Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total Loss-Absorbing Capacity Requirements

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1

See 84 FR 13814 (April 8, 2019).

2

When the proposal was issued, a banking

organization was an ‘‘advanced approaches banking

organization’’ if it had total assets of at least $250

billion, or if it had consolidated on-balance sheet

foreign exposures of at least $10 billion, or if it was

a subsidiary of a depository institution, bank

holding company, savings and loan holding

company or intermediate holding company that was

an advanced approaches banking organization. See

78 FR 62018, 62204 (October 11, 2013), 78 FR

55340, 55523 (September 10, 2013). See also 12

CFR part 3 (OCC); 12 CFR part 217 (Board); and 12

CFR part 324 (FDIC). In November 2019, the

agencies issued a final rule to revise the criteria for

determining the applicability of regulatory capital

and liquidity requirements for large U.S. banking

organizations and the U.S. intermediate holding

companies of certain foreign banking organizations,

including the application of the advanced

approaches (interagency tailoring final rule). Under

this final rule, advanced approaches banking

organizations include those banking organizations

subject to Category I standards (those banking

organizations that qualify as U.S. GSIBs) or

Category II standards (banking organizations with

(1) at least $700 billion in total consolidated assets

or (2) at least $75 billion in cross-jurisdictional

activity and more than $100 billion in total

consolidated assets), and a subsidiary depository

institution of such a banking organization. See 84

FR 59230 (November 1, 2019).

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket ID OCC–2018–0019]

RIN 1557–AE38

FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 252

[Regulation Q; Docket No. R–1655]

RIN 7100–AF43

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 324

RIN 3064–AE79

Regulatory Capital Treatment for

Investments in Certain Unsecured Debt

Instruments of Global Systemically

Important U.S. Bank Holding

Companies, Certain Intermediate

Holding Companies, and Global

Systemically Important Foreign

Banking Organizations; Total Loss-

Absorbing Capacity Requirements

AGENCY

: Office of the Comptroller of the

Currency, Treasury (OCC); the Board of

Governors of the Federal Reserve

System (Board); and the Federal Deposit

Insurance Corporation (FDIC).

ACTION

: Final rule.

SUMMARY

: The OCC, Board, and FDIC

(collectively, the agencies) are adopting

a final rule that applies to advanced

approaches banking organizations with

the aim of reducing both

interconnectedness within the financial

system and systemic risks. The final

rule requires deduction from a banking

organization’s regulatory capital for

certain investments in unsecured debt

instruments issued by foreign or U.S.

global systemically important banking

organizations (GSIBs) for the purposes

of meeting minimum total loss-

absorbing capacity (TLAC) requirements

and, where applicable, long-term debt

requirements, or for investments in

unsecured debt instruments issued by

GSIBs that are pari passu or

subordinated to such debt instruments.

In addition, the Board is adopting

changes to its TLAC rules to clarify

requirements and correct drafting errors.

DATES

: The final rule is effective on

April 1, 2021.

FOR FURTHER INFORMATION CONTACT

:

OCC: Andrew Tschirhart, Risk Expert

(202) 649–6370, Capital and Regulatory

Policy; or Carl Kaminski, Special

Counsel, or Jean Xiao, Attorney, Chief

Counsel’s Office, (202) 649–5490, for

persons who are deaf or hearing

impaired, TTY, (202) 649–5597, Office

of the Comptroller of the Currency, 400

7th Street SW, Washington, DC 20219.

Board: Constance M. Horsley, Deputy

Associate Director, (202) 452–5239; Juan

Climent, Assistant Director, (202) 872–

7526; Mark Handzlik, Manager, (202)

475–6636; Sean Healey, Lead Financial

Institution Policy Analyst, (202) 912–

4611; Division of Supervision and

Regulation; or Benjamin McDonough,

Assistant General Counsel (202) 452–

2036; or Mark Buresh, Senior Counsel

(202) 452–5270, Legal Division, Board of

Governors of the Federal Reserve

System, 20th and C Streets NW,

Washington, DC 20551. For the hearing

impaired only, Telecommunication

Device for the Deaf (TDD), (202) 263–

4869.

