third-party 

custodian or trustee); debt securities 

(other than mortgage- or asset-backed 

securities) that are bank-eligible 

investments and that have an 

investment grade rating; equity 

securities that are publicly traded; or 

convertible bonds that are publicly 

traded.63 Section 252.74 of the proposal 

explained how eligible collateral would 

have been taken into account in the 

calculation of net credit exposure.64

A number of commenters argued that 

the list of ‘‘eligible collateral’’ should be 

consistent with the definition of 

‘‘financial collateral’’ under the Board’s 

regulatory capital rules and with the 

large exposure standard. In particular, 

these commenters requested that the 

final rule should include as ‘‘eligible 

collateral’’ gold, any long- or short-term 

debt securities that are not 

resecuritization exposures and that are 

investment grade (including mortgageor asset-backed securities), and money 

market fund shares and other mutual 

fund shares if a price of such shares is 

publicly quoted daily. 

As requested by certain commenters, 

the final rule makes clear that cash in 

a foreign currency or U.S. dollars is an 

acceptable form of eligible collateral and 

that cash held by a third-party custodian 

or trustee may be held inside or outside 

the United States. For any asset to count 

as eligible collateral under the final rule, 

as under the proposal, the covered 

company generally is required to have a 

perfected, first priority security interest 

in the collateral or the legal equivalent 

thereof, if outside of the United States. 

In response to comments, the Board 

has added gold bullion to the list of 

eligible collateral. The Board has 

declined to add certain other types of 

collateral such as mortgage-backed 

securities (MBS) and shares in money 

market mutual funds (MMMF) as 

requested by commenters even though 

these collateral types are recognized as 

eligible collateral in the Board’s capital 

rules. The Board has decided to limit 

the scope of eligible collateral to restrict 

those collateral types that would be 

likely to suffer from a bout of illiquidity 

and general market dislocation in a 

period of financial stress when a 


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38470 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Rules and Regulations 

65See proposed rule § 252.71(k) and final rule 

§ 252.71(k); see also 12 CFR 252.2(p) (defining 

‘‘publicly traded’’). 

66 ‘‘Credit derivative’’ and ‘‘equity derivative’’ are 

defined in § 252.71(g) and (p) of the proposed rule, 

respectively. 

67See proposed rule § 252.71(h). The definition of 

‘‘credit transaction’’ in the proposed rule is similar 

to the definition of ‘‘credit exposure’’ in section 

165(e) of the Dodd-Frank Act. See 12 U.S.C. 

5365(e)(3). 68See proposed rule § 252.72. 

covered company may need to monetize 

collateral quickly in the face of a large 

counterparty default. This stands in 

contrast to the purpose of collateral for 

capital purposes, which serves to offset 

losses that may arise in a variety of 

circumstances, not all of which coincide 

with the default of a significant 

counterparty or a period of financial 

distress. Unlike gold bullion, both 

MMMF and MBS have previously been 

subject to bouts of illiquidity and 

dislocation during periods of financial 

stress due to their complexity and lack 

of transparency. In light of these 

structural features of both MBS and 

MMMF, the final rule does not to 

recognize these collateral types as 

eligible collateral. 

Accordingly, under the final rule, 

‘‘eligible collateral’’ generally is defined 

in a similar manner as in the proposal 

to include cash in foreign currency or 

U.S. dollars on deposit with a covered 

company (including cash held for the 

covered company by a custodian or 

trustee that is not an affiliate of the 

covered company whether inside or 

outside the United States); debt 

securities (other than mortgage- or assetbacked securities) that are bank-eligible 

investments and that have an 

investment grade rating; equity 

securities that are publicly traded; 

convertible bonds that are publicly 

traded; or gold.65 Like the proposal, the 

final rule generally excludes mortgagebacked securities and other asset-backed 

securities from the definition of 

‘‘eligible collateral’’ because of concerns 

that those securities may be more likely 

than other securities to become illiquid 

and lose value during periods of 

financial instability. However, assetbacked securities guaranteed by a U.S. 

government-sponsored entity, such as 

Ginnie Mae, Fannie Mae, or Freddie 

Mac, qualify as eligible collateral under 

the final rule so long as the entity 

remains under U.S. government 

conservatorship. The final rule clarifies 

that eligible collateral does not include 

debt securities or equity securities 

issued by the covered company or its 

affiliate. 

6. Credit Transaction 

Consistent with the statutory 

definition of credit exposure, the 

proposed rule would have defined 

‘‘credit transaction’’ to mean, with 

respect to a counterparty, any (i) 

extension of credit to the counterparty, 

including loans, deposits, and lines of 

credit, but excluding advised or other 

uncommitted lines of credit; (ii) 

repurchase or reverse repurchase 

agreement with the counterparty; (iii) 

securities lending or securities 

borrowing transaction with the 

counterparty; (iv) guarantee, acceptance, 

or letter of credit (including any 

confirmed letter of credit or standby 

letter of credit) issued on behalf of the 

counterparty; (v) purchase of, or 

investment in, securities issued by the 

counterparty; (vi) credit exposure to the 

counterparty in connection with a 

derivative transaction between the 

covered company and the counterparty; 

(vii) credit exposure to the counterparty 

in connection with a credit derivative or 

equity derivative transaction between 

the covered company and a third party, 

the reference asset of which is an 

obligation or equity security issued by 

the counterparty; 66 and (viii) any 

transaction that is the functional 

equivalent of the above, and any similar 

transaction that the Board determines to 

be a credit transaction for purposes of 

this subpart.67

One commenter urged the Board to 

exclude foreign demand deposits 

associated with custody services from 

the credit exposure calculation under 

the final rule. This commenter argued 

that cash deposits denominated in a 

foreign currency are often received from 

custody clients as a result of securities 

ownership and held in a demand 

deposit account with sub-custodian 

banks in jurisdictions where it does not 

self-custody. 

The final rule retains the proposed 

definition of ‘‘credit transaction’’ 

without modification. The final rule 

does not exclude foreign demand 

deposits associated with custody 

services as requested by certain 

commenters. Section 165(e) explicitly 

provides that ‘‘credit exposure’’ means 

all extensions of credit including loans, 

deposits, and lines of credit. The Board 

may only grant exemptions that are in 

the public interest and consistent with 

the purposes of section 165(e) of the 

Dodd-Frank Act. In light of the plain 

language of the statute, the Board 

believes that if a covered company 

holds deposits at a counterparty, those 

deposits should be subject to the limits 

of the final rule and that an exclusion 

would not be appropriate in these 

circumstances. The final rule exempts 

intra-day exposures to minimize the 

impact of the proposal on payment and 

settlement transactions. 

7. Other Terms 

The final rule also defines a number 

of other terms, which are defined largely 

in the same manner as under the 

proposal. Additionally, there are certain 

newly defined terms that were not 

defined in the proposal but which 

should provide additional clarity 

regarding the application of the SCCL. 

These terms are discussed throughout 

the remainder of this preamble. 

B. Credit Exposure Limits 

Section 252.72 of the proposed rule 

would have contained the key SCCL.68

As noted, a number of commenters 

argued that the use of tier 1 capital as 

the eligible capital base for covered 

companies was inconsistent with the 

statute, because section 165(e) defines 

the general SCCL limit by reference to 

a firm’s ‘‘capital stock and surplus.’’ In 

addition, some commenters urged the 

Board to eliminate the 15 percent limit 

for major covered companies to major 

counterparties. These commenters 

expressed the view that before 

proceeding with the application of the 

lower 15 percent limit, the Federal 

Reserve should properly account for the 

probability of the default of a major 

covered company or major counterparty 

taking into account the impact of key 

components of regulatory reforms aimed 

specifically at addressing both the 

probability and impact of such a default. 

One commenter argued the more 

stringent limit could negatively impact 

job creation and the economy and was 

unnecessary in light of increased capital 

levels. 

By contrast, other commenters 

expressed the view that the Board 

should use the flexibility granted by 

Congress under the statute to lower the 

credit exposure limits relative to the 

proposal. For instance, one commenter 

noted that a 25 percent limit would 

mean that a bank could expose 100 

percent of its entire capital to four 

borrowers. These commenters expressed 

the view that the 15 percent limit 

between major covered companies and 

major counterparties was too high and 

did not take into account the greater 

costs of a failure of a global systemically 

importantant banking organization. 

These commenters argued that the 

economic damage created by multiple 

defaults of the largest firms would be 

catastrophic and that the credit 

exposure limit between such firms 

should be much lower than the 15 

percent level proposed. One commenter, 


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Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Rules and Regulations 38471 

69 12 U.S.C. 5365(a)(1)(B); 12 U.S.C. 5365(a)(2)(A). 

70See 12 CFR 217.2; 12 CFR 217.20. 

71 12 U.S.C. 5365(a)(1)(B); 12 U.S.C. 5365(a)(2)(A). 

72See 12 CFR part 217. 

73See 12 U.S.C. 5365(e)(2). In contrast, the SCCL 

for a U.S. IHC with $50 billion or more in total 

consolidated assets but less than $250 billion in 

total consolidated assets are based on the U.S. IHC’s 

total regulatory capital plus ALLL. See final rule 

§ 252.172. 

for example, recommended a credit 

exposure limit of 5 percent of tier 1 

capital. A few commenters expressed 

the view that the final rule should use 

gross credit exposure rather than net 

credit exposure to establish the SCCL. 

The Board has considered the 

comments received as well as changes 

to the final rule made in response to 

EGRRCPA. Section 252.72 of the final 

rule now contains two credit exposure 

limits that are tailored to the size and 

systemic footprint of the firm. No 

covered company may have an aggregate 

net credit exposure to any counterparty 

that exceeds 25 percent of the tier 1 

capital of the covered company. In 

addition, no major covered company 

may have aggregate net credit exposure 

to any major counterparty that exceeds 

15 percent of the tier 1 capital of the 

major covered company. 

1. 25 Percent of Tier 1 Capital Limit 

The Board continues to believe that 

the use of tier 1 capital is the 

appropriate measurement for the SCCL 

applicable to covered companies. 

Notwithstanding the arguments that the 

standard in SCCL established under 

section 165(e) is based on a company’s 

‘‘capital stock and surplus,’’ section 

165(e) expressly authorizes the Board to 

establish a lower amount as necessary to 

mitigate the risks to the financial 

stability of the United States. Further, 

section 165 requires the Board to tailor 

enhanced prudential standards to 

increase in stringency based on certain 

factors (capital structure, riskiness, 

complexity, financial activities 

(including the financial activities of 

their subsidiaries), size, and other riskrelated factors that the Board deems 

appropriate).69

As indicated, the SCCL in the final 

rule for covered companies are 

calculated by reference to tier 1 capital 

as defined under the Board’s capital 

rules, rather than total regulatory capital 

plus ALLL.70 A key financial stability 

benefit of the SCCL is that such limits 

help reduce the likelihood that the 

failure of one financial institution will 

lead to the failure of other financial 

institutions. By reducing the likelihood 

of multiple simultaneous failures arising 

from interconnectedness, the SCCL 

reduce the probability of future 

financial crises and the social costs that 

would be associated with such crises. 

For this benefit to be realized, SCCL for 

firms whose failure is more likely to 

have an adverse impact on financial 

stability should be based on a measure 

of capital that is available to absorb 

losses on a going-concern basis. 

Total regulatory capital plus ALLL 

includes capital elements that do not 

absorb losses on a going-concern basis. 

For example, total regulatory capital 

includes a covered company’s 

subordinated debt, which is senior in 

the creditor hierarchy to equity and 

therefore only takes losses once a 

company’s equity has been wiped out. 

In contrast, a company’s tier 1 capital 

consists only of equity claims on the 

company, such as common equity and 

certain preferred shares. By definition, 

these equity claims are available to 

absorb losses on a going-concern basis. 

Therefore, in order to limit the aggregate 

net credit exposure that a covered 

company can have to a single 

counterparty, the SCCL applicable to 

such companies should be based on 

their tier 1 capital. Basing singlecounterparty credit limits for such 

companies on tier 1 capital also is 

consistent with the mandate in section 

165(a)(1)(B) of the Dodd-Frank Act to 

tailor enhanced prudential standards 

such that they increase in stringency 

based on the systemic footprint of the 

firms to which they apply.71

Moreover, this approach would be 

consistent with lessons learned during 

the financial crisis of 2007–2009. During 

the crisis, counterparties and other 

creditors of distressed financial 

institutions discounted lower-quality 

regulatory capital instruments issued by 

such institutions, such as trust preferred 

shares, hybrid capital instruments, and 

other term instruments. Instead, market 

participants focused on a financial 

institution’s common equity capital and 

other simple, perpetual-maturity 

instruments that now qualify as tier 1 

regulatory capital. For this reason, the 

Board’s revised capital framework 

introduced a new definition of common 

equity tier 1 capital, restricted the set of 

instruments that qualify as additional 

tier 1 capital, and raised the tier 1 

capital regulatory minimum from four to 

six percent.72 In contrast, the Board’s 

revised capital framework left the total 

regulatory capital minimum 

requirement unchanged from its precrisis calibration of 8 percent. 

Thus, basing single-counterparty 

credit limits for such covered 

companies on tier 1 capital would be 

consistent with the post-crisis focus on 

higher-quality forms of capital and 

would provide a more reliable capital 

base for the credit limits. In addition, 

the analysis that follows suggests that 

using a narrower definition of capital for 

covered companies should mitigate 

risks to U.S. financial stability. 

The marginal impact of basing singlecounterparty credit limits on tier 1 

capital for firms with $250 billion or 

more in total assets appears to be 

limited. As of December 31, 2016, tier 

1 capital represented approximately 84 

percent of the total regulatory capital 

plus ALLL for these firms. Further, the 

quantitative impact study Board staff 

conducted to help gauge the likely 

effects of the proposed requirements 

suggests that using tier 1 capital as the 

eligible capital base for bank holding 

companies with $250 billion or more in 

total consolidated assets or $10 billion 

or more in total on-balance-sheet foreign 

exposures likely would increase the 

total amount of excess exposure among 

U.S. bank holding companies by 

approximately $30 billion. This 

incremental amount of excess credit 

exposure could be largely eliminated by 

firms through compression of 

derivatives, collection of additional 

collateral from counterparties, greater 

use of central clearing, and modest 

rebalancing of portfolios among 

counterparties. The revised treatment 

for calculating net credit exposure from 

securities financing transactions should 

also reduce this exposure. For all these 

reasons, the Board has determined that 

it is appropriate to apply a more 

stringent SCCL of 25 percent of tier 1 

capital to covered companies to mitigate 

risks to the financial stability of the 

United States.73

2. 15 Percent of Tier 1 Capital Limit 

The 15 percent of tier 1 capital limit 

that applies to credit exposures of a 

major covered company to a major 

counterparty reflects the financial 

stability consequences associated with 

such credit extensions. A credit 

extension between a major covered 

company and a major counterparty is 

expected to result in a heightened 

degree of credit risk to the major 

covered company relative to the case in 

which a major covered company 

extends credit to a counterparty that is 

not a major counterparty. The 

heightened credit risk arises because 

major covered companies and major 

counterparties are often engaged in 

common business lines and often have 

common counterparties and common 

funding sources. This creates a 

significant degree of commonality in 

their economic performance. In 


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74See, ‘‘Calibrating the Single-Counterparty 

Credit Limit between Systemically Important 

Financial Institutions,’’ May 4, 2016, https://

www.federalreserve.gov/aboutthefed/board

meetings/sccl-paper-20160304.pdf. For purposes of 

the white paper, SIFIs include global systemically 

important banking organizations and nonbank 

financial companies designated by FSOC for 

supervision by the Board. 75 12 U.S.C. 5365(e)(2). 

76See proposed rule § 252.71(r). Section 252.74 of 

the proposed rule explains how these adjustments 

are made. 

77See final rule § 252.71(t) & (h). 

78See proposed rule § 252.73(a)(1)–(12). 

79 12 CFR part 217, subpart D. 

80 Id. 

particular, factors that would likely 

cause the distress of a major 

counterparty would also likely be 

expected simultaneously to adversely 

affect a major covered company that has 

extended credit to the major 

counterparty. As a result, such credit 

extensions would be expected to present 

more credit risk and greater potential for 

financial instability than a credit 

extension made by a major covered 

company to a counterparty that is not a 

major counterparty. 

In the white paper that was released 

in conjunction with the proposal, Board 

staff analyzed data on the default 

correlation between systemically 

important financial institutions (SIFIs) 

as well as data on the default correlation 

between SIFIs and a sample of non-SIFI 

companies.74 The analysis supports the 

view that the correlation between SIFIs, 

and hence the correlation between 

major covered companies and major 

counterparties, is measurably higher 

than the correlation between SIFIs and 

other companies. This finding further 

supports the view that credit extensions 

between SIFIs, and hence by a major 

covered company to a major 

counterparty, present a higher degree of 

risk and the potential for greater 

financial instability than credit 

extensions of a major covered company 

to a non-major counterparty. 

Some commenters contended that the 

credit limit on exposures to major 

counterparties should reflect a reduced 

probability of default of such major 

counterparties resulting from a range of 

post-crisis reforms. The Board disagrees 

with this approach. SCCL are, by their 

nature, simple and transparent limits 

that do not depend on the probability of 

default of any individual counterparty. 

As a specific example, the general 25 

percent limit does not recognize any 

difference in the probability of default 

between counterparties. Moreover, the 

SCCL are designed to protect against 

counterparty default and hence 

explicitly assume the default of the 

counterparty in question regardless of 

the likelihood of such an event. 

Accordingly, it would be inconsistent 

with the general motivation for 

counterparty credit limits to 

differentiate based on perceived 

differences in credit quality. 

Because credit extensions of a major 

covered company to a major 

counterparty present a heightened 

degree of credit risk and a greater 

potential for heightened financial 

instability and to mitigate risks to the 

financial stability of the United States, 

the Board has determined that it is 

appropriate to apply a more stringent 

SCCL for credit extensions between a 

major covered company and a major 

counterparty of 15 percent of tier 1 

capital.75 The more stringent credit limit 

of 15 percent of tier 1 capital is 

informed by the results of a credit risk 

model that is described in detail in the 

white paper. More specifically, data on 

correlations, as described above, is used 

to calibrate a credit risk model. The 

credit risk model is then used to set the 

single-counterparty credit limit between 

SIFIs such that the amount of credit risk 

that a SIFI is permitted to incur through 

extensions of credit to another SIFI is no 

greater than the amount of credit risk 

that the SIFI would be permitted to 

incur through extensions of credit to a 

non-SIFI under the 25 percent limit 

applicable to such exposures. The 

resulting calibrated model produces 

inter-SIFI single-counterparty credit 

limits that are in line with the proposed 

limit of 15 percent. 

An additional factor that is not 

considered explicitly in the context of 

the white paper’s credit risk model, but 

which should influence the calibration 

of the credit limit between major 

covered companies and major 

counterparties, is the relative difference 

in adverse consequences arising from 

multiple SIFI defaults relative to the 

default of a SIFI and non-SIFI 

counterparty. The financial stability 

consequences of multiple SIFI defaults 

caused by the default of a SIFI borrower 

and the resulting default of a SIFI lender 

are likely substantially greater than the 

adverse consequences that would result 

from the default of a single SIFI lender 

and a single non-SIFI borrower. As a 

result, there is a compelling rationale to 

require that credit risk posed by interSIFI credit extensions be materially 

smaller than that posed by credit 

extensions between a SIFI lender and 

non-SIFI borrower. This consideration 

suggests that an appropriate inter-SIFI 

single-counterparty credit limit would 

be even lower than the 15 percent limit 

suggested by the calibrated credit risk 

model that is presented in the white 

paper. The Board has considered the 

case for an even more stringent credit 

limit on such inter-SIFI exposures and 

has decided not to lower the limit so as 

not to unduly constrain the ability of 

large banking organizations to engage in 

transactions that are a necessary part of 

their business and banking models. 

Accordingly, the 15 percent of tier 1 

capital single-counterparty credit limit 

on credit exposures of a major covered 

company to a major counterparty should 

help to mitigate risks to U.S. financial 

stability while also allowing large 

banking organizations to continue to 

transact with each other as needed on a 

commercial basis. 

C. Gross Credit Exposure 

Under the proposal, gross credit 

exposure would have been defined to 

mean, with respect to any credit 

transaction, the credit exposure of the 

covered company to the counterparty 

before adjusting for the effect of any 

qualifying master netting agreements, 

eligible collateral, eligible guarantees, 

eligible credit derivatives and eligible 

equity derivatives, other eligible hedges 

(i.e., a short position in the 

counterparty’s debt or equity securities), 

and any unused portion of certain 

extensions of credit.76 No comments 

were received on the definition of 

‘‘gross credit exposure’’ or ‘‘credit 

transaction,’’ and the final rule 

continues to define these terms in the 

same manner as the proposal.77

Section 252.73 of the proposal 

described how the gross credit exposure 

of a covered company to a counterparty 

would have been calculated for each 

type of credit transaction described 

above.78 In general, the methodologies 

contained in the proposed rule are 

similar to those used to calculate credit 

exposure under the standardized riskbased capital rules for bank holding 

companies.79

Section 252.73 of the final rule 

describes how the gross credit exposure 

of a covered company to a counterparty 

should be calculated for each type of 

credit transaction. In general, the 

methodologies contained in the final 

rule are the same as those under the 

proposal, other than the calculation 

methodologies for certain derivative 

transactions and securities financing 

transactions, which have been modified 

to address comments received and are 

similar to those used to calculate credit 

exposure under the standardized riskbased capital rules for bank holding 

companies.80


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81 12 U.S.C. 5365(e)(3)(A). 

82See final rule § 252.73(a)(1). 

83See final rule § 252.73(a)(2) and (3). 

84See proposed rule § 252.73(a)(4)–(7) & 

252.74(b). 

85See § 252.73(a)(4) of the final rule. The Board 

may revisit the approach to securities financing 

transactions permitted under the capital rules in the 

future. See, e.g., Basel Committee on Banking 

Supervision, Basel III: Finalising post-crisis reforms 

(Dec. 2017), https://www.bis.org/bcbs/publ/ 

d424.pdf. 

86 ‘‘Qualifying master netting agreement’’ is 

defined in § 252.71(cc) of the final rule by reference 

to the Board’s capital rules. 

87See proposed rule § 252.73(a)(10). 

88See proposed rule § 252.73(a)(11). 

1. Loans, Deposits, and Lines of Credit 

Section 165(e) provides that credit 

exposure includes all extension of credit 

to a company, including loans, deposits, 

and lines of credit.81 Consistent with the 

statutory definition of credit exposure, 

the proposed rule would have defined 

‘‘credit transaction’’ to mean, with 

respect to a counterparty, any extension 

of credit to the counterparty, including 

loans, deposits, and lines of credit, but 

excluding advised or other 

uncommitted lines of credit. As noted, 

the proposal provided that the gross 

credit exposure for loans by a covered 

company to the counterparty and leases 

in which the covered company is the 

lessor and the counterparty is the lessee, 

would have been equal to the amount 

owed by the counterparty to the covered 

company under the transaction. The 

final rule retains this treatment.82

2. Debt and Equity Securities 

Similar to the proposal, under the 

final rule, trading and available-for-sale 

debt securities held by the covered 

company, as well as equity securities, 

are valued for purposes of singlecounterparty credit limits based on their 

market value. This approach requires a 

covered company to revalue upwards 

the amount of an investment in such 

securities when the market value of the 

securities increases. In these 

circumstances, the revaluation would 

reflect the covered company’s greater 

financial exposure to the counterparty 

and would reduce the covered 

company’s ability to engage in 

additional transactions with the 

counterparty. In circumstances where 

the market value of the securities falls, 

however, a covered company would 

revalue downwards its exposure to the 

issuer of the securities. This reflects the 

fact that, just as an increase in the value 

of a security results in greater exposure 

to the issuer of that security, a decrease 

in the value of the security leaves a firm 

with less exposure to that issuer.83

3. Securities Financing Transactions 

The proposal addressed the valuation 

of a securities financing transaction that 

is subject to a bilateral netting 

agreement and meets the definition of a 

‘‘repo-style’’ transaction in the section 

dealing with calculation of net credit 

exposure. To enhance clarity, the Board 

now addresses the valuation of 

securities financing transactions, 

including those subject to a bilateral 

netting agreement that meet the 

definition of ‘‘repo-style’’ transaction, in 

the gross credit exposure section of the 

final rule. 

Under the proposal, exposure from 

such a transaction generally would have 

been equal to an exposure at default 

amount as modified based on certain 

standardized collateral haircuts.84 A 

covered company would not have been 

permitted to apply its own internal 

estimates for haircuts. Further, in 

calculating its net credit exposure to a 

counterparty due to such transactions, a 

covered company would have been 

required to disregard any collateral 

received from that counterparty that is 

not eligible collateral. 

The proposal also would have 

required a covered company to 

recognize a credit exposure to any issuer 

of eligible collateral provided in 

connection with the securities financing 

transaction. The amount of credit 

exposure to the issuer would have been 

equal to the market value of the 

collateral minus standardized 

supervisory haircuts. However, the 

amount of the credit exposure to the 

issuer of the collateral would have been 

capped at the gross credit exposure to 

the counterparty on the original credit 

transaction. 

As noted, commenters objected to the 

proposed methodology for netting 

securities financing transactions as 

overly conservative and highly riskinsensitive. The commenters generally 

argued that the proposed approach 

implied unrealistic assumptions about 

correlations among securities that a 

covered company transfers to its 

counterparty and receives from that 

counterparty. For example, if a covered 

company loans equity securities to a 

counterparty and receives equity 

securities from the counterparty as 

collateral, the proposed methodology 

implied that, upon the counterparty’s 

default, the value of the equities 

transferred to the counterparty would 

increase in value while the value of the 

equities received would decrease in 

value. These commenters urged the 

Board to permit a covered company to 

use any methodology permitted under 

the risk-based capital rules, consistent 

with the proposal’s approach for 

measuring derivative exposures, 

including any revisions to the risk-based 

capital rules. Commenters argued that 

securities lending plays a critical role in 

the broader U.S. securities markets and 

flaws in the securities financing 

transaction measurement methodology 

that have the potential to cause covered 

companies to pull back from this 

activity as a result of a significant 

overstatement of risk could have real 

market consequences. 

In response to comments, the final 

rule includes a modified approach to 

securities financing transactions. The 

methodology that would have applied to 

securities financing transactions under 

the proposal could have overstated 

exposure from some transactions. In 

addition, the more risk-sensitive 

treatment of derivatives relative to 

securities financing transactions under 

the proposal could have artificially 

incentivized firms to engage in 

derivatives that are economically 

equivalent to securities financing 

transactions. Accordingly, the final rule 

allows covered companies to use any 

method that the company is authorized 

to use under the Board’s capital rules, 

including, in certain circumstances, 

internal models to measure exposure to 

securities financing transactions.85

4. Derivatives 

The proposed SCCL rule drew a 

distinction between derivative 

transactions that were subject to a 

qualifying master netting agreement 

(QMNA) and derivatives that were not 

subject to such an agreement.86

Derivative transactions between the 

covered company and the counterparty 

that were not subject to a QMNA would 

have been valued based on the current 

exposure of the derivatives contract and 

its potential future exposure.87

Derivative transactions between the 

covered company and the counterparty 

subject to a QMNA would have been 

valued based on the exposure at default 

amount calculated using methodologies 

the covered company is permitted to use 

under subparts D and E of the Board’s 

capital rules (12 CFR part 217).88 This 

approach would have allowed certain 

covered companies to calculate 

counterparty exposures for certain 

derivatives transactions subject to a 

QMNA using internal models. 

With respect to credit derivative 

transactions between a covered 

company and a third party, where the 

covered company is the protection 

provider and the reference asset is a 

debt investment in the counterparty, the 

credit exposure of the covered company 

to the counterparty is equal to the 


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89Under the proposal, this treatment would have 

applied to both equity derivatives and credit 

derivatives. See proposed rule § 252.73(a)(12). 

Under the final rule, a covered company that is the 

protection provider on an equity derivative will 

apply the same treatment as under the Board’s 

capital rules. See final rule § 252.73(7)–(8). ‘‘Credit 

derivative’’ is defined in § 252.71(g) of the final 

rule, and ‘‘equity derivative’’ is defined in 

§ 252.71(p) of the final rule. ‘‘Derivative 

transaction’’ is defined in § 252.71(j) of the final 

rule in the same manner as it is defined in the 

National Bank Act, as amended by section 610 of 

the Dodd-Frank Act. See 12 U.S.C. 84(b)(3). 

90See final rule § 252.73(c); see also 12 U.S.C. 

5365(e)(4). 91See proposed rule § 252.74. 

maximum potential loss to the covered 

company on the transaction.89

While commenters generally 

supported the valuation of derivative 

transactions under the proposal, certain 

commenters recommended that the final 

rule measure the credit exposure 

amount for derivatives that are not 

subject to a QMNA in a manner 

consistent with the proposed rule’s 

measurement of the credit exposure 

amount for derivatives that are subject 

to a QMNA—that is, by permitting 

measurement using internal model 

methodologies for measuring credit 

exposure amounts (IMM). These 

commenters argued that requiring a 

different approach would introduce 

unnecessary operational complexity by 

subjecting the same set of derivative 

transactions to two different credit 

exposure calculations depending on 

whether the derivatives are subject to a 

QMNA without any apparent prudential 

benefit. These commenters also 

expressed the view that allowing IMM 

with respect to derivatives that are not 

subject to a QMNA would maintain 

internal consistency within the final 

rule and be consistent with the riskbased capital rules more generally. 

In response to comments, the Board 

has modified the proposed rule to allow 

a covered company to use any 

methodology that the covered company 

is authorized to use under the capital 

rules to value a derivatives transaction. 

Thus, to the extent that a covered 

company is authorized to use a 

particular approach, including an 

internal model, to value a derivatives 

transaction under the capital rules, the 

covered company is authorized to use 

the same approach to value the 

transaction under the final rule. 

5. Collateral in Custody 

The proposal explained that, with 

respect to cleared and uncleared 

derivatives, the amount of initial margin 

and excess variation margin (that is, 

variation margin in excess of that 

needed to secure the mark-to-market 

value of a derivative) posted to a 

bilateral or central counterparty would 

have been treated as credit exposure to 

the counterparty unless the margin is 

held in a segregated account at a thirdparty custodian. Certain commenters 

urged the Board to make clear that all 

collateral posted to counterparties and 

held in segregated accounts at thirdparty custodians would not be treated as 

credit exposure to the counterparty (i.e., 

the custodian) and that this treatment be 

codified in the final rule. The Board 

notes that initial margin and excess 

variation margin that is posted to a 

bilateral or central counterparty and 

held in a segregated account by a thirdparty custodian are not subject to 

counterparty risk with respect to the 

third-party custodian. Therefore, a 

covered company is not required under 

the final rule to calculate gross credit 

exposure to a third party acting solely 

as a custodian with respect to collateral 

held in a segregated account with that 

custodian. 

6. Investments in and Exposures to 

Securitization Vehicles, Investment 

Funds, and Other Special Purpose 

Vehicles That Are Not Subsidiaries 

Under the proposal, a covered 

company with $250 billion in total 

consolidated assets or $10 billion in 

total on-balance-sheet foreign exposures 

would have calculated its gross credit 

exposure arising from investments in 

and exposures to securitization vehicles, 

investment funds, and other special 

purpose vehicles that are not 

subsidiaries of the covered company 

pursuant to § 252.75 of the proposed 

rule. The final rule, like the proposal, 

directs a covered company to calculate 

its gross credit exposure to such entities 

pursuant to § 252.75 of the final rule. A 

discussion of this valuation 

methodology, including comments 

received on the proposal’s valuation 

methodology, follows in section II.E. 

infra. 

7. Attribution Rule 

Just as in the proposal, § 252.73(c) of 

the final rule includes the statutory 

attribution rule, which provides that a 

covered company must treat a 

transaction with any person as a credit 

exposure to a counterparty to the extent 

the proceeds of the transaction are used 

for the benefit of, or transferred to, that 

party.90 This attribution rule seeks to 

prevent firms from evading the singlecounterparty credit limits by using 

intermediaries and thereby avoiding a 

direct credit transaction with a 

particular counterparty. The attribution 

rule in the final rule is similar to that 

of the proposed rule, except that the 

final rule refers to a ‘‘party’’ rather than 

a ‘‘counterparty’’ to follow more closely 

the terms of section 165(e). 

It is the Board’s intention to avoid 

interpreting the attribution rule in a 

manner that would impose undue 

burden on covered companies by 

requiring firms to monitor and trace the 

proceeds of transactions made in the 

ordinary course of business. In general, 

credit exposures resulting from 

transactions made in the ordinary 

course of business will not be subject to 

the attribution rule. 

D. Net Credit Exposure 

Section 252.74 of the proposed rule 

explained how a covered company 

would have converted gross credit 

exposure amounts to net credit exposure 

amounts by taking into account eligible 

collateral, eligible guarantees, eligible 

credit and equity derivatives, other 

eligible hedges (for example, a short 

position in the counterparty’s debt or 

equity securities), and for securities 

financing transactions, the effect also of 

bilateral netting agreements.91 The key 

difference between these two amounts is 

that a company’s net credit exposure 

would take into account any available 

credit risk mitigants, such as collateral, 

guarantees, credit or equity derivatives, 

and other hedges, provided the credit 

risk mitigants meet certain requirements 

in the rule, as discussed more fully 

below. For example, if a covered 

company had $100 in gross credit 

exposure to a counterparty with respect 

to a particular credit transaction, and 

the counterparty pledged collateral with 

an adjusted market value of $50, the full 

amount of which qualified as ‘‘eligible 

collateral’’ under the rule, the covered 

company’s net credit exposure to the 

counterparty on the transaction would 

be $50. 

