Source: http://www.law.cornell.edu/cfr/text/12/part-208/appendix-E
Timestamp: 2014-07-12 05:29:09
Document Index: 656468165

Matched Legal Cases: ['art 208', 'art 208', 'art 208', 'art 208', 'art 208', 'art;\n45', 'art 231', 'art 208', 'art 208']

12 CFR Part 208, Appendix E to Part 208 - Risk-Based Capital Guidelines; Market Risk | LII / Legal Information Institute
CFR › Title 12 › Chapter II › Subchapter A › Part 208 › Appendix E 12 CFR Part 208, Appendix E to Part 208 - Risk-Based Capital Guidelines; Market Risk
(a) Purpose. This appendix establishes risk-based capital requirements for banks with significant exposure to market risk and provides methods for these banks to calculate their risk-based capital requirements for market risk. This appendix supplements and adjusts the risk-based capital calculations under appendix A to this part and appendix F to this part and establishes public disclosure requirements.
(2) The Board may apply this appendix to any bank if the Board deems it necessary or appropriate because of the level of market risk of the bank or to ensure safe and sound banking practices.
(3) The Board may exclude a bank that meets the criteria of paragraph (b)(1) of this section from application of this appendix if the Board determines that the exclusion is appropriate based on the level of market risk of the bank and is consistent with safe and sound banking practices.
(c) Reservation of authority. (1) The Board may require a bank to hold an amount of capital greater than otherwise required under this appendix if the Board determines that the bank's capital requirement for market risk as calculated under this appendix is not commensurate with the market risk of the bank's covered positions. In making determinations under paragraphs (c)(1) through (c)(3) of this section, the Board will apply notice and response procedures generally in the same manner as the notice and response procedures set forth in [12 CFR 3.12, CFR 263.202, 12 CFR 325.6(c), CFR 567.3(d)].
(2) If the Board determines that the risk-based capital requirement calculated under this appendix by the bank for one or more covered positions or portfolios of covered positions is not commensurate with the risks associated with those positions or portfolios, the Board may require the bank to assign a different risk-based capital requirement to the positions or portfolios that more accurately reflects the risk of the positions or portfolios.
(3) The Board may also require a bank to calculate risk-based capital requirements for specific positions or portfolios under this appendix, or under appendix F to this part or appendix A to this part, as appropriate, to more accurately reflect the risks of the positions.
(ii) Any hedge of a trading position that the Board or the appropriate Reserve Bank, with concurrence of the Board, determines to be outside the scope of the bank's hedging strategy required in paragraph (a)(2) of section 3 of this appendix;
(iv) A credit derivative the bank recognizes as a guarantee for risk-weighted asset amount calculation purposes under appendix F to this part or appendix A to this part;
45 This requirement is met where all transactions under the agreement are (i) executed under U.S. law and (ii) constitute “securities contracts” or “repurchase agreements” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), qualified financial contracts under section 11(e)(8)of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting contracts between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4407), or the Federal Reserve Board's Regulation EE (12 CFR part 231).
Tier 1 capital is defined in appendix A to this part or appendix F to this part, as applicable.
Tier 2 capital is defined in appendix A to this part or appendix F to this part, as applicable.
(c) Requirements for internal models. (1) A bank must obtain the prior written approval of the Board or the appropriate Reserve Bank, with concurrence of the Board, before using any internal model to calculate its risk-based capital requirement under this appendix.
(2) A bank must meet all of the requirements of this section on an ongoing basis. The bank must promptly notify the Board and the appropriate Reserve Bank when:
(i) The bank plans to extend the use of a model that the Board or the appropriate Reserve Bank, with concurrence of the Board, has approved under this appendix to an additional business line or product type;
(ii) The bank makes any change to an internal model approved by the Board or the appropriate Reserve Bank, with concurrence of the Board, under this appendix that would result in a material change in the bank's risk-weighted asset amount for a portfolio of covered positions; or
(3) The Board or the appropriate Reserve Bank, with concurrence of the Board, may rescind its approval of the use of any internal model (in whole or in part) or of the determination of the approach under section 9(a)(2)(ii) of this appendix for a bank's modeled correlation trading positions and determine an appropriate capital requirement for the covered positions to which the model would apply, if the Board or the appropriate Reserve Bank, with concurrence of the Board, determines that the model no longer complies with this appendix or fails to reflect accurately the risks of the bank's covered positions.