FDIC: Benedetto Bosco, Chief, Capital

Policy Section; bbosco@fdic.gov;

Richard Smith, Capital Markets Policy

Analyst, rismith@fdic.gov;

regulatorycapital@fdic.gov; Capital

Markets Branch, Division of Risk

Management Supervision, (202) 898–

6888; or Michael Phillips, Counsel,

mphillips@fdic.gov; Catherine Wood,

Counsel, cawood@fdic.gov; or Ryan

Rappa, Counsel, rrappa@fdic.gov, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION

:

Table of Contents

I. Introduction

II. Background

A. Capital Requirements

B. TLAC Rule

III. Overview of the Notice of Proposed

Rulemaking and Comments

IV. Summary of the Final Rule

V. Regulatory Capital Treatment for

Advanced Approaches Banking

Organizations’ Investments in Covered

Debt Instruments

A. Scope of Application

B. Deduction From Tier 2 Capital

C. Amendments to Definitions

D. Investments in Covered Banking

Organizations’ Own Covered Debt

Instruments and Reciprocal Cross

Holdings

E. Significant and Non-Significant

Investments in Covered Debt Instruments

F. Corresponding Deduction Approach

G. Net Long Position Calculation

VI. Technical Amendment and Other

Comments

VII. Amendments to the Board’s TLAC Rule

VIII. Changes to Regulatory Reporting

A. Deductions From Tier 2 Capital Related

to Investments in Covered Debt

Instruments and Excluded Covered Debt

Instruments

B. Public Disclosure of Long-Term Debt

and TLAC by Covered BHCs and

Covered IHCs

IX. Regulatory Analyses

A. Paperwork Reduction Act

B. Regulatory Flexibility Act Analysis

C. Plain Language

D. OCC Unfunded Mandates Reform Act of

1995 Determination

E. Riegle Community Development and

Regulatory Improvement Act of 1994

F. Congressional Review Act

I. Introduction

The Office of the Comptroller of the

Currency (OCC), Board of Governors of

the Federal Reserve System (Board), and

Federal Deposit Insurance Corporation

(FDIC) (together, the agencies) are

issuing a final rule to revise the

regulatory capital rule in a manner

substantially consistent with a proposed

rule issued in April 2019 (proposal).

1

The final rule addresses the regulatory

capital treatment of investments by

advanced approaches banking

organizations in unsecured debt

instruments issued by foreign or U.S.

global systemically important banking

organizations (GSIBs) for the purposes

of meeting minimum total loss-

absorbing capacity (TLAC) requirements

and, as applicable, long-term debt

requirements, or of investments in

unsecured debt instruments issued by

GSIBs that are pari passu or

subordinated to such debt instruments

(covered debt instruments).

2

Consistent

with the proposal, the exposures of an

advanced approaches banking

organization to covered debt

instruments generally are subject to

deduction from the banking

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Banking organizations subject to the agencies’

capital rule include national banks, state member

banks, insured state nonmember banks, savings

associations, and top-tier bank holding companies,

intermediate holding companies, and savings and

loan holding companies domiciled in the United

States, but exclude banking organizations subject to

the Board’s Small Bank Holding Company and

Savings and Loan Holding Company Policy

Statement (12 CFR part 225, appendix C), qualifying

community banking organizations that elect to

comply with the agencies’ community bank

leverage ratio framework, and certain savings and

loan holding companies that are substantially

engaged in insurance underwriting or commercial

activities or that are estate trusts, and bank holding

companies and savings and loan holding companies

that are employee stock ownership plans.

4

See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a)

(Board); and 12 CFR 324.10(a) (FDIC). In addition

to the generally applicable leverage ratio, advanced

approaches banking organizations are subject to a

supplementary leverage ratio, which measures a

banking organization’s tier 1 capital relative to its

on-balance sheet and certain off-balance sheet

exposures.

5

A different deduction framework applies to non-

advanced approaches banking organizations. See 84

FR 35234 (July 22, 2019).