In order to calculate its aggregate net 

credit exposure to a counterparty under 

the proposed rule, a covered company 

first would have calculated its gross 

credit exposure to a counterparty on 

each credit transaction in accordance 

with certain valuation and other 

requirements under the rule. Second, 

the covered company would have 

reduced its gross credit exposure 

amount, based on eligible credit risk 

mitigants, to determine its net credit 

exposure for each credit transaction 

with the counterparty. Third and 

finally, the covered company would 

have summed all of its net credit 

exposures to the counterparty to 

calculate the covered company’s 

aggregate net credit exposure to the 

counterparty. It is this final amount, the 


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Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Rules and Regulations 38475 

92The proposal referred to an ‘‘eligible protection 

provider’’ instead of an ‘‘eligible guarantor.’’ For 

simplicity, the final rule refers to ‘‘eligible 

guarantor,’’ which is the term used in the Board’s 

capital rules. The definition of ‘‘eligible guarantor’’ 

in the final rule is unchanged from the proposal. 

See final rule § 252.71(o). 

93See proposed rule § 252.74(e)(2)(ii). 

94See proposed rule §§ 252.71(k) & 252.74(c). 

95See proposed rule § 252.74(c). 96Table 1 to section 217.132 of the Board’s capital 

rules (12 CFR 217.132, tbl. 1) provides haircuts for 

multiple collateral types, including some types that 

do not meet the proposed definition of ‘‘eligible 

collateral.’’ Notwithstanding the inclusion of those 

collateral types in the reference table, a company 

cannot reduce its gross credit exposure for a 

transaction with a counterparty based on the 

adjusted market value of collateral that does not 

meet the definition of ‘‘eligible collateral.’’ 

97As discussed below, the final rule treats eligible 

collateral as a gross credit exposure to the collateral 

issuer under the Board’s authority under 12 U.S.C. 

5365(e)(3)(F). 

98See 12 U.S.C. 5365(e)(3)(F). 99See final rule § 252.74(b)(3). 

aggregate net credit exposure, that 

would have been subject to the SCCL. 

With respect to a credit exposure 

involving eligible collateral or an 

eligible guarantor,92 the proposed rule 

would have applied a ‘‘risk-shifting’’ 

approach. In general, any reduction in 

the exposure amount to the original 

counterparty relating to the eligible 

collateral or eligible guarantor would 

result in a dollar-for-dollar increase in 

exposure to the eligible collateral issuer 

or eligible guarantor (as applicable). For 

example, in the case discussed above 

where a covered company had $100 in 

gross credit exposure to a counterparty 

and the counterparty pledged collateral 

with an adjusted market value of $50, 

the covered company would have net 

credit exposure to the counterparty on 

the transaction of $50 and net credit 

exposure to the issuer of the collateral 

of $50. 

However, in cases where a covered 

company hedged its exposure to an 

entity that is not a ‘‘financial entity’’ (a 

non-financial entity) using an eligible 

credit or equity derivative, and the 

underlying exposure is subject to the 

Board’s market risk capital rule (12 CFR 

part 217, subpart F), the covered 

company would have calculated its 

exposure to the eligible guarantor using 

methodologies that it is permitted to use 

under the Board’s risk-based capital 

rules.93 The final rule follows the same 

general approach to the calculation of 

net credit exposure as the proposal, 

with modifications as discussed below. 

1. Collateral 

Section 252.74(c) of the proposed rule 

describes how eligible collateral would 

have been taken into account in the 

calculation of net credit exposure.94

Under the proposal, the net credit 

exposure of a covered company to a 

counterparty on a credit transaction 

would have been the gross credit 

exposure of the covered company on the 

transaction minus the adjusted market 

value of any eligible collateral related to 

the transaction. In addition, under the 

proposal, a covered company generally 

would have been required to recognize 

a credit exposure to the collateral issuer 

in an amount equal to the adjusted 

market value of the collateral. 

Certain commenters argued that 

eligible margin loans should not be 

subject to the risk-shifting requirement 

under the final rule. These commenters 

contended that ‘‘risk-shifting’’ to the 

eligible collateral issuer in the case of 

margin lending accounts would 

introduce a significant and unnecessary 

operational burden as it would require 

a covered company to identify each 

collateral issuer and shift individually 

relatively small dollar amounts of such 

exposures to each collateral issuer for 

each of these small exposures. 

The final rule does not exclude 

margin loans from the risk-shifting 

requirements. The final rule contains no 

de minimis risk-shifting exception for 

any specific loan type, and margin loans 

do not have any special characteristics 

that would justify special treatment for 

margin loans relative to other credit 

transactions. 

In computing its net credit exposure 

to a counterparty with respect to a credit 

transaction under the proposed rule, a 

covered company would have been 

required to reduce its gross credit 

exposure on the transaction by the 

adjusted market value of any eligible 

collateral.95 Other than in the context of 

repo-style transactions, the ‘‘adjusted 

market value’’ of eligible collateral 

would have been defined to mean the 

fair market value of the eligible 

collateral after the application of certain 

haircuts.96

The final rule follows the same 

general approach. The net credit 

exposure of a covered company to a 

counterparty on a credit transaction 

under the final rule is the gross credit 

exposure of the covered company on the 

transaction minus the adjusted market 

value of any eligible collateral related to 

the transaction.97 In addition, under the 

final rule, a covered company generally 

must recognize a credit exposure to the 

collateral issuer in an amount equal to 

the adjusted market value of the 

collateral. 

The final rule treats eligible collateral 

as a gross credit exposure to the 

collateral issuer under the Board’s 

authority under section 165(e) to 

determine that any other similar 

transaction is a credit exposure.98 This 

approach will help to promote a covered 

company’s careful monitoring of its 

direct and indirect credit exposures. In 

order not to discourage 

overcollateralization, however, a 

covered company’s maximum credit 

exposure to the collateral issuer is 

limited to the credit exposure to the 

original counterparty (unless the 

counterparty is exempt or excluded 

from the rule).99 A covered company 

would continue to have credit exposure 

to the original counterparty to the extent 

that the adjusted market value of the 

eligible collateral does not equal the full 

amount of the credit exposure to the 

original counterparty. 

The amount of credit exposure to the 

original counterparty and the issuer of 

the eligible collateral would fluctuate 

over time based on the adjusted market 

value of the eligible collateral. Collateral 

that previously met the definition of 

eligible collateral under the rule but 

over time ceases to do so would no 

longer be eligible to reduce gross credit 

exposure to the original counterparty. 

Covered companies will need to 

monitor the adjusted market value and 

eligibility of all collateral under the 

final rule. To the extent the adjusted 

market value of collateral has increased 

or declined, the covered company 

would need to adjust its exposures to 

the original counterparty and issuer of 

collateral as appropriate. To the extent 

that collateral no longer meets the 

definition of eligible collateral, the 

covered company would need to 

recognize an exposure to the original 

counterparty. 

Example: A covered company 

(Company A) makes a $1,000 loan to a 

counterparty (Company B), creating 

$1,000 of gross credit exposure to that 

counterparty, and the counterparty 

provides eligible collateral issued by a 

third party (Company C) that has an 

adjusted market value of $700 on day 1. 

Company A is required to reduce its 

credit exposure to Company B by the 

adjusted market value of the eligible 

collateral. As a result, on day 1, 

Company A has gross credit exposure of 

$700 to Company C and $300 net credit 

exposure to Company B. 

As noted, the amount of credit 

exposure to the original counterparty 

and the issuer of the eligible collateral 

will fluctuate over time based on 

movements in the adjusted market value 

of the eligible collateral. If the adjusted 

market value of the eligible collateral 

decreased to $400 on day 2 in the 

previous example, on day 2 Company 

A’s net credit exposure to Company B 

would increase to $600, and its gross 


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100See final rule § 252.74(g)(1). 

101See proposed rule § 252.74(d). 

102See proposed rule § 252.71(n) for the 

definition of ‘‘eligible guarantee,’’ including a 

description of the requirements of an eligible 

guarantee. 

103See final rule § 252.71(o). 

104See final rule § 252.74(c). 

105See id. 

106See id. 

107See proposed rule § 252.74(e). 

108 Id. 

109 ‘‘Covered position’’ is defined in 12 CFR 

217.202. 

credit exposure to Company C would 

decrease to $400. By contrast, if on day 

3 the adjusted market value of the 

eligible collateral increased to $800, on 

day 3 Company A’s net credit exposure 

to Company B would decrease to $200, 

and its gross credit exposure to 

Company C would increase to $800. In 

each case, the covered company’s total 

credit exposure would be capped at the 

original amount of the exposure created 

by the loan or $1,000—even if the 

adjusted market value of the eligible 

collateral exceeded $1,000. 

Finally, in cases where eligible 

collateral is issued by an issuer covered 

by one of the exemptions in § 252.77 of 

the final rule or that is excluded from 

the definition of ‘‘counterparty,’’ the 

requirement to recognize an exposure to 

the collateral issuer does not apply.100

Example: A covered company makes 

a $1,000 loan to a counterparty and that 

counterparty has pledged as collateral 

U.S. government bonds with an adjusted 

market value of $1,000. In this case, the 

covered company does not have any net 

credit exposure to the original 

counterparty because the value of the 

loan and the adjusted market value of 

the U.S. government bonds are equal. 

Although the covered company has 

$1,000 of exposure to the U.S. 

government, single-counterparty credit 

limits do not apply to that exposure 

because U.S. government bonds are 

excluded from the single-counterparty 

credit limits of the final rule. 

2. Eligible Guarantees 

Section 252.74(d) of the proposed rule 

described how to reflect eligible 

guarantees in calculations of net credit 

exposure to a counterparty.101 Eligible 

guarantees would have been defined as 

guarantees that meet certain conditions, 

including having been written by an 

eligible protection provider.102 The 

proposal would have defined ‘‘eligible 

protection provider’’ in the same way as 

‘‘eligible guarantor’’ in § 217.2 of the 

Board’s capital rules. As such, an 

eligible protection provider would have 

included a sovereign entity, the Bank for 

International Settlements, the 

International Monetary Fund, the 

European Central Bank, the European 

Commission, a Federal Home Loan 

Bank, the Federal Agricultural Mortgage 

Corporation (Farmer Mac), a multilateral 

development bank (MDB), a depository 

institution, a bank holding company, a 

savings and loan holding company, a 

credit union, a foreign bank, or a 

qualifying central counterparty. An 

eligible protection provider also would 

have included any entity, other than a 

special purpose entity, (i) that at the 

time the guarantee is issued or anytime 

thereafter, has issued and maintains 

outstanding an unsecured debt security 

without credit enhancement that is 

investment grade, (ii) whose 

creditworthiness is not positively 

correlated with the credit risk of the 

exposures for which it has provided 

guarantees, and (iii) that is not an 

insurance company engaged 

predominantly in the business of 

providing credit protection (such as a 

monoline bond insurer or re-insurer). 

No comments were received on this 

aspect of the proposal, and the final rule 

is substantively the same as the 

proposal with respect to the treatment of 

eligible guarantees. However, for 

simplicity, the final rule refers to 

‘‘eligible guarantor’’ instead of ‘‘eligible 

protection provider,’’ as that is the term 

used in the Board’s capital rules. The 

definition of ‘‘eligible guarantor’’ in the 

final rule is unchanged from the 

proposal.103

In calculating its net credit exposure 

to the counterparty under the final rule, 

as in the proposal, a covered company 

is required to reduce its gross credit 

exposure to the counterparty by the 

amount of any eligible guarantee from 

an eligible guarantor.104 As with other 

types of eligible collateral, the covered 

company would then include the 

amount of the eligible guarantee when 

calculating its gross credit exposure to 

the eligible guarantor.105 In addition, as 

with eligible collateral, a covered 

company’s gross credit exposure to an 

eligible guarantor (with respect to an 

eligible guarantee) could not exceed its 

gross credit exposure to the original 

counterparty on the credit transaction 

prior to recognition of the eligible 

guarantee.106 Accordingly, the exposure 

to the eligible guarantor would be 

capped at the amount of the credit 

exposure to the original counterparty, 

even if the amount of the eligible 

guarantee is larger than the original 

exposure. A covered company would 

continue to have credit exposure to the 

original counterparty to the extent that 

the eligible guarantee is for an amount 

less than the full amount of the credit 

exposure to the original counterparty. 

Example: A covered company makes 

a $1,000 loan to an unaffiliated 

counterparty and obtains a $700 eligible 

guarantee on the loan from an eligible 

guarantor. The covered company has 

gross credit exposure of $700 to the 

protection provider as a result of the 

eligible guarantee and $300 net credit 

exposure to the original counterparty. 

Example: A covered company makes 

a $1,000 loan to an unaffiliated 

counterparty and obtains a $1,500 

eligible guarantee from an eligible 

guarantor. The covered company has 

$1,000 gross credit exposure to the 

protection provider (capped at the 

amount of the exposure to the 

unaffiliated counterparty), but the 

covered company has no net credit 

exposure to the original counterparty as 

a result of the eligible guarantee. 

As with eligible collateral, a covered 

company is required to reduce its gross 

exposure to a counterparty by the 

amount of an eligible guarantee in order 

to ensure that concentrations in 

exposures to guarantors are captured by 

the risk-shifting approach. This 

requirement was meant to limit the 

ability of a covered company to extend 

loans or other forms of credit to a large 

number of high-risk borrowers that are 

guaranteed by a single guarantor. 

3. Eligible Credit and Equity Derivative 

Hedges 

Under the proposal, a covered 

company would have been required to 

reduce its gross credit exposure to a 

counterparty by the notional amount of 

any eligible credit or equity derivative 

that references the counterparty if the 

covered company obtains the derivative 

from an eligible protection provider.107

In these circumstances, the covered 

company generally would have been 

required to include the notional amount 

of the eligible credit or equity derivative 

hedge in calculating its gross credit 

exposure to the eligible protection 

provider.108 However, in cases where 

the eligible credit or equity derivative 

was used to hedge covered positions 

subject to the Board’s market risk rule 

(12 CFR part 217, subpart F) 109 and the 

counterparty on the hedged transaction 

was not a financial entity, the covered 

company would only have been 

required to recognize a credit exposure 

to the eligible protection provider using 

methodologies that the covered 

company is authorized to use under the 

Board’s capital rules (12 CFR part 217, 

subparts D and E), rather than the 

notional amount. Under the proposal, 

an eligible protection provider would 

have been defined to have the same 


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110See proposed rule § 252.71(o). 

111See final rule § 252.74(d). 

112See final rule §§ 252.71(l) and (m) defining 

‘‘eligible credit derivative’’ and ‘‘eligible equity 

derivative,’’ respectively. ‘‘Eligible guarantor’’ is 

defined in § 252.71(o) of the final rule. The same 

types of organizations that are eligible guarantors 

for the purposes of eligible guarantees are eligible 

guarantors for purposes of eligible credit and equity 

derivatives. 

113As noted, the final rule replaces the term 

‘‘eligible protection provider’’ with ‘‘eligible 

guarantor,’’ as that is the term used in the Board’s 

capital rules. The definition of the term in the final 

rule is unchanged from the proposal. 

114See final rule § 252.74(d). 

115See final rule §§ 252.74(d)(1)–(2). 

116See final rule § 252.74(d). 

meaning as the definition of ‘‘eligible 

guarantor’’ in the Board’s capital 

rules.110

One commenter expressed support for 

the notional amount transfer of 

exposure to the protection provider. 

This commenter, however, objected to 

the transfer of exposure to the 

protection provider using the Board’s 

risk-based capital rules in the case 

where the hedged transaction is a nonfinancial entity. This commenter argued 

that this approach was effectively a 

loophole in the exposure calculation 

that would create incentives for a bank 

to transfer risks to third parties rather 

than developing a solid underwriting 

analysis of their counterparties. 

Certain commenters objected to the 

treatment of equity derivatives under 

the proposal. These commenters argued 

that equity derivatives that are covered 

positions under the market risk rule 

should be calculated as part of a covered 

company’s net long or net short position 

with respect to a given issuer in a 

manner more generally aligned with 

how exposure amounts are calculated 

for such positions under the market risk 

rule. Commenters contended that this 

approach, rather than the approach 

under the proposal to treat equity 

derivatives in a manner equivalent to 

instruments designed to offer credit 

protection, would be consistent with the 

applicable risk-based capital rules and 

the large exposure standard. 

Some commenters argued that 

purchased credit and equity derivatives 

when calculating net exposure for 

covered positions in the trading book 

should not be subject to the requirement 

to be purchased from an eligible 

protection provider. These commenters 

argued that permitting only credit and 

equity derivatives purchased from 

eligible protection providers to reduce a 

gross exposure conflicts with the nature 

of trading book positions and impacts 

the utility of derivatives purchased from 

protection providers that do not meet 

the eligibility criteria. As such, these 

commenters requested that the rule 

allow risk-shifting to a protection 

provider that is not an ‘‘eligible 

protection provider.’’ 

More broadly, a few commenters 

expressed the view that credit default 

swaps should not be used to reduce the 

calculation of exposure, noting that the 

experience of American International 

Group during the crisis demonstrates 

how the credit default swap itself can be 

worthless and argued this could be a 

potential loophole in the final rule. For 

example, one commenter requested that 

any obligations of a counterparty to a 

covered company be recognized 

directly, regardless of whether the 

covered company has taken an offsetting 

position. This commenter generally 

opposed the netting of derivative 

positions. Another commenter urged 

that dollar-for-dollar risk shifting is 

appropriate but calculation of exposure 

based upon any method permitted in 

the risk-based capital rules where the 

reference asset obligor is not a financial 

entity would result in much less than 

dollar-for-dollar risk shifting since the 

risk-based capital rules do not require 

derivatives to be measured at their full 

notional value. 

After considering the comments on 

the proposal, the Board has determined 

not to modify the treatment of eligible 

credit and equity derivatives in the 

manner suggested by commenters. The 

Board believes that the treatment in the 

final rule is reflective of the nature of 

credit and equity derivatives. Equity 

derivatives shift risk from underlying 

equities in the same manner as credit 

derivatives shift risk from underlying 

credit instruments. Moreover, there is 

no basis for a distinction between 

trading book and banking book products 

under a credit exposure regime. 

Section 252.74(d) of the final rule sets 

forth the treatment of eligible credit and 

equity derivatives, in the case where the 

covered company is the protection 

purchaser.111 In the case where a 

covered company is a protection 

purchaser, such derivatives can be used 

to mitigate gross credit exposure. A 

covered company may only recognize 

eligible credit and equity derivative 

hedges for purposes of calculating net 

credit exposure under the final rule. 

These derivatives are required to meet 

certain criteria, including having been 

written by an eligible guarantor.112 An 

eligible credit derivative hedge is 

required to be simple in form, meaning 

a single-name or standard, non-tranched 

index credit derivative. 

Where protection is obtained, a 

covered company must recognize 

exposure to an eligible guarantor.113

Accordingly, under the final rule, a 

covered company is required to reduce 

its gross credit exposure to a 

counterparty by the notional amount of 

any eligible credit derivative hedge that 

references the counterparty if the 

covered company obtains the derivative 

from an eligible guarantor.114 In these 

circumstances, the covered company 

generally will be required to include the 

notional amount of the eligible credit 

derivative hedge in calculating its gross 

credit exposure to the eligible 

guarantor.115 Similarly, a covered 

company is required to shift its gross 

credit exposure from a counterparty to 

an eligible guarantor in any case where 

the covered company obtains an eligible 

equity derivative hedge that references 

the counterparty from such eligible 

guarantor. As is the case for eligible 

collateral and eligible guarantees, the 

gross exposure to the eligible guarantor 

would in no event be greater than it was 

to the original counterparty prior to 

recognition of the eligible credit or 

equity derivative.116 In cases where a 

covered company is required to shift its 

credit exposure from the counterparty to 

an eligible guarantor under the final 

rule, the covered company is permitted 

to exclude the relevant equity or credit 

derivative when calculating its gross 

exposure to the eligible guarantor. This 

is to avoid requiring covered companies 

to double count the same exposures. 

The Board also has determined not to 

make the changes requested by 

commenters to allow requiring riskshifting to protection providers that do 

not meet the definition of ‘‘eligible 

guarantor.’’ Limiting exposures to a 

large protection provider is an 

important feature of the final rule. As 

with eligible collateral and eligible 

guarantees, a covered company is 

required to reduce its gross exposure to 

a counterparty by the amount of an 

eligible equity or credit derivative, and 

to recognize an exposure to an eligible 

guarantor, in order to ensure that 

concentrations in exposures to eligible 

guarantors are captured in the regime. 

The Board believes that the quality 

and creditworthiness of the protection 

provider is an important consideration 

when assessing the likelihood that the 

purchased protection would be 

provided in the event of a large 

counterparty default. Moreover, the 

Board notes that many positions subject 

to the Board’s market risk rule represent 

mark-to-market positions that are 

intended to hedge market movement on 

a day-to-day basis and are not always 

intended to hedge against extreme 

default events. Accordingly, there is no 

inconsistency in the final rule’s 


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117 ‘‘Covered position’’ is defined in 12 CFR 

217.202. 

118The revised definition of ‘‘financial entity’’ is 

explained above. 119See proposed rule § 252.74(b)–(e). 

120See final rule § 252.74(i). 

121A credit risk mitigant would be adjusted using 

the formula Pa = P x (t ¥ 0.25)/(T ¥ 0.25), where 

Pa is the value of the credit protection adjusted for 

maturity mismatch; P is the credit protection 

adjusted for any haircuts; t is the lesser of (1) T or 

(2) the residual maturity of the credit protection, 

expressed in years; and T is the lesser of (1) 5 or 

(2) the residual maturity of the exposure, expressed 

in years. See 12 CFR 217.36(d). 

requirement that protection be 

purchased from an eligible guarantor. 

For eligible credit and equity 

derivatives that are used to hedge 

covered positions subject to the Board’s 

market risk rule (12 CFR part 217, 

subpart F),117 the approach is the same 

as that explained above, except in the 

case of credit derivatives where the 

counterparty on the hedged transaction 

is not a financial entity.118 In this case, 

a covered company is required to reduce 

its gross credit exposure to the 

counterparty on the hedged transaction 

by the notional amount of the eligible 

credit derivative that references the 

counterparty if the covered company 

obtains the derivative from an eligible 

guarantor. In addition, the covered 

company is required to recognize a 

credit exposure to the eligible guarantor 

that is measured using methodologies 

that the covered company is authorized 

to use under the Board’s risk-based 

capital rules (12 CFR part 217, subparts 

D and E), rather than the notional 

amount. 

The final rule includes this treatment 

for credit and equity derivatives that are 

used to hedge covered positions subject 

to the market risk rule, where the credit 

or equity derivative is used to hedge an 

exposure to an entity that is not a 

financial entity. The final rule requires 

full notional risk-shifting for credit 

derivatives used to hedge exposures to 

financial entities because most 

protection providers are financial 

entities, and when both the protection 

provider and the reference entity are 

financial entities, the probability of 

correlated defaults generally is 

substantially greater than when 

protection is sold on non-financial 

reference entities. 

Example: A covered company holds a 

$1,000 bond issued by a non-financial 

entity (for example, a commercial firm 

or non-excluded sovereign) that is a 

covered position subject to the Board’s 

market risk rule, and the covered 

company purchases an eligible credit 

derivative in a notional amount of $800 

from Protection Provider X, which is an 

eligible guarantor, to hedge its exposure 

to the non-financial entity. The covered 

company continues to have $200 in net 

credit exposure to the non-financial 

entity. In addition, the covered 

company would treat Protection 

Provider X as a counterparty, and would 

measure its exposure to Protection 

Provider X using any methodology that 

the covered company is permitted to use 

under the Board’s capital rules to 

calculate its risk-based capital 

requirements. 

Example: A covered company holds 

as a covered position subject to the 

Board’s market risk rule a $1,000 bond 

issued by a financial entity (for 

example, a banking organization), and 

the covered company purchases an 

eligible credit derivative in a notional 

amount of $800 from Protection 

Provider X, which is an eligible 

guarantor, to hedge its exposure to the 

financial entity. The covered company 

continues to have credit exposure of 

$200 to the underlying financial entity. 

In addition, the covered company now 

treats Protection Provider X as a 

counterparty, and has an $800 credit 

exposure to Protection Provider X. 

4. Treatment of Maturity Mismatches 

Under the proposal, if the residual 

maturity of a credit risk mitigant was 

less than that of the underlying 

exposure, the credit risk mitigant would 

only have been recognized if the credit 

risk mitigant’s original maturity were 

equal to or greater than one year and its 

residual maturity were not less than 

three months from the current date.119

In that case, the reduction in the 

underlying exposure would have been 

adjusted based on the same approach 

that is used in the Board’s capital rules 

(12 CFR part 217) to address a maturity 

mismatch. 

Commenters argued that credit and 

equity derivatives that are covered 

positions under the Board’s market risk 

rule should not be subject to the 

maturity mismatch adjustments. These 

commenters argued that, in the trading 

book, maturity of purchased protection 

is less important as positions change 

frequently, are often not held to 

maturity, and additional extending 

protection can and would be purchased 

if necessary. Other commenters argued 

that no maturity mismatch should exist 

for securities financing transactions, 

consistent with the Board’s capital 

rules. 

The Board has determined not to 

make the changes to the proposal 

recommended by commenters. The 

SCCL are point-in-time measures of 

exposure and generally are not designed 

to respond to anticipated future actions 

but to reflect actual credit exposure at 

the time the exposure amount is 

measured. If the residual maturity of a 

credit risk mitigant is less than that of 

the underlying exposure, the credit risk 

mitigant is only recognized under the 

final rule if the credit risk mitigant’s 

original maturity is equal to or greater 

than one year and its residual maturity 

is not less than three months from the 

current date.120 In that case, the 

reduction in the underlying exposure 

would be adjusted based on the same 

approach that is used in the Board’s 

capital rules (12 CFR part 217) to 

address a maturity mismatch.121

With respect to the amount of 

exposure that a covered company is 

required to recognize to the issuer of 

eligible collateral or to an eligible 

guarantor in cases of maturity 

mismatch, such amount generally is 

equal to the amount by which the 

relevant form of credit risk mitigation 

has reduced the exposure to the original 

counterparty. However, in the case of 

credit and equity derivatives used to 

hedge exposures subject to the Board’s 

market risk rule (12 CFR 217, subpart F) 

that are to counterparties that are nonfinancial entities, the covered company 

is permitted to recognize a credit 

exposure with regard to the eligible 

guarantor measured using 

methodologies that the covered 

company is authorized to use under the 

Board’s capital rules (12 CFR 217, 

subparts D and E). 

Example: A covered company makes 

a loan to a counterparty and hedges the 

resulting exposure by obtaining an 

eligible guarantee from an eligible 

guarantor. If the residual maturity of the 

guarantee were less than that of the 

loan, the covered company would adjust 

the value assigned to the guarantee 

using the formula in the Board’s capital 

rules (12 CFR part 217). The covered 

company would then reduce its gross 

credit exposure to the underlying 

counterparty by the adjusted value of 

the guarantee and would set its 

exposure to the eligible guarantor equal 

to the adjusted value of the guarantee. 

Example: A covered company holds 

bonds issued by a non-financial entity 

that are subject to the Board’s market 

risk rule, and hedges the exposure using 

an eligible credit derivative obtained 

from an eligible guarantor. If the 

residual maturity of the eligible credit 

derivative were less than that of the 

bonds, the covered company would 

reduce its exposure to the issuer of the 

bonds by the adjusted value of the credit 

derivative using the formula in the 

Board’s capital rules. The covered 


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122See final rule § 252.74(h); see also 12 CFR 

217.37(c)(3)(ii) (providing the currency mismatch 

adjustments relevant to eligible collateral); 12 CFR 

217.36(f) (providing the currency mismatch 

adjustments relevant to eligible guarantees, eligible 

credit deriatives, and eligible equity derivatives). 

123See final rule § 252.74(b)–(d). 

124See final rule § 252.74(d) & (h). 

125See proposed rule § 252.74(f). 

126See final rule § 252.74(e). 

127See proposed rule § 252.74(g). 

128 Id. 

129See final rule § 252.74(f). 

company would measure its exposure to 

the eligible guarantor using 

methodologies that the covered 

company is permitted to use under the 

Board’s capital rules (12 CFR part 217, 

subparts D and E), without any specific 

adjustment to reflect the maturity 

mismatch between the bonds and the 

credit derivative. 

5. Treatment of Currency Mismatch 

To provide additional clarity, the final 

rule includes a section regarding 

application of currency mismatch 

adjustments to certain credit risk 

mitigants—namely, eligible collateral, 

eligible guarantees, eligible equity 

derivatives, and eligible credit 

derivatives—in cases where the 

collateral or hedge is denominated in a 

different currency than the hedged 

exposure. As with several other aspects 

of the final rule, this treatment is 

consistent with the Board’s capital 

rules. This section clarifies that a 

covered company that reduces its credit 

exposure to a counterparty under the 

final rule as a result of eligible 

collateral, an eligible guarantee, an 

eligible equity derivative, or an eligible 

credit derivative must apply the 

currency mismatch adjustment 

approach in the Board’s capital rules, if 

applicable, when calculating the 

covered company’s gross credit 

exposure to the issuer of eligible 

collateral or an eligible guarantor.122 As 

noted, a covered company that reduces 

its credit exposure to a counterparty as 

a result of such credit risk mitigants 

must calculate its gross credit exposure 

to an issuer of eligible collateral or an 

eligible guarantor even in cases where 

the underlying credit transaction would 

not be subject the credit limits of the 

final rule.123

To provide additional clarity, the final 

rule includes a section regarding 

application of cross-currency haircuts to 

certain credit risk mitigants, including 

eligible credit and equity derivatives. 

This section clarifies that a covered 

company that reduces its credit 

exposure to a counterparty under the 

final rule must apply the currency 

mismatch adjustment approach in the 

Board’s capital rules (12 CFR 217.36(f)), 

if applicable, when calculating the 

covered company’s gross credit 

exposure to the eligible guarantor, 

including in instances where the 

underlying credit transaction would not 

be subject the credit limits of the final 

rule.124

6. Other Eligible Hedges 

Under the proposal, a covered 

company would have been allowed to 

reduce its credit exposure to a 

counterparty by the face amount of a 

short sale of the counterparty’s debt or 

equity securities, provided that the 

instrument in which the covered 

company has a short position was junior 

to, or pari passu with, the instrument in 

which the covered company has the 

long position.125 This restriction on the 

set of short positions permitted to offset 

long positions would have helped to 

reduce the risk that any loss arising 

from the covered company’s long 

exposure were not offset by a gain in the 

covered company’s short exposure. No 

comments were received on this aspect 

of the proposal, and the final rule 

retains the approach from the 

proposal.126

Example: A covered company holds 

$100 of bonds issued by Company X. If 

the covered company sells short $100 of 

equity shares issued by Company X, the 

covered company would not have any 

net credit exposure to Company X. 

Similarly, the covered company would 

not have any net credit exposure to 

Company X if it sells short $100 of 

Company X’s debt obligations, provided 

that those obligations are junior to, or 

pari passu with, the Company X bonds 

that the covered company holds. 

7. Unused Credit Lines 

Section 252.74(g) of the proposed rule 

addressed the calculation of the net 

credit exposure for any unused portion 

of certain extensions of credit. In 

computing its net credit exposure to a 

counterparty for a credit line or 

revolving credit facility, a covered 

company would have been permitted to 

reduce its gross credit exposure by the 

amount of the unused portion of the 

credit extension to the extent that the 

covered company did not have any legal 

obligation to advance additional funds 

under the facility until the counterparty 

provided the amount of adjusted market 

value of collateral that qualifies under 

the credit line or revolving credit 

facility with respect to the entire used 

portion of the facility.127 To qualify for 

this reduction, the credit contract 

governing the extension of credit would 

have been required to specify that any 

used portion of the credit extension 

must be fully secured at all times by 

collateral that is either (i) cash; (ii) 

obligations of the United States or its 

agencies; (iii) obligations directly and 

fully guaranteed as to principal and 

interest by, the Federal National 

Mortgage Association or the Federal 

Home Loan Mortgage Corporation, but 

only while operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency, or any 

additional obligations issued by a U.S. 

government-sponsored entity, as 

determined by the Board.128

Commenters urged the Board to 

permit the full list of eligible collateral 

to qualify for this provision. 

Commenters also requested that the 

Board allow covered companies to 

apply the same credit conversion factors 

(CCF) to unfunded, off-balance sheet 

commitments as under the Board’s 

capital rules rather than the proposed 

uniform 100 percent CCF to all such 

commitments regardless of contractual 

provisions, to better reflect actual 

economic exposure. 

Under the final rule, in calculating net 

credit exposure to a counterparty for a 

credit line or revolving credit facility, a 

covered company is permitted to reduce 

its gross credit exposure by the amount 

of the unused portion of the credit 

extension, to the extent that the covered 

company does not have any legal 

obligation to advance additional funds 

under the facility until the counterparty 

provides the amount of adjusted market 

value of eligible collateral that qualifies 

under the credit line or revolving credit 

facility with respect to the entire used 

portion of the facility.129 In response to 

comments, this provision has been 

modified to make clear that any form of 

eligible collateral as defined in the final 

rule (and described above) can be used 

as collateral for this purpose. To ensure 

that the methodology is simple and 

transparent and reflects the true value of 

the exposure, the final rule does not, 

however, include credit conversion 

factors similar to the Board’s capital 

rules. 

8. Credit Transactions Involving Exempt 

and Excluded Persons 

Under the proposed rule, if a covered 

company obtained eligible collateral 

from an entity that would have been 

exempt or excluded from the SCCL (e.g., 

the U.S. government or a foreign 

sovereign entity that receives a zero 

percent risk weight under the Board’s 

capital rules), or obtained an eligible 

guarantee or an eligible credit or equity 

derivative from an eligible protection 

provider on an exposure to an exempt 


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130See proposed rule § 252.74(g). 

131See final rule § 252.74(g). As noted, the final 

rule replaces the term ‘‘eligible protection provider’’ 

with ‘‘eligible guarantor,’’ as that is the term used 

in the Board’s capital rules. The definition of the 

term in the final rule is unchanged from the 

proposal. 

