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FDIC Federal Register Citations
[Federal Register: February 22, 2006 (Volume 71, Number 35)]
[Rules and Regulations]
[Page 8932-8938]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22fe06-7]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 06-02]
RIN 1557-AC90
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: Final rule.
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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 a final rule that amends their market risk rules to revise the
risk-based capital treatment for cash collateral that is posted in
connection with securities borrowing transactions. This final rule will
make permanent, and expand the scope of, an interim final rule issued
in 2000 (the interim rule) that reduced the capital requirement for
certain cash-collateralized securities borrowing transactions of banks
and bank holding companies (banking organizations) that have adopted
the market risk rule. This action more appropriately aligns the capital
requirements for these transactions with the risk involved and provides
a capital treatment for U.S. banking organizations that is more in line
with the capital treatment to which their domestic and foreign
competitors are subject.
DATES: Effective: February 22, 2006.
FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Risk Expert,
Capital Policy (202) 874-6022, or Carl Kaminski, Attorney, Legislative
and Regulatory Activities Division (202) 874-5090, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
[[Page 8933]]
Board: Norah Barger, Associate Director, Division of Banking
Supervision and Regulation, (202) 452-2402, David Adkins, Supervisory
Financial Analyst, Division of Banking Supervision and Regulation,
(202) 452-5259, Juan C. Climent, Supervisory Financial Analyst,
Division of Banking Supervision and Regulation, (202) 872-7526, or Mark
Van Der Weide, Senior Counsel, Legal Division, (202) 452-2263. For the
hearing impaired only, Telecommunication Device for the Deaf (TDD),
(202) 263-4869.
FDIC: Jason Cave, Associate Director, Division of Supervision and
Consumer Protection, (202) 898-3548, John Feid, Senior Capital Markets
Specialist, Division of Supervision and Consumer Protection, (202) 898-
8649, or Michael B. Phillips, Counsel, (202) 898-3581, Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Neither the July 1988 agreement entitled ``International
Convergence of Capital Measurement and Capital Standards'' (Basel
Accord) nor the risk-based capital guidelines adopted by the Agencies
in 1989 (the 1989 rules) specifically address securities borrowing
transactions.\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 been authorized to engage in, and have engaged in,
trading activities to a significantly greater extent. Securities
borrowing transactions serve an important function in the operation of
securities markets. They 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.
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\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.
See 54 FR 4168 (January 27, 1989) (OCC), 54 FR 4186 (January 27,
1989) (Board), 54 FR 11509 (March 21, 1989) (FDIC).
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In a typical securities borrowing transaction, a party (for
example, a banking organization) borrows 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 (GAAP), 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). Under the 1989 rules, the securities borrower is
required to hold capital against the full amount of this receivable--
that is, the amount of the collateral posted. In contrast, under the
1989 rules, where a securities borrower posts collateral in the form of
securities and those securities continue to be carried on the
borrower's books, it does not incur a capital charge on the posting of
the securities as collateral because under GAAP no receivable from the
counterparty is booked on the balance sheet.
II. Interim Final Rule
In December 2000, the Agencies issued the interim rule with request
for comment addressing the risk-based capital treatment of securities
borrowing transactions where the borrower posts cash collateral.\2\ In
developing the interim rule, the Agencies recognized that securities
borrowing is a long-established financial activity that historically
has resulted in an exceedingly low level of losses. Accordingly, the
application of a standard 100 percent risk weight to the full amount of
the cash collateral posted to support such borrowings resulted in a
capital charge that was excessively 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. The Agencies also noted that, under the 1989
rules, a banking organization incurred no capital charge when it
borrowed securities and posted securities to collateralize the
borrowing, even though the organization was at risk for the amount by
which the collateral posted exceeded the value of the securities
borrowed. As a result, securities borrowing transactions in which cash
collateral was used were penalized relative to those where securities
were used as collateral.
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\2\ See 65 FR 75856 (December 5, 2000), 12 CFR part 3, appendix
B (OCC), 12 CFR part 208, appendix A, 12 CFR part 225, appendix A
(Board), 12 CFR part 325, appendix C (FDIC).