6

See 12 CFR 3.22(c)(1) (OCC); 12 CFR

217.22(c)(1) (Board); and 12 CFR 324.22(c)(1)

(FDIC).

7

See 12 CFR 3.22(c)(2) (OCC); 12 CFR

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2)

(FDIC).

8

See 12 CFR 3.22(c)(3), (c)(5), and (c)(6) (OCC);

12 CFR 217.22(c)(3), (c)(5), and (c)(6) (Board); and

12 CFR 324.22(c)(3), (c)(5), and (c)(6) (FDIC).

9

See 12 CFR part 3, subparts D, E, or F, as

applicable (OCC); 12 CFR part 217, subparts D, E,

and F, as applicable (Board); and 12 CFR part 324,

subparts D, E, or F, as applicable (FDIC).

10

See 12 CFR part 3, subparts D, E, or F, as

applicable (OCC); 12 CFR part 217, subparts D, E,

and F, as applicable (Board); and 12 CFR part 324,

subparts D, E, or F, as applicable (FDIC).

11

See 82 FR 8266 (January 24, 2017); 12 CFR part

252, subparts G and P. The TLAC rule’s TLAC and

long-term debt requirements took effect on January

1, 2019.

12

See 12 CFR 252.62 and 252.63; 12 CFR 252.162

and 252.165. The requirements applicable under

the TLAC rule to covered BHCs and covered IHCs

are similar but not identical.

13

Long-term debt issued by a covered IHC to

affiliates of the covered IHC is subject to notable

additional requirements, including the inclusion of

a provision allowing the Board to order the

conversion of the debt into common equity tier 1

capital of the covered IHC. See 12 CFR 252.163.

14

The internal debt conversion provision

included in covered IHC long-term debt issued to

affiliates performs a similar function outside of a

resolution proceeding.

organization’s regulatory capital. The

final rule includes certain adjustments

to the proposal in response to

comments. The final rule aims to reduce

both interconnectedness within the

financial system and systemic risks.

II. Background

A. Capital Requirements

The agencies’ regulatory capital rule

(capital rule) imposes minimum capital

requirements on banking organizations

measured through risk-based and

leverage capital ratios.

3

These regulatory

capital ratios consist of regulatory

capital measures relative to risk-

weighted assets and total assets,

respectively.

4

The numerators of the

regulatory capital ratios include various

adjustments and deductions to balance-

sheet-based regulatory capital

components.

The capital rule includes two broad

categories of deductions from regulatory

capital related to investments in the

capital instruments of financial

institutions by advanced approaches

banking organizations.

5

First, it requires

a banking organization to deduct any

investment in its own regulatory capital

instruments and any investment in

regulatory capital instruments held

reciprocally with another financial

institution (reciprocal cross holding).

6

Second, it requires a banking

organization to deduct investments in

capital instruments issued by

unconsolidated financial institutions

that would qualify as regulatory capital

if issued by the banking organization

itself.

7

For the purpose of the latter

deduction, a banking organization may

be required to deduct the entire amount

of the investment, or it may be required

to deduct only the portion of the

investment that exceeds a certain

threshold.

8

These deductions are

intended to reduce interconnectedness

and contagion risk among financial

institutions by discouraging banking

organizations from investing in the

capital of other financial institutions.

For deductions related to investments

in the capital of unconsolidated

financial institutions, a banking

organization must deduct from the

component of regulatory capital for

which the instrument qualifies or would

qualify if it were issued by the banking

organization that is holding the

exposure.

9

For example, an advanced

approaches banking organization that

owns 10 percent or less of the common

stock of an unconsolidated financial

institution is said to have a ‘‘non-

significant investment’’ in the capital of

the unconsolidated financial institution.