132See proposed rule § 252.75(a). 

133See proposed rule § 252.75(a)(3). The Board 

notes that a covered company’s exposure to each 

underlying asset in an SPV necessarily would be 

less than 0.25 percent of the covered company’s tier 

1 capital if the covered company’s entire 

investment in the SPV is less than 0.25 percent of 

the covered company’s tier 1 capital. 

134See proposed rule § 252.75(a)(2). 

135See id. 

136See proposed rule § 252.75(b)(3)(i). 

137See proposed rule § 252.75(b)(3)(ii). 138See, e.g., 15 U.S.C. 80a–5(b)(1). 

or excluded entity, the covered 

company would have been required to 

recognize an exposure to the collateral 

issuer or eligible protection provider to 

the same extent as if the underlying 

exposure were to an entity that is not 

exempt.130 The Board did not receive 

comments on this aspect of the 

proposal, and the final rule follows the 

same approach to exempt and excluded 

entities as the proposal.131

Example: A covered company has 

purchased a credit derivative from an 

eligible guarantor to hedge the credit 

risk on a portfolio of U.S. government 

bonds. The covered company needs to 

recognize an exposure to the credit 

protection provider equal to the full 

notional of the credit derivative (if the 

bonds are subject to the Board’s riskbased capital rules in 12 CFR part 217, 

subparts D and E) or to the counterparty 

credit risk measurements obtained by 

using methodologies that the covered 

company is permitted to use under the 

market risk capital rules (if the bonds 

are subject to the Board’s market risk 

rule in 12 CFR part 217, subpart F). 

E. Exposures to Securitization Funds, 

Investment Funds, or Other Special 

Purpose Vehicles 

1. Look-Through Approach 

Special considerations arise in 

connection with measuring credit 

exposures of a covered company to a 

securitization fund, investment fund, or 

other special purpose vehicle 

(collectively, ‘‘SPVs’’). Under the 

proposed rule, large covered companies 

would have been required to analyze 

their credit exposure to the issuers of 

the underlying assets in an SPV in 

which the large covered company 

invests or to which the large covered 

company otherwise has credit 

exposure.132 If such company was able 

to demonstrate that its exposure to each 

underlying asset in an SPV were less 

than 0.25 percent of its tier 1 capital 

(considering only exposures that arise 

from the SPV), then the covered 

company would have been allowed to 

recognize an exposure solely to the SPV 

and not to the underlying assets.133

Conversely, if a large covered company 

was not able to demonstrate that its 

exposure to the issuer of each 

underlying asset held by an SPV were 

less than 0.25 percent of the covered 

company’s tier 1 capital, then the 

company would have been required to 

apply a ‘‘look-through approach’’ and 

recognize an exposure to each issuer of 

the assets held by the SPV that exceeded 

0.25 percent of its tier 1 capital.134 In 

the latter case, if a large covered 

company were required to apply the 

look-through approach, but was unable 

to identify an issuer of assets underlying 

an SPV, the covered company would 

have been required to attribute the 

exposure to a single ‘‘unknown 

counterparty’’ and aggregate all 

exposures to such unknown 

counterparties to a single 

counterparty.135

The application of the look-through 

approach would have depended on the 

nature of the investment of the covered 

company in the SPV. Where all 

investors in an SPV are pari passu, the 

covered company would have 

calculated its exposure to an issuer of 

assets held by the SPV as an amount 

equal to the covered company’s pro rata 

share in the SPV multiplied by the value 

of the SPV’s underlying assets issued by 

that issuer.136 Otherwise, where the 

investors do not rank pari passu, then 

the exposure to an issuer would have 

been calculated as the lower of either 

the value of the tranche in which the 

covered company has invested or the 

value of each asset attributed to the 

issuer—then multiplied by the covered 

company’s pro rata share.137

While one commenter expressed 

support for the look-through 

requirement, a number of commenters 

expressed the view that the lookthrough approach was overbroad, 

complex, and unworkable as proposed. 

Commenters requested a number of 

modifications related to the proposal’s 

look-through approach. Commenters 

urged the Board to clarify the scope of 

the look-through requirement. In 

particular, commenters argued that the 

look-through approach should only 

apply to exposures arising from cash 

investments in a securitization vehicle, 

investment fund, or other SPV and 

synthetic positions, such as derivative 

contracts or other instruments, that 

mirror the economics of a cash 

investment that are held in the banking 

book and exposures arising from 

extensions of credit and liquidity 

facilities that mimic the risks of such 

cash investments and that exceed 0.25 

percent of the large covered company’s 

tier 1 capital. A few commenters urged 

clarification that the look-through 

approach would not extend to 

exposures resulting from the provision 

of traditional custody services to an 

investment fund client, including 

payment, settlement, and asset 

administration. Certain commenters 

expressed concerns that covered 

companies would have to attribute 

excessive exposures to a single 

unknown counterparty, which could 

chill investment in funds and vehicles. 

Commenters requested clarification as 

to whether the attribution to a single 

unknown counterparty was required for 

a covered company’s entire exposure to 

a securitization vehicle or merely the 

portion that it is unable to link back to 

an individual issuer. 

Certain commenters argued that the 

Board should adopt a more risk-based 

approach to the look-through 

requirement by only requiring the lookthrough to underlying assets for which 

the exposure value is at least 0.25 

percent of the company’s tier 1 capital 

(the partial look-through approach 

available under the large exposure 

standard). These commenters also 

requested that the look-through be 

undertaken at less frequent intervals 

(e.g., monthly or when asset-level 

disclosures are publicly filed) and using 

the most recently available information. 

Some commenters urged the Board to 

eliminate the requirement that 

exposures be attributed to a single, 

unknown counterparty across all SPVs 

when a large covered company is unable 

to identify each issuer of assets. 

Commenters requested that the final 

rule exempt from the look-through 

requirement exposures such as retail 

asset-backed securities (including those 

funds or vehicles backed by credit card 

receivables, auto-loans, and residential 

mortgages), pools of finance receivables 

in which the underlying assets are 

comprised of small business borrower 

receivables (such as equipment loans 

and leases, trade receivables, and loans 

to auto dealers), and commercial 

mortgage-backed securities. 

Commenters also argued that 

investment funds registered under the 

Investment Company Act of 1940 (or 

governed by similar legislation in other 

jurisdictions) should be exempt based 

on the stringent diversification 

requirements to which such funds are 

subject.138 Commenters argued that it is 

unlikely that any of the underlying 

assets would materially contribute to a 


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139See final rule § 252.75(b)(1). 140See final rule § 252.75(a)(3)(iii). 

covered company’s exposure to a given 

counterparty given the granular nature 

of such assets. 

Some commenters recommended that 

the Board exclude exposures from the 

look-through requirement that are 

required under other legal standards, 

such as the risk retention rule, since 

these exposures cannot be sold down. 

Commenters contended that the 

significant practical challenges of 

complying with the proposal could 

result in covered companies not 

investing in SPVs which could have a 

negative effect on credit markets. For 

example, certain commenters argued 

that covered companies may not have 

access to information at the frequency 

and level of granularity required. 

In order to address the concerns 

raised by commenters, the Board has 

narrowed the scope of the look-through 

approach and reduced the burden of its 

implementation. The final rule requires 

application of the look-through 

approach only to individual underlying 

assets for which the exposure value is 

at least 0.25 percent of the company’s 

tier 1 capital, even in cases where the 

covered company cannot demonstrate 

that each underlying asset in an SPV is 

less than 0.25 percent of the covered 

company’s tier 1 capital. This approach 

is referred to as the partial look-through 

in this SUPPLEMENTARY INFORMATION.139

The Board has not modified the lookthrough approach to exclude explicitly 

certain types of SPVs. However, certain 

information provided by commenters 

(e.g., that some retail exposures are 

unlikely to have large underlying 

exposures) bears on the potential 

compliance burden of the look-through 

and partial look-through approaches. In 

particular, covered companies may be 

able to ascertain that an SPV does not 

contain any exposures greater than or 

equal to 0.25 percent of tier 1 capital 

based on characteristics of the SPV 

without having to measure each specific 

exposure within the SPV. 

Finally, to address the concerns that 

covered companies may not have access 

to information at the frequency and 

level of granularity required, the final 

rule allows covered companies to rely in 

good faith on the most recent available 

information. In other words, covered 

companies are allowed to fill in any 

missing values to the best of their ability 

(i.e., in a reasonable manner and based 

on the most recently available 

information). 

Example: An SPV holds $10 of bonds 

issued by Company A, $10 of bonds 

issued by Company B, and $20 of bonds 

issued by Company C. Assume that all 

investors in the SPV are pari passu and 

that a covered company’s pro rata share 

in the SPV is 50 percent. Assume 

further that the ratio of the covered 

company’s pro rata investment in each 

bond (A, B, C) to its tier 1 capital is 0.26 

percent, 0.26 percent, and 0.52 percent. 

The covered company needs to 

recognize a $5 exposure to Company A 

and Company B (i.e., 50 percent of $10) 

and a $10 exposure to Company C (i.e., 

50 percent of $20). 

The foregoing example considers a 

case in which all of the underlying 

investments are at least 0.25 percent of 

the covered company’s tier 1 capital. 

The following example illustrates 

application of the partial look-through 

approach. 

Example: An SPV holds $10 of bonds 

issued by Company A, $10 of bonds 

issued by Company B, and $20 of bonds 

issued by Company C. Assume that all 

investors in the SPV are pari passu and 

that a covered company’s pro rata share 

in the SPV is 50 percent. Assume 

further that the ratio of the covered 

company’s pro rata investment in each 

bond (A, B, C) to its tier 1 capital is 0.24 

percent, 0.24 percent, and 0.48 percent. 

The covered company needs to 

recognize a $10 exposure to the SPV 

(i.e., 50 percent of the $10 exposure to 

Company A plus 50 percent of the $10 

exposure to Company B). Note that the 

covered company only recognizes the 

exposure to the SPV—and not 

individually to Companies A and B— 

because those two exposures are under 

0.25 percent of tier 1 capital. Finally, 

the covered company must recognize a 

$10 exposure to Company C (i.e., 50 

percent of the $20 exposure to Company 

C), as the exposure to Company C is 

above 0.25 percent of tier 1 capital. 

The previous two examples consider 

situations in which the covered 

company can identify the counterparty 

associated with each underlying 

investment in the SPV. In certain cases, 

a covered company may not be able to 

identify the counterparty in each 

underlying investment of the SPV. In 

such cases, the underlying investments 

must be allocated to an unknown 

counterparty if the pro rata size of the 

investment exceeds 0.25 percent of tier 

1 capital, as demonstrated in the 

following example.140

Example: An SPV holds $10 of bonds 

issued by one unidentified company, 

$14 of bonds issued by another 

unidentified company, and $20 of bonds 

issued by a third unidentified company. 

Assume that all investors in the SPV are 

pari passu and that a covered 

company’s pro rata share in the SPV is 

50 percent. Assume further that the ratio 

of the covered company’s pro rata 

investment in each bond (A, B, C) to its 

tier 1 capital is 0.24 percent, 0.34 

percent, and 0.48 percent. A covered 

company would need to recognize a $5 

exposure to the SPV (i.e., 50 percent of 

the $10 exposure to the first 

unidentified company) and a $17 

exposure to an unknown counterparty 

(i.e., 50 percent of the $14 exposure to 

the second unidentified company and 

50 percent of the $20 exposure to the 

third unidentified company). 

Note that the example above applies 

both the partial look-through approach, 

as the exposure to the first unidentified 

company is allocated to the SPV since 

it represents less than 0.25 percent of 

tier 1 capital, and the unknown 

counterparty treatment since the 

exposures to the second and third 

unknown companies are allocated to a 

single unknown counterparty, as each 

pro rata investment in the second and 

third investment exceeds 0.25 percent of 

the covered company’s tier 1 capital. 

Finally, note that the foregoing example 

only considers a single SPV and 

accordingly the effect of applying the 

unknown counterparty treatment is to 

allocate some portion of the underlying 

investments of the SPV to a single 

unknown counterparty. To the extent 

that a covered company cannot identify 

the counterparty associated with several 

underlying investments across several 

SPVs, all of these unidentified 

investments must be allocated to a 

single unknown counterparty to the 

extent that the pro rata size of each 

investment exceeded 0.25 percent of the 

covered company’s tier 1 capital. 

If all investors in an SPV are not pari 

passu, a covered company that is 

required to use the look-through 

approach would measure its exposure to 

an issuer of assets held by the SPV for 

each tranche in the SPV in which the 

covered company invests. The covered 

company would do this using a two-step 

process. First, the covered company 

would assume that the total exposure to 

an issuer of assets held by the SPV 

among all investors in a given SPV 

tranche is equal to the lesser of the 

value of the tranche and the value of the 

assets issued by the issuer that are held 

by the SPV. Second, the covered 

company would multiply this exposure 

amount by the percentage of the SPV 

tranche that the covered company 

holds. 

Example: An SPV holds $10 of bonds 

issued by Company A. The SPV has 

issued $4 of junior notes and $6 of 

senior notes to the SPV’s investors. A 

covered company holds 50 percent of 

the junior notes and 50 percent of the 


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141See proposed rule § 252.75(c). 

142See proposed rule § 252.75(c)(1). 

143See final rule § 252.75(c)(1). 

144See proposed rule § 252.75(c)(2). 

145See final rule § 252.75(c)(2). 

146See proposed rule § 252.76. 

147See proposed rule § 252.76(a). 

148See proposed rule § 252.76(b). 

149See final rule § 252.76(b). 

senior notes. With respect to the junior 

tranche of the SPV, the lesser of the 

value of the tranche (i.e., $4) and the 

value of the underlying assets issued by 

Company A (i.e., $10) is $4. With 

respect to the senior tranche of the SPV, 

the lesser of the value of the tranche 

(i.e., $6) and the value of the underlying 

assets issued by Company A (i.e., $10) 

is $6. Because the covered company’s 

pro rata share of each tranche is 50 

percent, it would need to recognize $2 

of exposure to Company A because of its 

investment in the junior tranche (i.e., 50 

percent of $4), and $3 of exposure to 

Company A because of its investment in 

the senior tranche (i.e., 50 percent of 

$6), assuming the look-through 

approach is required. 

2. Aggregation of Exposures to Certain 

Third Parties 

Under the proposal, a large covered 

company would have been required to 

recognize a gross credit exposure to 

each third party with a contractual or 

other business relationship with an SPV 

whose failure or material financial 

distress would cause a loss in the value 

of the covered company’s investment in 

or exposure to the SPV.141 A covered 

company would have been required to 

recognize gross credit exposure to such 

a third party in addition to the covered 

company’s gross credit exposure to an 

SPV. 

A number of commenters urged the 

Board to eliminate the third-party 

exposure requirement. Commenters 

argued that this requirement would 

have required a covered company to 

recognize additional exposures without 

a consideration of the actual amount of 

risk to which the covered company is 

exposed as a result of such exposures. 

Commenters contended that the 

requirement under the proposal 

referenced a ‘‘loss’’ to a covered 

company’s investment in a 

securitization vehicle or investment 

fund without reference to the 

materiality of such an investment 

relative to the covered company. 

Moreover, commenters argued that the 

proposal did not limit in any manner 

the universe of third parties, which 

could make it impossible for a covered 

company to identify all relevant third 

parties. As an alternative to eliminating 

this requirement, commenters urged the 

Board to limit this requirement to third 

parties that provide credit support or 

liquidity facilities to an SPV and only 

apply the requirement where the large 

covered company’s investment in the 

vehicle exceeds 0.25 percent of its tier 

1 capital, consistent with the lookthrough requirement. Commenters 

further argued that this requirement 

should only be on a reasonable ‘‘best 

efforts’’ basis, because covered 

companies may lack access to 

information to comply with this 

requirement (e.g., a covered company 

may not know the identity of currency 

or interest rate providers). Commenters 

noted that in any case this requirement 

would overstate exposures by requiring 

a covered company to recognize an 

exposure to two different parties: The 

SPV and the third-party credit provider 

to the SPV. 

The Board has modified the final rule 

to address the concerns raised by 

commenters, thereby reducing burden 

on covered companies. First, the Board 

has narrowed the scope of the 

requirement. The proposed rule would 

have applied to third parties that have 

a contractual or other business 

relationship with an SPV.142 Based on 

suggestions from commenters, the final 

rule applies solely to third parties that 

have a contractual obligation to provide 

credit or liquidity support to an SPV.143

Second, the final rule explicitly limits 

the exposure that a covered company 

has to attribute to a third party under 

this requirement. The proposed rule 

would have required a large covered 

company to recognize an exposure to 

the third party in an amount equal to 

the large covered company’s exposure to 

the SPV.144 The final rule caps the 

recognized exposure to the maximum 

contractual obligation of that third party 

to the SPV.145 This should mitigate the 

concern that the requirement would 

have required a covered company to 

recognize additional exposures without 

consideration of the actual amount of 

risk to which the covered company is 

exposed. 

Third, under the final rule, covered 

companies may rely in good faith on the 

most recent available information. In 

other words, covered companies are 

allowed to rely on a reasonable best 

effort in the event that they lack access 

to information to comply with this 

requirement. 

F. Aggregation of Exposures to 

Connected Counterparties 

The proposed rule would have 

required a covered company to 

aggregate counterparties based on tests 

of economic interdependence or due to 

certain control relationships.146 In cases 

where the total exposures to a single 

counterparty exceeded five percent of 

the covered company’s eligible capital 

base, the covered company would have 

had to aggregate exposures to that 

counterparty with its exposures to all 

other counterparties that are 

‘‘economically interdependent’’ with 

the first counterparty.147 The purpose of 

this proposed requirement was to limit 

a covered company’s overall credit 

exposure to two or more counterparties 

where the underlying risk of one 

counterparty’s financial distress or 

failure would cause the financial 

distress or failure of another 

counterparty. For similar reasons, under 

the proposed rule, a covered company 

would have been required to aggregate 

exposures of an unaffiliated 

counterparty with its exposures to all 

other counterparties connected by 

control relationships.148

Commenters argued that it would be 

very difficult and burdensome for 

covered companies to obtain the 

information required under the 

proposed rule to aggregate their 

counterparties on the basis of the 

economic interdependence and control 

tests. Certain commenters argued that if 

the control relationship tests were 

retained in the final rule, it should 

apply only to exposures exceeding five 

percent of the eligible capital base, 

similar to the threshold under the 

proposal for the economic 

interdependence test. Commenters 

urged the Board to make clear that any 

determinations regarding economic 

interdependence and control 

relationships, if retained in the final 

rule, would be subject to a reasonable 

inquiry standard (that is, there should 

be good faith due diligence into the 

relationship between the counterparty 

and other potentially related entities). 

Commenters also requested that the 

Board make clear these tests applied 

only within, and not across, different 

categories of counterparties (that is, the 

tests would not be used to aggregate a 

natural person with a company or a 

company with a State). 

1. Economic Interdependence 

The Board has incorporated two key 

provisions into the economic 

interdependency assessment in the final 

rule to address the concerns raised by 

commenters and to reduce burden on 

covered companies.149 First, the Board 

has revised the relevant factors to clarify 

when firms must aggregate exposures to 

counterparties. For instance, the 

proposed rule would have required a 


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150See proposed rule § 252.76(a)(2)(ii) (emphasis 

added). 

151See final rule § 252.76(b)(2)(ii) (emphasis 

added). 

152See final rule § 252.76(b)(3). 

153See final rule § 252.76(b)(3)(ii). 

154See final rule § 252.76(c)(1). For purposes of 

the final rule, one counterparty (counterparty A) is 

deemed to control the other counterparty 

(counterparty B) if (i) counterparty A owns, 

controls, or holds with the power to vote 25 percent 

or more of any class of voting securities of 

counterparty B; or (ii) counterparty A controls in 

any manner the election of a majority of the 

directors, trustees, general partners (or individuals 

exercising similar functions) of counterparty B. 

155See final rule § 252.76(c)(2)(i). 

156See final rule § 252.76(c)(2)(ii). 

157See final rule § 252.76(d). 

158See final rule § 252.76(e). 

covered company to consider whether a 

counterparty (counterparty A) has fully 

or partly guaranteed the credit exposure 

of another counterparty (counterparty 

B), or is liable by other means, and the 

credit exposure is significant enough 

that counterparty B is likely to default 

if presented with a claim relating to the 

guarantee or liability.150 The final rule 

reframes this standard to make it more 

concrete and more formulaic: Whether 

one counterparty has fully or partly 

guaranteed the credit exposure of the 

other counterparty, or is liable by other 

means, in an amount that is 50 percent 

or more of the covered company’s net 

credit exposure to the counterparty.151

Second, the final rule allows firms to 

request in writing a determination from 

the Board that two counterparties are 

not economically interdependent, even 

if one or more factors in the final rule 

are met.152 Upon such a request, the 

Board may grant temporary relief to the 

covered company and not require the 

covered company to aggregate one 

counterparty with another counterparty 

provided that the counterparty could 

modify its business relationships, such 

as by reducing its reliance on the other 

counterparty, and provided that such 

relief is in the public interest and is 

consistent with the purpose of the final 

rule and section 165(e).153

In addition, as under the proposal, 

this economic interdependency 

assessment in the final rule is required 

only when exposure to a counterparty 

exceeds five percent of a covered 

company’s tier 1 capital. The Board 

investigated the potential burden of the 

above requirement using supervisory 

data covering U.S. GSIBs and their 

largest credit counterparties from 2008 

to 2017. Although the specific definition 

of credit exposure in the supervisory 

data did not match precisely the 

exposure calculation that will be 

required under the final rule, the 

analysis does provide general insight 

into the frequency of large credit 

exposures. Based on this data, credit 

exposures exceeding the five-percent 

threshold occurred only 20 times per 

year since 2012, for all firms combined. 

Example: A covered company has a 

credit exposure to a bank that is equal 

to 4.5 percent of tier 1 capital. This 

covered company does not have to 

apply the economic interdependency 

test to the bank because the credit 

exposure does not exceed five percent of 

its tier 1 capital. 

Example: A covered company has 

credit exposures to both a car 

manufacturer and a tire manufacturer. 

The exposure to the car manufacturer is 

equal to 5.5 percent of its tier 1 capital. 

The exposure to the tire manufacturer is 

1.5 percent of its tier 1 capital. The tire 

manufacturer sells all of its output to 

the car manufacturer. This satisfies 

§ 252.76(b)(2)(i) of the final rule, so the 

covered company has to aggregate the 

credit exposures to both counterparties, 

which yields a total credit exposure of 

7.0 percent of its tier 1 capital. Notably, 

this example also satisfies 

§ 252.76(b)(2)(iii) of the final rule. 

Example: A covered company has 

credit exposures to a bank and an 

insurance company. The exposure to the 

bank is equal to 6.0 percent of its tier 

1 capital, or $3 billion. The exposure to 

the insurance company is 1.0 percent of 

its tier 1 capital, or $1 billion. As part 

of its business, the insurance company 

guaranteed half of the bank’s exposures 

to the covered company, i.e., $1.5 

billion. This partial guarantee of $1.5 

billion is greater than 50 percent of the 

covered company’s exposure to the 

insurance company, as $1.5 billion is 

greater than $0.5 billion. This threshold 

exceeds the standard in the final rule, 

which means the covered company 

must aggregate the exposures to the 

bank and the insurance company. 

2. Control Relationships 

Similar to the approach to 

economically interdependent 

counterparties, the Board has modified 

the control relationship tests in the final 

rule to address the concerns raised by 

commenters and to reduce burden. First, 

the control test in the final rule applies 

only when exposures exceed a threshold 

of five percent of tier 1 capital, similar 

to the economic interdependence 

standard. In practice, the likelihood of 

a counterparty exceeding this five 

percent threshold is unlikely. 

Second, covered companies will be 

required to apply only two clear control 

tests, based on 25 percent voting control 

and majority control of the board of 

directors.154

Third and finally, the final rule allows 

covered companies to request a 

determination in writing from the Board 

that two counterparties are not under 

common control, even if one or more of 

the control factors are met.155 Upon 

such a request, the Board may grant 

temporary relief to the covered company 

and not require the covered company to 

aggregate one counterparty with another 

counterparty provided that, taking into 

account the specific facts and 

circumstances, such indicia of control 

does not result in entities being 

connected by control relationships for 

purposes of the final rule, and provided 

that such relief is in the public interest 

and is consistent with the purpose of 

the final rule and section 165(e).156

Lastly, it should be noted that the 

final rule authorizes the Board to 

determine, after notice to the covered 

company and opportunity for hearing, 

that one or more counterparties of the 

covered company are economically 

interdependent or connected by control 

relationships for the purposes of this 

section, based on consideration of the 

factors in the final rule as well as related 

indicia.157 Moreover, the Board can 

determine, after notice to the covered 

company and opportunity for hearing, 

that the exposures to two counterparties 

must be aggregated to prevent evasion of 

the final rule and section 165(e).158

Example: A covered company has a 

credit exposure to a bank that is equal 

to 4.5 percent of its tier 1 capital. This 

covered company does not have to 

apply the control test because the 

exposure level does not exceed five 

percent of its tier 1 capital. 

Example: A covered company has 

credit exposures to both a bank and a 

fund that is sponsored by the bank. The 

exposure to the bank is equal to 6.5 

percent of its tier 1 capital. The 

exposure to the fund is 2.0 percent of its 

tier 1 capital. The bank does not own, 

control, or hold the power to vote 25 

percent or more of any class of voting 

securities of the fund; however, the 

bank does have the ability to appoint a 

majority of the directors of the fund. 

Under the final rule, this covered 

company is required to aggregate its 

credit exposures to the fund with its 

credit exposures to the bank, which 

yields 8.5 percent of its tier 1 capital. 

G. Exemptions 

Section 165(e)(6) of the Dodd-Frank 

Act states that the Board may, by 

regulation or order, exempt transactions, 

in whole or in part, from the definition 

of the term ‘‘credit exposure’’ for 

purposes of that subsection, if the Board 


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159See 12 U.S.C. 5365(e)(6). 

160See proposed rule § 252.77(a). 

161See proposed rule § 252.77(b). 

162See final rule § 252.77. 

163See final rule § 252.77(a)(1). 

164See 12 CFR 244.8. 

165See final rule § 252.77(a)(2). 

166See final rule § 252.77(a)(3). Qualifying central 

counterparty is defined to have the same meaning 

as in § 217.2 of the Board’s risk-based capital rules. 

See final rule § 252.71(bb); See also 12 CFR 217.2. 

167As initial margin and excess variation margin 

posted to the QCCP and held in a segregated 

account by a third-party custodian are not subject 

to counterparty risk, these amounts would not be 

considered credit exposures under the final rule. 

168Central banks of sovereign entities would only 

be considered counterparties under the final rule if 

the central bank’s foreign sovereign entity was not 

assigned a zero percent risk weight under the 

Board’s capital rules. See final rule § 252.71(e). 

finds that the exemption is in the public 

interest and is consistent with the 

purposes of that subsection.159 The 

proposed rule would have included 

several exemptions for credit 

transactions from the SCCL, including 

(1) direct claims on, and portions of 

claims that are directly and fully 

guaranteed as to principal and interest 

by the Federal National Mortgage 

Association and the Federal Home Loan 

Mortgage Corporation, while these 

entities are operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency; (2) 

intraday credit exposure to a 

counterparty; and (3) trade exposures to 

a central counterparty that meets the 

definition of a qualifying central 

counterparty.160 The proposal also 

would have exempted any Federal 

Home Loan Bank from the definition of 

covered company.161

Many commenters expressed support 

for the proposed exemptions to 

qualifying central counterparties and for 

intraday credit exposures to a 

counterparty. Certain commenters 

requested an additional exemption for 

short-dated exposures arising from the 

provision of traditional custody services 

or, in the alternative, the 

implementation of a five-day cure 

period for such exposures. A few 

commenters requested an express 

exemption for credit exposures to the 

Federal Home Loan Banks. One 

commenter urged the Board to include 

regulatory exemptive authority in the 

final rule that would provide explicit 

flexibility for tailoring the rule for a 

particular covered company based on 

the company’s risk profile. 

Certain commenters also requested 

exemptions for multilateral banks and 

certain supranational entities, including 

the Bank of International Settlements, 

the European Central Bank, the 

European Commission, the International 

Monetary Fund, and multilateral 

development banks that are assigned a 

zero percent risk weight under the 

Board’s capital rules. One commenter 

argued it is inappropriate to exclude 

sovereign exposures to zero percent risk 

weight foreign sovereign entities, which 

can be risky. Other commenters urged 

that the exclusion for exposures to zero 

percent risk weight foreign sovereign 

entities be extended to their zero 

percent risk weight public sector 

entities. These commenters argued that 

these entities similarly pose little risk of 

default and such treatment would align 

with the determination of risk weights 

under the Board’s risk-based capital 

rules. Certain commenters requested 

that the Board allow covered companies 

to exclude any credit exposures to a 

counterparty that are deducted from 

their tier 1 capital as credit exposure 

since the covered company has already 

reduced its regulatory capital by these 

amounts. The Board’s capital rules 

require certain unconsolidated 

investments in financial institutions to 

be deducted once certain thresholds are 

reached. 

In response to comments, the Board 

has decided not to allow covered 

companies to exclude exposures that 

have been deducted from capital for two 

reasons. First, the deduction only occurs 

after a certain threshold is reached and 

so the full amount of the exposure 

cannot be excluded as only part of the 

exposure is deducted from capital. 

Second, the deduction from capital 

serves better to reflect the actual loss 

absorbing capacity of a company’s 

capital base. These deductions are 

intended to result in a more accurate 

measure of equity capital; accordingly, 

no corresponding adjustment to the 

value of the related credit exposure is 

required. 

Section 252.77 of the final rule sets 

forth additional exemptions from the 

single-counterparty credit limits.162 The 

Board has retained the exemptions from 

the proposal and added two additional 

exemptions. 

The first exemption from the final 

rule is for direct claims on, and the 

portions of claims that are directly and 

fully guaranteed as to principal and 

interest by, the Federal National 

Mortgage Association and the Federal 

Home Loan Mortgage Corporation, 

while these entities are operating under 

the conservatorship or receivership of 

the Federal Housing Finance Agency. 

This exemption reflects a policy 

decision that credit exposures to these 

government-sponsored entities should 

not be subject to a regulatory limit for 

so long as the entities are in the 

conservatorship or receivership of the 

U.S. government.163 This approach is 

consistent with the approach that the 

Board used in its risk retention rules.164

As determined by the Board, obligations 

issued by other U.S. governmentsponsored entities also would be 

exempt. 

The second exemption from the final 

rule is for intraday credit exposure to a 

counterparty.165 This exemption will 

help minimize the impact of the rule on 

the payment and settlement of financial 

transactions. The Board has declined to 

broaden this exemption as requested by 

commenters to ensure that the credit 

exposure measures accurately reflect 

actual credit exposures assumed by 

covered companies. Moreover, the 

operational and logistical difficulties 

that extend to measuring intraday credit 

extensions do not extend in the same 

manner to longer-term credit extensions. 

The third exemption from the final 

rule is for trade exposures to a central 

counterparty that meets the definition of 

a qualifying central counterparty under 

the Board’s capital rules (QCCP).166

These exposures include potential 

future exposure arising from 

transactions cleared by a QCCP and prefunded default fund contributions. The 

final rule exempts these exposures to 

QCCPs from single-counterparty credit 

limits because of the concern that 

application of single-counterparty credit 

limits to these exposures would require 

firms to spread activity across a greater 

number of CCPs, which could lead to a 

reduction in multilateral netting 

benefits.167

In response to comments, the final 

rule includes two new exemptions. The 

fourth exemption from the final rule is 

for any credit transaction with the Bank 

for International Settlements, the 

International Monetary Fund, or 

institutions that are members of the 

World Bank Group (namely, the 

International Bank for Reconstruction 

and Development, the International 

Finance Corporation, the International 

Development Association, the 

Multilateral Investment Guarantee 

Agency, and the International Centre for 

Settlement of Investment Disputes). 

Although the Bank for International 

Settlements is not itself a central bank 

of any sovereign entity, the membership 

of the Bank for International Settlements 

is comprised entirely of central banks of 

sovereign entities, which are generally 

not defined as counterparties in the 

final rule.168 With respect to the other 

entities, the Board notes that the United 

States is a shareholder or contributing 

member of each of those entities, along 

with other sovereign entities. In light of 


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169See 12 U.S.C. 5365(e)(6); final rule 

§ 252.77(a)(6). 

170See final rule § 252.78(a)(1). 

171See final rule § 252.78(a)(2). 

172See proposed rule § 252.78(c). 

173This period could have been adjusted by the 

Board as appropriate to preserve the safety and 

soundness of the covered company or U.S. financial 

stability. Id. 

174 Id. 

175See proposed rule § 252.78(d). 

176See final rule § 252.78(c)(2). The factors are (i) 

a decrease in the covered company’s capital stock 

and surplus; (ii) the merger of the covered company 

with another covered company; (iii) a merger of two 

Continued 

the generally high-credit quality of these 

institutions and considering that each 

has a membership structure comprised 

of a significant proportion of sovereign 

entities or agencies with strong 

creditworthiness, the Board is of the 

view that this treatment is appropriate. 

The fifth exemption from the final rule 

is for any credit transaction with the 

European Commission or European 

Central Bank. These international 

organizations share many features of 

sovereign entities that have been 

excluded from the final SCCL rule, 

including the assignment of a zero 

percent risk weight under the Board’s 

capital rules. The Board believes that 

these exemptions are in the public 

interest, given the public purpose of 

each of these entities, and given the low 

credit risk of these entities, are 

consistent with the purposes of section 

165(e) and this final rule. Accordingly, 

for the reasons discussed above and in 

the proposal, the Board has determined 

that each of these exemptions is in the 

public interest and is consistent with 

the purpose of section 165(e). 