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To address the case where securities borrowing transactions are
collateralized by cash, the Agencies issued the interim rule with a
request for comment that would better reflect the low risk of such
transactions. The interim rule applied only to banking organizations
that had adopted the market risk rule because only banking
organizations with significant trading activity tend to engage in
securities borrowing in any volume. Banking organizations that had not
adopted the market risk rule continued to be subject to the risk-based
capital treatment set forth in the 1989 rules for all their securities
borrowing transactions.
Under the interim rule, banking organizations that have adopted the
market risk rule for assessing capital adequacy for trading positions
could exclude from risk-weighted assets receivables arising from the
posting of cash collateral associated with securities borrowing
transactions to the extent such receivables were collateralized by the
market value of the securities borrowed, subject to all of 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 under section 555 of
the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract
under 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 under 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 is 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
[[Page 8934]]
value of the securities borrowed, is assigned to the risk weight
appropriate to the securities lender.
The interim rule did not change the risk-based capital treatment
for the posting of securities collateral, as opposed to cash
collateral. However, the Agencies indicated that pending revisions to
the Basel Accord could require a charge for such borrowing transactions
and, accordingly, the U.S. risk-based capital treatment could change in
the future.
Comments Received
The Agencies received comment letters from eight respondents. The
commenters uniformly supported the interim rule. With regard to the
issue of whether the interim rule should be limited to only those
banking organizations that have implemented the market risk rules, the
three commenters who addressed this issue expressed support for the
extension of the interim rule to all banking organizations. On the
issue of whether the interim rule should be amended to impose a capital
charge on securities-collateralized borrowing transactions, the
Agencies received five comments. Views on this issue were mixed as
three commenters did not support a capital charge, while two expressed
mild support. Another commenter suggested eliminating the requirement
that the transaction be a securities contract under the Bankruptcy
Code, a qualified financial contract under the Federal Deposit
Insurance Act (FDIA), or a netting contract under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) or the Board's
Regulation EE. The commenter suggested that a banking organization
should be permitted to exclude securities borrowing receivables for
risk-based capital purposes as long as the pledge of the borrowed
securities is legally enforceable in the event the counterparty failed.
On November 17, 2005, the Federal Reserve Board hosted a meeting
for all institutions subject to the market risk rule to discuss
finalizing the interim rule. The meeting, which representatives of the
OCC and the FDIC also attended, allowed all parties subject to the
interim rule to discuss their positions with respect to how to finalize
the interim rule on securities borrowing. The Agencies made clear that
they were not seeking a group opinion or consensus, but rather seeking
advice from the participants on an individual basis to better
understand some of the issues. Most meeting participants expressed the
view that it was important to finalize the interim rule in a way that
grants capital relief to securities borrowing transactions in line with
the spirit of the interim rule.
At the meeting, various banking organizations noted that while the
first three criteria of the interim rule were appropriate for
securities borrowing transactions to qualify for the capital treatment
under the interim rule, the fourth criterion presented challenges.
Various banking organizations also indicated that a strict reading of
the fourth criterion would prevent transactions with counterparties
that are not subject to the U.S. Bankruptcy Code, the FDIA, or FDICIA
from qualifying for that treatment. In particular, transactions with
non-U.S. counterparties may not meet the interim rule's fourth
criterion. Uncertainty also exists with regard to transactions with
counterparties that are subject to state insolvency regimes or, like
pension funds, that are not subject to a statutory insolvency regime.
Several participants stated that an important risk mitigant in
securities borrowing transactions is that they typically are conducted
on either an overnight or an open basis, which gives both
counterparties the right to effectively close out at any time. This
feature ensures that the banking organization has the ability to
terminate the transactions early should the banking organization detect
counterparty credit risk problems, effectively reducing counterparty
credit risk to very low levels. Because an open or overnight
transaction allows a banking organization to terminate promptly
transactions with counterparties whose financial condition is
deteriorating, events of default such as failure to post margin are
very seldom encountered. Many institutions present at the meeting
indicated that, in large part because of the ability to terminate
transactions at will, defaults on securities borrowing transactions
have been extremely rare, and defaults resulting in losses have been
even rarer. Following this meeting, several banking organizations
submitted detailed technical suggestions on how to amend the interim
rule to deal with their concerns.