(a) Risk-based capital ratio denominators. A bank must calculate its general risk-based capital ratio denominator by following the steps described in paragraphs (a)(1) through (a)(4) of this section. A bank subject to appendix F to this part must use its general risk-based capital ratio denominator for purposes of determining its total risk-based capital ratio and its tier 1 risk-based capital ratio under section 3(a)(2)(ii) and section 3(a)(3)(ii), respectively, of appendix F to this part, provided that the bank may not use the supervisory formula approach (SFA) in section 10(b)(2)(vii)(B) of this appendix for purposes of this calculation. A bank subject to appendix F to this part also must calculate an advanced risk-based capital ratio denominator by following the steps in paragraphs (a)(1) through (a)(4) of this section for purposes of determining its total risk-based capital ratio and its tier 1 risk-based capital ratio under sections 3(a)(2)(i) and section 3(a)(3)(i), respectively, of appendix F to this part.
(B) For a bank subject to appendix F to this part, advanced adjusted risk-weighted assets, which equal risk-weighted assets as determined in accordance with appendix F to this part with the adjustments in paragraph (a)(1)(ii) of this section.
(2) Measure for market risk. The bank must calculate the general measure for market risk (except, as provided in paragraph (a) of this section, that the bank may not use the SFA in section 10(b)(2)(vii)(B) of this appendix for purposes of this calculation), which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures all as defined under this paragraph (a)(2). A bank subject to appendix F to this part also must calculate the advanced measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures as defined under this paragraph (a)(2).
(3) Market risk equivalent assets. The bank must calculate general market risk equivalent assets as the general measure for market risk (as calculated in paragraph (a)(2) of this section) multiplied by 12.5. A bank subject to appendix F to this part also must calculate advanced market risk equivalent assets as the advanced measure for market risk (as calculated in paragraph (a)(2) of this section) multiplied by 12.5.
(ii) A bank subject to appendix F to this part must add advanced market risk equivalent assets (as calculated in paragraph (a)(3) of this section) to advanced adjusted risk-weighted assets (as calculated in paragraph (a)(1)(i) of this section). The resulting sum is the bank's advanced risk-based capital ratio denominator.
(b) Backtesting. A bank must compare each of its most recent 250 business days' trading losses (excluding fees, commissions, reserves, net interest income, and intraday trading) with the corresponding daily VaR-based measures calibrated to a one-day holding period and at a one-tail, 99.0 percent confidence level. A bank must begin backtesting as required by this paragraph no later than one year after the later of January 1, 2013 and the date on which the bank becomes subject to this appendix. In the interim, consistent with safety and soundness principles, a bank subject to this appendix as of its effective date should continue to follow backtesting procedures in accordance with the supervisory expectations of the Board or the appropriate Reserve Bank.
(4) The bank must be able to justify to the satisfaction of the Board or the appropriate Reserve Bank, with the concurrence of the Board, the omission of any risk factors from the calculation of its VaR-based measure that the bank uses in its pricing models.
(5) The bank must demonstrate to the satisfaction of the Board or the appropriate Reserve Bank, with the concurrence of the Board, the appropriateness of any proxies used to capture the risks of the bank's actual positions for which such proxies are used.
(b) Quantitative requirements for VaR-based measure. (1) The VaR-based measure must be calculated on a daily basis using a one-tail, 99.0 percent confidence level, and a holding period equivalent to a 10-business-day movement in underlying risk factors, such as rates, spreads, and prices. To calculate VaR-based measures using a 10-business-day holding period, the bank may calculate 10-business-day measures directly or may convert VaR-based measures using holding periods other than 10 business days to the equivalent of a 10-business-day holding period. A bank that converts its VaR-based measure in such a manner must be able to justify the reasonableness of its approach to the satisfaction of the Board or the appropriate Reserve Bank, with the concurrence of the Board.
(ii) Demonstrate to the Board or the appropriate Reserve Bank, with the concurrence of the Board, that its weighting scheme is more effective than a weighting scheme with an average time lag of at least six months representing the volatility of the bank's trading portfolio over a full business cycle. A bank using this option must update its data more frequently than monthly and in a manner appropriate for the type of weighting scheme.
(c) A bank must divide its portfolio into a number of significant subportfolios approved by the Board or the appropriate Reserve Bank, with concurrence of the Board, for subportfolio backtesting purposes. These subportfolios must be sufficient to allow the bank and the Board or the appropriate Reserve Bank, with concurrence of the Board, to assess the adequacy of the VaR model at the risk factor level; the Board or the appropriate Reserve Bank, with concurrence of the Board, will evaluate the appropriateness of these subportfolios relative to the value and composition of the bank's covered positions. The bank must retain and make available to the Board and the appropriate Reserve Bank the following information for each subportfolio for each business day over the previous two years (500 business days), with no more than a 60-day lag:
(3) A bank must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the bank's stressed VaR-based measure under this section and must be able to provide empirical support for the period used. The bank must obtain the prior approval of the Board or the appropriate Reserve Bank, with concurrence of the Board, for, and notify the Board and the appropriate Reserve Bank if the bank makes any material changes to, these policies and procedures. The policies and procedures must address:
(4) Nothing in this section prevents the Board or the appropriate Reserve Bank, with the concurrence of the Board, from requiring a bank to use a different period of significant financial stress in the calculation of the stressed VaR-based measure.
