Source: http://www.fdic.gov/regulations/laws/federal/00RISKBASE.html
Timestamp: 2014-07-23 03:23:27
Document Index: 364966196

Matched Legal Cases: ['art 3', 'arts 208', 'art 325', 'art 231', 'art 3', 'art 325', 'art 3', 'ART 3', 'art 3', 'art 3', 'art 3', 'art 3', 'art 3', 'art 3', 'art 3', 'art 231', 'art 3', 'art 208', 'ART 208', 'art 208', 'art 208', 'art 231', 'ART 225', 'art 225', 'art 225', 'art 225', 'art 231', 'ART 325', 'art 325', 'art 325', 'art 325', 'art 231']

[Federal Register: December 5, 2000 (Volume 65,
Number 234)] [Rules and Regulations] [Page 75856-75859] From the Federal Register Online
via GPO Access [wais.access.gpo.gov] [DOCID:fr05de00-2] [[Page 75856]] ======================================================================= DEPARTMENT OF
THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket No. 00-28] RIN 1557-AB14 FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 225 [Regulation H and Y; Docket No. R-1087] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 325 RIN 3064-AC46 Risk-Based Capital Guidelines; Market Risk Measure; Securities Borrowing Transactions AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors of
the Federal Reserve System; and Federal Deposit Insurance Corporation. ACTION: Interim rule with request for comment. ----------------------------------------------------------------------- SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board of Governors of
the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC)
(collectively, the Agencies) are issuing an interim rule with a request for comment that
amends their market risk rules to revise the capital treatment for cash collateral that is
posted in connection with certain securities borrowing transactions. The effect of the
interim rule is to more appropriately align the capital requirements for these
transactions with the risk involved and to provide a capital treatment for U.S. banking
organizations that is more in line with the capital treatment applied to their domestic
and foreign competitors. DATES: This interim rule is effective January 4, 2001. U.S. banking organizations may
apply the provisions of this interim rule beginning December 5, 2000. Comments must be
received by January 19, 2001. ADDRESSES: Comments should be directed to: OCC: Written comments may be submitted
or by mail to Docket No. 00-28, Office of the Comptroller of the Currency, Public
Information Room, 250 E Street, SW, Mail Stop 1-5, Washington, DC 20219. Comments will be
available for inspection and photocopying at that address. Board: Comments, which should
refer to Docket No. R-1087, may be mailed to Ms. Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551, or
mailed electronically to
regs.comments@federalreserve.gov. Comments addressed to Ms. Johnson may be delivered
to the Board's mailroom between 8:45 a.m. and 5:15 p.m., and to the security control room
outside of those hours. Both the mailroom and the security control room are accessible
from the courtyard entrance on 20th Street between Constitution Avenue and C Street, NW.
Comments may be inspected in Room MP-500 between 9 a.m. and 5 p.m. weekdays pursuant to
Sec. 261.12, except as provided in Sec. 261.14 of the Board's Rules Regarding Availability
of Information, 12 CFR 261.12 and 261.14. FDIC: Written comments should be addressed to
Robert E. Feldman, Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429. Comments may be hand delivered to
the guard station at the rear of the 550 17th Street Building (located on F Street), on
business days between 7 a.m. and 5 p.m. (Fax number: (202) 898-3838; Internet address: comments@fdic.gov). Comments may be inspected and
photocopied in the FDIC Public Information Center, Room 100, 801 17th Street, NW,
Washington, DC, between 9 a.m. and 4:30 p.m. on business days. FOR FURTHER INFORMATION CONTACT: OCC: Roger Tufts, Senior Economic Advisor, Capital
Policy (202) 874-5070, or Ron Shimabukuro, Senior Attorney, Legislative and Regulatory
Activities Division (202) 874-5090, Office of the Comptroller of the Currency, 250 E
Street, SW, Washington, DC 20219. Board: Norah Barger, Assistant Director (202/452-2402),
or David Adkins, Supervisory Financial Analyst (202/452-5259), Division of Banking
Supervision and Regulation. For the hearing impaired only, Telecommunication Device for
the Deaf (TDD), Janice Simms (202/872- 4984), Board of Governors of the Federal Reserve
System, 20th and C Streets, NW, Washington, DC 20551. FDIC: Stephen G. Pfeifer,
Examination Specialist (202/898-8904), Accounting Section, Division of Supervision;
Michael B. Phillips, Counsel, (202/898-3581), Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Securities borrowing transactions were not specifically
addressed in the July 1988 agreement entitled ``International Convergence of Capital
Measurement and Capital Standards'' (Basel Accord), nor in the risk-based capital
guidelines adopted by the Agencies in 1989.\1\ At that time, the involvement of U.S.
