DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 02-04]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1085]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC17
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 2002-5]
RIN 1550-AB11
Risk-Based Capital Standards: Claims on Securities Firms
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); and Office of Thrift Supervision,
Treasury (OTS).
ACTION: Final rule.
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SUMMARY: The OCC, Board, FDIC, and OTS (collectively, the Agencies) are
amending their respective risk-based capital standards for banks, bank
holding companies, and savings associations (collectively, institutions
or banking organizations) with regard to the risk weighting of claims
on, and claims guaranteed by, qualifying securities firms. This rule
reduces the risk weight applied to certain claims on, and claims
guaranteed by, qualifying securities firms incorporated in the United
States and in other countries that are members of the Organization for
Economic Cooperation and Development (OECD) from 100 percent to 20
percent under the Agencies' risk-based capital rules. In addition,
consistent with the existing rules of the FRB and the OCC, the FDIC and
OTS are amending their risk-based capital standards to permit a zero
percent risk weight for certain claims on qualifying securities firms
that are collateralized by cash on deposit in the lending institution
or by securities issued or guaranteed by the United States or other
OECD central governments.
DATES: This final rule is effective on July 1, 2002. The Agencies will
not object if an institution wishes to apply the provisions of this
final rule beginning on the date it is published in the Federal
Register.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Risk Expert (202/874-5070), Capital Policy
Division; or Ron Shimabukuro, Counsel (202/874-5090), Legislative and
Regulatory Activities Division, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219.
Board: Norah Barger, Deputy Associate Director (202/452-2402),
Barbara Bouchard, Assistant Director (202-452-3072), or John F.
Connolly, Supervisory Financial Analyst (202/452-3621), Division of
Banking Supervision and Regulation; or Mark E. Van Der Weide, Counsel
(202/452-2263), Legal Division, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, NW., Washington,
DC 20551. For users of Telecommunications Device for the Deaf (``TDD'')
only, contact 202/263-4869.
FDIC: For supervisory issues, Stephen G. Pfeifer, Examination
Specialist (202/898-8904), Accounting Section, Division of Supervision;
for legal issues, Leslie Sallberg, Counsel, (202/898-8876), Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
OTS: David W. Riley, Project Manager, (202/906-6669), Supervision
Policy; Teresa A. Scott, Counsel, Banking and Finance (202/906-6478),
Regulations and Legislation Division, Office of the Chief Counsel,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION: The Agencies' risk-based capital standards
are based upon principles contained in the July 1988 agreement entitled
``International Convergence of Capital Measurement and Capital
Standards'' (Basel Accord or Accord). The Basel Accord was developed by
the Basel Committee on Banking Supervision (Basel Committee) and
endorsed by the central bank governors of the Group of Ten (G-10)
countries.\1\ The Basel Accord provides a framework for
[[Page 16972]]
assessing the capital adequacy of a bank by risk weighting its assets
and off-balance-sheet exposures primarily based on credit risk.
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\1\ The G-10 countries are Belgium, Canada, France, Germany,
Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States. The Basel Committee is comprised of
representatives of the central banks and supervisory authorities
from the G-10 countries, Luxembourg, and Spain.
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The original Basel Accord imposed a 20 percent risk weight for
claims on banks incorporated in the United States or other OECD
countries \2\ and a 100 percent risk weight for claims on securities
firms and most other nonbanking firms. In April 1998, the Basel
Committee amended the Basel Accord to lower the risk weight from 100
percent to 20 percent for claims on, and claims guaranteed by,
securities firms incorporated in OECD countries if such firms are
subject to supervisory and regulatory arrangements that are comparable
to those imposed on OECD banks.\3\ Such arrangements must include risk-
based capital requirements that are comparable to those applied to
banks under the Accord and its amendment to incorporate market risks.
The term ``comparable'' is also intended to require that qualifying
securities firms (but not necessarily their parent organizations) be
subject to consolidated regulation and supervision with respect to
their subsidiaries.
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\2\ The OECD is an international organization of countries that
are committed to market-oriented economic policies, including the
promotion of private enterprise and free market prices, liberal
trade policies, and the absence of exchange controls. For purposes
of the Basel Accord, OECD countries are those countries that are
full members of the OECD or that have concluded special lending
arrangements associated with the International Monetary Fund's
General Arrangements to Borrow. A listing of OECD member countries
is available at www.oecdwash.org. Any OECD country
that has
rescheduled its external sovereign debt, however, may not receive
the preferential capital treatment generally granted to OECD
countries under the Accord for five years after such rescheduling.
\3\ Prior to this 1998 amendment, the Basel Accord generally
permitted claims on securities firms to receive a preferential risk
weight only if the claims were covered by a qualifying guarantee or
secured by qualifying collateral. In general, under the Agencies'
risk-based capital standards, qualifying guarantees are limited to
guarantees by central governments (including U.S. government
agencies), U.S. government-sponsored agencies, state and local
governments of the OECD-based group of countries, multilateral
lending institutions, regional development banks, U.S. depository
institutions, and certain foreign banks. Qualifying collateral is
generally limited to cash on deposit in the lending bank, securities
issued or guaranteed by the U.S. or other OECD central governments
(including U.S. government agencies), and securities issued or
guaranteed by U.S. government-sponsored agencies, multilateral
lending institutions, or regional development banks. Claims covered
by a qualifying guarantee or secured by qualifying collateral
generally are accorded a risk weight of either zero percent or 20
percent.
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One of the primary reasons that the Basel Committee amended the
Accord was to make it consistent with the European Union's (EU) Capital
Adequacy Directive (CAD). A number of European countries have followed
the CAD for some time. The CAD, which subjects EU banks and securities
firms to the same capital requirements, applies a 20 percent risk
weight to claims on both banks and securities firms.
Proposed Rule
The Agencies proposed to reduce from 100 percent to 20 percent the
risk weight applied to certain claims on, and claims guaranteed by,
qualifying securities firms under the Agencies' risk-based capital
rules.\4\ Under the proposal, as under the Basel Accord, qualifying
securities firms must be incorporated in an OECD country and subject to
supervisory and regulatory arrangements comparable to those imposed on
OECD banks.
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\4\ 65 FR 76180 (Dec. 6, 2000).
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With respect to securities firms incorporated in the United States,
the proposal would have required U.S. securities firms to be broker-
dealers registered with the Securities and Exchange Commission (SEC) to
be qualifying securities firms. Qualifying U.S. securities firms also
had to be subject to and in compliance with the SEC's net capital rule,
and margin and other regulatory requirements applicable to registered
broker-dealers.
