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]