If the advanced approaches banking

organization invests in tier 2

instruments issued by the

unconsolidated financial institution,

then it must deduct from its own tier 2

capital the amount, if any, by which the

investment, combined with other non-

significant investments in the capital of

other unconsolidated financial

institutions, exceeds 10 percent of the

sum of the banking organization’s

common equity tier 1 capital elements

minus all deductions from and

adjustments to common equity tier 1

capital elements required under section

__.22(a) through __.22(c)(3), net of

associated deferred tax liabilities (DTLs)

(10 percent threshold for non-significant

investments). Any non-significant

investments in the capital of

unconsolidated financial institutions

that are not deducted from regulatory

capital are risk-weighted in accordance

with the capital rule.

10

B. TLAC Rule

In December 2016, the Board issued a

final rule to require the largest domestic

and foreign banking organizations

operating in the United States to

maintain a minimum amount of total

loss-absorbing capacity (TLAC),

consisting of tier 1 capital (excluding

minority interest) and certain long-term

debt instruments (TLAC rule).

11

The

TLAC rule applies to a U.S. top-tier

bank holding company identified under

the Board’s rules as a global

systemically important bank holding

company (covered BHC) or a top-tier

U.S. intermediate holding company

subsidiary of a global systemically

important foreign banking organization

(foreign GSIB) with $50 billion or more

in U.S. non-branch assets (covered IHC)

(collectively, covered banking

organizations).

The objective of the TLAC rule is to

enhance financial stability by reducing

the impact of the failure of covered

banking organizations by requiring such

organizations to have sufficient loss-

absorbing capacity on both a going-

concern and a gone-concern basis. The

TLAC rule includes requirements that a

covered banking organization maintain

outstanding minimum levels of TLAC

and long-term debt.

12

TLAC is the sum

of the tier 1 capital instruments issued

directly by the covered banking

organization (excluding minority

interest) and the long-term debt issued

directly by the covered banking

organization. Under the TLAC rule,

long-term debt is generally unsecured

debt that is issued directly by a covered

banking organization, has no features

that would interfere with an orderly

resolution proceeding, has a remaining

maturity of at least one year, and is

governed by U.S. law, among other

provisions.

13

Long-term debt instruments under the

TLAC rule are capable of absorbing

losses in resolution (i.e., on a gone-

concern basis). This is because the debt

holders’ claim on a banking

organization’s assets may not receive

full payment in a resolution,

receivership, insolvency, or similar

proceeding.

14

This potential loss-

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Long-term debt under the TLAC rule may also

qualify as tier 2 capital under the capital rule, if it

satisfies the eligibility criteria for tier 2 capital.

16

The proposal of the TLAC rule in 2015 was

issued solely by the Board. Therefore, the proposed

regulatory capital deductions in that proposal

would have only applied to Board-regulated

banking organizations, which include bank holding

companies, intermediate holding companies,

savings and loan holdings companies, and state

member banks.

17

As discussed further in section V.C.2 below,

the final rule excludes certain unsecured debt

instruments issued by foreign GSIBs from the scope

of the final rule. Specifically, the final rule

generally excludes from the definition of covered

debt instrument an unsecured debt instrument that

cannot be written down or converted into equity

(i.e., bailed in) under a special resolution regime.

absorbing capacity of long-term debt is

part of the rationale for the deduction

approach for investments in such debt

instruments under this final rule.

15

Given the ability of long-term debt to

absorb the losses of a covered banking

organization in a resolution,

receivership, insolvency, or similar

proceeding, the Board proposed

regulatory capital deductions for

investments by Board-regulated banking

organizations in long-term debt issued

under the TLAC rule when it initially

proposed the TLAC rule in 2015.

16

The

Board did not finalize these limitations

when it issued the final TLAC rule

because it needed additional time to

work with the OCC and the FDIC to

develop a proposed interagency

approach regarding the regulatory

capital treatment for investments in

certain debt instruments issued by

covered banking organizations.

III. Overview of Notice of Proposed

Rulemaking and Comments

In April 2019, the agencies issued a

proposal to address, for purposes of the

capital rule, the systemic risks posed by

an advanced approaches banking

organization’s investments in covered

debt instruments and to create an

incentive for advanced approaches

banking organizations to limit their

exposure to GSIBs. The deductions

required under the proposal would have

affected the capital ratios of advanced

approaches banking organizations.