To be qualifying securities firms, the proposal would have required
securities firms incorporated in any other OECD country to be subject
to consolidated supervision and regulation (covering their
subsidiaries, but not necessarily their parent organizations)
comparable to that imposed on depository institutions in OECD
countries. This includes risk-based capital requirements comparable to
those applied to banks under the Accord \5\ and banking organizations
under the Agencies' capital rules.
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\5\ This standard generally would include firms engaged in
securities activities in the EU that are subject to the CAD.
Securities firms in other OECD countries would need to demonstrate
to institutions and the Agencies that their supervision and
regulation qualify as comparable under this rule and the Accord.
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Finally, for claims on a qualifying securities firm to be accorded
a 20 percent risk weight, the proposal would have required the firm to
satisfy a rating standard. As proposed, a qualifying securities firm,
or its parent consolidated group, would have been required to have a
long-term issuer credit rating,\6\ or a rating on at least one issue of
long-term (i.e., one year or longer) unsecured debt, from a nationally
recognized statistical rating organization (rating agency) that is in
one of the three highest investment grade rating categories \7\ used by
the rating agency.\8\
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\6\ A long-term issuer credit rating is one that assesses a
firm's overall capacity and willingness to pay on a timely basis its
unsecured financial obligations. Under the proposed rule, issuer
credit ratings that are assigned to a non-broker-dealer subsidiary
or affiliate of the securities firm (other than the parent
consolidated group), or debt ratings on long-term unsecured debt
issues of such a subsidiary or affiliate of the securities firm,
would not satisfy the rating criterion.
\7\ The Agencies recognize that recent international
consultative papers and a rule issued by the banking agencies used
the two highest investment grade rating categories to identify
assets that would qualify for a 20 percent risk weight. Both the
Basel Committee's June 1999 consultative paper entitled ``A New
Capital Adequacy Framework'', and the Committee's January 2001
second consultative paper entitled ``The New Basel Capital Accord'',
proposed that a bank, commercial firm, or securitization position
rated in one of the two highest investment grade rating categories
would qualify for a 20 percent risk weight. In addition, the
Agencies' November 2001 final rule on recourse and direct credit
substitutes provides that a securitization position rated in one of
the two highest investment grade rating categories may qualify for a
20 percent risk weight. 66 FR 59614 (November 29, 2001) (Recourse
Rule).
The Agencies considered a rating requirement for securities
firms consistent with these other proposals, but decided it would be
appropriate to propose requiring qualifying securities firms to be
rated in one of the top three rating categories of a rating agency.
In addition to meeting the rating standard, qualifying securities
firms would be subject to supervision and regulation comparable to
depository institutions in OECD countries. This supervision
distinguishes qualifying securities firms from other types of
entities, such as commercial firms. Further, under the current Basel
Accord, claims on OECD banks and securities firms receive a 20
percent risk weight without satisfying a similar credit rating
requirement. Thus, while the Agencies considered both a higher
rating requirement, on the one hand, and no rating requirement, on
the other, the Agencies concluded the proposed rating requirement
struck an appropriate balance.
\8\ The Recourse Rule defined ``nationally recognized
statistical rating organization'' as an entity recognized by the
Division of Market Regulation of the SEC as a nationally recognized
statistical rating organization for various purposes, including the
Commission's uniform net capital requirements for brokers and
dealers.
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Comment Analysis
The Agencies received five comments. Four were from banking
organizations, while one was from a securities industry trade
association.
The five commenters supported the proposal to apply a 20 percent
risk weight to claims on, or guaranteed by, qualifying securities
firms. Two commenters indicated that the rule change would
appropriately recognize the relatively low credit risk of claims on
qualifying securities firms in OECD countries that are subject to
supervision and regulation, including a risk-based capital requirement,
comparable to supervision and regulation of banks in those countries.
Two commenters stated that adopting the rule change would create a
greater degree of equality
[[Page 16973]]
between U.S. institutions and non-U.S. institutions that already apply
the 1998 Basel revision for claims on securities firms.
One of the commenters did not object to the Agencies' adoption of a
rating criterion for qualifying securities firms even though it is more
conservative than the Basel provision. Three commenters, however,
opposed the adoption of a rating standard. First, these commenters
believed that the qualifying criteria requiring adequate supervision,
regulation, and capital are sufficient indicators of creditworthiness
without a rating requirement. Specifically, SEC supervision of broker-
dealers, including its net capital rule, provides a rigorous
supervisory framework not warranting the additional rating requirement.
Second, two commenters stated that elimination of the rating standard
from the proposed U.S. rule would make it consistent with the Basel
provision and would eliminate the competitive disparity with foreign
banks applying the Basel provision. Two commenters also indicated that
imposing a rating requirement on securities firms is inconsistent with
the provision of the Agencies' current capital rule granting a 20
percent risk weight to claims on OECD banks without a rating
requirement. Two commenters noted that many high quality securities
firms in the United States do not issue debt in the public debt markets
and therefore do not have a credit rating from a rating agency. They
contended that the Agencies should not put such firms into the position
of either obtaining ratings without a business need or being
disadvantaged (i.e., paying higher rates) when they borrow from banking
organizations. Another commenter argued that the Agencies should not
vest government authority in, and increase institutions' reliance on, a
small group of private rating agencies.
Upon further consideration, the Agencies have decided that market
practices for certain types of transactions and banking organizations'
credit risk exposure from such transactions do not necessitate
compliance with a rating standard for certain types of collateralized
transactions. Accordingly, the Agencies are differentiating the
treatment of uncollateralized transactions and certain types of
collateralized transactions satisfying designated prudential criteria.
Accordingly, with regard to claims on qualifying securities firms
that do not meet such prudential collateralization criteria (or that
are not otherwise covered by a qualifying guarantee or secured by
qualifying collateral), the Agencies are retaining the proposed rating
standard as a uniform way of assessing the credit risk of securities
firms in the United States and in other OECD countries. The use of such
credit ratings represents a market-based approach for credit assessment
because investors and market participants rely on such ratings in
making investment and business decisions. The Agencies recognize the
value of the supervisory and regulatory oversight of securities firms
in the United States and other OECD countries. However, the Agencies
believe that applying a rating standard as a uniform credit standard
for securities firms both domestically and internationally is a sound
prudential supplement to ensure that only claims on, or guaranteed by,
high quality securities firms are accorded a 20 percent risk weight.