banking organizations in corporate debt and equity securities trading activities was
limited. However, in recent years, U.S. banking organizations have experienced a rapid
growth of such activities, and it is recognized that securities borrowing transactions
serve an important function in the operation of securities markets. Securities borrowings
are used in conjunction with short sales, securities fails (securities sold but not made
available for delivery on the settlement date), and option and arbitrage positions.
Securities are also borrowed in order to be pledged against public fund deposits.
Securities borrowing enhances market efficiency and provides an important source of
liquidity to the securities markets.
--------------------------------------------------------------------------- \1\ The Basel Accord was developed by the Basel Committee on Banking Supervision and
endorsed by the central bank governors of the Group of Ten (G-10) countries. The Basel
Accord provides a framework for assessing the capital adequacy of a depository institution
by risk weighting its assets and off-balance sheet exposures primarily based on credit
risk. The Basel Committee on Banking Supervision consists of representatives of the
supervisory authorities and central banks from the Group of Ten countries (Belgium,
Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom,
United States), and Luxembourg.
--------------------------------------------------------------------------- In a typical securities borrowing transaction, a party (for example, a banking
organization) needing to borrow securities obtains the securities from a securities lender
and posts collateral in the form of cash or highly marketable securities with the
securities lender (or an agent acting on behalf of the securities lender) in an amount
that fully covers the value of the securities borrowed plus an additional margin, usually
ranging from two to five percent. In accordance with U.S. generally accepted accounting
principles, cash collateral posted with the securities lender is treated as a receivable
on the books of the securities borrower (that is, it is treated as a cash loan from the
securities borrower to the securities lender, who is the obligor). Under the existing
capital rules, the securities borrower must hold capital against the full amount of this
receivable, i.e., the collateral posted. The borrowed securities generally remain on the
balance sheet of the securities lender, and, therefore, no additional capital charge is
incurred by [[Page 75857]] the securities borrower. Where a securities borrower posts collateral in the form of
securities that continue to be carried on the borrower's books, the only capital charge
incurred by the borrower under the present guidelines is that associated with a direct
holding of the securities. The Agencies recognize that securities borrowing is a long-
established financial activity that historically has resulted in an exceedingly low level
of losses. Applying a standard 100 percent risk weight to the full amount of the cash
collateral posted to support such borrowings, the Agencies further recognize, results in a
capital charge that is inordinately high, not only in light of the risk involved in the
transactions, but also in comparison to the capital required by other U.S. and non-U.S.
regulators of financial firms for the same transactions. Further, under the current
capital rules, a banking organization incurs no incremental capital charge when it borrows
securities and posts securities to collateralize the borrowing, even though it is at risk
for the amount by which the collateral exceeds the value of the securities borrowed. The
Agencies are issuing an interim rule that better reflects the low risk of securities
borrowing and the posting of cash collateral in connection with such transactions and
brings the capital requirements for U.S. banking organizations into better alignment with
the capital requirements of other U.S. and non-U.S. regulators of financial institutions.