The sixth exemption category 

implements section 165(e)(6) of the 

Dodd-Frank Act and provides a catch-all 

category to exempt any transaction 

which the Board determines to be in the 

public interest and consistent with the 

purposes of section 165(e).169

Section 252.77(b) of the final rule 

implements section 165(e)(6) of the 

Dodd-Frank Act, which provides a 

statutory exemption for the Federal 

Home Loan Banks. The Board views 

section 165(e)(6) as providing an 

exemption for Federal Home Loan 

Banks from the definition of covered 

company but as not providing an 

exemption for a covered company’s 

credit exposure to the Federal Home 

Loan Banks. As such, a covered 

company’s exposure to a Federal Home 

Loan Bank is subject to the SCCL in the 

final rule. 

H. Compliance and Timing of 

Applicability 

1. Scope of Compliance 

Under the proposed rule, a covered 

company with $250 billion or more in 

total consolidated assets would have 

been required to comply with the 

requirements of the proposed rule on a 

daily basis. These covered companies 

also would have been required to 

submit a monthly compliance report to 

the Board. 

Certain commenters requested 

clarification that the daily compliance 

requirement for a covered company 

should be based on the most recent 

information available with respect to 

counterparties, consistent with the 

company’s internal risk management 

processes, and not on information that 

is updated on a daily basis. Other 

commenters believed that daily 

compliance constitutes a significant 

operational challenge, especially with 

respect to the look-through approach for 

SPVs. These commenters noted that the 

composition of SPVs is typically 

reported only on a monthly or less 

frequent basis. To address these 

concerns, the final rule allows covered 

companies to rely in good faith on the 

most recent available information about 

an SPV. For example, consistent with 

the final rule, a covered company may 

fill in values, in a reasonable manner, 

based on available information. 

Similar to the proposal, under 

§ 252.78(a) of the final rule, a covered 

company is required to comply with the 

requirements on a daily basis, as of the 

end of each business day.170 To address 

commenters’ concerns regarding the 

ability to access certain information 

(including information regarding SPVs), 

the final rule allows covered companies 

to rely in good faith on the most recent 

available information. In other words, 

covered companies are allowed to fill in 

missing values, in a reasonable manner, 

based on available information. In 

addition, under the final rule, a covered 

company must report its compliance to 

the Federal Reserve on a quarterly basis, 

as of the end of the quarter, rather than 

a monthly basis, unless the Board 

determines and notifies that company in 

writing that more frequent reporting is 

required.171

The Board has approved proposed 

forms, published elsewhere in this issue 

of the Federal Register, for covered 

companies to report credit exposures to 

their counterparties as those credit 

exposures would be measured under the 

final rule and section 165(e). The 

comment period on the proposed 

reporting expires on October 5, 2018. 

2. Noncompliance 

Section 252.78(c) of the proposed rule 

addressed the consequences if a covered 

company were to fail to comply with the 

credit exposure limits.172 The proposed 

rule stated that, if a covered company 

were not in compliance with respect to 

a counterparty due to any of four 

factors—(1) a decrease in the covered 

company’s capital stock and surplus; (2) 

the merger of the covered company with 

another covered company; (3) a merger 

of two unaffiliated counterparties; or (4) 

any other circumstance the Board 

determines is appropriate—then the 

covered company would not have been 

subject to enforcement actions with 

respect to such noncompliance for a 

period of 90 days,173 so long as the 

company were to use reasonable efforts 

to return to compliance with the 

proposed rule during this period. The 

covered company would have been 

prohibited from engaging in any 

additional credit transactions with such 

a counterparty in contravention of this 

requirement during the noncompliance 

period, except in cases where the Board 

determined that such additional credit 

transactions were necessary or 

appropriate to preserve the safety and 

soundness of the covered company or 

financial stability.174 In granting 

approval for any such special temporary 

exceptions, the Board could have 

imposed supervisory oversight and 

reporting measures that it determined 

would have been appropriate to monitor 

compliance with the foregoing 

standards.175

A number of commenters suggested 

broadening the cure period to mitigate 

potential disruptions to proper market 

activities. In particular, these 

commenters requested that the cure 

period be broadened to apply to any 

breach that is beyond the covered 

company’s control and could be 

reasonably remediated within the 90- 

day period. Commenters also requested 

appropriate transition periods if an 

exposure or counterparty changes status 

or loses an exemption under the final 

rule (e.g., if a sovereign’s risk-weight 

increases or if a qualifying central 

counterparty loses its status). A few 

commenters suggested that any breaches 

of the proposal’s credit exposure limits 

should be promptly reported to the 

Board. 

To address the concerns of 

commenters, the final rule includes an 

additional factor for relief during a 

period of noncompliance: An 

unforeseen and abrupt change in the 

status of a counterparty as a result of 

which the covered company’s credit 

exposure to the counterparty becomes 

limited by the requirements of this 

section.176 Along with the proposed 


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unaffiliated counterparties; (iv) an unforeseen and 

abrupt change in the status of a counterparty as a 

result of which the covered company’s credit 

exposure to the counterparty becomes limited by 

the requirements of this section; or (v) any other 

factor(s) the Board determines, in its discretion, is 

appropriate. 

177This prong is § 252.78(c)(4) in the proposed 

rule and § 252.78(c)(2) in the final rule. 

178See proposed rule § 252.70(g)(2). 

179See proposed rule § 252.70(h). 

180Section 252.78(a) of the proposal would have 

required covered companies to comply with the 

requirements on a daily basis at the end of each 

business day and submit on a monthly basis a 

report demonstrating its daily compliance. The 

preamble to the proposal explained that the Board 

plans to develop reporting forms for covered 

companies to use to report credit exposures to their 

counterparties as those exposures would be 

measured under rules implementing section 165(e) 

of the Dodd-Frank Act. 81 FR at 14344 (Mar. 16, 

2016). 

181See final rule § 252.70(c)(1)(ii). 

182See final rule § 252.70(c)(1)(i). A covered 

company that becomes subject to the final rule after 

its effective date is also given two years from the 

date on which it becomes a covered company to 

comply, unless that time is accelerated or extended 

by the Board in writing. See final rule 

§ 252.70(c)(2). The Board may, for instance, exercise 

its discretion to apply the SCCL to a covered 

company in a period of less than two years if the 

Board determined that there was a rapid expansion 

of risk in that company. 

183See Enhanced Prudential Standards for Bank 

Holding Companies and Foreign Banking 

Organizations, 79 FR 17240 (Mar. 27, 2014). The 

definition of ‘‘foreign banking organization’’ is the 

same as in section 211.21(o) of the Board’s 

Regulation K (12 CFR 211.21(o)), provided that, if 

the top-tier foreign banking organization is 

incorporated in or organized under the laws of any 

State, the foreign banking organization shall not be 

treated as a foreign banking organization for 

purposes of this part. See 12 CFR 252.2(j). 

184An FBO’s U.S. IHC is not required to hold the 

FBO’s interest in any company held under section 

2(h)(2) of the BHC Act, 12 U.S.C. 1841(h)(2). 

185 12 U.S.C. 1841(h)(2). 

186See 12 U.S.C. 5365(b)(2). 

187See, e.g., 12 U.S.C. 5365(b)(2)(B). 

discretionary factor (‘‘[a]ny other 

factor(s) the Board determines, in its 

discretion, is appropriate’’),177 this 

factor should sufficiently broaden the 

scope of the cure period to mitigate the 

risk of an enforcement action due to 

circumstances outside the control of the 

covered company. 

3. Initial Applicability and Ongoing 

Applicability 

Under the proposed rule, covered 

companies with $250 billion or more in 

total consolidated assets would have 

been required to comply one year from 

the effective date of the rule, unless that 

time were extended by the Board in 

writing.178 In addition, under the 

proposed rule, any company that 

becomes a covered company after the 

effective date of the rule would have 

been required to comply with the 

requirements of the rule beginning on 

the first day of the fifth calendar quarter 

after it becomes a covered company, 

unless that time were accelerated or 

extended by the Board in writing.179

A number of commenters urged the 

Board to provide covered companies 

additional time to comply with the 

requirements of the final rule. Most of 

these commenters argued that two years 

from the date the applicable reporting 

form is finalized is the minimum 

amount of time covered companies 

would need to develop the 

infrastructure to comply with the 

requirements.180 These commenters 

pointed out that compliance with the 

final rule would entail the deployment 

of significant resources and 

development of entirely new systems 

and procedures, which would depend 

on the final rule and the associated 

reporting requirements. Moreover, 

certain commenters argued that if retail 

exposures were not exempted from the 

scope of the final rule, then a minimum 

of three years from finalization of the 

applicable reporting form would be 

necessary for covered companies to 

develop and implement systems capable 

of tracking and calculating exposures to 

millions of individual customers, their 

intermediate family members, and any 

other entities a covered company may 

be required to aggregate. 

The Board has simplified the final 

rule to address the concerns raised by 

commenters regarding the compliance 

period of the final rule. The final rule 

gives major covered companies (i.e., 

GSIBs) until January 1, 2020, to 

comply,181 and gives all other covered 

companies until July 1, 2020, to 

comply.182

III. Final Rule for Foreign Banking 

Organizations 

A. Background 

In February 2014, the Board adopted 

a final rule establishing enhanced 

prudential standards for FBOs with U.S. 

banking operations and total 

consolidated assets of $50 billion or 

more.183 Under that rule, an FBO with 

U.S. non-branch assets of $50 billion or 

more is required to form a U.S. IHC to 

hold its interests in U.S. bank and 

nonbank subsidiaries.184 An FBO’s U.S. 

IHC is subject to enhanced prudential 

standards on a consolidated basis, 

including risk-based and leverage 

capital requirements, liquidity 

requirements, and risk management 

standards. Certain enhanced prudential 

standards also apply to an FBO’s 

‘‘combined U.S. operations,’’ which 

would include an FBO’s U.S. branches 

and agencies, as well as its U.S. IHC and 

its subsidiaries. 

As with covered companies, and 

consistent with the amendments to 

section 165(e) made by EGRRCPA, the 

single-counterparty credit limits in this 

final rule would apply to the U.S. 

operations of an FBO with $250 billion 

or more in total global consolidated 

assets. The single-counterparty credit 

limits also would apply to any U.S. IHC 

of such an FBO with $50 billion or more 

in total consolidated assets. However, 

the final rule makes clear that the SCCL 

applicable to the U.S. operations of an 

FBO would not apply if an FBO certifies 

to the Board that it meets large exposure 

or SCCL standards on a consolidated 

basis established by its home country 

supervisor that are consistent with the 

large exposure standard, unless the 

Board determines, in writing, after 

notice to the FBO, that compliance with 

the final rule is required. 

B. Summary of Comments on Proposal 

for Foreign Banking Organizations 

As noted, under the proposal, an FBO 

was subject to two SCCL: One for its 

IHC measured against the IHC’s capital 

base and one for its combined U.S. 

operations (including U.S. branches) 

measured against the capital base of the 

entire FBO. With respect to an FBO’s 

combined U.S. operations (rather than 

its U.S. IHC), the proposal would have 

applied SCCL with respect to exposures 

of any U.S. branch or agency of the 

foreign banking organization; exposures 

of the U.S. subsidiaries of the foreign 

banking organization, including any 

U.S. IHC; and all subsidiaries of such 

subsidiaries (other than any companies 

held under section 2(h)(2) of the BHC 

Act).185 The U.S. IHC and the FBO 

itself, with respect to its combined U.S. 

operations, each would have been a 

‘‘covered entity’’ under the proposal. A 

number of commenters argued that 

application of SCCL to those FBOs that 

are subject to comparable large exposure 

or single-counterparty credit limit 

regimes in their home country is 

inconsistent with the statutory mandate 

to give due regard to principles of 

national treatment and competitive 

equality.186 These commenters also 

noted that certain provisions of the 

Dodd-Frank Act expressly provide for 

the recognition of comparable home 

country regulation.187 These 

commenters argued that the 

development of the large exposure 

standard made it more likely that other 

jurisdictions would have comparable 

single-counterparty credit limit regimes 

to that of section 165(e) and its 

implementing regulation. 

Commenters also argued that the 

proposal would have had a materially 

disproportionate and adverse effect on 


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188The U.S. IHC and the FBO itself, with respect 

to its combined U.S. operations, are each a ‘‘covered 

foreign entity’’ under the final rule. For improved 

clarity, the final rule uses the term ‘‘covered foreign 

entity’’ rather than the term ‘‘covered entity’’ that 

was used in the proposal. 

189See final rule § 252.170(a)(2)(i). 

190 ‘‘Global methodology’’ is defined in the 

Board’s Regulation YY as ‘‘the assessment 

methodology and the higher loss absorbency 

requirement for global systemically important banks 

issued by the Basel Committee on Banking 

Supervision, as updated from time to time.’’ 12 CFR 

252.2(o). 

191 12 U.S.C. 5365(a)(1)(B), (e); See, ‘‘Calibrating 

the Single-Counterparty Credit Limit between 

Systemically Important Financial Institutions,’’ May 

4, 2016, https://www.federalreserve.gov/about

thefed/boardmeetings/sccl-paper-20160304.pdf. 

FBOs relative to covered companies due 

to the scope of FBOs subject to the 

proposal and the existence of limits for 

both the combined U.S. operations of 

FBOs and the U.S. IHCs of FBOs. In 

particular, commenters expressed 

concern that the proposed rule would 

apply to all FBOs with $50 billion or 

more in total global consolidated assets, 

regardless of the size of their U.S. 

operations. As a result, these 

commenters contended that the 

proposal would subject FBOs to 

materially greater costs and burdens 

than their covered company 

counterparts (e.g., by requiring FBOs to 

prepare, monitor, and keep records for 

limits at multiple levels of an FBO’s 

U.S. operations). 

Further, commenters expressed the 

view that the proposal potentially could 

interfere with the safety and soundness 

and enterprise-wide risk management of 

FBOs by applying multiple, redundant, 

and inconsistent regimes for calculating 

credit exposures. Commenters also 

expressed concerns with the 

noncompliance cross-trigger to FBOs 

(that is, the prohibition against either 

the U.S. IHC or the combined U.S. 

operations of an FBO engaging in 

additional credit transactions with a 

counterparty if either entity exceeds its 

SCCL) as discriminatory and 

unwarranted. Certain commenters urged 

that, before applying SCCL to only a 

portion of the FBO’s operations, the 

Board be required to find that existing 

federal and state lending limits 

applicable to an FBO’s U.S. branches 

and agencies and comparable home 

country SCCL currently applicable to 

FBOs are not sufficient and that a lower 

SCCL is necessary to mitigate risks to 

the financial stability of the United 

States. 

In light of these concerns, some 

commenters recommended that the final 

rule apply to a U.S. IHC as if it were a 

covered company and that an FBO, with 

respect to their combined U.S. 

operations, be required to comply with 

a comparable home country SCCL 

regime consistent with the large 

exposure standard. These commenters 

noted that such an approach would 

comport with the Board’s approach to 

implementing regulatory capital and 

stress testing components and meet the 

requirements of section 165 of the 

Dodd-Frank Act. 

Commenters representing FBOs also 

expressed substantive concerns with 

many of the same issues as commenters 

representing covered companies, such 

as the definitions of ‘‘covered company’’ 

and ‘‘counterparty,’’ the look-through 

approach for SPVs, and the aggregation 

of counterparties based on the economic 

interdependence and control 

relationship tests. To address these 

concerns, the final rule for FBOs 

generally contains the same 

modifications as those described above 

for covered companies. 

C. Overview of the Final Rule for 

Foreign Banking Organizations 

As noted, the final rule retains both 

sets of proposed limits that would have 

applied to FBOs; however, also as 

noted, an FBO that is subject on a 

consolidated basis to a home country 

SCCL framework will be able to comply 

with the SCCL for its combined U.S. 

operations by certifying to the Board 

that the FBO complies with its home 

country SCCL framework. This 

modification should address, in large 

part, the concerns raised by commenters 

regarding the multiple limits applicable 

to FBOs under the proposal and mitigate 

the compliance costs of the final rule for 

FBOs subject to the requirements in the 

final rule.188

An FBO that cannot make such a 

certification would be subject to one of 

two credit exposure limits with respect 

to its U.S. operations that are tailored to 

the size and systemic footprint of the 

firm. Similar to the final rule’s 

provisions for covered companies, the 

first category of limits applies to any 

entity that is part of the combined U.S. 

operations of an FBO with total 

consolidated assets that equal or exceed 

$250 billion.189 These covered foreign 

entities would be prohibited from 

having aggregate net credit exposure to 

an unaffiliated counterparty in excess of 

25 percent of the FBO’s tier 1 capital. 

The second category of limits 

prohibits any top-tier FBO that has the 

characteristics of a GSIB under the 

global methodology 190 (major FBO) 

from having aggregate net credit 

exposure in excess of 15 percent of the 

FBO’s tier 1 capital to a major 

counterparty (a GSIB or a nonbank 

financial company supervised by the 

Board) and in excess of 25 percent of the 

FBO’s tier 1 capital to any other 

counterparty. This standard is similar to 

the standard in the final rule for covered 

companies and consistent with the 

requirements in section 165(a)(1)(B) and 

section 165(e) of the Dodd-Frank Act, as 

discussed above.191 The SCCL 

applicable to the combined U.S. 

operations of an FBO that cannot certify 

to the Board that it complies with a 

home country SCCL regime consistent 

with the large exposure standard are 

summarized in Table 3. 

TABLE 3—SINGLE-COUNTERPARTY CREDIT LIMITS APPLICABLE TO THE COMBINED U.S. OPERATIONS OF FOREIGN

BANKING ORGANIZATIONS

Category of covered foreign entity Applicable credit exposure limit 

Combined U.S. operations of FBOs with total consolidated assets that 

equal or exceed $250 billion but are not major FBOs.

Aggregate net credit exposure to a counterparty cannot exceed 25 percent of the FBO’s tier 1 capital. 

Major FBOs .............................................................................................. Aggregate net credit exposure to a major counterparty cannot exceed 

15 percent of the FBO’s tier 1 capital. 

Aggregate net credit exposure to any other counterparty cannot exceed 

25 percent of the FBO’s tier 1 capital. 

Under the final rule, as in the 

proposal, the SCCL for a U.S. IHC of 

such an FBO with total consolidated 

assets that equal or exceed $50 billion 

to a single counterparty falls into one of 

three tailored tiers. First, a U.S. IHC 

with total consolidated assets of at least 

$50 billion but less than $250 billion is 

prohibited from having aggregate net 


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192The final rule’s definition of ‘‘capital stock 

and surplus’’ with respect to a foreign banking 

organization reflects differences in international 

accounting standards. See final rule § 252.171(e). 

193See final rule § 252.171(gg). For a company 

that is not subject to applicable accounting 

standards, ‘‘subsidiary’’ includes a company that 

would have been consolidated if such principles or 

standards had applied. 

194A U.S. IHC with total consolidated assets of 

$50 billion or more but less than $250 billion 

generally would not be required to apply the 

economic interdependence or control relationship 

tests. See final rule § 252.176(a). 

195 ‘‘Global methodology’’ is defined in the 

Board’s Regulation YY as ‘‘the assessment 

methodology and the higher loss absorbency 

requirement for global systemically important banks 

issued by the Basel Committee on Banking 

Supervision, as updated from time to time.’’ 12 CFR 

252.2(o). 

196As of March 31, 2018, all U.S. IHCs had less 

than $500 billion in total consolidated assets. 

197See final rule § 252.171(p). 

credit exposure to a single counterparty 

in excess of 25 percent of the company’s 

total regulatory capital plus ALLL.192

Second, a U.S. IHC with total 

consolidated assets of $250 billion or 

more but less than $500 billion is 

prohibited from having aggregate net 

credit exposure to a single counterparty 

in excess of 25 percent of the U.S. IHC’s 

tier 1 capital. (This limit is based on tier 

1 capital for the same reasons as 

described above with respect to the 

limit applied to covered companies.) 

Third, a U.S. IHC with $500 billion or 

more in total consolidated assets is 

prohibited from having aggregate net 

credit exposure to a major counterparty 

in excess of 15 percent of the U.S. IHC’s 

tier 1 capital and faces a 25 percent of 

tier 1 capital limit for any other 

counterparty. (This 15 percent limit of 

tier 1 capital limit is premised on the 

same rationale as described above with 

respect to the 15 percent of tier 1 capital 

limit that applies to major covered 

companies.) Similar to the final rule 

applicable to covered companies, a 

‘‘major counterparty’’ is defined as a 

U.S. or foreign GSIB or a nonbank 

financial company supervised by the 

Board. These limits are summarized in 

Table 2 above. 

In determining whether a U.S. IHC 

complies with these limits, exposures of 

the U.S. IHC itself and its subsidiaries 

needs to be taken into account. Similar 

to the final rule’s requirements for 

covered companies, ‘‘subsidiary’’ is 

defined as any company that is 

consolidated by the other company 

under applicable accounting 

standards.193 Definitions of 

‘‘counterparty,’’ ‘‘affiliate,’’ and other 

related terms in the final rule also are 

similar to the final rule applicable to 

covered companies. The attribution 

requirements and application of the 

economic interdependence and control 

relationship tests also are generally the 

same as under the portions of the final 

rule applicable to covered 

companies.194

The final rule includes modifications 

in response to concerns raised by 

commenters, including comments made 

to the proposal for covered companies. 

The Board’s final rule applicable to 

covered companies and the final rule 

applicable to FBOs have been aligned to 

the extent such alignment is 

appropriate. For example, the definition 

of ‘‘covered foreign entity’’ has been 

revised in the final rule to refer to 

financial consolidation standards rather 

than concepts of BHC Act control as 

under the proposal, which also is 

consistent with the approach in the final 

rule for covered companies. Similarly, 

FBOs that are not GSIBs will have until 

July 1, 2020, to comply with its 

requirements, as is the case with 

similarly situated covered companies. 

Although the major components of 

the SCCL for foreign banking 

organizations are the same as the 

requirements applicable to covered 

companies, there are some differences 

between these requirements. For 

example, as discussed in more detail 

below, the SCCL would not apply to 

exposures of a U.S. IHC or of the 

combined U.S. operations of an FBO to 

the FBO’s home country sovereign 

entity, regardless of the risk weight 

assigned to that sovereign entity under 

the Board’s capital rules (12 CFR part 

217). 

D. Key Terminology and Concepts 

1. Major Counterparty, Major Foreign 

Banking Organization, and Major 

Intermediate Holding Company 

Under the proposal, a ‘‘major foreign 

banking organization’’ would have been 

defined to mean any FBO with total 

consolidated assets of $500 billion or 

more. Similarly, a ‘‘major U.S. 

intermediate holding company’’ would 

have been defined to mean a U.S. IHC 

with total consolidated assets of $500 

billion or more. Under the proposal, 

major foreign banking organizations and 

major U.S. IHCs would have been 

subject to the more stringent 15 percent 

of tier 1 capital limit with a major 

counterparty (defined to mean a U.S. 

GSIB, foreign GSIB, or nonbank 

financial company supervised by the 

Board). 

Some commenters argued that major 

FBOs should be defined as GSIBs, in the 

same manner as ‘‘major covered 

company’’ would have been defined in 

the proposal for covered companies. 

These commenters noted that a GSIB 

determination is based on indicators 

that correlate to an institution’s 

systemic importance rather than simply 

consideration of its size, and that basing 

the classification of FBOs and U.S. IHCs 

as ‘‘major’’ based on size alone would 

grossly overstate the systemic impact of 

these entities on the U.S. financial 

system. Some commenters suggested the 

Board define a major FBO as an FBO 

that meets the following criteria: (i) The 

FBO is a GSIB as determined by the 

Financial Stability Board; and (ii) the 

FBO is required to have an IHC for its 

U.S. operations. These commenters 

urged that major counterparties also be 

identified in this manner. 

Similar to the definition of ‘‘major 

covered company’’ with respect to 

covered companies, the final rule 

generally defines ‘‘major foreign 

banking organization’’ as a covered FBO 

that has the characteristics of a GSIB 

under the global methodology.195 This 

should address in large part 

commenters’ concerns with respect to 

FBOs. As discussed above, a U.S. IHC 

with total consolidated assets of $500 

billion or more would present 

significant risk because of both its size 

and the likelihood that such a U.S. IHC 

would have significant cross-border 

exposure.196 Therefore, the Board 

believes that a total consolidated assets 

threshold of $500 billion or more 

provides a reasonable indication of a 

U.S. IHC’s ability to impact U.S. 

financial stability while providing a 

bright-line threshold that aids 

administrability of the rule. 

2. Eligible Guarantor 

Under the proposal, ‘‘eligible 

protection provider’’ for FBOs would 

not have included the FBO or any entity 

that is an affiliate either of the U.S. IHC 

or of any part of the FBO’s combined 

U.S. operations. Commenters argued 

that the exclusion of an FBO and its 

affiliates would hinder effective 

enterprise-wide risk management. 

As noted, the final rule replaces the 

term ‘‘eligible protection provider’’ with 

‘‘eligible guarantor,’’ as that is the term 

used in the Board’s capital rules. The 

Board has decided not to extend the 

definition of eligible guarantor to the 

FBO or any entity that is an affiliate 

either of the U.S. IHC or of any part of 

the FBO’s combined U.S. operations.197

Extraterritorial application of the final 

rule is limited by excluding exposures 

of the FBO outside the U.S. IHC, or its 

combined U.S. operations, from the 

SCCL. Similarly, hedges that are 

initiated and booked by the FBO outside 

of the U.S. IHC or its combined U.S. 

operations are not subject to the SCCL. 


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198See final rule § 252.171(l). 

199See final rule §§ 252.71(e), 252.171(f). 200See final rule § 252.171(f). 201See final rule § 252.171(hh). 

202See proposed rule § 252.172. 

203An FBO that makes such a certification is 

required to provide to the Board reports relating to 

its compliance with the large exposure or SCCL 

standards of its home country supervisor 

concurrently with filing the FR Y–7Q or any 

successor report. 

204See also section 401(g) of EGRRCPA. 

Further, this approach preserves 

consistent treatment with the SCCL 

applicable to covered companies—since 

those covered companies are subject to 

SCCL on a consolidated basis, a hedge 

provided by one subsidiary to another 

subsidiary would not result in any 

reduction of credit exposure of the 

covered company. If the Board were to 

change the definition as requested, an 

FBO or U.S. IHC would be able to 

reduce its credit exposures in a way 

unavailable to covered companies. For 

these reasons, the Board has decided not 

to expand the definition of eligible 

guarantor as requested. 

3. Eligible Collateral 

The proposal would have excluded 

from ‘‘eligible collateral’’ debt and 

equity securities, including convertible 

bonds, issued by an affiliate of the U.S. 

IHC or by any part of the combined U.S. 

operations of the FBO. FBO commenters 

argued that this was discriminatory and 

noted that a similar restriction did not 

appear in the definition of eligible 

collateral for covered companies. In 

response to comments, the final rule 

applicable to covered companies 

clarifies that, with respect to application 

of the SCCL to covered companies, 

‘‘eligible collateral’’ does not include 

debt securities or equity securities 

issued by the covered company or its 

affiliate.198

Some commenters also expressed 

concern with the limitation on eligible 

collateral that would have required a 

U.S. IHC or the combined U.S. 

operations of an FBO to have a 

perfected, first priority security interest 

in the collateral. Those commenters 

argued that this requirement could 

interfere with effective enterprise-wide 

risk management and urged recognition 

of collateral where a non-U.S. branch 

has a security interest if the collateral is 

held for the benefit of the combined 

U.S. operations of the FBO. The Board 

believes that covered foreign entities 

that operate in the United States should 

be subject to creditor protections that 

are consistent with U.S. law and, 

therefore, has not modified this 

requirement. Moreover, with respect to 

exposures within the United States and 

outside an FBO’s U.S. IHC, an FBO that 

certifies that it complies on a 

consolidated basis to a home country 

SCCL regime consistent with the large 

exposure standard would be subject to 

its home country requirements, not the 

final rule, in which case a perfected, 

first priority security interest in 

collateral may not be required. 

4. Counterparty 

The final rule generally defines 

‘‘counterparty’’ in the same manner as 

the final rule that applies to covered 

companies.199 The Board received 

similar comments concerning the 

definition of ‘‘counterparty’’ in the 

proposed rule for FBOs as with the 

proposed rule for covered companies, 

and the definition has been modified in 

the final rule in the same manner and 

for the same reasons as the revised 

definition of ‘‘counterparty’’ in the final 

rule for covered companies, as 

discussed earlier. 

One key difference between this 

definition in the final rule for FBOs and 

the final rule for covered companies is 

that, with respect to an FBO, the FBO’s 

home country sovereign entity is not 

included as a counterparty, 

notwithstanding the risk weight 

assigned to that sovereign entity under 

the Board’s Regulation Q (12 CFR part 

217).200 This difference recognizes that 

an FBO’s U.S. IHC and combined U.S. 

operations may have exposures to the 

FBO’s home country sovereign entity 

that are required by home country laws 

or are necessary to facilitate the normal 

course of business for the consolidated 

FBO. The proposal included an 

exemption to exclude these exposures; 

however, in light of the fact that these 

foreign sovereign entities would not be 

considered companies formally subject 

to the requirements of section 165(e) of 

the Dodd-Frank Act, the Board believes 

it is more appropriate simply to not 

include these entities as defined 

counterparties. ‘‘Sovereign entity’’ is 

defined in the final rule, as under the 

proposal, to mean a central national 

government (including the U.S. 

government) or an agency, department, 

ministry, or central bank, but not 

including any political subdivision such 

as a state, province or municipality.201

Certain commenters requested 

clarification or confirmation that the 

home country sovereign entity 

exemption includes a sovereign’s 

agencies and instrumentalities. Since 

the definition of ‘‘sovereign entity’’ 

includes an agency, department, 

ministry or central bank, these entities 

would fall within the scope of the home 

country sovereign entity exemption. 

Some commenters requested that the 

final rule extend the scope of this 

exemption to include the sovereign’s 

political subdivisions. These 

commenters urged that there is no 

reason to treat political subdivisions 

differently from sovereign agencies and 

instrumentalities. As noted, the Board’s 

final rule applicable to covered 

companies includes a U.S. State 

(including all of its agencies, 

instrumentalities, and political 

subdivisions) as a separate counterparty 

because the severe distress or failure of 

a U.S. state or municipality could have 

effects on a covered company that are 

comparable to those caused by the 

failure of a financial firm or 

nonfinancial corporation to which the 

covered company has a large credit 

exposure. For the same reason, the 

Board includes as a separate 

counterparty political subdivisions of a 

foreign sovereign entity (including all of 

such political subdivision’s agencies 

and instrumentalities), and the final rule 

does not extend the exclusion for 

exposures to an FBO’s home country 

sovereign entity. 

E. Credit Exposure Limits 

Section 252.172 of the proposed rule 

contained the key quantitative 

limitations on credit exposure of a 

covered entity to a single 

counterparty.202 As noted, consistent 

with the final rule applied to covered 

companies and the amendments to 

section 165(e) made by EGRRCPA, the 

final rule would apply SCCL to an FBO 

with U.S. banking operations and $250 

billion or more in total global 

consolidated assets. The final rule seeks 

to limit further the burden on FBOs by 

generally permitting an FBO to comply 

with the SCCL for the combined U.S. 

operations of an FBO by certifying to the 

Board that the FBO meets large 

exposure or SCCL standards on a 

consolidated basis established by its 

home country supervisor that are 

consistent with the large exposure 

standard.203 The final rule applies the 

SCCL to any U.S. IHC with $50 billion 

or more in total consolidated assets that 

is a subsidiary of an FBO with $250 

billion or more in total global 

consolidated assets, consistent with the 

proposal and the Board’s other 

enhanced prudential standards 

applicable to U.S. IHCs.204

A number of commenters argued that 

application of SCCL to foreign banking 

organizations subject to comparable 

large exposure or single-counterparty 

credit limit regimes in their home 

country is inconsistent with the 

statutory mandate to give due regard to 


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205See 12 U.S.C. 5365(b)(2). 

206See, e.g., 12 U.S.C. 5365(b)(2)(B). 

207As noted, a U.S. IHC with total consolidated 

assets of $500 billion or more would be considered 

a ‘‘major U.S. intermediate holding company.’’ 

Although this threshold is not identical to the 

standard applied to covered companies, the Board 

believes that an entity with that level of total 

consolidated assets would present significant risk 

because of both its size and the likelihood that such 

a U.S. IHC would have significant cross-border 

exposure. As a result, it is consistent with the 

principle of national treatment to subject such U.S. 

IHCs to the same SCCL as a major covered 

company. 208 12 U.S.C. 5365(b)(2). 

the principle of national treatment and 

competitive equality.205 These 

commenters noted that certain 

provisions of the Dodd-Frank Act 

expressly provide for the recognition of 

comparable home country regulation,206

and contended that more jurisdictions 

are likely to have comparable singlecounterparty credit limit regimes 

following development of the large 

exposure standard. 

The principle of national treatment 

and equality of competitive opportunity 

generally means that FBOs operating in 

the United States should be treated no 

less favorably than similarly situated 

U.S. banking organizations and should 

generally be subject to the same 

restrictions and obligations in the 

United States as those that apply to the 

domestic operations of U.S. banking 

organizations. The final rule generally 

applies SCCL to FBOs in the same 

manner as to covered companies, 

consistent with the principle of national 

treatment and equality of competitive 

opportunity. In particular, the final rule 

uses the same total consolidated assets 

threshold of $250 billion or more for 

both covered companies and FBOs, and 

both covered companies and FBOs are 

designated as ‘‘major covered 

companies’’ and ‘‘major foreign banking 

organizations’’ based on whether those 

firms have certain characteristics of 

GSIBs.207 The final rule’s application of 

SCCL to U.S. IHCs is tailored such that 

U.S. IHCs of similar size to covered 

companies are subject to the same 

SCCL. Although the final rule for FBOs 

differs from the final rule for covered 

companies by applying SCCL to U.S. 