Because a ratings-based approach increases the risk sensitivity of the
risk-based capital framework, the Agencies also adopted such an
approach in the recently issued Recourse Rule.\9\ In addition, the use
of external ratings is under consideration by the Basel Committee as
part of the revisions to the Accord.
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\9\ Furthermore, consistent with the Recourse Rule, if ratings
are available from more than one rating agency, the lowest rating
will be used to determine whether the rating standard has been met.
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One commenter believed that claims on a qualifying securities firm
that is unrated should be given a 20 percent risk weight only if the
claims are guaranteed by the securities firm's parent company and the
parent company is rated in one of the top three investment grade rating
categories. The parent company need not be a qualifying securities
firm. Such a guarantee legally ensures that a parent company with a
high credit rating will support claims on its qualifying securities
firm subsidiary. Accordingly, the final rule allows 20 percent risk
weighting on a claim on an unrated qualifying securities firm if the
parent company guarantees the claim and satisfies the rating standard.
One commenter believed that the Agencies should allow banking
organizations to rely on ratings generated by their internal ratings
systems and analytical models. These systems and models cover a wide
range of securities firms and are relied upon by banking organizations
for the allocation of economic capital and for other purposes. This
commenter argued that reliance on such systems is consistent with the
internal-ratings-based approach that is a major focus of the potential
revisions to the Basel Accord set forth in the Basel Committee's
January 2000 consultative paper. However, it is premature to adopt such
an option in this rulemaking. The broader Basel consultative process is
addressing outstanding issues related to the adoption of such an
internal ratings approach, and the Agencies may reconsider this
position once the Basel process is concluded.
In response to commenters who argued that the rule could force some
securities firms to obtain unneeded ratings to avoid higher borrowing
costs, the Agencies have decided to accord a 20 percent risk weight to
certain collateralized claims on qualifying securities firms, without
regard to the rating standard, provided the claims satisfy certain
specified criteria. The Agencies have determined that the requirements
imposed by the market on certain collateralized transactions,
particularly reverse repurchase/repurchase agreements and securities
lending/borrowing transactions, ensure that such claims on qualifying
securities firms pose very low credit risk to banking organizations.
These market practices are incorporated in the prudential requirements
imposed by the final rule.
Under the final rule, the collateralized portion of a claim on a
qualifying securities firm is eligible for a 20 percent risk weight
provided that the claim arises under a contract that: (1) Is a reverse
repurchase/repurchase agreement or securities lending/borrowing
transaction executed using standard industry documentation; (2) is
collateralized by liquid and readily marketable debt or equity
securities; (3) is marked to market daily; (4) is subject to a daily
margin maintenance requirement under the standard industry
documentation \10\; and (5) can be liquidated, terminated, or
accelerated immediately in bankruptcy or similar proceeding, and the
security or collateral agreement will not be stayed or avoided, under
applicable law of the relevant jurisdiction.\11\ The
[[Page 16974]]
collateralization of such a claim should be consistent with sound
industry practice for the type of transaction, such as a securities
borrowing transaction. The final rule accords such collateralized
claims on qualifying securities firms a 20 percent risk weight (if the
claims are not otherwise eligible for a zero percent risk weight)
without the need for the qualifying securities firm or its parent
company to comply with the rating standard of the final rule. If the
claim were off balance sheet, the claim would continue to be converted
to an on-balance sheet credit equivalent amount according to each
Agency's risk-based capital rules and then risk weighted.
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\10\ The collateralized portion of the claim is the portion
covered by the market value of the collateral. Remargining of
collateral should be executed on a daily basis, taking into account
any change in a banking organization's exposure to the counterparty
under the claim in relation to the market value of the collateral
held in support of the claim.
\11\ For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities
contract or a repurchase agreement subject to section 555 or 559 of
the Bankruptcy Code, respectively (11 U.S.C. 555 or 559), 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 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).
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One commenter contended that the rule should accord a 20 percent
risk weight to claims on, or guaranteed by, a subsidiary of a
qualifying securities firm if the subsidiary is subject to the same
supervision and regulation as its parent qualifying securities firm.
However, the Agencies believe that this approach would require
extensive qualitative assessment of the regulation of subsidiaries of
qualifying securities firms both domestically and internationally and,
thus, is of little practical use in setting the risk weight for claims.
Consequently, the Agencies have not made this suggested revision to the
proposal.
One commenter urged the Agencies to eliminate the reference to
``other regulatory requirements'' in the criteria for qualifying U.S.
securities firms. This commenter stated that the term includes
regulatory requirements unrelated to securities firms' financial
condition and would impose a substantial compliance burden on lending
institutions. The commenter believed that a banking organization should
be able to rely on representations of a broker-dealer that it meets the
relevant regulatory requirements. The Agencies have decided to revise
the language of the rule to require qualified U.S. securities firms to
be broker-dealers registered with the SEC and comply with the SEC's net
capital rule, 17 CFR 240.15c3-1. Thus, the only requirement that
banking organizations must track is whether a securities firm is in
compliance with its net capital requirement. This requirement should
not be burdensome to monitor because securities firms not in compliance
with the net capital rule must immediately cease conducting business as
broker-dealers, which would usually be well known in the financial
sector. Absent information to the contrary, however, the Agencies would
allow banking organizations to rely on annual reports or other
confirmations of compliance provided by securities firms.
Two commenters urged the Agencies to extend the 20 percent risk
weight to over-the-counter (OTC) derivatives dealers registered with
the SEC. They noted that such firms are subject to substantial
regulation, supervision, and capital requirements. These include limits
on the scope of their activities, specified internal risk management
controls, recordkeeping and reporting obligations, and a net capital
rule. Although these commenters recognized that the oversight of OTC
derivatives dealers is less rigorous than for standard broker-dealers,
they contended that the level of oversight is sufficient to support a
20 percent risk weight for claims on such firms. One commenter also
believed that a risk weight less than 100 percent should be applied to
entities subject to regulatory reporting as Material Associated Persons
(MAPs) under the SEC's risk assessment rules. This commenter also
believed that, if a MAP voluntarily reports information under the
guidelines of the Derivatives Policy Group, the risk weight applicable
to claims on the MAP should be reduced further.