Without the proposed changes,

investments in covered debt

instruments issued by covered BHCs,

foreign GSIBs, and covered IHCs are

generally not subject to deduction and

would generally be subject to a risk

weight of 100 percent.

An investment in a covered debt

instrument, as defined in the proposal,

by an advanced approaches banking

organization would have been treated as

an investment in a tier 2 capital

instrument for purposes of the existing

deduction framework. As a result, an

investment in a covered debt instrument

would have been subject to deduction

from the advanced approaches banking

organization’s own tier 2 capital.

The existing corresponding deduction

approach in the capital rule would have

been amended to apply any required

deduction by advanced approaches

banking organizations of an investment

in a covered debt instrument that

exceeded certain thresholds, consistent

with the deduction framework for

investments in the capital of

unconsolidated financial institutions. In

addition, the existing deduction

approaches under the capital rule would

have been amended to apply to an

advanced approaches banking

organization’s reciprocal cross holdings

of covered debt instruments; that is, an

advanced approaches banking

organization would have deducted from

its own tier 2 capital any reciprocal

cross holdings of covered debt

instruments with another banking

organization. The existing deduction

approaches under the capital rule would

have also been amended to apply to a

covered BHC’s investments in its own

covered debt instruments. Similarly, the

existing deduction approaches under

the capital rule would have also been

amended to apply to a covered IHC

subject to the advanced approaches

(advanced approaches covered IHC) and

its investments in its own covered debt

instruments.

The proposal also included certain

exclusions from deduction. Importantly,

the proposal would have allowed

advanced approaches banking

organizations to exclude from deduction

investments in covered debt

instruments, subject to certain

qualifying and measurement criteria,

that are five percent or less of the sum

of advanced approaches banking

organization’s common equity tier 1

capital elements minus all deductions

from and adjustments to common equity

tier 1 capital elements required under

section __.22(a) through __.22(c)(3), net

of associated DTLs (five percent

exclusion). As discussed in the

preamble to the proposal, the agencies

designed the exclusion from deduction

to support deep and liquid markets for

covered debt instruments issued by

GSIBs. In the case of a U.S. GSIB, it

would have applied the proposed

exclusion only to ‘‘excluded covered

debt instruments,’’ which were defined

in the proposal as covered debt

instruments held for 30 business days or

less and held for the purpose of short-

term resale or with the intent of

benefiting from actual or expected short-

term price movements, or to lock in

arbitrage profits. This provision was

intended to limit the five percent

exclusion for U.S. GSIBs to covered debt

instruments held in connection with

market making activities. Advanced

approaches banking organizations that

are not U.S. GSIBs would not have been

subject to this limit on the use of the

five percent exclusion. Under the

proposal’s five percent exclusion, all

advanced approaches banking

organizations could exclude covered

debt instruments measured on a gross

long basis from the deduction

framework up to a cap of five percent

of the banking organization’s common

equity tier 1 capital.

The proposal would have revised

section __.22(c), (f), and (h) of the

capital rule to incorporate the proposed

deduction approach for investments in

covered debt instruments, and added

several new definitions to section __.2

to effectuate these deductions. Further,

the definition of ‘‘investment in the

capital of an unconsolidated financial

institution’’ would have been amended

to correct a typographical error.

Collectively, the agencies received ten

public comment letters from trade

associations, public interest groups,

private individuals, and other interested

parties. As further detailed below,

commenters generally supported the

overarching goal of the proposal to

reduce interconnectedness by creating

an incentive for advanced approaches

banking organizations to limit their

exposure to GSIBs. However,

commenters also expressed certain

general concerns with the proposal and

noted specific concerns with certain

technical aspects of it.

The agencies are jointly finalizing a

regulatory capital treatment for

investments in covered debt

instruments that applies to advanced

approaches banking organizations. The

final rule is substantially consistent

with the proposal, with certain

modifications in response to comments

as well as some technical clarifications.

IV. Summary of the Final Rule

The final rule applies to advanced

approaches banking organizations and

generally requires deductions from

capital for direct, indirect, and synthetic

exposures to covered debt instruments

and any other unsecured debt

instruments pari passu or subordinated

to covered debt instruments.