(a) General requirement. A bank that measures the specific risk of a portfolio of debt positions under section 7(b) of this appendix using internal models must calculate at least weekly an incremental risk measure for that portfolio according to the requirements in this section. The incremental risk measure is the bank's measure of potential losses due to incremental risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions. With the prior approval of the Board or the appropriate Reserve Bank, with the concurrence of the Board, a bank may choose to include portfolios of equity positions in its incremental risk model, provided that it consistently includes such equity positions in a manner that is consistent with how the bank internally measures and manages the incremental risk of such positions at the portfolio level. If equity positions are included in the model, for modeling purposes default is considered to have occurred upon the default of any debt of the issuer of the equity position. A bank may not include correlation trading positions or securitization positions in its incremental risk measure.
(a) General requirement. (1) Subject to the prior approval of the Board or the appropriate Reserve Bank, with the concurrence of the Board, a bank may use the method in this section to measure comprehensive risk, that is, all price risk, for one or more portfolios of correlation trading positions.
(ii) With approval of the Board or the appropriate Reserve Bank, with the concurrence of the Board, and provided the bank has met the requirements of this section for a period of at least one year and can demonstrate the effectiveness of the model through the results of ongoing model validation efforts including robust benchmarking, the greater of:
(2) Other requirements. (i) A bank must retain and make available to the Board and the appropriate Reserve Bank the results of the supervisory stress testing, including comparisons with the capital requirements generated by the bank's comprehensive risk model.
(ii) A bank must report to the Board and the appropriate Reserve Bank promptly any instances where the stress tests indicate any material deficiencies in the comprehensive risk model.
(vii) Securitization positions. (A) General requirements. (1) A bank that does not use appendix F to this part must assign a specific risk-weighting factor to a securitization position using either the simplified supervisory formula approach (SSFA) in accordance with section 11 of this appendix or assign a specific risk-weighting factor of 100 percent to the position.
(2) A bank that uses appendix F to this part must calculate a specific risk add-on for a securitization position using the SFA in section 45 of appendix F to this part and in accordance with paragraph (b)(2)(vii)(B) of this section if the bank and the securitization position each qualifies to use the SFA under appendix F to this part. A bank that uses appendix F to this part and that has a securitization position that does not qualify for the SFA may assign a specific risk-weighting factor to the securitization position using the SSFA in accordance with section 11 of this appendix or assign a specific risk-weighting factor of 100 percent to the position.
(B) SFA. To calculate the specific risk add-on for a securitization position using the SFA, a bank that is subject to appendix F to this part must set the specific risk add-on for the position equal to the risk-based capital requirement, calculated under section 45 of appendix F to this part.
(3) For futures contracts on main indices that are matched by offsetting positions in a basket of stocks comprising the index, a bank may apply a 2.0 percent specific risk-weighting factor to the futures and stock basket positions (long and short), provided that such trades are deliberately entered into and separately controlled, and that the basket of stocks is comprised of stocks representing at least 90.0 percent of the capitalization of the index. A main index refers to the Standard & Poor's 500 Index, the FTSE All-World Index, and any other index for which the bank can demonstrate to the satisfaction of the Board or the appropriate Reserve Bank, with the concurrence of the Board, that the equities represented in the index have liquidity, depth of market, and size of bid-ask spreads comparable to equities in the Standard & Poor's 500 Index and FTSE All-World Index.
(f) Due diligence requirements. (1) A bank must demonstrate to the satisfaction of the Board or the appropriate Reserve Bank, with the concurrence of the Board, a comprehensive understanding of the features of a securitization position that would materially affect the performance of the position by conducting and documenting the analysis set forth in paragraph (f)(2) of this section. The bank's analysis must be commensurate with the complexity of the securitization position and the materiality of the position in relation to capital.
(1) KG is the weighted-average (with unpaid principal used as the weight for each exposure) total capital requirement of the underlying exposures calculated using appendix A to this part]. KG is expressed as a decimal value between zero and 1 (that is, an average risk weight of 100 percent represents a value of KG equal to .08).
[Reg. H, 77 FR 53112, Aug. 30, 2012]
At 77 FR 53113, Aug. 30, 2012, section 3(e)(4) of appendix E to part 208 was amended; however, the amendment could not be incorporated because section 3(e)(4) does not exist in appendix E to part 208.