Specifically, the Agencies are adopting an interim rule that permits banking organizations
under the market risk rules to exclude from risk-weighted assets receivables arising from
the posting of cash collateral associated with securities borrowing transactions to the
extent such receivables are collateralized by the market value of the securities borrowed,
subject to the following conditions: 1. The transaction is based on securities includable
in the trading book that are liquid and readily marketable; 2. The transaction is marked
to market daily; 3. The transaction is subject to daily margin maintenance requirements,
and; 4. The transaction is a securities contract for the purposes of section 555 of the
Bankruptcy Code (11 U.S.C. 555), a qualified financial contract for the purpose of section
11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting
contract between or among financial institutions for the purposes of sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407),
or the Board's Regulation EE (12 CFR Part 231). Under this treatment, the amount of the
receivable created in connection with the posting of cash collateral in a securities
borrowing transaction that would be excluded from the securities borrower's adjusted
risk-weighted assets is limited to the portion that is collateralized by the market value
of the securities borrowed. The uncollateralized portion, which equals the difference
between the amount of cash collateral that the securities borrower posts in support of the
borrowing and the current market value of the securities borrowed, would be assigned to
the risk weight appropriate to the obligor. The Agencies note that the Basel Accord is
currently under revision. These revisions could result in a more risk-sensitive treatment
for securities borrowing transactions. Accordingly, banking organizations should be aware
that this capital treatment under the market risk rules is subject to change pending the
outcome of the Basel revisions, which may call for higher capital charges for securities
borrowing and similar transactions. The Agencies welcome comment on all aspects of this
interim rule. In particular, the Agencies request industry views on the capital treatment
of the posting of securities collateral associated with securities borrowing transactions.
Under the current capital rules and the interim rule, the posting of securities collateral
will continue to not incur a capital charge even though the securities borrower is at risk
(as it is where cash is posted as collateral) for the amount by which the securities
collateral exceeds the value of the securities borrowed. The Agencies recognize that a
strong case can be made for achieving a greater consistency between the treatment of the
posting of cash collateral and the posting of securities collateral by requiring a capital
charge on the amount by which the market value of the securities posted as collateral
exceeds the market value of securities borrowed. This could be accomplished under the
present capital framework, for example, by requiring the difference in the market value of
the securities posted as collateral and that of the securities borrowed to be treated as a
securities lending transaction. Under such a treatment, the difference would be converted
at 100 percent to an on- balance sheet credit equivalent amount and risk-weighted
according to the obligor. Industry views are sought on whether the Agencies should seek to
further equalize the capital treatment of cash and securities collateral posted in support
of a securities borrowing transaction. In addition, the Agencies are specifically
interested in whether this revision to the calculation of the capital requirement for
securities borrowing transactions should be limited only to those banking organizations
that have implemented the market risk rules. Under the interim rule, no reduction in the
capital requirement for these securities borrowing transactions is available to banking
organizations that have not implemented an approved value-at-risk model. Accordingly,
comment is sought on whether the capital treatment of securities borrowing should be
modified within the non-trading portion of the risk-based capital calculation. Regulatory Flexibility Act Analysis Pursuant to section 605(b) of the Regulatory Flexibility Act, the Agencies have
determined that this interim rule would not have a significant impact on a substantial
number of small entities in accord with the spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.). Accordingly, a regulatory flexibility analysis is
not required. The interim rule would reduce regulatory burden. The rule will only affect
banking organizations that operate under the market risk rules which limits the
applicability of the rule to organizations with significant trading operations. The rule
will reduce regulatory burden for banking organizations that engage in securities
borrowing transactions. Administrative Procedure Act Pursuant to section 553 of the Administrative Procedure Act, 5 U.S.C. 553, the Agencies
find good cause for issuing this interim rule in advance of the receipt of comments from
interested parties. Currently, U.S. banking organizations are at a competitive
disadvantage versus certain foreign organizations because of differing capital treatment
for securities borrowing transactions. The Agencies find that it is contrary to the public
interest for U.S. banking organizations to be subject to more stringent rules (resulting
in higher regulatory capital requirements) than direct competitor institutions outside of
the U.S. that have capital charges determined from rules that are consistent with the
interim rule. This rule relieves a restriction on banking organizations and fosters
consistency among international institutions prior to year-end, but does not raise safety
and soundness concerns. [[Page 75858]] The Agencies are seeking public comment on the interim rule. Paperwork Reduction Act The Agencies have determined that this interim rule does not involve a collection of
3501 et seq.). OCC Unfunded Mandates Reform Act of 1995 Determinations Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104-4 (Unfunded
promulgating a rule that includes a Federal mandate that may result in expenditure by
preamble, this interim rule is limited to banking organizations subject to the market risk
rules and to securities borrowing transactions collateralized with cash. The OCC,
therefore, has determined that the interim rule will not result in expenditures by State,
local, or tribal governments, or by the private sector of $100 million or more.