17

Under

the final rule, an advanced approaches

banking organization treats investments

in covered debt instruments as

investments in tier 2 capital instruments

for purposes of applying the

corresponding deduction approach in

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See 12 CFR 3.22(h)(2) (OCC); 12 CFR

217.22(h)(2) (Board); 12 CFR 324.2(h)(2) (FDIC).

19

See 84 FR 59230 (November 1, 2019).

20

See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC).

the capital rule. Deduction from capital

is required for:

•Investments in a covered BHC’s or

advanced approaches covered IHC’s

own covered debt instruments, as

applicable;

•Reciprocal cross holdings with

another financial institution of covered

debt instruments;

•Investments in covered debt

instruments of a financial institution

while also holding 10 percent or more

of the financial institution’s common

stock; and

•Investments in covered debt

instruments that, together with

investments in the capital of

unconsolidated financial institutions,

exceed 10 percent of the investing

advanced approaches banking

organization’s common equity tier 1

capital.

•Under the final rule, an advanced

approaches banking organization may

exclude from deduction investments in

certain covered debt instruments up to

five percent of its common equity tier 1

capital, as measured on a gross long

basis.

18

Usage of the five percent

exclusion is tailored, depending on

whether the advanced approaches

banking organization is a U.S. GSIB.

For U.S. GSIBs, only ‘‘excluded

covered debt instruments’’ are eligible

for the five percent exclusion in the

final rule. Generally, ‘‘excluded covered

debt instruments’’ in the final rule are

investments in covered debt

instruments that are held in accordance

with market making activities, as

identified using criteria from the

regulations implementing section 13 of

the Bank Holding Company Act

(commonly known as the Volcker Rule)

as discussed in more detail in section

V.E. below. A U.S. GSIB’s direct or

indirect exposure to a covered debt

instrument is an excluded covered debt

instrument if the exposure is held for 30

or fewer business days and held in

connection with market making-related

activities. A U.S. GSIB’s holding of a

synthetic exposure to a covered debt

instrument is not limited to 30 business

days in order to qualify as an excluded

covered debt instrument.

For advanced approaches banking

organizations that are not U.S. GSIBs,

any direct, indirect, or synthetic

exposure to a covered debt instrument

issued by an unconsolidated financial

institution that is a non-significant

investment is eligible for the five

percent exclusion in the final rule.

The final rule revises section __.22(c),

(f), and (h) of the capital rule to

incorporate the deduction approach for

investments in covered debt

instruments. As with the proposal,

several new definitions are added to

section __.2 in the final rule to

effectuate these deductions. More

information on these specific revisions

to the capital rule are provided below.

V. Regulatory Capital Treatment for

Advanced Approaches Banking

Organizations’ Investments in Covered

Debt Instruments

A. Scope of Application

The proposal would have applied the

deduction framework for covered debt

instruments to advanced approaches

banking organizations. Since the

proposal was issued, the agencies issued

the interagency tailoring final rule that

included revisions to the scope of

advanced approaches banking

organizations.

19

As a result of the

interagency tailoring final rule,

‘‘advanced approaches banking

organizations’’ include those banking

organizations subject to Category I

standards (i.e., those banking

organizations that qualify as U.S.

GSIBs), Category II standards (i.e.,

banking organizations with (1) at least

$700 billion in total consolidated assets

or (2) at least $75 billion in cross-

jurisdictional activity and at least $100

billion in total consolidated assets), or a

subsidiary depository institution of a

banking organization subject to Category

I or II standards. Some commenters

suggested that the agencies should

apply the proposal to all banking

organizations subject to the capital rule.

Other commenters suggested the

agencies apply the proposal to all

banking organizations subject to

Category I through IV standards, as

defined in the interagency tailoring final

rule.