IHCs with total consolidated assets of at 

least $50 billion but less than $250 

billion, the SCCL applicable to this 

category of companies is tailored 

relative to covered companies (a limit of 

25 percent of capital stock and surplus 

rather than a limit of 25 percent of tier 

1 capital). Furthermore, application of 

the SCCL to these U.S. IHCs promotes 

equality of competitive opportunity, 

since they represent one portion of a 

significantly larger banking 

organization. 

In addition, the final rule also does 

not include as a counterparty the home 

country sovereign entity of an FBO, 

without regard to the risk weight that 

applies to the sovereign. This treatment 

is consistent with the exclusion of 

exposures to the U.S. government from 

the final rule. Finally, as noted, the final 

rule permits FBOs to comply with the 

SCCL for their combined U.S. 

operations by certifying to the Board 

that the FBO meets large exposure or 

SCCL standards on a consolidated basis 

established by its home country 

supervisor that are consistent with the 

large exposure standard. This option 

should avoid subjecting an FBO to 

duplicative SCCL standards. For all 

these reasons, the Board believes it is 

providing due regard to the principles of 

national treatment and equality of 

competitive opportunity in applying 

SCCL to FBOs through this final rule.208

As noted, the Board is developing a 

comprehensive proposal on application 

of enhanced prudential standards to 

FBOs with total consolidated assets of at 

least $100 billion but less than $250 

billion, including any subsidiary U.S. 

IHC. In connection with this proposal 

and other tailoring and implementation 

efforts related to EGRRCPA, the Board 

may make amendments to the SCCL 

framework in this final rule. 

F. Gross Credit Exposure 

Under the proposed rule, a covered 

entity would have been permitted to 

calculate gross exposure to certain 

derivative transactions using any 

methodology that it is permitted to use 

under the Board’s capital rules, 

including IMM. This treatment would 

have been the same as the proposed 

treatment of covered companies. FBO 

commenters expressed support for the 

proposal’s flexibility in permitting use 

of IMM that have been approved for risk 

based-capital purposes to value 

exposures due to derivative 

transactions. However, commenters 

explained that an FBO would be unable 

to benefit from this treatment with 

respect to its U.S. IHC or its combined 

U.S. operations because there is 

currently no approval process in place 

for FBOs to seek approval to use IMM 

in the United States. As a result, these 

commenters indicated that an FBO 

would need to use the standardized 

methodology, which does not fully 

consider correlation between derivatives 

and any netting benefits, and thus may 

overstate the entity’s exposures, in 

valuing exposures due to derivatives 

transactions of its U.S. IHC and its 

combined U.S. operations. Some 

commenters urged the Board to provide 

an avenue in the final rule for an FBO 

to obtain approval for its U.S. IHC and 

its combined U.S. operations to use 

IMM in calculating exposures due to 

derivatives transactions. In particular, 

these commenters argued that, to the 

extent FBOs are subject to rigorous 

approval processes to use IMM in their 

home countries, the Board should 

establish a process to recognize and 

defer to home country regulators’ 

approval of IMM and thereby permit an 

FBO to use such methodologies in 

calculating exposures due to derivative 

transactions of its U.S. IHC or its 

combined U.S. operations, if desired. 

These commenters noted that this 

approach would be consistent with the 

statutory mandate to give due regard to 

comparable home country treatment. 

Under the final rule, an FBO is 

authorized to measure its gross credit 

exposure to a counterparty on a 

derivatives transaction using the same 

valuation approaches as those set forth 

in the final rule applicable to covered 

companies. As noted, an FBO that is 

subject on a consolidated basis to a 

home country SCCL framework will be 

able to comply with the SCCL for its 

combined U.S. operations by certifying 

to the Board that the FBO complies with 

its home country SCCL framework. To 

the extent the FBO’s home country 

SCCL framework permits the use of 

internal models to value derivative 

transactions, the FBO’s certification to 

the Board that the FBO complies with 

the SCCL framework could be based, in 

part, on its measurement of derivatives 

transactions using such models. In the 

case of a U.S. IHC, the U.S. IHC is 

authorized under the final rule to value 

a derivative transaction using any 

approach, including internal models, 

that the U.S. IHC is authorized to use 

under the capital rules to value the 

derivatives transaction. 

G. Net Credit Exposure 

The final rule describes how a 

covered foreign entity would convert 

gross credit exposure amounts to net 

credit exposure amounts by taking into 

account eligible collateral, eligible 

guarantees, eligible credit and equity 

derivatives, and other eligible hedges 

(that is, a short position in the 

counterparty’s debt or equity securities). 

An FBO generally would calculate its 

net credit exposure to a counterparty by 

adjusting its gross credit exposure to 

that counterparty in the same way as 

covered companies would adjust their 

gross credit exposures. However, the 

definition of ‘‘eligible collateral’’ for 


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209See final rule § 252.171(p). 

210See final rule §§ 252.175–.176. 

211See final rule § 252.177(a). As noted, the final 

rule retains the treatment for an FBO’s exposures 

to a home country sovereign entity, but does so by 

modifying the definition of ‘‘counterparty’’ to 

exclude these entities. See section III.D.4 supra for 

additional discussion. 

212See proposed rule § 252.178(a). 

213 Id. 

214See proposed rule § 252.178(c). 

215See proposed rule § 252.178(d). 

216See proposed rule § 252.170(c)(1)(i), 

252.170(c)(2)(i). 

covered foreign entities would exclude 

debt or equity securities (including 

convertible bonds) issued by an affiliate 

(rather than a subsidiary) of the U.S. 

IHC or the combined U.S. operations of 

a foreign banking organization. 

Referring to ‘‘affiliate’’ in the context of 

FBOs preserves consistent treatment 

with covered companies, who are 

subject to SCCL on a consolidated basis. 

As discussed above, the definition of 

‘‘eligible guarantor’’ would exclude the 

foreign banking organization or any 

affiliate thereof, in order to preserve 

consistent treatment with covered 

companies.209

H. Exposures to SPVs and Aggregation 

of Exposures to Connected 

Counterparties 

The final rule generally treats foreign 

covered entities in the same manner as 

covered companies with respect to 

exposures to SPVs and the application 

of the economic interdependence and 

control relationship tests.210 This 

treatment includes modifications made 

in the final rule for covered companies 

in response to public comments for the 

same reasons discussed earlier in this 

SUPPLEMENTARY INFORMATION. Just as in 

the proposal, under the final rule for 

FBOs, U.S. IHCs with total consolidated 

assets of at least $50 billion but less 

than $250 billion generally are not 

required to apply the specialized SPV 

treatment of section 252.175 of the final 

rule. However, the final rule has been 

revised such that only a covered foreign 

entity or U.S. IHC with $250 billion or 

more in total consolidated assets is 

required to apply the economic 

interdependence and control 

relationship tests to aggregate connected 

counterparties, unless the Board 

determines it is necessary to apply these 

tests with respect to such a company to 

prevent evasion of the rule. 

I. Exemptions 

As with the proposal for covered 

companies, certain commenters also 

requested exemptions for multilateral 

banks and certain supranational entities, 

including the Bank of International 

Settlements, the European Central Bank, 

the European Commission, the 

International Monetary Fund, and 

multilateral development banks that are 

assigned a zero percent risk weight 

under the Board’s capital rules. 

As noted, section 165(e)(6) of the 

Dodd-Frank Act permits the Board to 

exempt transactions from the definition 

of the term ‘‘credit exposure’’ for 

purposes of this subsection, if the Board 

finds that the exemption is in the public 

interest and is consistent with the 

purposes of this subsection. The final 

rule provides the same exemptions for 

the credit exposures of covered foreign 

entities as those provided in the final 

rule for covered companies.211

J. Compliance 

Under the proposed rule, a U.S. IHC 

and the combined U.S. operations of an 

FBO with less than $250 billion in total 

consolidated assets, and less than $10 

billion in total on-balance-sheet foreign 

exposures, would have been required to 

comply with the requirements of the 

proposed rule as of the end of each 

quarter.212 Other U.S. IHCs and FBOs 

would have been required to comply 

with the proposed rule on a daily basis 

as of the end of each business day and 

submit a monthly compliance report 

demonstrating its daily compliance.213

The final rule, like the proposal, 

requires a U.S. IHC with total 

consolidated assets of at least $50 

billion but less than $250 billion to 

comply with the requirements of the 

rule as of the end of each quarter, unless 

the Board determines and notifies the 

U.S. IHC in writing that more frequent 

compliance is required. Also like the 

proposal, the final rule requires an FBO 

(with respect to its combined U.S. 

operations) or U.S. IHC with total 

consolidated assets of $250 billion or 

more to comply with the requirements 

of the rule on a daily basis, as of the end 

of each business day. The final rule 

requires all covered foreign entities to 

report compliance on a quarterly basis. 

Under the proposal, an FBO would 

have been required to ensure the 

compliance of its U.S. IHC and its 

combined U.S. operations. If either the 

U.S. IHC or the combined U.S. 

operations were not in compliance with 

respect to a counterparty, both the U.S. 

IHC and the combined U.S. operations 

would have been prohibited from 

engaging in any additional credit 

transactions with such a counterparty, 

except in cases when the Board 

determines that such additional credit 

transactions were necessary or 

appropriate to preserve the safety and 

soundness of the foreign banking 

organization or financial stability.214 In 

considering special temporary 

exceptions, the Board could have 

imposed supervisory oversight and 

reporting measures that the Board 

determined were appropriate to monitor 

compliance with the foregoing 

standards.215

Commenters expressed concern with 

the fact that if either the U.S. IHC or the 

combined U.S. operations of an FBO 

were not in compliance, both the U.S. 

IHC and the combined U.S. operations 

would be prohibited from engaging in 

any additional credit transactions with 

such a counterparty (the ‘‘crosstrigger’’). Commenters contended there 

was no similar restriction on U.S. 

covered companies (for example, the 

breach of lending limits that apply to a 

national bank subsidiary would not 

restrict lending or additional exposures 

by other parts of the consolidated BHC). 

Commenters also noted that this 

provision would create incentives for 

FBOs to shift banking, lending, and 

derivatives activities to non-U.S. 

branches to avoid the potential 

curtailment of activities that could 

result from operation of the crosstrigger. 

As noted, the final rule modifies the 

manner in which the SCCL apply to an 

FBO. In particular, an FBO that is 

subject on a consolidated basis to a 

home country SCCL framework will be 

able to comply with the SCCL for its 

combined U.S. operations by certifying 

to the Board that the FBO complies with 

its home country SCCL framework. If an 

FBO is able to make such a certification, 

the FBO would be viewed as compliant 

with the final rule with respect to its 

combined U.S. operations. As a result, 

any noncompliance by the FBO would 

be with respect to its IHC. This 

modification should help mitigate 

concerns raised by commenters 

regarding the cross-trigger. 

K. Timing of Applicability 

Under the proposal, FBOs and U.S. 

IHCs with less than $250 billion in total 

consolidated assets and less than $10 

billion in total on-balance-sheet foreign 

assets would have been required to 

comply with the proposed rule two 

years from the effective date of the 

proposed rule, unless that time were 

extended by the Board in writing.216

FBOs and U.S. IHCs with $250 billion 

or more in total consolidated assets or 

$10 billion or more in total on-balancesheet foreign assets would have been 

required to comply with the proposed 

rule one year from the effective date of 

any final rule, unless that time were 


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217See proposed rule §§ 252.170(c)(1)(ii), 

252.170(c)(2)(ii). 

218See proposed rule § 252.170(d). 219 81 FR 14328 (Mar. 16, 2016). 

220See 13 CFR 121.201. 

221See 12 U.S.C. 5365(e). 

extended by the Board in writing.217

The proposal would have required any 

company that became a covered 

company after the effective date of the 

final rule to comply with the 

requirements of the rule beginning on 

the first day of the fifth calendar quarter 

after it becomes a covered entity, unless 

that time were accelerated or extended 

by the Board in writing.218

Commenters argued that FBOs should 

have more time to comply with the final 

rule, for reasons similar to those 

provided by commenters concerning the 

proposal for covered companies. In 

particular, these commenters argued 

that the one-year compliance period 

might be insufficient for smaller 

organizations in light of the multiple 

and complex requirements on the 

combined U.S. operations of an FBO. 

The Board has determined to permit 

all covered foreign entities that are not 

major FBOs or major U.S. IHCs until 

July 1, 2020, to comply with the final 

rule, while major FBOs and major U.S. 

IHCs have until January 1, 2020, to 

comply. This timing is similar to the 

final compliance period for covered 

companies. Also similar to the final rule 

for covered companies, the final rule 

requires a covered foreign entity that 

becomes a covered foreign entity after 

the effective date of the final rule to 

comply with the SCCL beginning on the 

first day of the ninth calendar quarter 

after it becomes a covered foreign entity, 

unless that time is accelerated or 

extended by the Board in writing. 

IV. Impact Analysis 

A quantitative impact study 

conducted by Board staff on the 

proposal concluded that banking firms 

would generally have been able to meet 

the proposed SCCL with modest 

adjustments. The study estimated that 

the total amount of covered companies’ 

credit exposure in excess of the limits 

in the proposed rule would have been 

less than $100 billion, and that the 

overwhelming majority of this excess 

credit exposure would have been credit 

exposure of major covered companies to 

major counterparties. The final rule 

contains a number of recommended 

modifications that would reduce this 

estimated impact. In particular, the final 

rule would allow covered companies 

and U.S. IHCs to use internal models to 

measure exposures from securities 

financing transactions, which was one 

of the major sources of excess exposure. 

Moreover, the narrower scope of 

application of the final rule, including 

the narrower definitions of ‘‘covered 

company’’ and ‘‘counterparty,’’ would 

further reduce its impact. Finally, recent 

staff analysis shows that covered 

companies and U.S. IHCs have very few 

single-counterparty exposures above 5 

percent of their tier 1 capital. Thus, they 

are unlikely to exceed the credit limits 

of the final rule. As a result, staff 

believes the final rule is unlikely to 

have a material impact on covered 

companies and U.S. IHCs. 

Importantly, the final rule provides 

covered companies and U.S. IHCs with 

a compliance period of 18 to 24 months, 

which should allow firms sufficient 

time to construct an infrastructure for 

monitoring and reporting their credit 

exposures to the Federal Reserve and for 

conforming any excess credit exposures. 

Covered firms will have a number of 

relatively low-cost mechanisms for 

reducing any residual excess credit 

exposures, including shifting exposures 

to other less-concentrated 

counterparties, increasing margin 

requirements for some derivatives or 

securities financing transactions, or 

increasing use of derivative transactions 

that are cleared by qualifying central 

counterparties. 

V. Regulatory Analysis 

A. Paperwork Reduction Act 

Certain provisions of the final rule 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 through 3521). The Board 

has reviewed the reporting requirements 

in §§ 252.78(a) and 252.178(a) of the 

final rule under the authority delegated 

to the Board by Office of Management 

and Budget. As noted, the Board is 

addressing these requirements in a 

separate notice published elsewhere in 

this issue of the Federal Register. 

B. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act, 5 

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

requires that an agency prepare and 

make available an initial regulatory 

flexibility analysis in connection with a 

notice of proposed rulemaking. 

The Board solicited public comment 

on this rule in a notice of proposed 

rulemaking 219 and has since considered 

the potential impact of this rule on 

small entities in accordance with 

section 604 of the RFA. Based on the 

Board’s analysis, and for the reasons 

stated below, the Board believes the 

final rule will not have a significant 

economic impact on a substantial 

number of small entities. 

Under regulations issued by the Small 

Business Administration (SBA), a 

‘‘small entity’’ includes a depository 

institution, bank holding company, or 

savings and loan holding company with 

assets of $550 million or less (small 

banking organizations).220 As discussed 

in the SUPPLEMENTARY INFORMATION, the 

final rule generally would apply to bank 

holding companies and foreign banking 

organizations with total consolidated 

assets of $250 billion or more. 

Companies that are subject to the final 

rule have consolidated assets that 

substantially exceed the $550 million 

asset threshold at which a banking 

entity is considered a ‘‘small entity’’ 

under SBA regulations. Because the 

final rule does not apply to any 

company with assets of $550 million or 

less, the final rule would not apply to 

any ‘‘small entity’’ for purposes of the 

RFA. The Board does not believe that 

the final rule duplicates, overlaps, or 

conflicts with any other Federal rules. 

In light of the foregoing, the Board does 

not believe that the final rule would 

have a significant economic impact on 

a substantial number of small entities 

supervised. 

1. Statement of the need for, and 

objectives of the final rule. 

In accordance with section 165 of the 

Dodd-Frank Act, the Board is proposing 

to amend Regulation YY to establish 

SCCL for covered companies and 

covered foreign entities in order to limit 

the risks that the failure of any 

individual firm could pose to those 

organizations.221 Section 165(e) requires 

the Board to implement the SCCL by 

regulation. The reasons and justification 

for the final rule are described above in 

more detail in this SUPPLEMENTARY

INFORMATION. 

2. Summary of the significant issues 

raised by public comment on the 

Board’s initial analysis, the Board’s 

assessment of any such issues, and a 

result of such comments. 

The Board performed a regulatory 

flexibility analysis in connection with 

the final rule. Moreover, the final rule 

does not impact small entities as 

described below. 

3. Small entities affected by the final 

rule and compliance requirements. 

The provisions of the final rule apply 

to covered companies and covered 

foreign entities. Bank holding 

companies and foreign banking 

organizations that are subject to the 

proposed rule therefore substantially 

exceed the $550 million asset threshold 

at which a banking entity would qualify 

as a small banking organization. 


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4. Significant alternatives to the final 

rule. 

In light of the foregoing, the Board 

does not believe that this final rule 

would have a significant negative 

economic impact on any small entities. 

C. Solicitation of Comments on the Use 

of Plain Language 

Section 722 of the Gramm-Leach 

Bliley Act of 1999 requires the Federal 

banking agencies to use plain language 

in all proposed and final rules 

published after January 1, 2000. The 

Board received no comments on these 

matters and believes that the final rule 

is written plainly and clearly. 

List of Subjects in 12 CFR Part 252 

Administrative practice and 

procedure, Banks, Banking, Federal 

Reserve System, Holding companies, 

Reporting and recordkeeping 

requirements, Securities. 

Authority and Issuance 

For the reasons stated in the 

preamble, the Board of Governors of the 

Federal Reserve System amends 12 CFR 

part 252 as follows: 

PART 252—ENHANCED PRUDENTIAL 

STANDARDS (REGULATION YY). 

■ 1. The authority citation for part 252 

continues to read as follows: 

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

1467a(g), 1818, 1828, 1831n, 1831o, 1831p– 

l, 1831w, 1835, 1844(b), 1844(c), 3904, 3906– 

3909, 4808, 5361, 5365, 5366, 5367, 5368, 

5371. 

■ 2. Add subpart H to read as follows: 

Subpart H—Single-Counterparty Credit 

Limits 

Sec. 

252.70 Applicability and general 

provisions. 

252.71 Definitions. 

252.72 Credit exposure limits. 

252.73 Gross credit exposure. 

252.74 Net credit exposure. 

252.75 Investments in and exposures to 

securitization vehicles, investment 

funds, and other special purpose 

vehicles that are not affiliates of the 

covered company. 

252.76 Aggregation of exposures to more 

than one counterparty due to economic 

interdependence or control 

relationships. 

252.77 Exemptions. 

252.78 Compliance. 

Subpart H—Single-Counterparty Credit 

Limits 

§ 252.70 Applicability and general 

provisions. 

(a) In general. (1) This subpart 

establishes single counterparty credit 

limits for a covered company. 

(2) For purposes of this subpart: 

(i) Covered company means 

(A) Any bank holding company (other 

than a foreign banking organization that 

is subject to subpart Q of this part, 

including any U.S. intermediate holding 

company of such foreign banking 

organization) with total consolidated 

assets that equal or exceed $250 billion; 

and 

(B) Any U.S. bank holding company 

identified as a global systemically 

important BHC pursuant to § 217.402 of 

the Board’s Regulation Q (12 CFR 

217.402). 

(ii) Major covered company means 

any covered company that is a U.S. bank 

holding company identified as a global 

systemically important BHC pursuant to 

§ 217.402 of the Board’s Regulation Q 

(12 CFR 217.402). 

(b) Credit exposure limits. (1) Section 

252.72 establishes credit exposure limits 

for a covered company and a major 

covered company. 

(2) A covered company is required to 

calculate its aggregate net credit 

exposure, gross credit exposure, and net 

credit exposure to a counterparty using 

the methods in this subpart. 

(c) Applicability of this subpart. (1)(i) 

A company that is a covered company 

as of October 5, 2018, must comply with 

the requirements of this subpart, 

including but not limited to § 252.72, 

beginning on July 1, 2020, unless that 

time is extended by the Board in 

writing. 

(ii) Notwithstanding paragraph 

(c)(1)(i) of this section, a company that 

is a major covered company as of 

October 5, 2018, must comply with the 

requirements of this subpart, including 

but not limited to § 252.72, beginning on 

January 1, 2020, unless that time is 

extended by the Board in writing. 

(2) A covered company that becomes 

subject to this subpart after October 5, 

2018 must comply with the 

requirements of this subpart beginning 

on the first day of the ninth calendar 

quarter after it becomes a covered 

company, unless that time is accelerated 

or extended by the Board in writing. 

(d) Cessation of requirements. (1) Any 

company that becomes a covered 

company will remain subject to the 

requirements of this subpart unless and 

until its total consolidated assets fall 

below $250 billion for each of four 

consecutive quarters, as reported on the 

covered company’s FR Y–9C, effective 

on the as-of date of the fourth 

consecutive FR Y–9C. 

(2) A covered company that has 

ceased to be a major covered company 

for purposes of § 252.72(b) is no longer 

subject to the requirements of 

§ 252.72(b) beginning on the first day of 

the calendar quarter following the 

reporting date on which it ceased to be 

a major covered company; provided that 

the covered company remains subject to 

the requirements of this subpart, unless 

it ceases to be a covered company 

pursuant to paragraph (d)(1) of this 

section. 

§ 252.71 Definitions. 

Unless defined in this section, terms 

that are set forth in § 252.2 of this part 

and used in this subpart have the 

definitions assigned in § 252.2. For 

purposes of this subpart: 

(a) Adjusted market value means: 

(1) With respect to the value of cash, 

securities, or other eligible collateral 

transferred by the covered company to 

a counterparty, the sum of: 

(i) The market value of the cash, 

securities, or other eligible collateral; 

and 

(ii) The product of the market value 

of the securities or other eligible 

collateral multiplied by the applicable 

collateral haircut in Table 1 to § 217.132 

of the Board’s Regulation Q (12 CFR 

217.132); and 

(2) With respect to cash, securities, or 

other eligible collateral received by the 

covered company from a counterparty: 

(i) The market value of the cash, 

securities, or other eligible collateral; 

minus 

(ii) The market value of the securities 

or other eligible collateral multiplied by 

the applicable collateral haircut in Table 

1 to § 217.132 of the Board’s Regulation 

Q (12 CFR 217.132). 

(3) Prior to calculating the adjusted 

market value pursuant to paragraphs 

(a)(1) and (2) of this section, with regard 

to a transaction that meets the definition 

of ‘‘repo-style transaction’’ in § 217.2 of 

the Board’s Regulation Q (12 CFR 

217.2), the covered company would first 

multiply the applicable collateral 

haircuts in Table 1 to § 217.132 of the 

Board’s Regulation Q (12 CFR 217.132) 

by the square root of 1⁄2. 

(b) Affiliate means, with respect to a 

company: 

(1) Any subsidiary of the company 

and any other company that is 

consolidated with the company under 

applicable accounting standards; or 

(2) For a company that is not subject 

to principles or standards referenced in 

paragraph (b)(1) of this section, any 

subsidiary of the company and any 

other company that would be 

consolidated with the company, if 

consolidation would have occurred if 

such principles or standards had 

applied. 

(c) Aggregate net credit exposure 

means the sum of all net credit 

exposures of a covered company and all 


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1 In addition, under § 252.76, under certain 

circumstances, a covered company is required to 

aggregate its net credit exposure to one or more 

counterparties for all purposes under this subpart. 

of its subsidiaries to a single 

counterparty as calculated under this 

subpart. 

(d) Bank-eligible investments means 

investment securities that a national 

bank is permitted to purchase, sell, deal 

in, underwrite, and hold under 12 

U.S.C. 24 (Seventh) and 12 CFR part 1. 

(e) Counterparty means, with respect 

to a credit transaction: 

(1) With respect to a natural person, 

the natural person, and, if the credit 

exposure of the covered company to 

such natural person exceeds 5 percent 

of the covered company’s tier 1 capital, 

the natural person and members of the 

person’s immediate family collectively; 

(2) With respect to any company that 

is not a subsidiary of the covered 

company, the company and its affiliates 

collectively; 

(3) With respect to a State, the State 

and all of its agencies, instrumentalities, 

and political subdivisions (including 

any municipalities) collectively; 

(4) With respect to a foreign sovereign 

entity that is not assigned a zero percent 

risk weight under the standardized 

approach in the Board’s Regulation Q 

(12 CFR part 217, subpart D), the foreign 

sovereign entity and all of its agencies 

and instrumentalities (but not including 

any political subdivision) collectively; 

and 

(5) With respect to a political 

subdivision of a foreign sovereign entity 

such as a state, province, or 

municipality, any political subdivision 

of the foreign sovereign entity and all of 

such political subdivision’s agencies 

and instrumentalities, collectively.1

(f) Covered company is defined in 

§ 252.70(a)(2)(i) of this subpart. 

(g) Credit derivative has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(h) Credit transaction means, with 

respect to a counterparty: 

(1) Any extension of credit to the 

counterparty, including loans, deposits, 

and lines of credit, but excluding 

uncommitted lines of credit; 

(2) Any repurchase agreement or 

reverse repurchase agreement with the 

counterparty; 

(3) Any securities lending or 

securities borrowing transaction with 

the counterparty; 

(4) Any guarantee, acceptance, or 

letter of credit (including any 

endorsement, confirmed letter of credit, 

or standby letter of credit) issued on 

behalf of the counterparty; 

(5) Any purchase of securities issued 

by or other investment in the 

counterparty; 

(6) Any credit exposure to the 

counterparty in connection with a 

derivative transaction between the 

covered company and the counterparty; 

(7) Any credit exposure to the 

counterparty in connection with a credit 

derivative or equity derivative between 

the covered company and a third party, 

the reference asset of which is an 

obligation or equity security of, or 

equity investment in, the counterparty; 

and 

(8) Any transaction that is the 

functional equivalent of the above, and 

any other similar transaction that the 

Board, by regulation or order, 

determines to be a credit transaction for 

purposes of this subpart. 

(i) Depository institution has the same 

meaning as in section 3 of the Federal 

Deposit Insurance Act (12 U.S.C. 

1813(c)). 

(j) Derivative transaction means any 

transaction that is a contract, agreement, 

swap, warrant, note, or option that is 

based, in whole or in part, on the value 

of, any interest in, or any quantitative 

measure or the occurrence of any event 

relating to, one or more commodities, 

securities, currencies, interest or other 

rates, indices, or other assets. 

(k) Eligible collateral means collateral 

in which, notwithstanding the prior 

security interest of any custodial agent, 

the covered company has a perfected, 

first priority security interest (or the 

legal equivalent thereof, if outside of the 

United States), with the exception of 

cash on deposit, and is in the form of: 

(1) Cash on deposit with the covered 

company or a subsidiary of the covered 

company (including cash in foreign 

currency or U.S. dollars held for the 

covered company by a custodian or 

trustee, whether inside or outside of the 

United States); 

(2) Debt securities (other than 

mortgage- or asset-backed securities and 

resecuritization securities, unless those 

securities are issued by a U.S. 

government-sponsored enterprise) that 

are bank-eligible investments and that 

are investment grade, except for any 

debt securities issued by the covered 

company or any subsidiary of the 

covered company; 

(3) Equity securities that are publicly 

traded, except for any equity securities 

issued by the covered company or any 

subsidiary of the covered company; 

(4) Convertible bonds that are 

publicly traded, except for any 

convertible bonds issued by the covered 

company or any subsidiary of the 

covered company; or 

(5) Gold bullion. 

(l) Eligible credit derivative means a 

single-name credit derivative or a 

standard, non-tranched index credit 

derivative, provided that: 

(1) The contract meets the 

requirements of an eligible guarantee 

and has been confirmed by the 

protection purchaser and the protection 

provider; 

(2) Any assignment of the contract has 

been confirmed by all relevant parties; 

(3) If the credit derivative is a credit 

default swap, the contract includes the 

following credit events: 

(i) Failure to pay any amount due 

under the terms of the reference 

exposure, subject to any applicable 

minimal payment threshold that is 

consistent with standard market 

practice and with a grace period that is 

closely in line with the grace period of 

the reference exposure; and 

(ii) Receivership, insolvency, 

liquidation, conservatorship, or inability 

of the reference exposure issuer to pay 

its debts, or its failure or admission in 

writing of its inability generally to pay 

its debts as they become due, and 

similar events; 

(4) The terms and conditions dictating 

the manner in which the contract is to 

be settled are incorporated into the 

contract; 

(5) If the contract allows for cash 

settlement, the contract incorporates a 

robust valuation process to estimate loss 

reliably and specifies a reasonable 

period for obtaining post-credit event 

valuations of the reference exposure; 

(6) If the contract requires the 

protection purchaser to transfer an 

exposure to the protection provider at 

settlement, the terms of at least one of 

the exposures that is permitted to be 

transferred under the contract provide 

that any required consent to transfer 

may not be unreasonably withheld; and 

(7) If the credit derivative is a credit 

default swap, the contract clearly 

identifies the parties responsible for 

determining whether a credit event has 

occurred, specifies that this 

determination is not the sole 

responsibility of the protection 

provider, and gives the protection 

purchaser the right to notify the 

protection provider of the occurrence of 

a credit event. 

(m) Eligible equity derivative means 

an equity derivative, provided that: 

(1) The derivative contract has been 

confirmed by all relevant parties; 

(2) Any assignment of the derivative 

contract has been confirmed by all 

relevant parties; and 

(3) The terms and conditions dictating 

the manner in which the derivative 

contract is to be settled are incorporated 

into the contract. 


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(n) Eligible guarantee has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(o) Eligible guarantor has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(p) Equity derivative has the same 

meaning as ‘‘equity derivative contract’’ 

in § 217.2 of the Board’s Regulation Q 

(12 CFR 217.2). 

(q) Exempt counterparty means an 

entity that is identified as exempt from 

the requirements of this subpart under 

§ 252.77, or that is otherwise excluded 

from this subpart, including any 

sovereign entity assigned a zero percent 

risk weight under the standardized 

approach in the Board’s Regulation Q 

(12 CFR part 217, subpart D). 

(r) Financial entity means: 

(1)(i) A bank holding company or an 

affiliate thereof; a savings and loan 

holding company as defined in section 

10(n) of the Home Owners’ Loan Act (12 

U.S.C. 1467a(n)); a U.S. intermediate 

holding company established or 

designated for purposes of compliance 

with this part; or a nonbank financial 

company supervised by the Board; 

(ii) A depository institution as defined 

in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)); an 

organization that is organized under the 

laws of a foreign country and that 

engages directly in the business of 

banking outside the United States; a 

federal credit union or state credit union 

as defined in section 2 of the Federal 

Credit Union Act (12 U.S.C. 1752(1) and 

(6)); a national association, state 

member bank, or state nonmember bank 

that is not a depository institution; an 

institution that functions solely in a 

trust or fiduciary capacity as described 

in section 2(c)(2)(D) of the Bank Holding 

Company Act (12 U.S.C. 1841(c)(2)(D)); 

an industrial loan company, an 

industrial bank, or other similar 

institution described in section 

2(c)(2)(H) of the Bank Holding Company 

Act (12 U.S.C. 1841(c)(2)(H)); 

(iii) An entity that is state-licensed or 

registered as: 

(A) A credit or lending entity, 

including a finance company; money 

lender; installment lender; consumer 

lender or lending company; mortgage 

lender, broker, or bank; motor vehicle 

title pledge lender; payday or deferred 

deposit lender; premium finance 

company; commercial finance or 

lending company; or commercial 

mortgage company; except entities 

registered or licensed solely on account 

of financing the entity’s direct sales of 

goods or services to customers; 

(B) A money services business, 

including a check casher; money 

transmitter; currency dealer or 

exchange; or money order or traveler’s 

check issuer; 

(iv) Any person registered with the 

Commodity Futures Trading 

Commission as a swap dealer or major 

swap participant pursuant to the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1 et seq.), or an entity that is 

registered with the U.S. Securities and 

Exchange Commission as a securitybased swap dealer or a major securitybased swap participant pursuant to the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.); 

(v) A securities holding company as 

defined in section 618 of the DoddFrank Wall Street Reform and Consumer 

Protection Act (12 U.S.C. 1850a); a 

broker or dealer as defined in sections 

3(a)(4) and 3(a)(5) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(4)–(5)); an investment adviser as 

defined in section 202(a) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)); an investment 

company registered with the U.S. 

Securities and Exchange Commission 

under the Investment Company Act of 

1940 (15 U.S.C. 80a–1 et seq.); or a 

company that has elected to be 

regulated as a business development 

company pursuant to section 54(a) of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–53(a)); 

(vi) A private fund as defined in 

section 202(a) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b– 

2(a)); an entity that would be an 

investment company under section 3 of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–3) but for section 

3(c)(5)(C); or an entity that is deemed 

not to be an investment company under 

section 3 of the Investment Company 

Act of 1940 pursuant to Investment 

Company Act Rule 3a–7 (17 CFR 

270.3a–7) of the U.S. Securities and 

Exchange Commission; 

(vii) A commodity pool, a commodity 

pool operator, or a commodity trading 

advisor as defined, respectively, in 

sections 1a(10), 1a(11), and 1a(12) of the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1a(10), 1a(11), and 1a(12)); a floor 

broker, a floor trader, or introducing 

broker as defined, respectively, in 

sections 1a(22), 1a(23) and 1a(31) of the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1a(22), 1a(23), and 1a(31)); or a 

futures commission merchant as defined 

in section 1a(28) of the Commodity 

Exchange Act of 1936 (7 U.S.C. 1a(28)); 

(viii) An employee benefit plan as 

defined in paragraphs (3) and (32) of 

section 3 of the Employee Retirement 

Income and Security Act of 1974 (29 

U.S.C. 1002); 

(ix) An entity that is organized as an 

insurance company, primarily engaged 

in writing insurance or reinsuring risks 

underwritten by insurance companies, 

or is subject to supervision as such by 

a State insurance regulator or foreign 

insurance regulator; 

(x) Any designated financial market 

utility, as defined in section 803 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (12 U.S.C. 