Accordingly, the OCC has not prepared a budgetary impact statement or specifically
addressed the regulatory alternatives considered. List of Subjects 12 CFR Part 3 Administrative practice and procedure, Capital, National banks, Reporting and
companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 325 Administrative practice and procedure, Bank deposit insurance, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings associations, State non-member
banks. Department of Treasury Office of the Comptroller of the Currency 12 CFR Chapter 1 Authority and Issuance For the reasons set out in the joint preamble, part 3 of chapter I of title 12 of the
Code of Federal Regulations is amended as follows: PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES 1. The authority citation for part 3 continues to read as follows: Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907 and
3909. 2. In appendix A to part 3, in section 3: a. Revise paragraph (a)(4) introductory text;
and b. Add a new footnote 12a. Appendix A To Part 3--Risked-Based Capital Guidelines * * * * * Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-Balance Sheet
Items * * * * * (a) * * * (4) 100 percent risk weight. All other assets not specified
above,\12a\ including: \12a\ A bank subject to the market risk capital requirements
pursuant to appendix B of this part 3 may calculate the capital requirement for qualifying
securities borrowing transactions pursuant to section 3(a)(1)(ii) of appendix B of this
part 3. * * * * * 3. In appendix B to part 3, in section 3, revise paragraph (a)(1) to read as follows: Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk Adjustment (a) * * * (1) Adjusted risk-weighted assets. (i) Covered positions. Calculate adjusted
risk-weighted assets, which equal risk-weighted assets (as determined in accordance with
appendix A of this part), excluding the risk-weighted amount of all covered positions
(except foreign exchange positions outside the trading account and over-the- counter
derivatives positions).\7\ (ii) Securities borrowing transactions. In calculating adjusted
risk-weighted assets, a bank also may exclude a receivable that results from the bank's
posting of cash collateral in a securities borrowing transaction to the extent that the
receivable is collateralized by the market value of the borrowed securities and subject to
the following conditions: (A) The borrowed securities must be includable in the trading
account and must be liquid and readily marketable; (B) The borrowed securities must be
marked to market daily; (C) The receivable must be subject to a daily margining
requirement; and (D) The securities borrowing transaction must be a securities contract
for purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555741(7)), a qualified
financial contract for purposes of section 11(e)(8) of the Federal Deposit Insurance Act
(12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions, for
purposes of sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act
of 1991 (12 U.S.C. 4401-4407) or Regulation EE (12 CFR Part 231). * * * * * \7\ Foreign
exchange positions outside the trading account and all over-the-counter derivative
positions, whether or not in the trading account, must be included in adjusted
risk-weighted assets as determined in appendix A of this part 3. Dated: November 20, 2000. John D. Hawke, Jr., Comptroller of the Currency. Federal Reserve System 12 CFR Chapter 11 Authority and Issuance For the reasons set forth in the joint preamble, part 208 of chapter II of title 12 of
the Code of Federal Regulations is amended as set forth below: PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b),
78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w, 6801, and 6805; 31 U.S.C. 5318; 42
U.S.C. 4012a, 4104a, 4104b, 4106, and 4128. 2. In appendix E to part 208, under section 3, paragraph (a)(1) is revised to read as
follows: Appendix E to part 208--Capital Adequacy Guidelines for State Member Banks; Market Risk
Measure * * * * * Section 3 Adjustments to the Risk-Based Capital Ratio Calculations (a) * * * [[Page 75859]] (1) Adjusted risk-weighted assets. Calcuate adjusted risk- weighted assets, which
equals risk-weighted assets (as determined in accordance with appendix A of this part),
excluding the risk- weighted amounts of all covered positions (except foreign exchange
positions outside the trading account and over-the counter derivative positions) \7\ and
receivables arising from the posting of cash collateral that is associated with securities
borrowing transactions to the extent the receivables are collateralized by the market
value of the borrowed securities, provided that the following conditions are met: (i) The
transaction is based on securities includable in the trading book that are liquid and
readily marketable, (ii) The transaction is marked to market daily, (iii) The transaction
is subject to daily margin maintenance requirements, (iv) The transaction is a securities
contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a
qualified financial contract for the purposes of section 11(e)(8) of the Federal Deposit
Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial
institutions for the purposes of sections 401-407 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE
(12 CFR part 231). * * * * * \7\ Foreign exchange positions outside the trading account
and all over-the-counter derivative positions, whether or not in the trading account, must
be included in the adjusted risk weighted assets asdetermined in appendix A of this part.
* * * * * PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 1. The authority citation for part 225 continues to read as follows: Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c), 1844(b),
1972(1), 3106, 3108, 3310, 3331-3351, 3907. and 3909; 15 U.S.C. 6801 and 6805. 2. In appendix E to part 225, under section 3, paragraph (a)(1) is revised to read as
follows: Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding Companies; Market
Risk Measure * * * * * Section 3. Adjustments to the Risk-Based Capital Ratio Calculations (a) * * * (1) Adjusted risk-weighted assets. Calculate adjusted risk- weighted assets,
which equals risk-weighted assets (as determined in accordance with appendix A of this
part), excluding the risk- weighted amounts of all covered positions (except foreign
exchange positions outside the trading account and over-the-counter derivative positions)
\7\ and receivables arising from the posting of cash collateral that is associated with
securities borrowing transactions to the extent the receivables are collateralized by the
market value of the borrowed securities, provided that the following conditions are met:
(i) The transaction is based on securities includable in the trading book that are liquid
and readily marketable, (ii) The transaction is marked to market daily, (iii) The
transaction is subject to daily margin maintenance requirements, (iv) The transaction is a
securities contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C.
555), a qualified financial contract for the purposes of section 11(e)(8) of the Federal
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among
financial institutions for the purposes of sections 401-407 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the Board's
Regulation EE (12 CFR Part 231). * * * * * \7\ Foreign exchange positions outside the
trading account and all over-the-counter derivative positions, whether or not in the
trading account, must be included in the adjusted risk weighted assets as determined in
appendix A of this part. By order of the Board of Governors of the Federal Reserve System, November 24, 2000.
the Code of Federal Regulations is amended as follows: PART 325--CAPITAL MAINTENANCE 1. The authority citation for part 325 continues to read as follows: Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t),
Stat. 2236, 2355, 2386 (12 U.S.C. 1828 note). 2. In appendix C to part 325, under section 3, paragraph (a)(1) is revised to read as
follows: Appendix C to Part 325--Risk-Based Capital for State Non-Member Banks: Market Risk * * * * * Section 3. Adjustments to the Risk-Based Capital Ratio Calculations (a) * * * * * * * * (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in accordance with
appendix A of this part), excluding the risk- weighted amounts of all covered positions
(except foreign exchange positions outside the trading account and over-the-counter
derivative positions) \7\ and receivables arising from the posting of cash collateral that
is associated with securities borrowing transactions to the extent the receivables are
collateralized by the market value of the borrowed securities, provided that the following
conditions are met: (i) The transaction is based on securities includable in the trading
book that are liquid and readily marketable, (ii) The transaction is marked to market
daily, (iii) The transaction is subject to daily margin maintenance requirements, (iv) The
transaction is a securities contract for the purposes of section 555 of the Bankruptcy
Code (11 U.S.C. 555), a qualified financial contract for the purposes of section 11(e)(8)
of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between
or among financial institutions for the purposes of sections 401-407 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the
Board's Regulation EE (12 CFR Part 231). * * * * * \7\ Foreign exchange positions outside
the trading account and all over-the-counter derivative positions, whether or not in the
appendix A of this part. Dated at Washington, DC, this 21st day of November, 2000. By order of the Board of Directors. Federal Deposit Insurance Corporation. James D. LaPierre, Deputy Executive Secretary.
[FR Doc. 00-30748 Filed 12-4-00; 8:45 am] BILLING CODE 4810-33-P 6210-01-P 6714-01-P Last Updated 12/05/2000