20

After considering the comments, the

agencies are continuing to limit the

scope of this rule to advanced

approaches banking organizations, as

revised by the interagency tailoring final

rule. As explained in the proposal, the

systemic risks associated with banking

organizations’ investments in covered

debt instruments is greatest for the

banking organizations covered by the

proposal. However, the agencies

acknowledge the possibility of potential

systemic risks associated with other

banking organizations’ investments in

covered debt instruments and will

continue to evaluate whether additional

steps are warranted to address such

risks.

B. Deduction From Tier 2 Capital

Under the agencies’ capital rule, a

banking organization must deduct from

regulatory capital any investments in its

own capital instruments and in the

capital of other financial institutions

that it holds reciprocally. Other

investments in the capital of

unconsolidated financial institutions are

subject to deduction to the extent they

exceed certain thresholds.

Under the proposal, an investment in

a covered debt instrument by an

advanced approaches banking

organization would have been treated as

an investment in a tier 2 capital

instrument for purposes of the

deduction framework, and therefore,

would have been subject to deduction

from the advanced approaches banking

organization’s own tier 2 capital. The

existing corresponding deduction

approach in the capital rule would have

been amended to apply to any

deduction by advanced approaches

banking organizations of an investment

in a covered debt instrument that

exceeded certain thresholds, as if the

covered debt instrument were a tier 2

capital instrument. In addition, the

existing deduction approaches under

the capital rule would have been

amended to apply to a covered BHC’s or

advanced approaches covered IHC’s

investments in its own covered debt

instruments, and to advanced

approaches banking organizations’

reciprocal cross holdings of covered

debt instruments with other financial

institutions. Such investments and cross

holdings would be deducted from an

advanced approaches banking

organization’s own tier 2 capital, as

applicable.

Some commenters expressed concerns

that deducting a covered debt

instrument from an advanced

approaches banking organization’s own

tier 2 capital is insufficiently restrictive.

As an alternative, these commenters

recommended that advanced

approaches banking organizations

deduct investments in covered debt

instruments from their own common

equity tier 1 capital. Some commenters

suggested that the prohibition of all

holdings of covered debt instruments by

advanced approaches banking

organizations would be more

appropriate. Other commenters

expressed concerns that deducting a

covered debt instrument from an

advanced approaches banking

organization’s own tier 2 capital is

overly restrictive. These commenters

asserted that a covered BHC or

advanced approaches covered IHC

should be able to effectuate deductions

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21

See 12 CFR 252.61.

22

See 12 CFR 252.161.

23

The Basel Committee’s TLAC Holdings

standard excludes from the definition of ‘‘other

TLAC liabilities’’ instruments that are pari passu to

(1) excluded liabilities and (2) other instruments

that are eligible for recognition as external TLAC by

virtue of the exemptions to the subordination

requirements in the Financial Stability Board’s

TLAC term sheet. See section 66.c of the TLAC

Holdings standard. Only a proportion of

instruments that are eligible to be recognized as

external TLAC by virtue of the subordination

exemptions may be considered TLAC under the

TLAC Holdings standard. The proportion equals the

ratio of (1) the debt instruments issued by a GSIB

that rank pari passu to excluded liabilities and that

are recognized as external TLAC by the GSIB, to (2)

the debt instruments issued by the GSIB that rank

pari passu to excluded liabilities and that would be

recognized as external TLAC if the subordination

requirement was not applied. As stated in the

proposal, the agencies believe that implementation

of the proportional deduction approach used in the

Basel Committee’s TLAC Holdings standard would

have introduced too much complexity and

operational burden to the capital rule; the final rule

does not implement the proportional deduction

approach. See Basel Committee for Banking

Supervision and Regulation, ‘‘TLAC Holdings’’

(October 12, 2016), available at https://www.bis.org/

bcbs/publ/d387.pdf. (TLAC Holdings standard).

24

See Financial Stability Board, ‘‘Principles on

Loss-absorbing and Recapitalisation Capacity of G–

SIBs in Resolution—Total Loss-absorbing Capacity

(TLAC) Term Sheet,’’ (November 9, 2015), available

at https://www.fsb.org/wp-content/uploads/TLAC-

Principles-and-Term-Sheet-for-publication-

final.pdf.