The Agencies have retained their proposed requirement that U.S.
firms must be fully regulated registered broker-dealers as a
prerequisite to being qualifying securities firms. The Agencies
continue to believe that only claims on those firms that are subject to
the SEC's full oversight and net capital requirements should qualify
for a capital charge that is only 20 percent of the requirement applied
to a broad array of claims on other supervised financial firms,
including bank holding companies. The Agencies believe that such
oversight and supervision is needed to be consistent with the terms of
the revised provision of the Basel Accord giving a 20 percent risk
weight to claims on securities firms subject to such supervision and
oversight. Accordingly, the final rule only reduces the risk weight of
U.S. securities firms that are fully regulated, registered broker-
dealers satisfying their net capital requirements. Furthermore, the
Agencies are cognizant that claims on OTC derivatives dealers, MAPs,
and other companies, with high quality ratings, may qualify for reduced
risk weightings under the standardized ratings-based approach currently
being considered as part of the revisions to the Basel Accord. The
Agencies may reconsider this issue when the Basel Accord is amended.
Finally, one commenter stated that the Agencies should conduct a
comprehensive review of all of their regulations to eliminate
regulations that are unnecessary or outmoded, thereby hindering the
flexibility needed by banking organizations as they adapt to the
changing financial services industry. The Agencies note that the Basel
risk-based capital framework is undergoing an overall review and
revision to make it more risk-focused and flexible for banking
organizations. Furthermore, the Agencies currently conduct
comprehensive scheduled reviews of their regulations, including their
capital guidelines.
In addition to the modifications discussed previously, the final
rule states expressly that a claim (including a subordinated claim) on
a qualifying securities firm that is an instrument used by the firm to
satisfy its applicable capital requirement will be ineligible for the
20 percent risk weight. The Agencies have decided to impose this
restriction because banks make subordinated loans to, and purchase
subordinated debt of, securities firms that are included in the
securities firms' capital under the SEC's net capital rule. As
subordinated debt, the credit risk of these loans is higher than on the
securities firms' senior debt and general unsecured obligations.
The collateralization provision of the final rule, in general,
provides a 20 percent risk weight to claims on, or guaranteed by,
qualifying securities firms that are collateralized by debt and equity
securities, including corporate debt and equity securities. The
Agencies note that the current rules of the OCC and the Board give a
zero percent risk weight to certain claims that are collateralized by
cash on deposit in the banking organization or by securities issued or
guaranteed by the U.S. government or its agencies or other OECD central
governments.\12\ These current rules of the OCC and the Board require a
positive margin of collateral to be maintained on such a claim on a
daily basis, taking into account any change in a banking organization's
exposure to the obligor or counterparty under the claim in relation to
the market value of the collateral held in support of the claim. Claims
qualifying for a zero percent risk weight under the current rules of
the OCC and the Board are unaffected by this final rule giving a 20
[[Page 16975]]
percent risk weight to certain claims on qualifying securities
firms.\13\
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\12\ 12 CFR part 3, appendix A, 3(a)(1)(viii); 12 CFR part 208,
appendix A, III.C (1); and 12 CFR part 225, appendix A, III. (C)(1).
\13\ Also, this final rule is in addition to, and does not
modify, the current rules of the Agencies that already permit a 20
percent risk weight to be assigned to certain claims that are
collateralized by securities issued or guaranteed by U.S.
government-sponsored agencies, multilateral lending institutions, or
regional development banks.
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By contrast, OTS and FDIC rules apply a 20 percent risk weight to
claims that are collateralized by cash on deposit in depository
institutions or by securities issued or guaranteed by OECD
governments.\14\ To ensure uniform treatment of claims on qualifying
securities firms under the final rule, the FDIC and OTS are amending
their rules to provide a zero percent risk weight to these claims.\15\
The FDIC and OTS are reviewing whether to make further rule changes to
apply this risk weight to claims on other entities that are
collateralized in this manner, e.g., claims on borrowers that are
secured by certificates of deposit.
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\14\ 12 CFR part 325, Appendix A, II.C and 12 CFR
567.6(a)(ii)(B) and (N).
\15\ The Riegle Community Development and Regulatory Improvement
Act of 1994 (12 U.S.C. 4803(a)) requires the Agencies to work
jointly to make uniform their regulations and guidelines
implementing common statutory or supervisory policies. Although the
current risk-based capital rules of the OCC and the Board with
regard to collateralized claims that qualify for the zero percent
risk weighting are not affected by this final rule, the FDIC and OTS
are amending their risk-based capital standards to ensure that the
Agencies have consistency of application in how claims on qualifying
securities firms are risk-weighted when the claims are
collateralized by cash on deposit in the lending depository
institution or by securities issued or guaranteed by the U.S. or
other OECD central governments (including U.S. government agencies).
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Final Rule
After careful consideration of the comments received and for the
reasons discussed, the Agencies have decided to adopt a final rule
according a 20 percent risk weight to certain claims on, or guaranteed
by, certain qualifying OECD securities firms. Qualifying U.S.
securities firms are broker-dealers that are registered with the
Securities and Exchange Commission and satisfy their net capital
requirements. Qualifying securities firms incorporated in other OECD
countries are those firms that are subject to consolidated supervision
and regulation comparable to that applied to banks in such countries.
Such regulation must include risk-based capital requirements comparable
to those applied to banks under the Basel Accord. With respect to OECD
countries that are members of the European Union, compliance with the
CAD generally satisfies this requirement.
The final rule applies a 20 percent risk weight to a claim on, or
guaranteed by, a qualifying securities firm that has a long-term issuer
credit rating or a rating on at least one issue of long-term unsecured
debt in one of the three highest investment-grade-rating categories
from a rating agency. However, if ratings are available from more than
one rating agency, the lowest rating will be used to determine whether
the rating standard has been met. The final rule also gives a 20
percent risk weight to a claim on a qualifying securities firm not
satisfying the rating criterion if the firm's parent company satisfies
the rating criterion and guarantees the claim. In addition, the final
rule accords a 20 percent risk weight to a collateralized claim on, or
guaranteed by, a qualifying securities firm if the claim arises under a
contract that: (1) Is a reverse repurchase/repurchase agreement or
securities lending/borrowing transaction executed under standard
industry documentation; (2) is collateralized by liquid and readily
marketable debt or equity securities; (3) is marked to market daily;
(4) is subject to a daily margin maintenance requirement under the
standard industry documentation; and (5) can be liquidated, terminated,
or accelerated immediately in bankruptcy or similar proceeding, and the
security or collateral agreement will not be stayed or avoided, under
applicable law of the relevant jurisdiction.
The Agencies are adopting this rule giving a 20 percent risk weight
to certain claims on certain qualifying securities firms for several
reasons. First, claims on qualifying securities firms satisfying the
criteria of the final rule generally pose relatively low credit risk to
banking organizations. Second, the 100 percent risk weight applied to
claims on securities firms under the Agencies' current capital rules is
more stringent than the 20 percent risk weight permitted for claims on
qualifying securities firms under the Basel Accord and the CAD. This
results in a competitive inequity for U.S. depository institutions,
which would be reduced by this final rule.
