Federal Deposit
Insurance Corporation

Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Attention: OMB No: 7100-0035

Robert Feldman
Executive Secretary
Federal Deposit Insurance Company
Information Collection 3064-0017, FFIEC 009
550 17th Street, N.W.
Washington, DC 20429

Re: Joint Notice and Request for Comment on Country Exposure Report/Country Exposure Information Report (FFIEC 009 and FFIEC 009a Reports)

Ladies and Gentlemen:

The Clearing House Association L.L.C.1 (“The Clearing House”) appreciates the opportunity to comment on the proposed revisions to the Country Exposure Report (FFIEC 009) and the Country Exposure Information Report (FFIEC 009a) by 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”). First, we would like to express our appreciation for your meeting with us on December 21, 2004 and for addressing some of our concerns raised at that meeting. However, The Clearing House has a few additional general concerns about the proposal and a specific concern about the reporting of potential future credit exposures on derivative contracts, which are set forth below.

Delay of Effective Date

Currently, the changes and instructions have not been finalized for the FFIEC 009 Reports, and therefore, it is difficult for our members to request their information systems departments to begin implementing programming changes for these reports. Additionally, our members’ current procedures and systems configurations for the FFIEC 009 are set up to capture all exposure amounts in U.S. dollars and U.S. dollar equivalents using daily closing exchange rates. Collecting their foreign offices’ claims on local residents in a non-local currency would require significant system enhancements as well as changes to their procedures in order to reconcile local and non-local currencies to ensure data integrity. Therefore, the new reporting format will require extensive programming changes and testing to deliver the same level of accuracy that our members currently deliver. Considering recent reporting proposals to be implemented in 2005 (e.g., TIC D, FR 2436, FR Y-12, Call Report Modernization, and FR Y-9C updates), in addition to the increased burden for the FFIEC 009 proposals, The Clearing House requests that the Agencies delay the implementation date of any proposed changes to March 2006 or later.

The information necessary to complete proposed columns 22 and 23, Foreign Office Commitments to and Guarantees on Foreign Residents, is not currently readily available and would need to be gathered manually until programming could be completed. Generally programming requests take a minimum of several months.

Reporting commitments on an ultimate risk-basis would be problematic since currently financial institutions only collect cross-border commitments and guarantees, whereas the new form would require institutions to collect cross-border commitments and guarantees plus foreign-office commitments to and guarantees on local residents. While it would not be particularly difficult to split guarantees and credit derivatives into two columns, some of our members would need to collect data on foreign office commitments to and guarantees on local residents manually from over one hundred countries until programming could be completed. The manual collection, tracking and consolidation of such data along with the review effort required for quality assurance would significantly increase the preparation time for the report.

Splitting column 18 Local Country Claims on Local Residents by sector of the ultimate obligor also would be problematic and require significant system enhancements, which would take a minimum of four to six months to implement.

Extend Filing Period

The proposal states that the Agencies would extend the filing period to 60 days for the initial revised report. The Clearing House also recommends if the Agencies agree to a phased-in approach, that the filing period also be extended for the initial phase-in for all new data requirements.

Potential Future Credit Exposures of Derivative Contracts

In the August 17, 2004 Federal Register, the Agencies requested comment on the possible reporting of potential future credit exposures of derivative contracts on a credit equivalency basis following the U.S. risk-based capital standards. The Clearing House commented on October 18, 2004 that additional information was required in order to provide the Agencies with proper feedback on the proposal. The Clearing House further stated its belief that the use of current mark-to-market (CMTM) after application of FASB Interpretation No. 39 netting is most appropriate for the point-in-time calculation of country risk. In response to the comments received, the Agencies stated in the April 19, 2005 Federal Register notice that a column would be added to Schedule 2 to collect total credit equivalent amount based on the risk based capital standards of the ultimate counterparty risk by country. The effective date of this proposal would be September 30, 2005. It is our belief that this new column will not be used in the calculation of country risk, but will be a memorandum item.

At present, some of our member banks use value-at-risk models such as pre-settlement exposure (PSE) to manage country risk exposure throughout their organizations. Others use CMTM to manage and report cross border exposure. The current proposal would add a third country exposure measurement for derivative related exposure. This credit equivalent amount, however, will not be used to calculate or monitor country exposure for the banking organization.

While banks currently compute the credit equivalent amount for risk-based capital purposes, the data is not readily available on an ultimate counterparty risk basis. Risk-based capital methodology for credit risk does not easily correlate to country risk. Some items that would require further review would be exchange-traded contracts with an original maturity of 14 or fewer days, exchange traded contracts that require daily margin, floating-to-floating/ basis swap contracts, and written option contracts. While these products are excluded from the current risk-based capital framework, it would appear that they should be factored into the computation of country risk. Another area where differences exist is in the treatment of head-office exposure. The FFIEC 009 requires that exposure to banks be transferred to the country of the head-office. Risk-based capital standards do not make any adjustments for this, but are based on the immediate counterparty. The Clearing House believes that these items should be discussed before implementation of this proposal.

Furthermore, in April 2005 the Basel Committee issued a Consultative Document entitled “The Application of Basel II to Trading Activities and the Treatment of Double Default Effects”. The document discusses the limitations for calculating counterparty credit risk under the 1998 Basel Accord and recommends the use of expected positive exposure (EPE) for banks intending to utilize the internal ratings-based approach under Basel II. The move to an EPE approach by the Basel Committee demonstrates that the credit equivalent amount which creates the “add-on” is arbitrary, albeit, consistent across banks. The joint Basel/ IOSCO working group has instead recommended the use of EPE as the best measure of the credit equivalent amount on foreign exchange and derivative contracts. However, there is no basis for using this calculation to calculate cross-border exposure.

The Clearing House strongly recommends that the Agencies do not implement the collection of credit equivalent amount by country on Schedule 2 of the FFIEC 009. We believe that availability and usefulness of the data requested along with Basel’s preferred use of an EPE methodology do not justify the reporting burden.

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Thank you for considering the concerns expressed in this letter. If you have any questions or are in need of any further information, please contact Norman R. Nelson at (212) 612 9205.

Sincerely yours,
Jeffrey P. Neubert

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1 The member banks of The Clearing House are:  Bank of America, National Association, The Bank of New York, Citibank, N.A., Deutsche Bank Trust Company Americas; HSBC Bank USA, National Association, JPMorgan Chase Bank, National Association; LaSalle Bank National Association;  UBS AG; U.S. Bank National Association; Wachovia Bank, National Association; and Wells Fargo Bank, National Association.