5462); and 

(xi) An entity that would be a 

financial entity described in paragraphs 

(r)(1)(i) through (x) of this section, if it 

were organized under the laws of the 

United States or any State thereof; and 

(2) Provided that, for purposes of this 

subpart, ‘‘financial entity’’ does not 

include any counterparty that is a 

foreign sovereign entity or multilateral 

development bank. 

(s) Foreign sovereign entity means a 

sovereign entity other than the United 

States government and the entity’s 

agencies, departments, ministries, and 

central bank collectively. 

(t) Gross credit exposure means, with 

respect to any credit transaction, the 

credit exposure of the covered company 

before adjusting, pursuant to § 252.74, 

for the effect of any eligible collateral, 

eligible guarantee, eligible credit 

derivative, eligible equity derivative, 

other eligible hedge, and any unused 

portion of certain extensions of credit. 

(u) Immediate family means the 

spouse of an individual, the individual’s 

minor children, and any of the 

individual’s children (including adults) 

residing in the individual’s home. 

(v) Intraday credit exposure means 

credit exposure of a covered company to 

a counterparty that by its terms is to be 

repaid, sold, or terminated by the end of 

its business day in the United States. 

(w) Investment grade has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(x) Major counterparty means any 

counterparty that is or includes: 

(1) A major covered company; 

(2) A top-tier foreign banking 

organization that meets the 

requirements of § 252.172(c)(3) through 

(5); or 

(3) Any nonbank financial company 

supervised by the Board. 

(y) Major covered company is defined 

in § 252.70(a)(2)(ii) of this subpart. 

(z) Multilateral development bank has 

the same meaning as in § 217.2 of the 

Board’s Regulation Q (12 CFR 217.2). 

(aa) Net credit exposure means, with 

respect to any credit transaction, the 

gross credit exposure of a covered 

company and all of its subsidiaries 

calculated under § 252.73, as adjusted in 

accordance with § 252.74. 

(bb) Qualifying central counterparty 

has the same meaning as in § 217.2 of 


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38496 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Rules and Regulations 

the Board’s Regulation Q (12 CFR 

217.2). 

(cc) Qualifying master netting 

agreement has the same meaning as in 

§ 217.2 of the Board’s Regulation Q (12 

CFR 217.2). 

(dd) Securities financing transaction 

means any repurchase agreement, 

reverse repurchase agreement, securities 

borrowing transaction, or securities 

lending transaction. 

(ee) Short sale means any sale of a 

security which the seller does not own 

or any sale which is consummated by 

the delivery of a security borrowed by, 

or for the account of, the seller. 

(ff) Sovereign entity means a central 

national government (including the U.S. 

government) or an agency, department, 

ministry, or central bank, but not 

including any political subdivision such 

as a state, province, or municipality. 

(gg) Subsidiary. A company is a 

subsidiary of another company if: 

(1) The company is consolidated by 

the other company under applicable 

accounting standards; or 

(2) For a company that is not subject 

to principles or standards referenced in 

paragraph (gg)(1) of this definition, 

consolidation would have occurred if 

such principles or standards had 

applied. 

(hh) Tier 1 capital means common 

equity tier 1 capital and additional tier 

1 capital, as defined in the Board’s 

Regulation Q (12 CFR part 217) and as 

reported by the bank holding company 

on the most recent FR Y–9C report on 

a consolidated basis. 

(ii) Total consolidated assets. A 

company’s total consolidated assets are 

determined based on: 

(1) The average of the bank holding 

company’s total consolidated assets in 

the four most recent consecutive 

quarters as reported quarterly on the FR 

Y–9C; or 

(2) If the bank holding company has 

not filed an FR Y–9C for each of the four 

most recent consecutive quarters, the 

average of the bank holding company’s 

total consolidated assets, as reported on 

the company’s FR Y–9C, for the most 

recent quarter or consecutive quarters, 

as applicable. 

§ 252.72 Credit exposure limits. 

(a) General limit on aggregate net 

credit exposure. No covered company 

may have an aggregate net credit 

exposure to any counterparty that 

exceeds 25 percent of the tier 1 capital 

of the covered company. 

(b) Limit on aggregate net credit 

exposure of major covered companies to 

major counterparties. No major covered 

company may have aggregate net credit 

exposure to any major counterparty that 

exceeds 15 percent of the tier 1 capital 

of the major covered company. 

§ 252.73 Gross credit exposure. 

(a) Calculation of gross credit 

exposure. The amount of gross credit 

exposure of a covered company to a 

counterparty with respect to a credit 

transaction is, in the case of: 

(1) A deposit of the covered company 

held by the counterparty, loan by a 

covered company to the counterparty, 

and lease in which the covered 

company is the lessor and the 

counterparty is the lessee, equal to the 

amount owed by the counterparty to the 

covered company under the transaction. 

(2) A debt security or debt investment 

held by the covered company that is 

issued by the counterparty, equal to: 

(i) The market value of the securities, 

for trading and available-for-sale 

securities; and 

(ii) The amortized purchase price of 

the securities or investments, for 

securities or investments held to 

maturity. 

(3) An equity security held by the 

covered company that is issued by the 

counterparty, equity investment in a 

counterparty, and other direct 

investments in a counterparty, equal to 

the market value. 

(4) A securities financing transaction 

must be valued using any of the 

methods that the covered company is 

authorized to use under the Board’s 

Regulation Q (12 CFR part 217, subparts 

D and E) to value such transactions: 

(i)(A) As calculated for each 

transaction, in the case of a securities 

financing transaction between the 

covered company and the counterparty 

that is not subject to a bilateral netting 

agreement or does not meet the 

definition of ‘‘repo-style transaction’’ in 

§ 217.2 of the Board’s Regulation Q (12 

CFR 217.2); or 

(B) As calculated for a netting set, in 

the case of a securities financing 

transaction between the covered 

company and the counterparty that is 

subject to a bilateral netting agreement 

with that counterparty and meets the 

definition of ‘‘repo-style transaction’’ in 

§ 217.2 of the Board’s Regulation Q (12 

CFR 217.2); 

(ii) For purposes of paragraph (a)(4)(i) 

of this section, the covered company 

must: 

(A) Assign a value of zero to any 

security received from the counterparty 

that does not meet the definition of 

‘‘eligible collateral’’ in § 252.71(k); and 

(B) Include the value of securities that 

are eligible collateral received by the 

covered company from the counterparty 

(including any exempt counterparty), 

calculated in accordance with 

paragraphs (a)(4)(i) through (iv) of this 

section, when calculating its gross credit 

exposure to the issuer of those 

securities; 

(iii) Notwithstanding paragraphs 

(a)(4)(i) and (ii) of this section and with 

respect to each credit transaction, a 

covered company’s gross credit 

exposure to a collateral issuer under this 

paragraph (a)(4) is limited to the 

covered company’s gross credit 

exposure to the counterparty on the 

credit transaction; and 

(iv) In cases where the covered 

company receives eligible collateral 

from a counterparty in addition to the 

cash or securities received from that 

counterparty, the counterparty may 

reduce its gross credit exposure to that 

counterparty in accordance with 

§ 252.74(b). 

(5) A committed credit line extended 

by a covered company to a counterparty, 

equal to the face amount of the 

committed credit line. 

(6) A guarantee or letter of credit 

issued by a covered company on behalf 

of a counterparty, equal to the 

maximum potential loss to the covered 

company on the transaction. 

(7) A derivative transaction must be 

valued using any of the methods that 

the covered company is authorized to 

use under the Board’s Regulation Q (12 

CFR part 217, subparts D and E) to value 

such transactions: 

(i)(A) As calculated for each 

transaction, in the case of a derivative 

transaction between the covered 

company and the counterparty, 

including an equity derivative but 

excluding a credit derivative described 

in paragraph (a)(8) of this section, that 

is not subject to a qualifying master 

netting agreement; or 

(B) As calculated for a netting set, in 

the case of a derivative transaction 

between the covered company and the 

counterparty, including an equity 

derivative but excluding a credit 

derivative described in paragraph (a)(8) 

of this section, that is subject to a 

qualifying master netting agreement. 

(ii) In cases where a covered company 

is required to recognize an exposure to 

an eligible guarantor pursuant to 

§ 252.74(d), the covered company must 

exclude the relevant derivative 

transaction when calculating its gross 

exposure to the original counterparty 

under this section. 

(8) A credit derivative between the 

covered company and a third party 

where the covered company is the 

protection provider and the reference 

asset is an obligation or debt security of 

the counterparty, equal to the maximum 

potential loss to the covered company 

on the transaction. 


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(b) Investments in and exposures to 

securitization vehicles, investment 

funds, and other special purpose 

vehicles that are not subsidiaries. 

Notwithstanding paragraph (a) of this 

section, a covered company must 

calculate pursuant to § 252.75 its gross 

credit exposure due to any investment 

in the debt or equity of, and any credit 

derivative or equity derivative between 

the covered company and a third party 

where the covered company is the 

protection provider and the reference 

asset is an obligation or equity security 

of, or equity investment in, a 

securitization vehicle, investment fund, 

and other special purpose vehicle that is 

not a subsidiary of the covered 

company. 

(c) Attribution rule. Notwithstanding 

any other requirement in this subpart, a 

covered company must treat any 

transaction with any natural person or 

entity as a credit transaction with 

another party, to the extent that the 

proceeds of the transaction are used for 

the benefit of, or transferred to, the other 

party. 

§ 252.74 Net credit exposure. 

(a) In general. For purposes of this 

subpart, a covered company must 

calculate its net credit exposure to a 

counterparty by adjusting its gross 

credit exposure to that counterparty in 

accordance with the rules set forth in 

this section. 

(b) Eligible collateral. (1) In 

computing its net credit exposure to a 

counterparty for any credit transaction 

other than a securities financing 

transaction, a covered company must 

reduce its gross credit exposure on the 

transaction by the adjusted market value 

of any eligible collateral. 

(2) A covered company that reduces 

its gross credit exposure to a 

counterparty as required under 

paragraph (b)(1) of this section must 

include the adjusted market value of the 

eligible collateral, when calculating its 

gross credit exposure to the collateral 

issuer. 

(3) Notwithstanding paragraph (b)(2) 

of this section, a covered company’s 

gross credit exposure to a collateral 

issuer under this paragraph (b) is 

limited to: 

(i) Its gross credit exposure to the 

counterparty on the credit transaction, 

or 

(ii) In the case of an exempt 

counterparty, the gross credit exposure 

that would have been attributable to that 

exempt counterparty on the credit 

transaction if valued in accordance with 

§ 252.73(a). 

(c) Eligible guarantees. (1) In 

calculating net credit exposure to a 

counterparty for any credit transaction, 

a covered company must reduce its 

gross credit exposure to the 

counterparty by the amount of any 

eligible guarantee from an eligible 

guarantor that covers the transaction. 

(2) A covered company that reduces 

its gross credit exposure to a 

counterparty as required under 

paragraph (c)(1) of this section must 

include the amount of eligible 

guarantees when calculating its gross 

credit exposure to the eligible guarantor. 

(3) Notwithstanding paragraph (c)(2) 

of this section, a covered company’s 

gross credit exposure to an eligible 

guarantor with respect to an eligible 

guarantee under this paragraph (c) is 

limited to: 

(i) Its gross credit exposure to the 

counterparty on the credit transaction 

prior to recognition of the eligible 

guarantee, or 

(ii) In the case of an exempt 

counterparty, the gross credit exposure 

that would have been attributable to that 

exempt counterparty on the credit 

transaction prior to recognition of the 

eligible guarantee if valued in 

accordance with § 252.73(a). 

(d) Eligible credit and equity 

derivatives. (1) In calculating net credit 

exposure to a counterparty for a credit 

transaction under this section, a covered 

company must reduce its gross credit 

exposure to the counterparty by: 

(i) In the case of any eligible credit 

derivative from an eligible guarantor, 

the notional amount of the eligible 

credit derivative; or 

(ii) In the case of any eligible equity 

derivative from an eligible guarantor, 

the gross credit exposure amount to the 

counterparty (calculated in accordance 

with § 252.73(a)(7)). 

(2)(i) A covered company that reduces 

its gross credit exposure to a 

counterparty as provided under 

paragraph (d)(1) of this section must 

include, when calculating its net credit 

exposure to the eligible guarantor, 

including in instances where the 

underlying credit transaction would not 

be subject to the credit limits of § 252.72 

(for example, due to an exempt 

counterparty), either 

(A) In the case of any eligible credit 

derivative from an eligible guarantor, 

the notional amount of the eligible 

credit derivative; or 

(B) In the case of any eligible equity 

derivative from an eligible guarantor, 

the gross credit exposure amount to the 

counterparty (calculated in accordance 

with § 252.73(a)(7)). 

(ii) Notwithstanding paragraph 

(d)(2)(i) of this section, in cases where 

the eligible credit derivative or eligible 

equity derivative is used to hedge 

covered positions that are subject to the 

Board’s market risk rule (12 CFR part 

217, subpart F) and the counterparty on 

the hedged transaction is not a financial 

entity, the amount of credit exposure 

that a company must recognize to the 

eligible guarantor is the amount that 

would be calculated pursuant to 

§ 252.73(a). 

(3) Notwithstanding paragraph (d)(2) 

of this section, a covered company’s 

gross credit exposure to an eligible 

guarantor with respect to an eligible 

credit derivative or an eligible equity 

derivative under this paragraph (d) is 

limited to: 

(i) Its gross credit exposure to the 

counterparty on the credit transaction 

prior to recognition of the eligible credit 

derivative or the eligible equity 

derivative, or 

(ii) In the case of an exempt 

counterparty, the gross credit exposure 

that would have been attributable to that 

exempt counterparty on the credit 

transaction prior to recognition of the 

eligible credit derivative or the eligible 

equity derivative if valued in 

accordance with § 252.73(a). 

(e) Other eligible hedges. In 

calculating net credit exposure to a 

counterparty for a credit transaction 

under this section, a covered company 

may reduce its gross credit exposure to 

the counterparty by the face amount of 

a short sale of the counterparty’s debt 

security or equity security, provided 

that: 

(1) The instrument in which the 

covered company has a short position is 

junior to, or pari passu with, the 

instrument in which the covered 

company has the long position; and 

(2) The instrument in which the 

covered company has a short position 

and the instrument in which the 

covered company has the long position 

are either both treated as trading or 

available-for-sale exposures or both 

treated as held-to-maturity exposures. 

(f) Unused portion of certain 

extensions of credit. (1) In computing its 

net credit exposure to a counterparty for 

a committed credit line or revolving 

credit facility under this section, a 

covered company may reduce its gross 

credit exposure by the amount of the 

unused portion of the credit extension 

to the extent that the covered company 

does not have any legal obligation to 

advance additional funds under the 

extension of credit and the used portion 

of the credit extension has been fully 

secured by eligible collateral. 

(2) To the extent that the used portion 

of a credit extension has been secured 

by eligible collateral, the covered 

company may reduce its gross credit 

exposure by the adjusted market value 


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of any eligible collateral received from 

the counterparty, even if the used 

portion has not been fully secured by 

eligible collateral. 

(3) To qualify for the reduction in net 

credit exposure under this paragraph, 

the credit contract must specify that any 

used portion of the credit extension 

must be fully secured by the adjusted 

market value of any eligible collateral. 

(g) Credit transactions involving 

exempt counterparties. (1) A covered 

company’s credit transactions with an 

exempt counterparty are not subject to 

the requirements of this subpart, 

including but not limited to § 252.72. 

(2) Notwithstanding paragraph (g)(1) 

of this section, in cases where a covered 

company has a credit transaction with 

an exempt counterparty and the covered 

company has obtained eligible collateral 

from that exempt counterparty or an 

eligible guarantee or eligible credit or 

equity derivative from an eligible 

guarantor, the covered company must 

include (for purposes of this subpart) 

such exposure to the issuer of such 

eligible collateral or the eligible 

guarantor, as calculated in accordance 

with the rules set forth in this section, 

when calculating its gross credit 

exposure to that issuer of eligible 

collateral or eligible guarantor. 

(h) Currency mismatch adjustments. 

For purposes of calculating its net credit 

exposure to a counterparty under this 

section, a covered company must apply, 

as applicable: 

(1) When reducing its gross credit 

exposure to a counterparty resulting 

from any credit transaction due to any 

eligible collateral and calculating its 

gross credit exposure to an issuer of 

eligible collateral, pursuant to paragraph 

(b) of this section, the currency 

mismatch adjustment approach of 

§ 217.37(c)(3)(ii) of the Board’s 

Regulation Q (12 CFR 217.37(c)(3)(ii)); 

and 

(2) When reducing its gross credit 

exposure to a counterparty resulting 

from any credit transaction due to any 

eligible guarantee, eligible equity 

derivative, or eligible credit derivative 

from an eligible guarantor and 

calculating its gross credit exposure to 

an eligible guarantor, pursuant to 

paragraphs (c) and (d) of this section, 

the currency mismatch adjustment 

approach of § 217.36(f) of the Board’s 

Regulation Q (12 CFR 217.36(f)). 

(i) Maturity mismatch adjustments. 

For purposes of calculating its net credit 

exposure to a counterparty under this 

section, a covered company must apply, 

as applicable, the maturity mismatch 

adjustment approach of § 217.36(d) of 

the Board’s Regulation Q (12 CFR 

217.36(d)): 

(1) When reducing its gross credit 

exposure to a counterparty resulting 

from any credit transaction due to any 

eligible collateral or any eligible 

guarantees, eligible equity derivatives, 

or eligible credit derivatives from an 

eligible guarantor, pursuant to 

paragraphs (b) through (d) of this 

section, and 

(2) In calculating its gross credit 

exposure to an issuer of eligible 

collateral, pursuant to paragraph (b) of 

this section, or to an eligible guarantor, 

pursuant to paragraphs (c) and (d) of 

this section; provided that 

(3) The eligible collateral, eligible 

guarantee, eligible equity derivative, or 

eligible credit derivative subject to 

paragraph (i)(1) of this section: 

(i) Has a shorter maturity than the 

credit transaction; 

(ii) Has an original maturity equal to 

or greater than one year; 

(iii) Has a residual maturity of not less 

than three months; and 

(iv) The adjustment approach is 

otherwise applicable. 

§ 252.75 Investments in and exposures to 

securitization vehicles, investment funds, 

and other special purpose vehicles that are 

not subsidiaries of the covered company. 

(a) In general. (1) For purposes of this 

section, the following definitions apply: 

(i) SPV means a securitization vehicle, 

investment fund, or other special 

purpose vehicle that is not a subsidiary 

of the covered company. 

(ii) SPV exposure means an 

investment in the debt or equity of an 

SPV, or a credit derivative or equity 

derivative between the covered 

company and a third party where the 

covered company is the protection 

provider and the reference asset is an 

obligation or equity security of, or 

equity investment in, an SPV. 

(2)(i) A covered company must 

determine whether the amount of its 

gross credit exposure to an issuer of 

assets in an SPV, due to an SPV 

exposure, is equal to or greater than 0.25 

percent of the covered company’s tier 1 

capital using one of the following two 

methods: 

(A) The sum of all of the issuer’s 

assets (with each asset valued in 

accordance with § 252.73(a)) in the SPV; 

or 

(B) The application of the lookthrough approach described in 

paragraph (b) of this section. 

(ii) With respect to the determination 

required under paragraph (a)(2)(i) of this 

section, a covered company must use 

the same method to calculate gross 

credit exposure to each issuer of assets 

in a particular SPV. 

(iii) In making a determination under 

paragraph (a)(2)(i) of this section, the 

covered company must consider only 

the credit exposure to the issuer arising 

from the covered company’s SPV 

exposure. 

(iv) For purposes of this paragraph 

(a)(2), a covered company that is unable 

to identify each issuer of assets in an 

SPV must attribute to a single unknown 

counterparty the amount of its gross 

credit exposure to all unidentified 

issuers and calculate such gross credit 

exposure using one method in either 

paragraph (a)(2)(i)(A) or (a)(2)(i)(B) of 

this section. 

(3)(i) If a covered company 

determines pursuant to paragraph (a)(2) 

of this section that the amount of its 

gross credit exposure to an issuer of 

assets in an SPV is less than 0.25 

percent of the covered company’s tier 1 

capital, the amount of the covered 

company’s gross credit exposure to that 

issuer may be attributed to either that 

issuer of assets or the SPV: 

(A) If attributed to the issuer of assets, 

the issuer of assets must be identified as 

a counterparty, and the gross credit 

exposure calculated under paragraph 

(a)(2)(i)(A) of this section to that issuer 

of assets must be aggregated with any 

other gross credit exposures (valued in 

accordance with § 252.73) to that same 

counterparty; and 

(B) If attributed to the SPV, the 

covered company’s gross credit 

exposure is equal to the covered 

company’s SPV exposure, valued in 

accordance with § 252.73(a). 

(ii) If a covered company determines 

pursuant to paragraph (a)(2) of this 

section that the amount of its gross 

credit exposure to an issuer of assets in 

an SPV is equal to or greater than 0.25 

percent of the covered company’s tier 1 

capital or the covered company is 

unable to determine that the amount of 

the gross credit exposure is less than 

0.25 percent of the covered company’s 

tier 1 capital: 

(A) The covered company must 

calculate the amount of its gross credit 

exposure to the issuer of assets in the 

SPV using the look-through approach in 

paragraph (b) of this section; 

(B) The issuer of assets in the SPV 

must be identified as a counterparty, 

and the gross credit exposure calculated 

in accordance with paragraph (b) must 

be aggregated with any other gross 

credit exposures (valued in accordance 

with § 252.73) to that same 

counterparty; and 

(C) When applying the look-through 

approach in paragraph (b) of this 

section, a covered company that is 

unable to identify each issuer of assets 

in an SPV must attribute to a single 

unknown counterparty the amount of its 

gross credit exposure, calculated in 


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1An employer will not be treated as a source of 

repayment under this paragraph because of wages 

and salaries paid to an employee. 

accordance with paragraph (b) of this 

section, to all unidentified issuers. 

(iii) For purposes of this section, a 

covered company must aggregate all 

gross credit exposures to unknown 

counterparties for all SPVs as if the 

exposures related to a single unknown 

counterparty; this single unknown 

counterparty is subject to the limits of 

§ 252.72 as if it were a single 

counterparty. 

(b) Look-through approach. A covered 

company that is required to calculate 

the amount of its gross credit exposure 

with respect to an issuer of assets in 

accordance with this paragraph (b) must 

calculate the amount as follows: 

(1) Where all investors in the SPV 

rank pari passu, the amount of the gross 

credit exposure to the issuer of assets is 

equal to the covered company’s pro rata 

share of the SPV multiplied by the value 

of the underlying asset in the SPV, 

valued in accordance with § 252.73(a); 

and 

(2) Where all investors in the SPV do 

not rank pari passu, the amount of the 

gross credit exposure to the issuer of 

assets is equal to: 

(i) The pro rata share of the covered 

company’s investment in the tranche of 

the SPV; multiplied by 

(ii) The lesser of: 

(A) The market value of the tranche in 

which the covered company has 

invested, except in the case of a debt 

security that is held to maturity, in 

which case the tranche must be valued 

at the amortized purchase price of the 

securities; and 

(B) The value of each underlying asset 

attributed to the issuer in the SPV, each 

as calculated pursuant to § 252.73(a). 

(c) Exposures to third parties. (1) 

Notwithstanding any other requirement 

in this section, a covered company must 

recognize, for purposes of this subpart, 

a gross credit exposure to each third 

party that has a contractual obligation to 

provide credit or liquidity support to an 

SPV whose failure or material financial 

distress would cause a loss in the value 

of the covered company’s SPV exposure. 

(2) The amount of any gross credit 

exposure that is required to be 

recognized to a third party under 

paragraph (c)(1) of this section is equal 

to the covered company’s SPV exposure, 

up to the maximum contractual 

obligation of that third party to the SPV, 

valued in accordance with § 252.73(a). 

(This gross credit exposure is in 

addition to the covered company’s gross 

credit exposure to the SPV or the issuers 

of assets of the SPV, calculated in 

accordance with paragraphs (a) and (b) 

of this section.) 

(3) A covered company must 

aggregate the gross credit exposure to a 

third party recognized in accordance 

with paragraphs (c)(1) and (2) of this 

section with its other gross credit 

exposures to that third party (that are 

unrelated to the SPV) for purposes of 

compliance with the limits of § 252.72. 

§ 252.76 Aggregation of exposures to 

more than one counterparty due to 

economic interdependence or control 

relationships. 

(a) In general. (1) If a covered 

company has an aggregate net credit 

exposure to any counterparty that 

exceeds 5 percent of its tier 1 capital, 

the covered company must assess its 

relationship with the counterparty 

under paragraph (b)(2) of this section to 

determine whether the counterparty is 

economically interdependent with one 

or more other counterparties of the 

covered company and under paragraph 

(c)(1) of this section to determine 

whether the counterparty is connected 

by a control relationship with one or 

more other counterparties. 

(2) If, pursuant to an assessment 

required under paragraph (a)(1) of this 

section, the covered company 

determines that one or more of the 

factors of paragraph (b)(2) or (c)(1) of 

this section are met with respect to one 

or more counterparties, or the Board 

determines pursuant to paragraph (d) of 

this section that one or more other 

counterparties of a covered company are 

economically interdependent or that 

one or more other counterparties of a 

covered company are connected by a 

control relationship, the covered 

company must aggregate its net credit 

exposure to the counterparties for all 

purposes under this subpart, including, 

but not limited to, § 252.72. 

(3) In connection with any request 

pursuant to paragraph (b)(3) or (c)(2) of 

this section, the Board may require the 

covered company to provide additional 

information. 

(b) Aggregation of exposures to more 

than one counterparty due to economic 

interdependence. (1) For purposes of 

this paragraph, two counterparties are 

economically interdependent if the 

failure, default, insolvency, or material 

financial distress of one counterparty 

would cause the failure, default, 

insolvency, or material financial distress 

of the other counterparty, taking into 

account the factors in paragraph (b)(2) of 

this section. 

(2) A covered company must assess 

whether the financial distress of one 

counterparty (counterparty A) would 

prevent the ability of the other 

counterparty (counterparty B) to fully 

and timely repay counterparty B’s 

liabilities and whether the insolvency or 

default of counterparty A is likely to be 

associated with the insolvency or 

default of counterparty B and, therefore, 

these counterparties are economically 

interdependent, by evaluating the 

following: 

(i) Whether 50 percent or more of one 

counterparty’s gross revenue is derived 

from, or gross expenditures are directed 

to, transactions with the other 

counterparty; 

(ii) Whether counterparty A has fully 

or partly guaranteed the credit exposure 

of counterparty B, or is liable by other 

means, in an amount that is 50 percent 

or more of the covered company’s net 

credit exposure to counterparty A; 

(iii) Whether 25 percent or more of 

one counterparty’s production or output 

is sold to the other counterparty, which 

cannot easily be replaced by other 

customers; 

(iv) Whether the expected source of 

funds to repay the loans of both 

counterparties is the same and neither 

counterparty has another independent 

source of income from which the loans 

may be serviced and fully repaid; 1 and 

(v) Whether two or more 

counterparties rely on the same source 

for the majority of their funding and, in 

the event of the common provider’s 

default, an alternative provider cannot 

be found. 

(3)(i) Notwithstanding paragraph 

(b)(2) of this section, if a covered 

company determines that one or more of 

the factors in paragraph (b)(2) is met, the 

covered company may request in 

writing a determination from the Board 

that those counterparties are not 

economically interdependent and that 

the covered company is not required to 

aggregate those counterparties. 

(ii) Upon a request by a covered 

company pursuant to paragraph (b)(3) of 

this section, the Board may grant 

temporary relief to the covered company 

and not require the covered company to 

aggregate one counterparty with another 

counterparty provided that the 

counterparty could promptly modify its 

business relationships, such as by 

reducing its reliance on the other 

counterparty, to address any economic 

interdependence concerns, and 

provided that such relief is in the public 

interest and is consistent with the 

purpose of this subpart and 12 U.S.C. 

5365(e). 

(c) Aggregation of exposures to more 

than one counterparty due to certain 

control relationships. (1) For purposes 

of this subpart, one counterparty 

(counterparty A) is deemed to control 

the other counterparty (counterparty B) 

if: 


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(i) Counterparty A owns, controls, or 

holds with the power to vote 25 percent 

or more of any class of voting securities 

of counterparty B; or 

(ii) Counterparty A controls in any 

manner the election of a majority of the 

directors, trustees, or general partners 

(or individuals exercising similar 

functions) of counterparty B. 

(2)(i) Notwithstanding paragraph 

(c)(1) of this section, if a covered 

company determines that one or more of 

the factors in paragraph (c)(1) is met, the 

covered company may request in 

writing a determination from the Board 

that counterparty A does not control 

counterparty B and that the covered 

company is not required to aggregate 

those counterparties. 

(ii) Upon a request by a covered 

company pursuant to paragraph (c)(2) of 

this section, the Board may grant 

temporary relief to the covered company 

and not require the covered company to 

aggregate counterparty A with 

counterparty B provided that, taking 

into account the specific facts and 

circumstances, such indicia of control 

does not result in the entities being 

connected by control relationships for 

purposes of this subpart, and provided 

that such relief is in the public interest 

and is consistent with the purpose of 

this subpart and 12 U.S.C. 5365(e). 

(d) Board determinations for 

aggregation of counterparties due to 

economic interdependence or control 

relationships. The Board may 

determine, after notice to the covered 

company and opportunity for hearing, 

that one or more counterparties of a 

covered company are: 

(i) Economically interdependent for 

purposes of this subpart, considering 

the factors in paragraph (b)(2) of this 

section, as well as any other indicia of 

economic interdependence that the 

Board determines in its discretion to be 

relevant; or 

(ii) Connected by control 

relationships for purposes of this 

subpart, considering the factors in 

paragraph (c)(1) of this section and 

whether counterparty A: 

(A) Controls the power to vote 25 

percent or more of any class of voting 

securities of Counterparty B pursuant to 

a voting agreement; 

(B) Has significant influence on the 

appointment or dismissal of 

counterparty B’s administrative, 

management, or governing body, or the 

fact that a majority of members of such 

body have been appointed solely as a 

result of the exercise of counterparty A’s 

voting rights; or 

(C) Has the power to exercise a 

controlling influence over the 

management or policies of counterparty 

B. 

(e) Board determinations for 

aggregation of counterparties to prevent 

evasion. Notwithstanding paragraphs (b) 

and (c) of this section, a covered 

company must aggregate its exposures 

to a counterparty with the covered 

company’s exposures to another 

counterparty if the Board determines in 

writing after notice and opportunity for 

hearing, that the exposures to the two 

counterparties must be aggregated to 

prevent evasions of the purposes of this 

subpart, including, but not limited to 

§ 252.76 and 12 U.S.C. 5365(e). 

§ 252.77 Exemptions. 

(a) Exempted exposure categories. 

The following categories of credit 

transactions are exempt from the limits 

on credit exposure under this subpart: 

(1) Any direct claim on, and the 

portion of a claim that is directly and 

fully guaranteed as to principal and 

interest by, the Federal National 

Mortgage Association and the Federal 

Home Loan Mortgage Corporation, only 

while operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency, and 

any additional obligation issued by a 

U.S. government-sponsored entity as 

determined by the Board; 

(2) Intraday credit exposure to a 

counterparty; 

(3) Any trade exposure to a qualifying 

central counterparty related to the 

covered company’s clearing activity, 

including potential future exposure 

arising from transactions cleared by the 

qualifying central counterparty and prefunded default fund contributions; 

(4) Any credit transaction with the 

Bank for International Settlements, the 

International Monetary Fund, the 

International Bank for Reconstruction 

and Development, the International 

Finance Corporation, the International 

Development Association, the 

Multilateral Investment Guarantee 

Agency, or the International Centre for 

Settlement of Investment Disputes; 

(5) Any credit transaction with the 

European Commission or the European 

Central Bank; and 

(6) Any transaction that the Board 

exempts if the Board finds that such 

exemption is in the public interest and 

is consistent with the purpose of this 

subpart. 

(b) Exemption for Federal Home Loan 

Banks. For purposes of this subpart, a 

covered company does not include any 

Federal Home Loan Bank. 

(c) Additional exemptions by the 

Board. The Board may, by regulation or 

order, exempt transactions, in whole or 

in part, from the definition of the term 

‘‘credit exposure,’’ if the Board finds 

that the exemption is in the public 

interest and is consistent with the 

purpose of 12 U.S.C. 5365(e). 

§ 252.78 Compliance. 

(a) Scope of compliance. (1) Using all 

available data, including any data 

required to be maintained or reported to 

the Federal Reserve under this subpart, 

a covered company must comply with 

the requirements of this subpart on a 

daily basis at the end of each business 

day. 

(2) A covered company must report its 

compliance to the Federal Reserve as of 

the end of the quarter, unless the Board 

determines and notifies that company in 

writing that more frequent reporting is 

required. 

(3) In reporting its compliance, a 

covered company must calculate and 

include in its gross credit exposure to an 

issuer of eligible collateral or eligible 

guarantor the amounts of eligible 

collateral, eligible guarantees, eligible 

equity derivatives, and eligible credit 

derivatives that were provided to the 

covered company in connection with 

credit transactions with exempt 

counterparties, valued in accordance 

with and as required by § 252.74(b) 

through (d) and (g). 