The Agencies note that this rule will address collateralized
transactions conducted with qualifying securities firms where the
collateral is a marketable security other than an U.S. or other OECD
government security. As noted previously, the OCC and the Board will
permit transactions that are collateralized by cash or an U.S. or other
OECD government security to be risk weighted according to each Agency's
existing risk-based capital rules for collateralized transactions.
Furthermore, consistent with the current rules of the OCC and the
Board, the FDIC and the OTS are modifying their risk-based capital
standards to permit a zero percent risk weight to be assigned to
certain claims on qualifying securities firms collateralized by cash on
deposit in a bank or securities issued or guaranteed by the central
governments of OECD countries (e.g., securities of the U.S. Government
and its agencies), as discussed previously. Finally, if the banking
organization is subject to the market risk rules of the OCC, Board, or
FDIC, and the transaction is a securities borrowing transaction, the
risk-based capital for the transaction should be determined according
to the Interim Rule on Securities Borrowing Transactions.\16\
-------------------------------------------------------------------------------------------------------------------
\16\ 12 CFR part 3, appendix B, 3(a)(1)(ii) (OCC); 12 CFR part
208, appendix E, 3(a)(1)(Board); 12 CFR part 225, appendix E,
3(a)(1)(Board); and 12 CFR part 325, appendix C, 3(a)(1)(FDIC).
--------------------------------------------------------------------------------------------------------------------
Regulatory Flexibility Act
Under section 605(b) of the Regulatory Flexibility Act, the
Agencies certify that this rule will not have a significant economic
impact on a substantial number of small entities within the meaning of
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) because it will
not have a significant impact on the amount of capital required to be
held by small institutions. The rule: (1) Only covers a narrow category
of assets, (2) decreases the amount of capital that an institution must
hold for those assets, (3) does not significantly change the amount of
total capital an institution must hold, and (4) will have a positive
impact on an affected institution's capital compliance. 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.).
Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the use
of ``plain language'' in all proposed and final rules published after
January 1, 2001. The Agencies invited comments on whether the proposed
rule was written in ``plain language'' and how to make the proposed
rule easier to understand. No commenter indicated that the proposed
rule needs to be revised to make it easier to understand. The final
rule is substantially similar to the proposed rule and the Agencies
believe the final rule is written plainly and clearly.
[[Page 16976]]
Executive Order 12866
The Comptroller of the Currency and the Director of the OTS have
determined that this final rule is not a ``significant regulatory
action'' for purposes of Executive Order 12866. This rule reduces the
current risk weighting applied to claims on qualifying securities firms
and will not impose additional cost or burden on institutions.
OCC and OTS--Unfunded Mandates Reform Act of 1995
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 promulgating a rule that includes a
federal mandate that may result in the 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 reduces the current risk-based capital charge for
claims on, and claims guaranteed by, qualifying securities firms.
Accordingly, the OCC and OTS have determined that this rule will not
result in the expenditure by state, local, and tribal governments, or
by the private sector, of $100 million or more in any one year. In
fact, this rule will not impose any new cost or burden on state, local,
or tribal governments, or the private sector. Therefore, the OCC and
OTS have not prepared a budgetary impact statement or specifically
addressed the regulatory alternatives considered.
FDIC Assessment of Impact of Federal Regulation On Families
The FDIC has determined that this final rule will not affect family
well being within the meaning of section 654 of the Treasury and
General Government Appropriations Act of 1999 (Pub. L.105-277).
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, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings
associations.
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set out in the joint preamble, the Office of the
Comptroller of the Currency amends part 3 of chapter I of title 12 of
the Code of Federal Regulations 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:
A. In section 1, paragraphs (c)(19) through (c)(34) are
redesignated as (c)(20) through (c)(35);
B. In section 1, new paragraph (c)(19) is added;
C. In section 3, footnotes 11a and 11b are redesignated as 11b and
11c;
D. In section 3, new paragraphs (a)(2)(xiii) and (a)(4)(x) are
added; and
E. In section 3, new footnote 11a is added.
The additions read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions.
* * * * *
(c) * * *
(19) Nationally recognized statistical rating organization
(NRSRO) means an entity recognized by the Division of Market
Regulation of the Securities and Exchange Commission (or any
successor Division) (Commission or SEC) as a nationally recognized
statistical rating organization for various purposes, including the
Commission's uniform net capital requirements for brokers and
dealers.
* * * * *
Section 3. Risk Categories/Weights for On-Balance Sheet Assets and
Off-Balance Sheet Items.
* * * * *
(a) * * *
(2) * * *
(xiii) Claims on, or guaranteed by, a securities firm
incorporated in an OECD country, that satisfies the following
conditions:
(A) If the securities firm is incorporated in the United States,
then the firm must be a broker-dealer that is registered with the
SEC and must be in compliance with the SEC's net capital regulation
(17 CFR 240.15c3(1)).
(B) If the securities firm is incorporated in any other OECD
country, then the bank must be able to demonstrate that the firm is
subject to consolidated supervision and regulation, including its
subsidiaries, comparable to that imposed on depository institutions
in OECD countries; such regulation must include risk-based capital
standards comparable to those applied to depository institutions
under the Basel Capital Accord.\11a\
--------------------------------------------------------------------------------------------------------------------
\11a\ See Accord on International Convergence of Capital
Measurement and Capital Standards as adopted by the Basle Committee
on Banking Regulations and Supervisory Practices (renamed as the
Basel Committee on Banking Supervision), dated July 1988 (amended
1998).
--------------------------------------------------------------------------------------------------------------------
(C) The securities firm, whether incorporated in the United
States or another OECD country, must also have a long-term credit
rating in accordance with section 3(a)(2)(xiii)(C)(1) of this
appendix A; a parent company guarantee in accordance with section
3(a)(2)(xiii)(C)(2) of this appendix A; or a collateralized claim in
accordance with section 3(a)(2)(xiii)(C)(3) of this appendix A.
Claims representing capital of a securities firm must be risk
weighted at 100 percent in accordance with section 3(a)(4) of this
Appendix A.
(1) Credit rating. The securities firm must have either a long-
term issuer credit rating or a credit rating on at least one issue
of long-term unsecured debt, from a NRSRO that is in one of the
three highest investment-grade categories used by the NRSRO. If the
securities firm has a credit rating from more than one NRSRO, the
lowest credit rating must be used to determine the credit rating
under this paragraph.