III. Final Rule
After consideration of the comments received, the Agencies are
issuing a final rule (the final rule) identical to the interim rule
with one exception. Specifically, the fourth criterion, which requires
that a cash-collateralized securities borrowing transaction be a
securities contract for purposes of the Bankruptcy Code, a qualified
financial contract for purposes of the FDIA, or a netting contract for
purposes of FDICIA or Regulation EE, will be replaced with the
following:
4.(A) 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); or
(B) If the transaction does not meet the criteria set forth in
paragraph 4. (A) of this section, then either:
(i) The banking organization has conducted sufficient legal review
to reach a well-founded conclusion that (1) the securities borrowing
agreement executed in connection with the transaction provides the
banking organization the right to accelerate, terminate, and close-out
on a net basis all transactions under the agreement and to liquidate or
set off collateral promptly upon an event of counterparty default,
including in a bankruptcy, insolvency, or other similar proceeding of
the counterparty and (2) under applicable law of the relevant
jurisdiction, its rights under the agreement are legal, valid, binding,
and enforceable and any exercise of rights under the agreement will not
be stayed or avoided; or
(ii) The transaction is either overnight or unconditionally
cancelable at any time by the banking organization, and the banking
organization has conducted sufficient legal review to reach a well-
founded conclusion that (1) the securities borrowing agreement executed
in connection with the transaction provides the banking organization
the right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set off collateral
promptly upon an event of counterparty default and (2) under the law
governing the agreement, its rights under the agreement are legal,
valid, binding, and enforceable.
The fourth criterion has been revised to broaden the types of
securities borrowing transactions that qualify for the interim rule.
Subpart (A) preserves the existing method of qualification. It is the
responsibility of the banking organization to determine if the
transaction meets the criteria of subpart (A). If the transaction does
not meet the criteria under subpart (A), or if there is uncertainty
about it, the banking organization can rely on the criteria of
[[Page 8935]]
subpart (B) to apply the capital treatment set forth in this final
rule. Subpart (B) extends the treatment set forth in the interim rule
to transactions that are exempt from any automatic stay in bankruptcy,
insolvency, or similar proceedings or that are conducted on a basis
that is either overnight or that provides the banking organization the
unconditional right to terminate that transaction at will. In this
regard, the Agencies will not view a reasonably short notice period,
typically no more than the standard settlement period associated with
the securities borrowed, as detracting from the unconditionality of the
banking organization's termination rights. With regard to overnight
transactions, the counterparty generally should have no expectation,
either explicit or implicit, that the banking organization will
automatically roll over the transaction.
Under subpart (B), transactions may qualify only if the banking
organization has conducted sufficient legal review to conclude that its
rights under the agreement under which the transactions are executed is
legal, valid, binding, and enforceable. No such review is required for
transactions qualifying under subpart (A). For transactions executed
under standard industry contracts, trade groups representing the
financial services industry with established expertise often commission
and maintain a library of current legal opinions with respect to the
legal status, validity, binding effect, and enforceability of such
contracts with various counterparties under the laws of a number of
jurisdictions. While the Agencies do not discourage a banking
organization from obtaining a specific legal opinion tailored to a
particular transaction, a banking organization's review of the legal
opinions described above to determine the legal status, validity,
binding effect, and enforceability of a particular contract with a
specific counterparty, for example, generally would meet the
requirement for sufficient legal review under subpart (B).
The Agencies believe that the revisions to the fourth criterion set
forth in the final rule resolve, in a manner that preserves safety and
soundness, technical difficulties banking organizations may have had in
meeting this criterion for a number of securities borrowing
transactions.
At this time, the Agencies have decided not to extend the final
rule beyond those banking organizations subject to the market risk
rules. In general, securities borrowings are used to support trading
activities and, thus, typically only banking organizations subject to
the market risk rules could realize a more than de minimis benefit from
the capital treatment set out in this final rule. With regard to the
issue of assessing a capital charge on securities-collateralized
securities borrowing transactions, the Agencies believe that while
imposing such a charge would provide for a more consistent risk-based
treatment of securities borrowing transactions in general, the enhanced
consistency would impose additional burden on the affected banking
organization with only a minimal increase in risk-based capital
requirements. Accordingly, the Agencies will take no action on this
issue at this time.