(b) Qualifying Master Netting 

Agreement. With respect to any 

qualifying master netting agreement, a 

covered company must establish and 

maintain procedures that meet or 

exceed the requirements of § 217.3(d) of 

the Board’s Regulation Q (12 CFR 

217.3(d)) to monitor possible changes in 

relevant law and to ensure that the 

agreement continues to satisfy these 

requirements. 

(c) Noncompliance. (1) Except as 

otherwise provided in this section, if a 

covered company is not in compliance 

with this subpart with respect to a 

counterparty solely due to the 

circumstances listed in paragraphs 

(c)(2)(i) through (v) of this section, the 

covered company will not be subject to 

enforcement actions for a period of 90 

days (or, with prior notice to the 

company, such shorter or longer period 

determined by the Board, in its sole 

discretion, to be appropriate to preserve 

the safety and soundness of the covered 

company or U.S. financial stability), if 

the covered company uses reasonable 

efforts to return to compliance with this 

subpart during this period. The covered 

company may not engage in any 

additional credit transactions with such 

a counterparty in contravention of this 

rule during the period of 

noncompliance, except as provided in 

paragraph (c)(2). 


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(2) A covered company may request a 

special temporary credit exposure limit 

exemption from the Board. The Board 

may grant approval for such exemption 

in cases where the Board determines 

that such credit transactions are 

necessary or appropriate to preserve the 

safety and soundness of the covered 

company or U.S. financial stability. In 

acting on a request for an exemption, 

the Board will consider the following: 

(i) A decrease in the covered 

company’s capital stock and surplus; 

(ii) The merger of the covered 

company with another covered 

company; 

(iii) A merger of two counterparties; 

or 

(iv) An unforeseen and abrupt change 

in the status of a counterparty as a result 

of which the covered company’s credit 

exposure to the counterparty becomes 

limited by the requirements of this 

section; or 

(v) Any other factor(s) the Board 

determines, in its discretion, is 

appropriate. 

(d) Other measures. The Board may 

impose supervisory oversight and 

additional reporting measures that it 

determines are appropriate to monitor 

compliance with this subpart. Covered 

companies must furnish, in the manner 

and form prescribed by the Board, such 

information to monitor compliance with 

this subpart and the limits therein as the 

Board may require. 

■ 3. Add subpart Q to read as follows: 

Subpart Q—Single-Counterparty Credit 

Limits 

Sec. 

252.170 Applicability and general 

provisions. 

252.171 Definitions. 

252.172 Credit exposure limits. 

252.173 Gross credit exposure. 

252.174 Net credit exposure. 

252.175 Investments in and exposures to 

securitization vehicles, investment 

funds, and other special purpose 

vehicles that are not affiliates of the 

covered foreign entity. 

252.176 Aggregation of exposures to more 

than one counterparty due to economic 

interdependence or control 

relationships. 

252.177 Exemptions. 

252.178 Compliance. 

§ 252.170 Applicability and general 

provisions. 

(a) In general. (1) This subpart 

establishes single counterparty credit 

limits for a covered foreign entity. 

(2) For purposes of this subpart: 

(i) Covered foreign entity means: 

(A) A foreign banking organization 

with total consolidated assets that equal 

or exceed $250 billion with respect to 

its combined U.S. operations; and 

(B) Any U.S. intermediate holding 

company of such a foreign banking 

organization with total consolidated 

assets that equal or exceed $50 billion, 

including a U.S. intermediate holding 

company that is a bank holding 

company. 

(ii) Major foreign banking 

organization means a foreign banking 

organization that is a covered foreign 

entity and meets the requirements of 

§ 252.172(c)(3) through (5). 

(iii) Major U.S. intermediate holding 

company means any covered foreign 

entity that is a U.S. intermediate 

holding company and has total 

consolidated assets that equal or exceed 

$500 billion. 

(b) Credit exposure limits. (1) Section 

252.172 establishes credit exposure 

limits for covered foreign entities, major 

foreign banking organizations, and 

major U.S. intermediate holding 

companies. 

(2) A covered foreign entity is 

required to calculate its aggregate net 

credit exposure, gross credit exposure, 

and net credit exposure to a 

counterparty using the methods in this 

subpart. 

(c) Applicability of this subpart—(1) 

Foreign banking organizations. (i) A 

foreign banking organization that is a 

covered foreign entity as of October 5, 

2018, must comply with the 

requirements of this subpart, including 

but not limited to § 252.172, beginning 

on July 1, 2020, unless that time is 

extended by the Board in writing. 

(ii) Notwithstanding paragraph 

(c)(1)(i) of this section, a foreign banking 

organization that is a major foreign 

banking organization as of October 5, 

2018, must comply with the 

requirements of this subpart, including 

but not limited to § 252.172, beginning 

on January 1, 2020, unless that time is 

extended by the Board in writing. 

(iii) A foreign banking organization 

that becomes a covered foreign entity 

subject to this subpart after October 5, 

2018 must comply with the 

requirements of this subpart beginning 

on the first day of the ninth calendar 

quarter after it becomes a covered 

foreign entity, unless that time is 

accelerated or extended by the Board in 

writing. 

(2) U.S. intermediate holding 

companies. (i) A U.S. intermediate 

holding company that is a covered 

foreign entity but not a major U.S. 

intermediate holding company as of 

October 5, 2018, must comply with the 

requirements of this subpart, including 

but not limited to § 252.172, beginning 

on July 1, 2020, unless that time is 

extended by the Board in writing. 

(ii) Notwithstanding paragraph 

(c)(2)(i) of this section, a U.S. 

intermediate holding company that is a 

major U.S. intermediate holding 

company as of October 5, 2018, must 

comply with the requirements of this 

subpart, including but not limited to 

§ 252.172, beginning on January 1, 2020, 

unless that time is extended by the 

Board in writing. 

(iii) A U.S. intermediate holding 

company that becomes a covered foreign 

entity subject to this subpart after 

October 5, 2018 must comply with the 

requirements of this subpart beginning 

on the first day of the ninth calendar 

quarter after it becomes a covered 

foreign entity, unless that time is 

accelerated or extended by the Board in 

writing. 

(d) Cessation of requirements—(1) 

Foreign banking organizations. (i) Any 

foreign banking organization that 

becomes a covered foreign entity will 

remain subject to the requirements of 

this subpart unless and until its total 

consolidated assets fall below $250 

billion for each of four consecutive 

quarters, as reported on the covered 

foreign entity’s FR Y–7Q, effective on 

the as-of date of the fourth consecutive 

FR Y–7Q. 

(ii) A foreign banking organization 

that is a covered foreign entity and that 

has ceased to be a major foreign banking 

organization for purposes of § 252.172(c) 

is no longer subject to the requirements 

of § 252.172(c) beginning on the first 

day of the calendar quarter following 

the reporting date on which it ceased to 

be a major foreign banking organization; 

provided that the foreign banking 

organization remains subject to the 

requirements of this subpart, unless it 

ceases to be a foreign banking 

organization that is a covered foreign 

entity pursuant to paragraph (d)(1)(i) of 

this section. 

(2) U.S. intermediate holding 

companies. (i) Any U.S. intermediate 

holding company that becomes a 

covered foreign entity will remain 

subject to the requirements of this 

subpart unless and until its total 

consolidated assets fall below $50 

billion for each of four consecutive 

quarters, as reported on the covered 

foreign entity’s FR Y–9C, effective on 

the as-of date of the fourth consecutive 

FR Y–9C. 

(ii) A U.S. intermediate holding 

company that is a covered foreign entity 

and that has ceased to be a major U.S. 

intermediate holding company for 

purposes of § 252.172(c) is no longer 

subject to the requirements of 

§ 252.172(c) beginning on the first day 

of the calendar quarter following the 

reporting date on which it ceased to be 


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1 In addition, under § 252.176, under certain 

circumstances, a covered foreign entity is required 

to aggregate its net credit exposure to one or more 

counterparties for all purposes under this subpart. 

a major U.S. intermediate holding 

company; provided that the U.S. 

intermediate holding company remains 

subject to the requirements of this 

subpart, unless it ceases to be a U.S. 

intermediate holding company that is a 

covered foreign entity pursuant to 

paragraph (d)(2)(i) of this section. 

§ 252.171 Definitions. 

Unless defined in this section, terms 

that are set forth in § 252.2 of this part 

and used in this subpart have the 

definitions assigned in § 252.2. For 

purposes of this subpart: 

(a) Adjusted market value means: 

(1) With respect to the value of cash, 

securities, or other eligible collateral 

transferred by the covered foreign entity 

to a counterparty, the sum of: 

(i) The market value of the cash, 

securities, or other eligible collateral; 

and 

(ii) The product of the market value 

of the securities or other eligible 

collateral multiplied by the applicable 

collateral haircut in Table 1 to § 217.132 

of the Board’s Regulation Q (12 CFR 

217.132); and 

(2) With respect to cash, securities, or 

other eligible collateral received by the 

covered foreign entity from a 

counterparty: 

(i) The market value of the cash, 

securities, or other eligible collateral; 

minus 

(ii) The market value of the securities 

or other eligible collateral multiplied by 

the applicable collateral haircut in Table 

1 to § 217.132 of the Board’s Regulation 

Q (12 CFR 217.132). 

(3) Prior to calculating the adjusted 

market value pursuant to paragraphs (1) 

and (2) of this section, with regard to a 

transaction that meets the definition of 

‘‘repo-style transaction’’ in § 217.2 of the 

Board’s Regulation Q (12 CFR 217.2), 

the covered foreign entity would first 

multiply the applicable collateral 

haircuts in Table 1 to § 217.132 of the 

Board’s Regulation Q (12 CFR 217.132) 

by the square root of 1⁄2. 

(b) Affiliate means, with respect to a 

company: 

(1) Any subsidiary of the company 

and any other company that is 

consolidated with the company under 

applicable accounting standards; or 

(2) For a company that is not subject 

to principles or standards referenced in 

paragraph (b)(1) of this section, any 

subsidiary of the company and any 

other company that would be 

consolidated with the company, if 

consolidation would have occurred if 

such principles or standards had 

applied. 

(c) Aggregate net credit exposure 

means the sum of all net credit 

exposures of a covered foreign entity 

and all of its subsidiaries to a single 

counterparty as calculated under this 

subpart. 

(d) Bank-eligible investments means 

investment securities that a national 

bank is permitted to purchase, sell, deal 

in, underwrite, and hold under 12 

U.S.C. 24 (Seventh) and 12 CFR part 1. 

(e) Capital stock and surplus means, 

with respect to a U.S. intermediate 

holding company, the sum of the 

following amounts in each case as 

reported by the U.S. intermediate 

holding company on the most recent FR 

Y–9C on a consolidated basis: 

(1) The tier 1 capital and tier 2 capital 

of the U.S. intermediate holding 

company, as calculated under the 

capital adequacy guidelines applicable 

to that U.S. intermediate holding 

company under subpart O of the Board’s 

Regulation YY (12 CFR part 252, subpart 

O); and 

(2) The excess allowance for loan and 

lease losses of the U.S. intermediate 

holding company not included in its tier 

2 capital, as calculated under the capital 

adequacy guidelines applicable to that 

U.S. intermediate holding company 

under subpart O of the Board’s 

Regulation YY (12 CFR part 252, subpart 

O). 

(f) Counterparty means with respect to 

a credit transaction: 

(1) With respect to a natural person, 

the natural person, and, if the credit 

exposure of the covered foreign entity to 

such natural person exceeds 5 percent 

of its capital stock and surplus in the 

case of a U.S. intermediate holding 

company that is a covered foreign entity 

with total consolidated assets of less 

than $250 billion, or 5 percent of its tier 

1 capital in the case of a foreign banking 

organization that is a covered foreign 

entity or a U.S. intermediate holding 

company with total consolidated assets 

that equal or exceed $250 billion, the 

natural person and members of the 

person’s immediate family collectively; 

(2) With respect to any company that 

is not an affiliate of the covered foreign 

entity, the company and its affiliates 

collectively; 

(3) With respect to a State, the State 

and all of its agencies, instrumentalities, 

and political subdivisions (including 

any municipalities) collectively; 

(4) With respect to a foreign sovereign 

entity that is not assigned a zero percent 

risk weight under the standardized 

approach in the Board’s Regulation Q 

(12 CFR part 217, subpart D), other than 

the home country foreign sovereign 

entity of a foreign banking organization, 

the foreign sovereign entity and all of its 

agencies and instrumentalities (but not 

including any political subdivision), 

collectively; and 

(5) With respect to a political 

subdivision of a foreign sovereign entity 

such as a state, province, or 

municipality, any political subdivision 

of the foreign sovereign entity and all of 

such political subdivision’s agencies 

and instrumentalities, collectively.1

(g) Covered foreign entity is defined in 

§ 252.170(a)(2)(i) of this subpart. 

(h) Credit derivative has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(i) Credit transaction means, with 

respect to a counterparty: 

(1) Any extension of credit to the 

counterparty, including loans, deposits, 

and lines of credit, but excluding 

uncommitted lines of credit; 

(2) Any repurchase agreement or 

reverse repurchase agreement with the 

counterparty; 

(3) Any securities lending or 

securities borrowing transaction with 

the counterparty; 

(4) Any guarantee, acceptance, or 

letter of credit (including any 

endorsement, confirmed letter of credit, 

or standby letter of credit) issued on 

behalf of the counterparty; 

(5) Any purchase of securities issued 

by or other investment in the 

counterparty; 

(6) Any credit exposure to the 

counterparty in connection with a 

derivative transaction between the 

covered foreign entity and the 

counterparty; 

(7) Any credit exposure to the 

counterparty in connection with a credit 

derivative or equity derivative between 

the covered foreign entity and a third 

party, the reference asset of which is an 

obligation or equity security of, or 

equity investment in, the counterparty; 

and 

(8) Any transaction that is the 

functional equivalent of the above, and 

any other similar transaction that the 

Board, by regulation, determines to be a 

credit transaction for purposes of this 

subpart. 

(j) Depository institution has the same 

meaning as in section 3 of the Federal 

Deposit Insurance Act (12 U.S.C. 

1813(c)). 

(k) Derivative transaction means any 

transaction that is a contract, agreement, 

swap, warrant, note, or option that is 

based, in whole or in part, on the value 

of, any interest in, or any quantitative 

measure or the occurrence of any event 

relating to, one or more commodities, 


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securities, currencies, interest or other 

rates, indices, or other assets. 

(l) Eligible collateral means collateral 

in which, notwithstanding the prior 

security interest of any custodial agent, 

the covered foreign entity has a 

perfected, first priority security interest 

(or the legal equivalent thereof, if 

outside of the United States), with the 

exception of cash on deposit, and is in 

the form of: 

(1) Cash on deposit with the covered 

foreign entity or an affiliate of the 

covered foreign entity (including cash in 

foreign currency or U.S. dollars held for 

the covered foreign entity by a 

custodian or trustee, whether inside or 

outside of the United States); 

(2) Debt securities (other than 

mortgage- or asset-backed securities and 

resecuritization securities, unless those 

securities are issued by a U.S. 

government-sponsored enterprise) that 

are bank-eligible investments and that 

are investment grade, except for any 

debt securities issued by the covered 

foreign entity or any affiliate of the 

covered foreign entity; 

(3) Equity securities that are publicly 

traded, except for any equity securities 

issued by the covered foreign entity or 

any affiliate of the covered foreign 

entity; 

(4) Convertible bonds that are 

publicly traded, except for any 

convertible bonds issued by the covered 

foreign entity or any affiliate of the 

covered foreign entity; or 

(5) Gold bullion. 

(m) Eligible credit derivative means a 

single-name credit derivative or a 

standard, non-tranched index credit 

derivative, provided that: 

(1) The contract meets the 

requirements of an eligible guarantee 

and has been confirmed by the 

protection purchaser and the protection 

provider; 

(2) Any assignment of the contract has 

been confirmed by all relevant parties; 

(3) If the credit derivative is a credit 

default swap, the contract includes the 

following credit events: 

(i) Failure to pay any amount due 

under the terms of the reference 

exposure, subject to any applicable 

minimal payment threshold that is 

consistent with standard market 

practice and with a grace period that is 

closely in line with the grace period of 

the reference exposure; and 

(ii) Receivership, insolvency, 

liquidation, conservatorship, or inability 

of the reference exposure issuer to pay 

its debts, or its failure or admission in 

writing of its inability generally to pay 

its debts as they become due, and 

similar events; 

(4) The terms and conditions dictating 

the manner in which the contract is to 

be settled are incorporated into the 

contract; 

(5) If the contract allows for cash 

settlement, the contract incorporates a 

robust valuation process to estimate loss 

reliably and specifies a reasonable 

period for obtaining post-credit event 

valuations of the reference exposure; 

(6) If the contract requires the 

protection purchaser to transfer an 

exposure to the protection provider at 

settlement, the terms of at least one of 

the exposures that is permitted to be 

transferred under the contract provide 

that any required consent to transfer 

may not be unreasonably withheld; and 

(7) If the credit derivative is a credit 

default swap, the contract clearly 

identifies the parties responsible for 

determining whether a credit event has 

occurred, specifies that this 

determination is not the sole 

responsibility of the protection 

provider, and gives the protection 

purchaser the right to notify the 

protection provider of the occurrence of 

a credit event. 

(n) Eligible equity derivative means an 

equity derivative, provided that: 

(1) The derivative contract has been 

confirmed by all relevant parties; 

(2) Any assignment of the derivative 

contract has been confirmed by all 

relevant parties; and 

(3) The terms and conditions dictating 

the manner in which the derivative 

contract is to be settled are incorporated 

into the contract. 

(o) Eligible guarantee has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(p) Eligible guarantor has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2), but does 

not include the foreign banking 

organization or any entity that is an 

affiliate of either the U.S. intermediate 

holding company or of any part of the 

foreign banking organization’s 

combined U.S. operations. 

(q) Equity derivative has the same 

meaning as ‘‘equity derivative contract’’ 

in § 217.2 of the Board’s Regulation Q 

(12 CFR 217.2). 

(r) Exempt counterparty means an 

entity that is identified as exempt from 

the requirements of this subpart under 

§ 252.177, or that is otherwise excluded 

from this subpart, including any 

sovereign entity assigned a zero percent 

risk weight under the standardized 

approach in the Board’s Regulation Q 

(12 CFR part 217, subpart D). 

(s) Financial entity means: 

(1)(i) A bank holding company or an 

affiliate thereof; a savings and loan 

holding company as defined in section 

10(n) of the Home Owners’ Loan Act (12 

U.S.C. 1467a(n)); a U.S. intermediate 

holding company established or 

designated for purposes of compliance 

with this part; or a nonbank financial 

company supervised by the Board; 

(ii) A depository institution as defined 

in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)); an 

organization that is organized under the 

laws of a foreign country and that 

engages directly in the business of 

banking outside the United States; a 

federal credit union or state credit union 

as defined in section 2 of the Federal 

Credit Union Act (12 U.S.C. 1752(1) and 

(6)); a national association, state 

member bank, or state nonmember bank 

that is not a depository institution; an 

institution that functions solely in a 

trust or fiduciary capacity as described 

in section 2(c)(2)(D) of the Bank Holding 

Company Act (12 U.S.C. 1841(c)(2)(D)); 

an industrial loan company, an 

industrial bank, or other similar 

institution described in section 

2(c)(2)(H) of the Bank Holding Company 

Act (12 U.S.C. 1841(c)(2)(H)); 

(iii) An entity that is state-licensed or 

registered as: 

(A) A credit or lending entity, 

including a finance company; money 

lender; installment lender; consumer 

lender or lending company; mortgage 

lender, broker, or bank; motor vehicle 

title pledge lender; payday or deferred 

deposit lender; premium finance 

company; commercial finance or 

lending company; or commercial 

mortgage company; except entities 

registered or licensed solely on account 

of financing the entity’s direct sales of 

goods or services to customers; 

(B) A money services business, 

including a check casher; money 

transmitter; currency dealer or 

exchange; or money order or traveler’s 

check issuer; 

(iv) Any person registered with the 

Commodity Futures Trading 

Commission as a swap dealer or major 

swap participant pursuant to the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1 et seq.), or an entity that is 

registered with the U.S. Securities and 

Exchange Commission as a securitybased swap dealer or a major securitybased swap participant pursuant to the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.); 

(v) A securities holding company as 

defined in section 618 of the DoddFrank Wall Street Reform and Consumer 

Protection Act (12 U.S.C. 1850a); a 

broker or dealer as defined in sections 

3(a)(4) and 3(a)(5) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(4)–(5)); an investment adviser as 

defined in section 202(a) of the 


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Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)); an investment 

company registered with the U.S. 

Securities and Exchange Commission 

under the Investment Company Act of 

1940 (15 U.S.C. 80a–1 et seq.); or a 

company that has elected to be 

regulated as a business development 

company pursuant to section 54(a) of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–53(a)); 

(vi) A private fund as defined in 

section 202(a) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b– 

2(a)); an entity that would be an 

investment company under section 3 of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–3) but for section 

3(c)(5)(C); or an entity that is deemed 

not to be an investment company under 

section 3 of the Investment Company 

Act of 1940 pursuant to Investment 

Company Act Rule 3a–7 (17 CFR 

270.3a–7) of the U.S. Securities and 

Exchange Commission; 

(vii) A commodity pool, a commodity 

pool operator, or a commodity trading 

advisor as defined, respectively, in 

sections 1a(10), 1a(11), and 1a(12) of the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1a(10), 1a(11), and 1a(12)); a floor 

broker, a floor trader, or introducing 

broker as defined, respectively, in 

sections 1a(22), 1a(23) and 1a(31) of the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1a(22), 1a(23), and 1a(31)); or a 

futures commission merchant as defined 

in section 1a(28) of the Commodity 

Exchange Act of 1936 (7 U.S.C. 1a(28)); 

(viii) An employee benefit plan as 

defined in paragraphs (3) and (32) of 

section 3 of the Employee Retirement 

Income and Security Act of 1974 (29 

U.S.C. 1002); 

(ix) An entity that is organized as an 

insurance company, primarily engaged 

in writing insurance or reinsuring risks 

underwritten by insurance companies, 

or is subject to supervision as such by 

a State insurance regulator or foreign 

insurance regulator; 

(x) Any designated financial market 

utility, as defined in section 803 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (12 U.S.C. 

5462); and 

(xi) An entity that would be a 

financial entity described in paragraphs 

(s)(1)(i) through (x) of this section, if it 

were organized under the laws of the 

United States or any State thereof; and 

(2) Provided that, for purposes of this 

subpart, ‘‘financial entity’’ does not 

include any counterparty that is a 

foreign sovereign entity or multilateral 

development bank. 

(t) Foreign sovereign entity means a 

sovereign entity other than the United 

States government and the entity’s 

agencies, departments, ministries, and 

central bank. 

(u) Gross credit exposure means, with 

respect to any credit transaction, the 

credit exposure of the covered foreign 

entity before adjusting, pursuant to 

§ 252.174, for the effect of any 

qualifying master netting agreement, 

eligible collateral, eligible guarantee, 

eligible credit derivative, eligible equity 

derivative, other eligible hedge, and any 

unused portion of certain extensions of 

credit. 

(v) Immediate family means the 

spouse of an individual, the individual’s 

minor children, and any of the 

individual’s children (including adults) 

residing in the individual’s home. 

(w) Intraday credit exposure means 

credit exposure of a covered foreign 

entity to a counterparty that by its terms 

is to be repaid, sold, or terminated by 

the end of its business day in the United 

States. 

(x) Investment grade has the same 

meaning as in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2). 

(y) Major counterparty means any 

counterparty that is or includes: 

(1) A U.S. bank holding company 

identified as a global systemically 

important BHC pursuant to § 217.402 of 

the Board’s Regulation Q (12 CFR 

217.402); 

(2) A top-tier foreign banking 

organization that meets the 

requirements of § 252.172(c)(3) through 

(5); or 

(3) Any nonbank financial company 

supervised by the Board. 

(z) Major foreign banking organization 

is defined in § 252.170(a)(2)(ii) of this 

subpart. 

(aa) Major U.S. intermediate holding 

company is defined in 

§ 252.170(a)(2)(iii) of this subpart. 

(bb) Multilateral development bank 

has the same meaning as in § 217.2 of 

the Board’s Regulation Q (12 CFR 

217.2). 

(cc) Net credit exposure means, with 

respect to any credit transaction, the 

gross credit exposure of a covered 

foreign entity and all of its subsidiaries 

calculated under § 252.173, as adjusted 

in accordance with § 252.174. 

(dd) Qualifying central counterparty 

has the same meaning as in § 217.2 of 

the Board’s Regulation Q (12 CFR 

217.2). 

(ee) Qualifying master netting 

agreement has the same meaning as in 

§ 217.2 of the Board’s Regulation Q (12 

CFR 217.2). 

(ff) Securities financing transaction 

means any repurchase agreement, 

reverse repurchase agreement, securities 

borrowing transaction, or securities 

lending transaction. 

(gg) Short sale means any sale of a 

security which the seller does not own 

or any sale which is consummated by 

the delivery of a security borrowed by, 

or for the account of, the seller. 

(hh) Sovereign entity means a central 

national government (including the U.S. 

government) or an agency, department, 

ministry, or central bank, but not 

including any political subdivision such 

as a state, province, or municipality. 

(ii) Subsidiary. A company is a 

subsidiary of another company if 

(1) The company is consolidated by 

the other company under applicable 

accounting standards; or 

(2) For a company that is not subject 

to principles or standards referenced in 

paragraph (ii)(1) of this definition, 

consolidation would have occurred if 

such principles or standards had 

applied. 

(jj) Tier 1 capital means common 

equity tier 1 capital and additional tier 

1 capital, as defined in subpart O of the 

Board’s Regulation YY(12 CFR part 252, 

subpart O). 

(kk) Tier 2 capital means tier 2 capital 

as defined in subpart O of the Board’s 

Regulation YY (12 CFR part 252, subpart 

O). 

(ll) Total consolidated assets. (1) A 

foreign banking organization’s total 

consolidated assets are determined 

based on: 

(i) The average of the foreign banking 

organization’s total consolidated assets 

in the four most recent consecutive 

quarters as reported quarterly on the FR 

Y–7Q; or 

(ii) If the foreign banking organization 

has not filed an FR Y–7Q for each of the 

four most recent consecutive quarters, 

the average of the foreign banking 

organization’s total consolidated assets, 

as reported on the foreign banking 

organization’s FR Y–7Q, for the most 

recent quarter or consecutive quarters, 

as applicable; or 

(iii) If the foreign banking 

organization has not yet filed an FR Y– 

7Q, as determined under applicable 

accounting standards. 

(2) A U.S. intermediate holding 

company’s total consolidated assets are 

determined based on: 

(i) The average of the U.S. 

intermediate holding company’s total 

consolidated assets in the four most 

recent consecutive quarters as reported 

quarterly on the FR Y–9C; or 

(ii) If the U.S. intermediate holding 

company has not filed an FR Y–9C for 

each of the four most recent consecutive 

quarters, the average of the U.S. 

intermediate holding company’s total 

consolidated assets, as reported on the 

company’s FR Y–9C, for the most recent 


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quarter or consecutive quarters, as 

applicable; or 

(iii) If the U.S. intermediate holding 

company has not yet filed an FR Y–9C, 

as determined under applicable 

accounting standards. 

§ 252.172 Credit exposure limits. 

(a) General limit on aggregate net 

credit exposure. No U.S. intermediate 

holding company that is a covered 

foreign entity may have an aggregate net 

credit exposure to any counterparty that 

exceeds 25 percent of the consolidated 

capital stock and surplus of the U.S. 

intermediate holding company. 

(b) Limit on aggregate net credit 

exposure for U.S. intermediate holding 

companies with total consolidated 

assets that equal or exceed $250 billion 

and foreign banking organizations that 

are covered foreign entities. (1) No U.S. 

intermediate holding company with 

total consolidated assets that equal or 

exceed $250 billion that is a covered 

foreign entity may have an aggregate net 

credit exposure to any counterparty that 

exceeds 25 percent of the tier 1 capital 

of the U.S. intermediate holding 

company. 

(2) No foreign banking organization 

that is a covered foreign entity may 

permit its combined U.S. operations to 

have aggregate net credit exposure to 

any counterparty that exceeds 25 

percent of the tier 1 capital of the 

foreign banking organization. 

(c) Limit on aggregate net credit 

exposure of major U.S. intermediate 

holding companies and major foreign 

banking organizations to major 

counterparties. (1) No major U.S. 

intermediate holding company may 

have aggregate net credit exposure to 

any major counterparty that exceeds 15 

percent of the tier 1 capital of the major 

U.S. intermediate holding company. 

(2) No major foreign banking 

organization may permit its combined 

U.S. operations to have aggregate net 

credit exposure to any major 

counterparty that exceeds 15 percent of 

the tier 1 capital of the major foreign 

banking organization. 

(3) For purposes of this subpart, a toptier foreign banking organization will be 

a major counterparty if it meets one of 

the following conditions: 

(i) The top-tier foreign banking 

organization determines, pursuant to 12 

CFR 252.153(b)(6), that the top-tier 

foreign banking organization has the 

characteristics of a global systemically 

important banking organization under 

the global methodology; or 

(ii) The Board, using information 

available to the Board, determines: 

(A) That the top-tier foreign banking 

organization would be a global 

systemically important banking 

organization under the global 

methodology; 

(B) That the top-tier foreign banking 

organization, if it were subject to the 

Board’s Regulation Q, would be 

identified as a global systemically 

important BHC under 12 CFR 217.402 of 

the Board’s Regulation Q; or 

(C) That the U.S. intermediate holding 

company, if it were subject to 12 CFR 

217.402 of the Board’s Regulation Q, 

would be identified as a global 

systemically important BHC. 

(4) Each top-tier foreign banking 

organization that controls a U.S. 

intermediate holding company must 

submit to the Board by January 1 of each 

calendar year through the U.S. 

intermediate holding company: 

(A) Notice of whether the home 

country supervisor (or other appropriate 

home country regulatory authority) of 

the top-tier foreign banking organization 

of the U.S. intermediate holding 

company has adopted standards 

consistent with the global methodology; 

and 

(B) Notice of whether the top-tier 

foreign banking organization prepares or 

reports the indicators used by the global 

methodology to identify a banking 

organization as a global systemically 

important banking organization and, if it 

does, whether the top-tier foreign 

banking organization has determined 

that it has the characteristics of a global 

systemically important banking 

organization under the global 

methodology pursuant to 12 CFR 

252.153(b)(6). 

(5) A top-tier foreign banking 

organization that controls a U.S. 

intermediate holding company and 

prepares or reports for any purpose the 

indicator amounts necessary to 

determine whether the top-tier foreign 

banking organization is a global 

systemically important banking 

organization under the global 

methodology must use the data to 

determine whether the top-tier foreign 

banking organization has the 

characteristics of a global systemically 

important banking organization under 

the global methodology. 

(d) Foreign banking organizations 

subject on a consolidated basis to a 

large exposures or single-counterparty 

credit limit regime by its home-country 

supervisor. (1) Notwithstanding 

paragraphs (a) through (c) of this 

section, a foreign banking organization 

that is a covered foreign entity is not 

required to comply with the 

requirements of this subpart with 

respect to limits on the aggregate net 

credit exposure of its combined U.S. 

operations if the foreign banking 

organization certifies to the Board that 

it meets large exposure standards on a 

consolidated basis established by its 

home-country supervisor that are 

consistent with the large exposures 

framework published by the Basel 

Committee on Banking Supervision 

(Basel Large Exposures Framework), 

unless the Board determines in writing, 

after notice to the foreign banking 

organization, that compliance with this 

subpart is required. 

(i) For purposes of this paragraph, 

home-country large exposure standards 

that are consistent with the Basel Large 

Exposures Framework include singlecounterparty credit limits and any 

restrictions set forth in ‘‘Supervisory 

framework for measuring and 

controlling large exposures’’ (2014) 

(Basel LE Standard), as implemented in 

accordance with the Basel LE Standard. 

(ii) [Reserved] 

(2) A foreign banking organization 

that is a covered foreign entity must 

provide to the Board reports relating to 

its compliance with the large exposure 

standards described in paragraph (d)(1) 

of this section concurrently with filing 

the FR Y–7Q or any successor report. 

§ 252.173 Gross credit exposure. 

(a) Calculation of gross credit 

exposure. The amount of gross credit 

exposure of a covered foreign entity to 

a counterparty with respect to a credit 

transaction is, in the case of: 

(1) A deposit of the covered foreign 

entity held by the counterparty, loan by 

a covered foreign entity to the 

counterparty, and lease in which the 

covered foreign entity is the lessor and 

the counterparty is the lessee, equal to 

the amount owed by the counterparty to 

the covered foreign entity under the 

transaction. 

(2) A debt security or debt investment 

held by the covered foreign entity that 

is issued by the counterparty, equal to: 

(i) The market value of the securities, 

for trading and available-for-sale 

securities; and 

(ii) The amortized purchase price of 

the securities or investments, for 

securities or investments held to 

maturity. 

(3) An equity security held by the 

covered foreign entity that is issued by 

the counterparty, equity investment in a 

counterparty, and other direct 

investments in a counterparty, equal to 

the market value. 