(2) Parent company guarantee. The claim on, or guaranteed by,
the securities firm must be guaranteed by the firm's parent company,
and the parent company must have either a long-term issuer credit
rating or a credit rating on at least one issue of long-term
unsecured debt, from a NRSRO that is in one of the three highest
investment-grade categories used by the NRSRO.
(3) Collateralized claim. The claim on the securities firm must
be collateralized subject to all of the following requirements:
(i) The claim must arise from a reverse repurchase/repurchase
agreement or securities lending/borrowing contract executed using
standard industry documentation.
[[Page 16977]]
(ii) The collateral must consist of debt or equity securities
that are liquid and readily marketable.
(iii) The claim and collateral must be marked-to-market daily.
(iv) The claim must be subject to daily margin maintenance
requirements under standard industry documentation.
(v) The contract from which the claim arises can be liquidated,
terminated, or accelerated immediately in bankruptcy or similar
proceedings, and the security or collateral agreement will not be
stayed or avoided under the applicable law of the relevant
jurisdiction. To be exempt from the automatic stay in bankruptcy in
the United States, the claim must arise from a securities contract
or a repurchase agreement under section 555 or 559, respectively, of
the Bankruptcy Code (11 U.S.C. 555 or 559), 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 (912 U.S.C. 4407), or
the Regulation EE (12 CFR part 231).
* * * * *
(4) * * *
(x) Claims representing capital of a securities firm
notwithstanding section 3(a)(2)(xiii) of this appendix A.
* * * * *
Dated: March 25, 2002.
John D. Hawke, Jr.,
Comptroller of the Currency.
Federal Reserve System
12 CFR Chapter II
For the reasons set forth in the joint preamble, parts 208 and 225
of chapter II of title 12 of the Code of Federal Regulations are
amended as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
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, 1831p-1, 1831r-1, 1835(a), 1882, 2901-2907,
3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 781(g),
781(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106, and 4128.
2. In appendix A to part 208, the following amendments are made:
a. In sections III. and IV., footnotes 38 through 54 are
redesignated as footnotes 41 through 57;
b. In section III.C.2. under the title Category 2: 20 percent, the
three existing paragraphs are designated as 2.a. through 2.c., and a
new paragraph 2.d. is added with new footnotes 38, 39, and 40;
c. In section III.C.4.b., a new sentence is added at the end of the
paragraph; and
d. In Attachment III, under Category 2, new paragraphs 12 and 13
are added. The revision and additions read as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
* * * * *
III. * * *
C. * * *
2. * * *
d. This category also includes claims \38\ on, or guaranteed by,
a qualifying securities firm incorporated in the United States or
other member of the OECD-based group of countries \39\ provided
that: The qualifying securities firm has a long-term issuer credit
rating, or a rating on at least one issue of long-term debt, in one
of the three highest investment grade rating categories from a
nationally recognized statistical rating organization; or the claim
is guaranteed by the firm's parent company and the parent company
has such a rating. If ratings are available from more than one
rating agency, the lowest rating will be used to determine whether
the rating requirement has been met. This category also includes a
collateralized claim on a qualifying securities firm in such a
country, without regard to satisfaction of the rating standard,
provided that the claim arises under a contract that:
(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed using standard industry
documentation;
--------------------------------------------------------------------------------------------------------------------
\38\ Claims on a qualifying securities firm that are instruments
the firm, or its parent company, uses to satisfy its applicable
capital requirements are not eligible for this risk weight.
\39\ With regard to securities firms incorporated in the United
States, qualifying securities firms are those securities firms that
are broker-dealers registered with the Securities and Exchange
Commission (SEC) and are in compliance with the SEC's net capital
rule, 17 CFR 240.15c3-1. With regard to securities firms
incorporated in any other country in the OECD-based group of
countries, qualifying securities firms are those securities firms
that a bank is able to demonstrate are subject to consolidated
supervision and regulation (covering their direct and indirect
subsidiaries, but not necessarily their parent organizations)
comparable to that imposed on banks in OECD countries. Such
regulation must include risk-based capital requirements comparable
to those applied to banks under the Accord on International
Convergence of Capital Measurement and Capital Standards (1988, as
amended in 1998) (Basel Accord).
--------------------------------------------------------------------------------------------------------------------
(2) Is collateralized by debt or equity securities that are
liquid and readily marketable;
(3) Is marked-to-market daily;
(4) Is subject to a daily margin maintenance requirement under
the standard industry documentation; and
(5) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction.\40\
--------------------------------------------------------------------------------------------------------------------
\40\ For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities
contract or a repurchase agreement subject to section 555 or 559 of
the Bankruptcy Code, respectively (11 U.S.C. 555 or 559), 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 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).
--------------------------------------------------------------------------------------------------------------------
* * * * *
4. * * *
b. * * * This category also includes claims representing capital
of a qualifying securities firm.
* * * * *
Attachment III--Summary of Risk Weights and Risk Categories for State
Member Banks
* * * * *
Category 2: 20 Percent * * *
12. Claims on, and claims guaranteed by, qualifying securities
firms incorporated in the United States or other member of the OECD-
based group of countries provided that:
a. The qualifying securities firm has a rating in one of the top
three investment grade rating categories from a nationally
recognized statistical rating organization; or
b. The claim is guaranteed by a qualifying securities firm's
parent company with such a rating.
13. Certain collateralized claims on qualifying securities firms
in the United States or other member of the OECD-based group of
countries, without regard to satisfaction of the rating standard,
provided that the claim arises under a contract that:
a. Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed using standard industry
documentation;
b. Is collateralized by liquid and readily marketable debt or
equity securities;
c. Is marked to market daily;
d. Is subject to a daily margin maintenance requirement under
the standard industry documentation; and
e. Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction.
* * * * *
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)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In appendix A to part 225, the following amendments are made:
[[Page 16978]]
a. In sections III. and IV., footnotes 42 through 58 are
redesignated as footnotes 45 through 61;
b. In section III.C.2. under the title Category 2: 20 percent, the
three existing paragraphs are designated as 2.a. through 2.c., and a
new paragraph 2.d. is added with new footnotes 42, 43, and 44;
c. In section III.C.4.b., a new sentence is added at the end of the
paragraph; and
d. In Attachment III, under Category 2, new paragraphs 12 and 13
are added.