The Agencies note that the treatment set forth in the final rule
for securities borrowing differs from, and could result in lower
capital charges than, the treatment set forth in the Basel II
framework. The U.S. implementation of that framework could result in a
capital treatment that differs significantly from that set forth in the
final rule.
Effective Date
This final rule is effective as of February 22, 2006. Pursuant to 5
U.S.C. 553, each of the Agencies may issue a rule without delaying its
effectiveness if the agency finds good cause for the immediate
effective date.
For the following reasons, the Agencies find good cause to issue
this rule without a delayed effective date. First, in all respects,
except one, the final rule is identical to the interim final rule that
has been in effect since 2000. Thus, banking institutions are already
subject to similar requirements. Second, the new provision in the final
rule broadens the types of securities transactions that qualify for the
risk-based capital treatment provided in the interim rule. The final
rule thus relieves a restriction on U.S. banking organizations and
fosters consistency among international institutions consistent with
safety and soundness. Elimination of the costs and burdens associated
with the restriction that is being removed warrants making this rule
effective without a delayed effective date.
Subject to certain exceptions, 12 U.S.C. 4802(b)(1) provides that
new regulations and amendments to regulations prescribed by a Federal
banking agency that impose additional reporting, disclosure, or other
new requirements on an insured depository institution must take effect
on the first day of a calendar quarter that begins on or after the date
on which the regulations are published in final form. Like the interim
rule, the final rule imposes no additional reporting, disclosure, or
other new requirements on insured depository institutions. Instead, it
relieves a restriction. For this reason, section 4802(b)(1) does not
apply to this rulemaking. Alternatively, section 4802(b)(1)(A) provides
that the Agencies may, upon finding good cause to do so, determine that
a regulation should become effective without a delayed effective date.
As noted in the previous paragraph, the Agencies find good cause to
issue this rule without a delayed effective date.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Agencies have determined that this final 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.). The final rule is only applicable to banking
organizations subject to the market risk rules, which typically apply
to large banking organizations with significant trading operations.
Therefore, the Agencies do not believe this final rule will likely have
a significant impact on a substantial number of small entities.
Moreover, the overall impact of this final rule is to reduce regulatory
burden. Accordingly, a regulatory flexibility analysis is not required.
Paperwork Reduction Act
The Agencies have determined that this final rule does not involve
a collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
OCC Executive Order 12866
This rule will apply only to the small number of banks that are
subject to the market risk rules. For those banks, the rule more
accurately aligns the risk-based capital charge with the low risk of
securities borrowing transactions, illustrated by a long-established
history of exceedingly low levels of losses. Also, the rule will make
the capital treatment comparable to that of other U.S. and non-U.S.
regulators of financial firms for the same transactions. The OCC has
determined that this joint final rule is not a significant regulatory
action under Executive Order 12866.
OCC Unfunded Mandates Reform Act of 1995 Determinations
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before
[[Page 8936]]
promulgating a rule that includes a Federal mandate that may result in
expenditure by State, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more in any one year. If a
budgetary impact statement is required, section 205 of the Unfunded
Mandates Act also requires an agency to identify and consider a
reasonable number of regulatory alternatives before promulgating a
rule. As discussed in the preamble, this final rule is limited to banks
subject to the market risk rules and to securities borrowing
transactions collateralized with cash. The OCC, therefore, has
determined that the final 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.
OCC Executive Order 13132
The OCC has determined that this rule does not have any Federalism
implications, as required by Executive Order 13132, because it would
not have substantial direct effects on the States, on the relationship
between the national government and the States, or on the distribution
of power and responsibilities among the various levels of government.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding 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 the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter 1
Authority and Issuance
0
The interim final rule amending 12 CFR part 3 Appendices A and B,
published at 65 FR 75856 (December 5, 2000), is adopted as final, with
the following changes:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
0
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.
0
2. 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
Section 3. Adjustments to the Risk-Based Capital Ratio
Calculations.
(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\
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\7\ Foreign exchange position 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.