(4) A securities financing transaction 

must be valued using any of the 

methods that the covered foreign entity 

is authorized to use under the Board’s 

Regulation Q (12 CFR part 217, subparts 

D and E) to value such transactions: 


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(i)(A) As calculated for each 

transaction, in the case of a securities 

financing transaction between the 

covered foreign entity and the 

counterparty that is not subject to a 

bilateral netting agreement or does not 

meet the definition of ‘‘repo-style 

transaction’’ in § 217.2 of the Board’s 

Regulation Q (12 CFR 217.2); or 

(B) As calculated for a netting set, in 

the case of a securities financing 

transaction between the covered foreign 

entity and the counterparty that is 

subject to a bilateral netting agreement 

with that counterparty and meets the 

definition of ‘‘repo-style transaction’’ in 

§ 217.2 of the Board’s Regulation Q (12 

CFR 217.2); 

(ii) For purposes of paragraph (a)(4)(i) 

of this section, the covered foreign 

entity must: 

(A) Assign a value of zero to any 

security received from the counterparty 

that does not meet the definition of 

‘‘eligible collateral’’ in § 252.171(l); and 

(B) Include the value of securities that 

are eligible collateral received by the 

covered foreign entity from the 

counterparty (including any exempt 

counterparty), calculated in accordance 

with paragraphs (a)(4)(i) through (iv) of 

this section, when calculating its gross 

credit exposure to the issuer of those 

securities; 

(iii) Notwithstanding paragraph 

(a)(4)(i) and (ii) of this section and with 

respect to each credit transaction, a 

covered foreign entity’s gross credit 

exposure to a collateral issuer under this 

paragraph (a)(4) is limited to the 

covered foreign entity’s gross credit 

exposure to the counterparty on the 

credit transaction; 

(iv) In cases where the covered foreign 

entity receives eligible collateral from a 

counterparty in addition to the cash or 

securities received from that 

counterparty, the counterparty may 

reduce its gross credit exposure to that 

counterparty in accordance with 

§ 252.174(b). 

(5) A committed credit line extended 

by a covered foreign entity to a 

counterparty, equal to the face amount 

of the committed credit line. 

(6) A guarantee or letter of credit 

issued by a covered foreign entity on 

behalf of a counterparty, equal to the 

maximum potential loss to the covered 

foreign entity on the transaction. 

(7) A derivative transaction must be 

valued using any of the methods that 

the covered foreign entity is authorized 

to use under the Board’s Regulation Q 

(12 CFR part 217, subparts D and E) to 

value such transactions: 

(i)(A) As calculated for each 

transaction, in the case of a derivative 

transaction between the covered foreign 

entity and the counterparty, including 

an equity derivative but excluding a 

credit derivative described in paragraph 

(a)(8) of this section, that is not subject 

to a qualifying master netting 

agreement; or 

(B) As calculated for a netting set, in 

the case of a derivative transaction 

between the covered foreign entity and 

the counterparty, including an equity 

derivative but excluding a credit 

derivative described in paragraph (a)(8) 

of this section, that is subject to a 

qualifying master netting agreement. 

(ii) In cases where a covered foreign 

entity is required to recognize an 

exposure to an eligible guarantor 

pursuant to § 252.174(d), the covered 

foreign entity must exclude the relevant 

derivative transaction when calculating 

its gross exposure to the original 

counterparty under this section. 

(8) A credit derivative between the 

covered foreign entity and a third party 

where the covered foreign entity is the 

protection provider and the reference 

asset is an obligation or debt security of 

the counterparty, equal to the maximum 

potential loss to the covered foreign 

entity on the transaction. 

(b) Investments in and exposures to 

securitization vehicles, investment 

funds, and other special purpose 

vehicles that are not affiliates. 

Notwithstanding paragraph (a) of this 

section. 

(1) Unless the Board applies the 

requirements of § 252.175 to the 

transaction pursuant to § 252.175(d), a 

U.S. intermediate holding company that 

is a covered foreign entity but has less 

than $250 billion in total consolidated 

assets must: 

(A) Calculate pursuant to § 252.173(a) 

its gross credit exposure due to any 

investment in the debt or equity of, and 

any credit derivative or equity 

derivative between the covered foreign 

entity and a third party where the 

covered foreign entity is the protection 

provider and the reference asset is an 

obligation or equity security of, or 

equity investment in, a securitization 

vehicle, investment fund, and other 

special purpose vehicle that is not an 

affiliate of the covered foreign entity; 

and 

(B) Attribute that gross credit 

exposure to the securitization vehicle, 

investment fund, or other special 

purpose vehicle for purposes of this 

subpart. 

(2) A foreign banking organization 

that is a covered foreign entity or a U.S. 

intermediate holding company with 

total consolidated assets that equal or 

exceed $250 billion must calculate 

pursuant to § 252.175 its gross credit 

exposure due to any investment in the 

debt or equity of, and any credit 

derivative or equity derivative between 

the covered foreign entity and a third 

party where the covered foreign entity is 

the protection provider and the 

reference asset is an obligation or equity 

security of, or equity investment in, a 

securitization vehicle, investment fund, 

and other special purpose vehicle that is 

not an affiliate of the covered foreign 

entity. 

(c) Attribution rule. Notwithstanding 

paragraph (a) of this section, a covered 

foreign entity must treat any transaction 

with any natural person or entity as a 

credit transaction with another party, to 

the extent that the proceeds of the 

transaction are used for the benefit of, 

or transferred to, the other party. 

§ 252.174 Net credit exposure. 

(a) In general. For purposes of this 

subpart, a covered foreign entity must 

calculate its net credit exposure to a 

counterparty by adjusting its gross 

credit exposure to that counterparty in 

accordance with the rules set forth in 

this section. 

(b) Eligible collateral. (1) In 

computing its net credit exposure to a 

counterparty for any credit transaction 

other than a securities financing 

transaction, a covered foreign entity 

must reduce its gross credit exposure on 

the transaction by the adjusted market 

value of any eligible collateral. 

(2) A covered foreign entity that 

reduces its gross credit exposure to a 

counterparty as required under 

paragraph (b)(1) of this section must 

include the adjusted market value of the 

eligible collateral when calculating its 

gross credit exposure to the collateral 

issuer. 

(3) Notwithstanding paragraph (b)(2) 

of this section, a covered foreign entity’s 

gross credit exposure to a collateral 

issuer under this paragraph (b) is 

limited to: 

(i) Its gross credit exposure to the 

counterparty on the credit transaction, 

or 

(ii) In the case of an exempt 

counterparty, the gross credit exposure 

that would have been attributable to that 

exempt counterparty on the credit 

transaction if valued in accordance with 

§ 252.173(a). 

(c) Eligible guarantees. (1) In 

calculating net credit exposure to a 

counterparty for any credit transaction, 

a covered foreign entity must reduce its 

gross credit exposure to the 

counterparty by the amount of any 

eligible guarantee from an eligible 

guarantor that covers the transaction. 

(2) A covered foreign entity that 

reduces its gross credit exposure to a 

counterparty as required under 


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paragraph (c)(1) of this section must 

include the amount of eligible 

guarantees when calculating its gross 

credit exposure to the eligible guarantor. 

(3) Notwithstanding paragraph (c)(2) 

of this section, a covered foreign entity’s 

gross credit exposure to an eligible 

guarantor with respect to an eligible 

guarantee under this paragraph (c) is 

limited to: 

(i) Its gross credit exposure to the 

counterparty on the credit transaction 

prior to recognition of the eligible 

guarantee, or 

(ii) In the case of an exempt 

counterparty, the gross credit exposure 

that would have been attributable to that 

exempt counterparty on the credit 

transaction prior to recognition of the 

eligible guarantee if valued in 

accordance with § 252.173(a). 

(d) Eligible credit and equity 

derivatives. (1) In calculating net credit 

exposure to a counterparty for a credit 

transaction under this section, a covered 

foreign entity must reduce its gross 

credit exposure to the counterparty by: 

(i) In the case of any eligible credit 

derivative from an eligible guarantor, 

the notional amount of the eligible 

credit derivative; or 

(ii) In the case of any eligible equity 

derivative from an eligible guarantor, 

the gross credit exposure amount to the 

counterparty (calculated in accordance 

with § 252.173(a)(7)). 

(2)(i) A covered foreign entity that 

reduces its gross credit exposure to a 

counterparty as provided under 

paragraph (d)(1) of this section must 

include, when calculating its net credit 

exposure to the eligible guarantor, 

including in instances where the 

underlying credit transaction would not 

be subject to the credit limits of 

§ 252.172 (for example, due to an 

exempt counterparty), either 

(A) In the case of any eligible credit 

derivative from an eligible guarantor, 

the notional amount of the eligible 

credit derivative; or 

(B) In the case of any eligible equity 

derivative from an eligible guarantor, 

the gross credit exposure amount to the 

counterparty (calculated in accordance 

with § 252.173(a)(7)). 

(ii) Notwithstanding paragraph 

(d)(2)(i) of this section, in cases where 

the eligible credit derivative or eligible 

equity derivative is used to hedge 

covered positions that are subject to the 

Board’s market risk rule (12 CFR part 

217, subpart F) and the counterparty on 

the hedged transaction is not a financial 

entity, the amount of credit exposure 

that a entity must recognize to the 

eligible guarantor is the amount that 

would be calculated pursuant to 

§ 252.173(a). 

(3) Notwithstanding paragraph (d)(2) 

of this section, a covered foreign entity’s 

gross credit exposure to an eligible 

guarantor with respect to an eligible 

credit derivative or an eligible equity 

derivative under this paragraph (d) is 

limited to: 

(i) Its gross credit exposure to the 

counterparty on the credit transaction 

prior to recognition of the eligible credit 

derivative or the eligible equity 

derivative, or 

(ii) In the case of an exempt 

counterparty, the gross credit exposure 

that would have been attributable to that 

exempt counterparty on the credit 

transaction prior to recognition of the 

eligible credit derivative or the eligible 

equity derivative if valued in 

accordance with § 252.173(a). 

(e) Other eligible hedges. In 

calculating net credit exposure to a 

counterparty for a credit transaction 

under this section, a covered foreign 

entity may reduce its gross credit 

exposure to the counterparty by the face 

amount of a short sale of the 

counterparty’s debt security or equity 

security, provided that: 

(1) The instrument in which the 

covered foreign entity has a short 

position is junior to, or pari passu with, 

the instrument in which the covered 

foreign entity has the long position; and 

(2) The instrument in which the 

covered foreign entity has a short 

position and the instrument in which 

the covered foreign entity has the long 

position are either both treated as 

trading or available-for-sale exposures 

or both treated as held-to-maturity 

exposures. 

(f) Unused portion of certain 

extensions of credit. (1) In computing its 

net credit exposure to a counterparty for 

a committed credit line or revolving 

credit facility under this section, a 

covered foreign entity may reduce its 

gross credit exposure by the amount of 

the unused portion of the credit 

extension to the extent that the covered 

foreign entity does not have any legal 

obligation to advance additional funds 

under the extension of credit and the 

used portion of the credit extension has 

been fully secured by eligible collateral. 

(2) To the extent that the used portion 

of a credit extension has been secured 

by eligible collateral, the covered 

foreign entity may reduce its gross 

credit exposure by the adjusted market 

value of any eligible collateral received 

from the counterparty, even if the used 

portion has not been fully secured by 

eligible collateral. 

(3) To qualify for the reduction in net 

credit exposure under this paragraph, 

the credit contract must specify that any 

used portion of the credit extension 

must be fully secured by the adjusted 

market value of any eligible collateral. 

(g) Credit transactions involving 

exempt counterparties. (1) A covered 

foreign entity’s credit transactions with 

an exempt counterparty are not subject 

to the requirements of this subpart, 

including but not limited to § 252.172. 

(2) Notwithstanding paragraph (g)(1) 

of this section, in cases where a covered 

foreign entity has a credit transaction 

with an exempt counterparty and the 

covered foreign entity has obtained 

eligible collateral from that exempt 

counterparty or an eligible guarantee or 

eligible credit or equity derivative from 

an eligible guarantor, the covered 

foreign entity must include (for 

purposes of this subpart) such exposure 

to the issuer of such eligible collateral 

or the eligible guarantor, as calculated 

in accordance with the rules set forth in 

this section, when calculating its gross 

credit exposure to that issuer of eligible 

collateral or eligible guarantor. 

(h) Currency mismatch adjustments. 

For purposes of calculating its net credit 

exposure to a counterparty under this 

section, a covered foreign entity must 

apply, as applicable: 

(1) When reducing its gross credit 

exposure to a counterparty resulting 

from any credit transaction due to any 

eligible collateral and calculating its 

gross credit exposure to an issuer of 

eligible collateral, pursuant to paragraph 

(b) of this section, the currency 

mismatch adjustment approach of 

§ 217.37(c)(3)(ii) of the Board’s 

Regulation Q (12 CFR 217.37(c)(3)(ii)); 

and 

(2) When reducing its gross credit 

exposure to a counterparty resulting 

from any credit transaction due to any 

eligible guarantee, eligible equity 

derivative, or eligible credit derivative 

from an eligible guarantor and 

calculating its gross credit exposure to 

an eligible guarantor, pursuant to 

paragraphs (c) and (d) of this section, 

the currency mismatch adjustment 

approach of § 217.36(f) of the Board’s 

Regulation Q (12 CFR 217.36(f)). 

(i) Maturity mismatch adjustments. 

For purposes of calculating its net credit 

exposure to a counterparty under this 

section, a covered foreign entity must 

apply, as applicable, the maturity 

mismatch adjustment approach of 

§ 217.36(d) of the Board’s Regulation Q 

(12 CFR 217.36(d)): 

(1) When reducing its gross credit 

exposure to a counterparty resulting 

from any credit transaction due to any 

eligible collateral or any eligible 

guarantees, eligible equity derivatives, 

or eligible credit derivatives from an 

eligible guarantor, pursuant to 


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paragraphs (b) through (d) of this 

section, and 

(2) In calculating its gross credit 

exposure to an issuer of eligible 

collateral, pursuant to paragraph (b) of 

this section, or to an eligible guarantor, 

pursuant to paragraphs (c) and (d) of 

this section; provided that 

(3) The eligible collateral, eligible 

guarantee, eligible equity derivative, or 

eligible credit derivative subject to 

paragraph (i)(1) of this section: 

(1) Has a shorter maturity than the 

credit transaction; 

(2) Has an original maturity equal to 

or greater than one year; 

(3) Has a residual maturity of not less 

than three months; and 

(4) The adjustment approach is 

otherwise applicable. 

§ 252.175 Investments in and exposures to 

securitization vehicles, investment funds, 

and other special purpose vehicles that are 

not affiliates of the covered foreign entity. 

(a) In general. (1) This section applies 

only to a foreign banking organization 

that is a covered foreign entity or a U.S. 

intermediate holding company with 

total consolidated assets that equal or 

exceed $250 billion, provided that: 

(i) In order to avoid evasion of this 

subpart, the Board may determine, after 

notice to the covered foreign entity and 

opportunity for hearing, that a U.S. 

intermediate holding company with less 

than $250 billion in total consolidated 

assets must apply either the approach in 

paragraph (a) of this section or the lookthrough approach in paragraph (b) of 

this section, or must recognize 

exposures to a third party that has a 

contractual obligation to provide credit 

or liquidity support to a securitization 

vehicle, investment fund, or other 

special purpose vehicle that is not an 

affiliate of the covered foreign entity, as 

provided in paragraph (c) of this 

section; and 

(ii) For purposes of paragraph (a)(1)(i) 

of this section, the Board, in its 

discretion and as applicable, may allow 

a covered foreign entity to measure its 

capital base using the covered foreign 

entity’s capital stock and surplus rather 

than its tier 1 capital. 

(2) For purposes of this section, the 

following definitions apply: 

(i) SPV means a securitization vehicle, 

investment fund, or other special 

purpose vehicle that is not an affiliate 

of the covered foreign entity. 

(ii) SPV exposure means an 

investment in the debt or equity of an 

SPV or a credit derivative or equity 

derivative between the covered foreign 

entity and a third party where the 

covered foreign entity is the protection 

provider and the reference asset is an 

obligation or equity security of, or 

equity investment in, an SPV. 

(3)(i) A covered foreign entity must 

determine whether the amount of its 

gross credit exposure to an issuer of 

assets in an SPV, due to an SPV 

exposure, is equal to or greater than 0.25 

percent of the covered foreign entity’s 

tier 1 capital using one of the following 

two methods: 

(A) The sum of all of the issuer’s 

assets (with each asset valued in 

accordance with § 252.173(a)) in the 

SPV; or 

(B) The application of the lookthrough approach described in 

paragraph (b) of this section. 

(ii) With respect to the determination 

required under paragraph (a)(3)(i) of this 

section, a covered foreign entity must 

use the same method to calculate gross 

credit exposure to each issuer of assets 

in a particular SPV. 

(iii) In making a determination under 

paragraph (a)(3)(i) of this section, the 

covered foreign entity must consider 

only the credit exposure to the issuer 

arising from the covered foreign entity’s 

SPV exposure. 

(iv) For purposes of this paragraph 

(a)(3), a covered foreign entity that is 

unable to identify each issuer of assets 

in an SPV must attribute to a single 

unknown counterparty the amount of its 

gross credit exposure to all unidentified 

issuers and calculate such gross credit 

exposure using one method in either 

paragraph (a)(3)(i)(A) or (B) of this 

section. 

(4)(i) If a covered foreign entity 

determines pursuant to paragraph (a)(3) 

of this section that the amount of its 

gross credit exposure to an issuer of 

assets in an SPV is less than 0.25 

percent of the covered foreign entity’s 

tier 1 capital, the amount of the covered 

foreign entity’s gross credit exposure to 

that issuer may be attributed to either 

that issuer of assets or the SPV: 

(A) If attributed to the issuer of assets, 

the issuer of assets must be identified as 

a counterparty, and the gross credit 

exposure calculated under paragraph 

(a)(3)(i)(A) of this section to that issuer 

of assets must be aggregated with any 

other gross credit exposures (valued in 

accordance with § 252.173) to that same 

counterparty; and 

(B) If attributed to the SPV, the 

covered foreign entity’s gross credit 

exposure is equal to the covered foreign 

entity’s SPV exposure, valued in 

accordance with § 252.173(a). 

(ii) If a covered foreign entity 

determines pursuant to paragraph (a)(3) 

of this section that the amount of its 

gross credit exposure to an issuer of 

assets in an SPV is equal to or greater 

than 0.25 percent of the covered foreign 

entity’s tier 1 capital or the covered 

foreign entity is unable to determine 

that the amount of the gross credit 

exposure is less than 0.25 percent of the 

covered foreign entity’s tier 1 capital: 

(A) The covered foreign entity must 

calculate the amount of its gross credit 

exposure to the issuer of assets in the 

SPV using the look-through approach in 

paragraph (b) of this section; 

(B) The issuer of assets in the SPV 

must be identified as a counterparty, 

and the gross credit exposure calculated 

in accordance with paragraph (b) must 

be aggregated with any other gross 

credit exposures (valued in accordance 

with § 252.173) to that same 

counterparty; and 

(C) When applying the look-through 

approach in paragraph (b) of this 

section, a covered foreign entity that is 

unable to identify each issuer of assets 

in an SPV must attribute to a single 

unknown counterparty the amount of its 

gross credit exposure, calculated in 

accordance with paragraph (b) of this 

section, to all unidentified issuers. 

(iii) For purposes of this section, a 

covered foreign entity must aggregate all 

gross credit exposures to unknown 

counterparties for all SPVs as if the 

exposures related to a single unknown 

counterparty; this single unknown 

counterparty is subject to the limits of 

§ 252.172 as if it were a single 

counterparty. 

(b) Look-through approach. A covered 

foreign entity that is required to 

calculate the amount of its gross credit 

exposure with respect to an issuer of 

assets in accordance with this paragraph 

(b) must calculate the amount as 

follows: 

(1) Where all investors in the SPV 

rank pari passu, the amount of the gross 

credit exposure to the issuer of assets is 

equal to the covered foreign entity’s pro 

rata share of the SPV multiplied by the 

value of the underlying asset in the SPV, 

valued in accordance with § 252.173(a); 

and 

(2) Where all investors in the SPV do 

not rank pari passu, the amount of the 

gross credit exposure to the issuer of 

assets is equal to: 

(i) The pro rata share of the covered 

foreign entity’s investment in the 

tranche of the SPV; multiplied by 

(ii) The lesser of: 

(A) The market value of the tranche in 

which the covered foreign entity has 

invested, except in the case of a debt 

security that is held to maturity, in 

which case the tranche must be valued 

at the amortized purchase price of the 

securities; and 

(B) The value of each underlying asset 

attributed to the issuer in the SPV, each 

as calculated pursuant to § 252.173(a). 


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1An employer will not be treated as a source of 

repayment under this paragraph because of wages 

and salaries paid to an employee. 

(c) Exposures to third parties. (1) 

Notwithstanding any other requirement 

in this section, a covered foreign entity 

must recognize, for purposes of this 

subpart, a gross credit exposure to each 

third party that has a contractual 

obligation to provide credit or liquidity 

support to an SPV whose failure or 

material financial distress would cause 

a loss in the value of the covered foreign 

entity’s SPV exposure. 

(2) The amount of any gross credit 

exposure that is required to be 

recognized to a third party under 

paragraph (c)(1) of this section is equal 

to the covered foreign entity’s SPV 

exposure, up to the maximum 

contractual obligation of that third party 

to the SPV, valued in accordance with 

§ 252.173(a). (This gross credit exposure 

is in addition to the covered foreign 

entity’s gross credit exposure to the SPV 

or the issuers of assets of the SPV, 

calculated in accordance with 

paragraphs (a) and (b) of this section.) 

(3) A covered foreign entity must 

aggregate the gross credit exposure to a 

third party recognized in accordance 

with paragraphs (c)(1) and (2) of this 

section with its other gross credit 

exposures to that third party (that are 

unrelated to the SPV) for purposes of 

compliance with the limits of § 252.172. 

§ 252.176 Aggregation of exposures to 

more than one counterparty due to 

economic interdependence or control 

relationships. 

(a) In general. (1)(i) Paragraphs (a)(2) 

through (d) of this section apply only to 

a foreign banking organization that is a 

covered foreign entity or a U.S. 

intermediate holding company with 

total consolidated assets that equal or 

exceed $250 billion. 

(ii) Paragraph (e) of this section 

applies to all covered foreign entities. 

(2)(i) If a covered foreign entity has an 

aggregate net credit exposure to any 

counterparty that exceeds 5 percent of 

its tier 1 capital, the covered foreign 

entity must assess its relationship with 

the counterparty under paragraph (b)(2) 

of this section to determine whether the 

counterparty is economically 

interdependent with one or more other 

counterparties of the covered foreign 

entity and under paragraph (c)(1) of this 

section to determine whether the 

counterparty is connected by a control 

relationship with one or more other 

counterparties. 

(ii) If, pursuant to an assessment 

required under paragraph (a)(2)(i) of this 

section, the covered foreign entity 

determines that one or more of the 

factors of paragraph (b)(2) or (c)(1) of 

this section are met with respect to one 

or more counterparties, or the Board 

determines pursuant to paragraph (d) of 

this section that one or more other 

counterparties of a covered foreign 

entity are economically interdependent 

or that one or more other counterparties 

of a covered foreign entity are connected 

by a control relationship, the covered 

foreign entity must aggregate its net 

credit exposure to the counterparties for 

all purposes under this subpart, 

including, but not limited to, § 252.172. 

(iii) In connection with any request 

pursuant to paragraph (b)(3) or (c)(2) of 

this section, the Board may require the 

covered foreign entity to provide 

additional information. 

(b) Aggregation of exposures to more 

than one counterparty due to economic 

interdependence. (1) For purposes of 

this paragraph, two counterparties are 

economically interdependent if the 

failure, default, insolvency, or material 

financial distress of one counterparty 

would cause the failure, default, 

insolvency, or material financial distress 

of the other counterparty, taking into 

account the factors in paragraph (b)(2) of 

this section. 

(2) A covered foreign entity must 

assess whether the financial distress of 

one counterparty (counterparty A) 

would prevent the ability of the other 

counterparty (counterparty B) to fully 

and timely repay counterparty B’s 

liabilities and whether the insolvency or 

default of counterparty A is likely to be 

associated with the insolvency or 

default of counterparty B and, therefore, 

these counterparties are economically 

interdependent, by evaluating the 

following: 

(i) Whether 50 percent or more of one 

counterparty’s gross revenue is derived 

from, or gross expenditures are directed 

to, transactions with the other 

counterparty; 

(ii) Whether counterparty A has fully 

or partly guaranteed the credit exposure 

of counterparty B, or is liable by other 

means, in an amount that is 50 percent 

or more of the covered foreign entity’s 

net credit exposure to counterparty A; 

(iii) Whether 25 percent or more of 

one counterparty’s production or output 

is sold to the other counterparty, which 

cannot easily be replaced by other 

customers; 

(iv) Whether the expected source of 

funds to repay the loans of both 

counterparties is the same and neither 

counterparty has another independent 

source of income from which the loans 

may be serviced and fully repaid; 1 and 

(v) Whether two or more 

counterparties rely on the same source 

for the majority of their funding and, in 

the event of the common provider’s 

default, an alternative provider cannot 

be found. 

(3)(i) Notwithstanding paragraph 

(b)(2) of this section, if a covered foreign 

entity determines that one or more of 

the factors in paragraph (b)(2) is met, the 

covered foreign entity may request in 

writing a determination from the Board 

that those counterparties are not 

economically interdependent and that 

the covered foreign entity is not 

required to aggregate those 

counterparties. 

(ii) Upon a request by a covered 

foreign entity pursuant to paragraph 

(b)(3) of this section, the Board may 

grant temporary relief to the covered 

foreign entity and not require the 

covered foreign entity to aggregate one 

counterparty with another counterparty 

provided that the counterparty could 

promptly modify its business 

relationships, such as by reducing its 

reliance on the other counterparty, to 

address any economic interdependence 

concerns, and provided that such relief 

is in the public interest and is consistent 

with the purpose of this subpart and 12 

U.S.C. 5365(e). 

(c) Aggregation of exposures to more 

than one counterparty due to certain 

control relationships. (1) For purposes 

of this subpart, one counterparty 

(counterparty A) is deemed to control 

the other counterparty (counterparty B) 

if: 

(i) Counterparty A owns, controls, or 

holds with the power to vote 25 percent 

or more of any class of voting securities 

of counterparty B; or 

(ii) Counterparty A controls in any 

manner the election of a majority of the 

directors, trustees, or general partners 

(or individuals exercising similar 

functions) of counterparty B. 

(2)(i) Notwithstanding paragraph 

(c)(1) of this section, if a covered foreign 

entity determines that one or more of 

the factors in paragraph (c)(1) is met, the 

covered foreign entity may request in 

writing a determination from the Board 

that counterparty A does not control 

counterparty B and that the covered 

foreign entity is not required to 

aggregate those counterparties. 

(ii) Upon a request by a covered 

foreign entity pursuant to paragraph 

(c)(2) of this section, the Board may 

grant temporary relief to the covered 

foreign entity and not require the 

covered foreign entity to aggregate 

counterparty A with counterparty B 

provided that, taking into account the 

specific facts and circumstances, such 

indicia of control does not result in the 

entities being connected by control 

relationships for purposes of this 


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subpart, and provided that such relief is 

in the public interest and is consistent 

with the purpose of this subpart and 12 

U.S.C. 5365(e). 

(d) Board determinations for 

aggregation of counterparties due to 

economic interdependence or control 

relationships. The Board may 

determine, after notice to the covered 

foreign entity and opportunity for 

hearing, that one or more counterparties 

of a covered foreign entity are: 

(1) Economically interdependent for 

purposes of this subpart, considering 

the factors in paragraph (b)(2) of this 

section, as well as any other indicia of 

economic interdependence that the 

Board determines in its discretion to be 

relevant; or 

(2) Connected by control relationships 

for purpose of this subpart, considering 

the factors in paragraph (c)(1) of this 

section and whether counterparty A: 

(i) Controls the power to vote 25 

percent or more of any class of voting 

securities of Counterparty B pursuant to 

a voting agreement; 

(ii) Has significant influence on the 

appointment or dismissal of 

counterparty B’s administrative, 

management, or governing body, or the 

fact that a majority of members of such 

body have been appointed solely as a 

result of the exercise of counterparty A’s 

voting rights; or 

(iii) Has the power to exercise a 

controlling influence over the 

management or policies of counterparty 

B. 

(e) Board determinations for 

aggregation of counterparties to prevent 

evasion. Notwithstanding paragraphs (b) 

and (c) of this section, a covered foreign 

entity must aggregate its exposures to a 

counterparty with the covered foreign 

entity’s exposures to another 

counterparty if the Board determines in 

writing after notice and opportunity for 

hearing, that the exposures to the two 

counterparties must be aggregated to 

prevent evasions of the purposes of this 

subpart, including, but not limited to 

§ 252.176 and 12 U.S.C. 5365(e). 

§ 252.177 Exemptions. 

(a) Exempted exposure categories. 

The following categories of credit 

transactions are exempt from the limits 

on credit exposure under this subpart: 

(1) Any direct claim on, and the 

portion of a claim that is directly and 

fully guaranteed as to principal and 

interest by, the Federal National 

Mortgage Association and the Federal 

Home Loan Mortgage Corporation, only 

while operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency, and 

any additional obligation issued by a 

U.S. government-sponsored entity as 

determined by the Board; 

(2) Intraday credit exposure to a 

counterparty; 

(3) Any trade exposure to a qualifying 

central counterparty related to the 

covered foreign entity’s clearing 

activity, including potential future 

exposure arising from transactions 

cleared by the qualifying central 

counterparty and pre-funded default 

fund contributions; 

(4) Any credit transaction with the 

Bank for International Settlements, the 

International Monetary Fund, the 

International Bank for Reconstruction 

and Development, the International 

Finance Corporation, the International 

Development Association, the 

Multilateral Investment Guarantee 

Agency, or the International Centre for 

Settlement of Investment Disputes; 

(5) Any credit transaction with the 

European Commission or the European 

Central Bank; and 

(6) Any transaction that the Board 

exempts if the Board finds that such 

exemption is in the public interest and 

is consistent with the purpose of this 

subpart. 

(b) Additional exemptions by the 

Board. The Board may, by regulation or 

order, exempt transactions, in whole or 

in part, from the definition of the term 

‘‘credit exposure,’’ if the Board finds 

that the exemption is in the public 

interest and is consistent with the 

purpose of 12 U.S.C. 5365(e). 

§ 252.178 Compliance. 

(a) Scope of compliance. (1) Using all 

available data, including any data 

required to be maintained or reported to 

the Federal Reserve under this subpart, 

a foreign banking organization that is a 

covered foreign entity or a U.S. 

intermediate holding company with 

total consolidated assets that equal or 

exceed $250 billion must comply with 

the requirements of this subpart on a 

daily basis at the end of each business 

day. 

(2) Using all available data, including 

any data required to be maintained or 

reported to the Federal Reserve under 

this subpart, a U.S. intermediate holding 

company with less than $250 billion in 

total consolidated assets must comply 

with the requirements of this subpart on 

a quarterly basis, unless the Board 

determines and notifies the entity in 

writing that more frequent compliance 

is required. 

(3) A covered foreign entity must 

report its compliance to the Federal 

Reserve as of the end of the quarter, 

unless the Board determines and 

notifies that entity in writing that more 

frequent reporting is required. 

(4) In reporting its compliance, a 

covered foreign entity must calculate 

and include in its gross credit exposure 

to an issuer of eligible collateral or 

eligible guarantor the amounts of 

eligible collateral, eligible guarantees, 

eligible equity derivatives, and eligible 

credit derivatives that were provided to 

the covered foreign entity in connection 

with credit transactions with exempt 

counterparties, valued in accordance 

with and as required by § 252.174(b) 

through (d) and (g). 

(b) Qualifying Master Netting 

Agreement. With respect to any 

qualifying master netting agreement, a 

covered foreign entity must establish 

and maintain procedures that meet or 

exceed the requirements of § 217.3(d) of 

the Board’s Regulation Q (12 CFR 

217.3(d)) to monitor possible changes in 

relevant law and to ensure that the 

agreement continues to satisfy these 

requirements. 

(c) Noncompliance. (1) Except as 

otherwise provided in this section, if a 

covered foreign entity is not in 

compliance with this subpart with 

respect to a counterparty solely due to 

the circumstances listed in paragraphs 

(c)(2)(i) through (v) of this section, the 

covered foreign entity will not be 

subject to enforcement actions for a 

period of 90 days (or, with prior notice 

to the foreign entity, such shorter or 

longer period determined by the Board, 

in its sole discretion, to be appropriate 

to preserve the safety and soundness of 

the covered foreign entity or U.S. 

financial stability), if the covered 

foreign entity uses reasonable efforts to 

return to compliance with this subpart 

during this period. The covered foreign 

entity may not engage in any additional 

credit transactions with such a 

counterparty in contravention of this 

rule during the period of 

noncompliance, except as provided in 

paragraph (c)(2) of this section. 

(2) A covered foreign entity may 

request a special temporary credit 

exposure limit exemption from the 

Board. The Board may grant approval 

for such exemption in cases where the 

Board determines that such credit 

transactions are necessary or 

appropriate to preserve the safety and 

soundness of the covered foreign entity 

or U.S. financial stability. In acting on 

a request for an exemption, the Board 

will consider the following: 

(i) A decrease in the covered foreign 

entity’s capital stock and surplus; 

(ii) The merger of the covered foreign 

entity with another covered foreign 

entity; 

(iii) A merger of two counterparties; 

or 


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(iv) An unforeseen and abrupt change 

in the status of a counterparty as a result 

of which the covered foreign entity’s 

credit exposure to the counterparty 

becomes limited by the requirements of 

this section; or 

(v) Any other factor(s) the Board 

determines, in its discretion, is 

appropriate. 

(d) Other measures. The Board may 

impose supervisory oversight and 

additional reporting measures that it 

determines are appropriate to monitor 

compliance with this subpart. Covered 

foreign entities must furnish, in the 

manner and form prescribed by the 

Board, such information to monitor 

compliance with this subpart and the 

limits therein as the Board may require. 

By order of the Board of Governors of the 

Federal Reserve System, July 24, 2018. 

Yao-Chin Chao, 

Assistant Secretary of the Board. 

[FR Doc. 2018–16133 Filed 8–3–18; 8:45 am] 

BILLING CODE 6210–01–P 


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