The revision and additions read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank
Holding Companies: Risk-Based Measure
* * * * *
III. * * *
C. * * *
2. * * *
d. This category also includes claims \42\ on, or guaranteed by,
a qualifying securities firm \43\ incorporated in the United States
or other member of the OECD-based group of countries provided that:
the qualifying securities firm has a long-term issuer credit rating,
or a rating on at least one issue of long-term debt, in one of the
three highest investment grade rating categories from a nationally
recognized statistical rating organization; or the claim is
guaranteed by the firm's parent company and the parent company has
such a rating. If ratings are available from more than one rating
agency, the lowest rating will be used to determine whether the
rating requirement has been met. This category also includes
collateralized claims on, or guaranteed by, a qualifying securities
firm in such a country, without regard to satisfaction of the rating
standard, provided the claim arises under a contract that:
--------------------------------------------------------------------------------------------------------------------
\42\ Claims on a qualifying securities firm that are instruments
the firm, or its parent company, uses to satisfy its applicable
capital requirement are not eligible for this risk weight.
\43\ With regard to securities firms incorporated in the United
States, qualifying securities firms are those securities firms that
are broker-dealers registered with the Securities and Exchange
Commission and are in compliance with the SEC's net capital rule, 17
CFR 240.15c3-1. With regard to securities firms incorporated in
other countries in the OECD-based group of countries, qualifying
securities firms are those securities firms that a banking
organization is able to demonstrate are subject to consolidated
supervision and regulation (covering their direct and indirect
subsidiaries, but not necessarily their parent organizations)
comparable to that imposed on banks in OECD countries. Such
regulation must include risk-based capital requirements comparable
to those applied to banks under the Accord on International
Convergence of Capital Measurement and Capital Standards (1988, as
amended in 1998) (Basel Accord).
--------------------------------------------------------------------------------------------------------------------
(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
(2) Is collateralized by debt or equity securities that are
liquid and readily marketable;
(3) Is marked-to-market daily;
(4) Is subject to a daily margin maintenance requirement under
the standard industry documentation; and
(5) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction.\44\
--------------------------------------------------------------------------------------------------------------------
\44\ For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities
contract or repurchase agreement subject to section 555 or 559 of
the Bankruptcy Code, respectively (11 U.S.C. 555 or 559), 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 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).
--------------------------------------------------------------------------------------------------------------------
* * * * *
4. * * *
b.* * * This category also includes claims representing capital
of a qualifying securities firm.
* * * * *
Attachment III--Summary of Risk Weights and Risk Categories for Bank
Holding Companies
* * * * *
Category 2: 20 Percent * * *
12. Claims on, and claims guaranteed by, qualifying securities
firms incorporated in the United States or other member of the OECD-
based group of countries provided that:
a. The qualifying securities firm has a rating in one of the top
three investment grade rating categories from a nationally
recognized statistical rating organization; or
b. The claim is guaranteed by a qualifying securities firm's
parent company with such a rating.
13. Certain collateralized claims on qualifying securities firms
in the United States or other member of the OECD-based group of
countries, without regard to satisfaction of the rating standard,
provided that the claim arises under a contract that:
a. Is a reverse repurchase/ repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
b. Is collateralized by liquid and readily marketable debt or
equity securities;
c. Is marked to market daily;
d. Is subject to a daily margin maintenance requirement under
the standard industry documentation; and
e. Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction.
* * * * *
4. * * * This category also includes claims representing capital
of a qualifying securities firm.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, March 27, 2002.
Jennifer J. Johnson,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
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
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, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).
2. In appendix A to part 325:
a. In section II.B.3., the phrase ``U.S. depository institutions
and foreign banks'' is removed and the phrase ``U.S. depository
institutions, foreign banks, and qualifying OECD-based securities
firms'' is added in its place;
b. Redesignate footnotes 27 through 47 as footnotes 30 through 50;
c. Add new footnotes 27 through 29;
d. In section II.C., under Category 1--Zero Percent Risk Weight,
add a new paragraph to follow the existing two paragraphs, and
redesignate these three paragraphs as paragraphs a. through c.
e. In section II.C., under Category 2--20 Percent Risk Weight,
amend paragraph a. by adding three new sentences and paragraphs (1)
through (5);
f. In section II.C., under Category 4--100 Percent Risk Weight, add
a new paragraph (b)(12);
g. In Table II, add a new paragraph (7) under Category 1--Zero
Percent Risk Weight, and
h. In Table II, add new paragraphs (13) and (14) under Category 2--
20 Percent Risk Weight.
Appendix A to Part 325--Statement of Policy on Risk-Based Capital
* * * * *
II. * * *
C. * * *
Category 1--Zero Percent Risk Weight
c. This category also includes claims on, and claims guaranteed
by, qualifying
[[Page 16979]]
securities firms incorporated in the United States or other members
of the OECD-based group of countries that are collateralized by cash
on deposit in the lending bank or by securities issued or guaranteed
by the United States or OECD central governments (including U.S.
government agencies), provided that a positive margin of collateral
is required to be maintained on such a claim on a daily basis,
taking into account any change in a bank's exposure to the obligor
or counterparty under the claim in relation to the market value of
the collateral held in support of the claim.
Category 2--20 Percent Risk Weight
a. * * * This category also includes a claim \27\ on, or
guaranteed by, qualifying securities firms incorporated in the
United States or other member of the OECD-based group of countries
\28\ provided that: the qualifying securities firm has a long-term
issuer credit rating, or a rating on at least one issue of long-term
debt, in one of the three highest investment grade rating categories
from a nationally recognized statistical rating organization; or the
claim is guaranteed by the firm's parent company and the parent
company has such a rating. If ratings are available from more than
one rating agency, the lowest rating will be used to determine
whether the rating requirement has been met. This category also
includes a collateralized claim on a qualifying securities firm in
such a country, without regard to satisfaction of the rating
standard, provided that the claim arises under a contract that:
--------------------------------------------------------------------------------------------------------------------
\27\ Claims on a qualifying securities firm that are instruments
the firm, or its parent company, uses to satisfy its applicable
capital requirements are not eligible for this risk weight.