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(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) (1) 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); or
(2) If the transaction does not meet the criteria set forth in
paragraph (a)(1)(ii)(D)(1) of this section, then either:
(i) The bank has conducted sufficient legal review to reach a
well-founded conclusion that:
(A) The securities borrowing agreement executed in connection
with the transaction provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an
event of counterparty default, including in a bankruptcy,
insolvency, or other similar proceeding of the counterparty; and
(B) Under applicable law of the relevant jurisdiction, its
rights under the agreement are legal, valid, binding, and
enforceable and any exercise of rights under the agreement will not
be stayed or avoided; or
(ii) The transaction is either overnight or unconditionally
cancelable at any time by the bank, and the bank has conducted
sufficient legal review to reach a well-founded conclusion that:
(A) The securities borrowing agreement executed in connection
with the transaction provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an
event of counterparty default; and
(B) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
* * * * *
Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
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 (REGULATION H)
0
1. The authority citation for part 208 continues to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j),
1828(o), 1831, 1831o, 1831-1, 1831r-1, 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.
0
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 8937]]
(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:
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\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.
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(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, and
(iv)(A) 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); or
(B) If the transaction does not meet the criteria set forth in
paragraph (iv)(A) of this section, then either:
(1) The bank has conducted sufficient legal review to reach a
well-founded conclusion that:
(i) The securities borrowing agreement executed in connection
with the transaction provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an
event of counterparty default, including in a bankruptcy,
insolvency, or other similar proceeding of the counterparty; and
(ii) Under applicable law of the relevant jurisdiction, its
rights under the agreement are legal, valid, binding, and
enforceable and any exercise of rights under the agreement will not
be stayed or avoided; or
(2) The transaction is either overnight or unconditionally
cancelable at any time by the bank, and the bank has conducted
sufficient legal review to reach a well-founded conclusion that:
(i) The securities borrowing agreement executed in connection
with the transaction provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an
event of counterparty default; and
(ii) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
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)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907,
and 3909; 15 U.S.C. 6801 and 6805.
0
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, and
(iv)(A) 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); or
(B) If the transaction does not meet the criteria set forth in
paragraph (iv)(A) of this section, then either:
(1) The banking organization has conducted sufficient legal
review to reach a well-founded conclusion that:
(i) The securities borrowing agreement executed in connection
with the transaction provides the banking organization the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set off collateral promptly
upon an event of counterparty default, including in a bankruptcy,
insolvency, or other similar proceeding of the counterparty; and
(ii) Under applicable law of the relevant jurisdiction, its
rights under the agreement are legal, valid, binding, and
enforceable and any exercise of rights under the agreement will not
be stayed or avoided; or
(2) The transaction is either overnight or unconditionally
cancelable at any time by the banking organization, and the banking
organization has conducted sufficient legal review to reach a well-
founded conclusion that:
(i) The securities borrowing agreement executed in connection
with the transaction provides the banking organization the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set off collateral promptly
upon an event of counterparty default; and
(ii) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
* * * * *
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
0
For the reasons set forth in the joint preamble, part 325 of chapter
III of title 12 of the Code of Federal Regulations is amended as
follows:
PART 325--CAPITAL MAINTENANCE
0
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), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, 2386 (12 U.S.C. 1828 note).
0
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, and
[[Page 8938]]
(iv)(A) 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); or
(B) If the transaction does not meet the criteria set forth in
paragraph (iv)(A) of this section, then either:
(1) The bank has conducted sufficient legal review to reach a
well-founded conclusion that:
(i) The securities borrowing agreement executed in connection
with the transaction provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an
event of counterparty default, including in a bankruptcy,
insolvency, or other similar proceeding of the counterparty; and
(ii) Under applicable law of the relevant jurisdiction, its
rights under the agreement are legal, valid, binding, and
enforceable and any exercise of rights under the agreement will not
be stayed or avoided; or
(2) The transaction is either overnight or unconditionally
cancelable at any time by the bank, and the bank has conducted
sufficient legal review to reach a well-founded conclusion that:
(i) The securities borrowing agreement executed in connection
with the transaction provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an
event of counterparty default; and
(ii) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
* * * * *
Dated: February 9, 2006.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, February 8, 2006.
Jennifer J. Johnson
Secretary of the Board
Dated at Washington, DC, this 10th day of February, 2006.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 06-1533 Filed 2-21-06; 8:45 am]
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