\28\ With regard to securities firms incorporated in the United
States, qualifying securities firms are those securities firms that
are broker-dealers registered with the Securities and Exchange
Commission (SEC) and are in compliance with the SEC's net capital
rule, 17 CFR 240.15c3-1. With regard to securities firms
incorporated in any other country in the OECD-based group of
countries, qualifying securities firms are those securities firms
that a bank is able to demonstrate are subject to consolidated
supervision and regulation (covering their direct and indirect
subsidiaries, but not necessarily their parent organizations)
comparable to that imposed on banks in OECD countries. Such
regulation must include risk-based capital requirements comparable
to those applied to banks under the Accord on International
Convergence of Capital Measurement and Capital Standards (1988, as
amended in 1998) (Basel Accord). Claims on a qualifying securities
firm that are instruments the firm, or its parent company, uses to
satisfy its applicable capital requirements are not eligible for
this risk weight and are generally assigned to at least a 100
percent risk weight. In addition, certain claims on qualifying
securities firms are eligible for a zero percent risk weight if the
claims are collateralized by cash on deposit in the lending bank or
by securities issued or guaranteed by the United States or OECD
central governments (including U.S. government agencies), provided
that a positive margin of collateral is required to be maintained on
such a claim on a daily basis, taking into account any change in a
bank's exposure to the obligor or counterparty under the claim in
relation to the market value of the collateral held in support of
the claim.
--------------------------------------------------------------------------------------------------------------------
(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed using standard industry
documentation;
(2) Is collateralized by debt or equity securities that are
liquid and readily marketable;
(3) Is marked-to-market daily;
(4) Is subject to a daily margin maintenance requirement under
the standardized documentation; and
(5) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction.\29\
--------------------------------------------------------------------------------------------------------------------
\29\ For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities
contract or a repurchase agreement subject to section 555 or 559 of
the Bankruptcy Code, respectively (11 U.S.C. 555 or 559), 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 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).
--------------------------------------------------------------------------------------------------------------------
* * * * *
Category 4--100 Percent Risk Weight
(b) * * *
(12) Claims representing capital of a qualifying securities
firm.
* * * * *
Table II--Summary of Risk Weights and Risk Categories
* * * * *
Category 1--Zero Percent Risk Weight
* * * * *
(7) Claims on, or guaranteed by, qualifying securities firms
incorporated in the United States or other members of the OECD-based
group of countries that are collateralized by cash on deposit in the
lending bank or by securities issued or guaranteed by the United
States or OECD central governments (including U.S. government
agencies), provided that a positive margin of collateral is required
to be maintained on such a claim on a daily basis, taking into
account any change in a bank's exposure to the obligor or
counterparty under the claim in relation to the market value of the
collateral held in support of the claim.
* * * * *
Category 2--20 Percent Risk Weight
* * * * *
(13) Claims on, and claims guaranteed by, qualifying securities
firms incorporated in the United States or other member of the OECD-
based group of countries provided that:
a. The qualifying securities firm has a rating in one of the top
three investment grade rating categories from a nationally
recognized statistical rating organization; or
b. The claim is guaranteed by a qualifying securities firm's
parent company with such a rating.
(14) Certain collateralized claims on qualifying securities
firms in the United States or other member of the OECD-based group
of countries, without regard to satisfaction of the rating standard,
provided that the claim arises under a contract that:
a. Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
b. Is collateralized by liquid and readily marketable debt or
equity securities;
c. Is marked to market daily;
d. Is subject to a daily margin maintenance requirement under
the standard documentation; and
e. Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant country.
* * * * *
By order of the Board of Directors.
Dated at Washington, DC, this 29th day of January, 2002.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Office of Thrift Supervision
12 CFR Chapter V
For the reasons set forth in the joint preamble, the Office of
Thrift Supervision amends part 567 of chapter V of title 12 of the Code
of Federal Regulations as follows:
PART 567--CAPITAL
1. The authority citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
2. Section 567.1 is amended by adding the definition of qualified
securities firm to read as follows:
Sec. 567.1 Definitions.
* * * * *
Qualifying securities firm. The term qualifying securities firm
means: (1) A securities firm incorporated in the United States that is
a broker-dealer that is registered with the Securities and Exchange
Commission (SEC) and that complies with the SEC's net capital
regulations (17 CFR 240.15c3(1)); and
(2) A securities firm incorporated in any other OECD-based country,
if the savings association is able to demonstrate that the securities
firm is subject to consolidated supervision and regulation (covering
its subsidiaries, but not necessarily its parent organizations)
comparable to that imposed on depository institutions in OECD
countries. Such regulation must include risk-based capital requirements
comparable to those imposed on depository institutions under the Accord
on International Convergence of Capital Measurement and Capital
Standards (1988, as amended in 1998).
* * * * *
[[Page 16980]]
3. Section 567.6 is amended by adding paragraphs (a)(1)(i)(H) and
(a)(1)(ii)(H) to read as follows:
Sec. 567.6 Risk-based capital credit risk-weight categories.
(a) * * *
(1) * * *
(i) * * *
(H) Claims on, and claims guaranteed by, a qualifying securities
firm that are collateralized by cash on deposit in the savings
association or by securities issued or guaranteed by the United States
Government or its agencies, or the central government of an OECD
country. To be eligible for this risk weight, the savings association
must maintain a positive margin of collateral on the claim on a daily
basis, taking into account any change in a savings association's
exposure to the obligor or counterparty under the claim in relation to
the market value of the collateral held in support of the claim.
(ii) * * *
(H) Claims on, and claims guaranteed by, a qualifying securities
firm, subject to the following conditions:
(1) A qualifying securities firm must have a long-term issuer
credit rating, or a rating on at least one issue of long-term unsecured
debt, from a NRSRO. The rating must be in one of the three highest
investment grade categories used by the NRSRO. If two or more NRSROs
assign ratings to the qualifying securities firm, the savings
association must use the lowest rating to determine whether the rating
requirement of this paragraph is met. A qualifying securities firm may
rely on the rating of its parent consolidated company, if the parent
consolidated company guarantees the claim.
(2) A collateralized claim on a qualifying securities firm does not
have to comply with the rating requirements under paragraph
(a)(1)(ii)(H)(1) of this section if the claim arises under a contract
that:
(i) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed using standard industry
documentation;
(ii) Is collateralized by debt or equity securities that are liquid
and readily marketable;
(iii) Is marked-to-market daily;
(iv) Is subject to a daily margin maintenance requirement under the
standard industry documentation; and
(v) Can be liquidated, terminated or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided under applicable law of the
relevant jurisdiction. For example, a claim is exempt from the
automatic stay in bankruptcy in the United States if it arises under a
securities contract or a repurchase agreement subject to section 555 or
559 of the Bankruptcy Code (11 U.S.C. 555 or 559), 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 Regulation EE (12 CFR part 231).
(3) If the securities firm uses the claim to satisfy its applicable
capital requirements, the claim is not eligible for a risk weight under
this paragraph (a)(1)(ii)(H);
* * * * *
Dated: February 1, 2002.
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-8142 Filed 4-8-02; 8:45 am]
BILLING CODE 6210-01-P