25

Under the FSB’s TLAC term sheet, ‘‘excluded

liabilities’’ do not qualify as TLAC and therefore are

not subject to deduction under the TLAC Holdings

from its own TLAC-eligible long-term

debt rather than its own tier 2 capital.

Requiring deduction of a covered debt

instrument from tier 2 capital should be

a sufficiently prudent and simple

approach that discourages advanced

approaches banking organizations’

investments in such instruments and

thereby supports the objectives of

reducing both interconnectedness

within the financial system and

systemic risks. Effectuating deductions

from a covered BHC’s or advanced

approaches covered IHC’s own TLAC-

eligible debt, rather than own tier 2

capital, could disproportionately favor

the largest and most internationally

active banking organizations. A less

complex banking organization, such as

a non-GSIB advanced approaches

banking organization, would make all

deductions related to an investment in

a covered debt instrument from its own

tier 2 capital, since non-GSIBs are not

required to issue TLAC-eligible debt.

Further, allowing covered BHCs and

advanced approaches covered IHCs to

deduct from their own TLAC-eligible

debt creates additional balance sheet

capacity for these banking organizations

to invest in covered debt instruments

issued by other GSIBs relative to non-

GSIB advanced approaches banking

organizations, thereby undermining a

goal of the final rule to reduce

interconnectedness among large and

internationally active banking

organizations. The disproportionate

effects of allowing deduction from own

TLAC-eligible debt would be further

exacerbated if the agencies were to

expand the scope of the final rule in the

future as described above.

As such, the agencies are finalizing, as

proposed, the requirement that an

advanced approaches banking

organization treat an investment in a

covered debt instrument as an

investment in a tier 2 capital

instrument, and therefore, deduct such

investment from its own tier 2 capital.

C. Amendments to Definitions

The proposal would have added or

amended certain definitions in section _

_.2 of the capital rule to implement the

proposed deduction approach.

1. Definition of ‘‘Covered Debt

Instrument’’ for Covered BHC and

Covered IHC Issuance

Under the proposal, a ‘‘covered debt

instrument’’ would have been defined to

include an unsecured debt instrument

that is:

(1) Issued by a covered BHC and that

is an ‘‘eligible debt security’’ for

purposes of the TLAC rule,

21

or that is

pari passu or subordinated to any

‘‘eligible debt security’’ issued by the

covered BHC; or

(2) Issued by a covered IHC and that

is an ‘‘eligible Covered IHC debt

security’’ for purposes of the TLAC

rule,

22

or that is pari passu or

subordinated to any ‘‘eligible Covered

IHC debt security’’ issued by the

covered IHC.

Under the proposal, a covered debt

instrument would not have included a

debt instrument that qualifies as tier 2

capital under the capital rule.

Some commenters requested that pari

passu or subordinated unsecured debt

instruments be excluded from the

definition of ‘‘covered debt instrument.’’

Commenters argued that it is not

practical to determine whether a given

instrument is pari passu or

subordinated to TLAC-eligible debt

issued by a covered BHC or covered IHC

and whether a given debt instrument

was an eligible long-term debt

instrument under the TLAC rule.

Further, commenters argued that

because the TLAC rule limits the

amount of debt that a covered BHC or

covered IHC can issue that is not TLAC-

eligible but is pari passu with or

subordinated to TLAC-eligible debt,

significant amounts of such debt should

not be outstanding.

Treating unsecured debt instruments

that are pari passu or subordinated to

TLAC-eligible debt instruments as

‘‘covered debt instruments’’ is

important, given that these liabilities

will incur losses ahead of or

proportionally with TLAC-eligible debt.

Excluding these pari passu and

subordinated instruments from the

regulatory deduction treatment would

understate the degree of risk of these

investments. Advanced approaches

banking organizations should be able to

determine whether an instrument

qualifies as TLAC under applicable

standards, or whether an instrument is

pari passu or subordinated to a

company’s TLAC-eligible debt

instruments based on public

information and routine due diligence.

Accordingly, the agencies are finalizing

as proposed the above prongs of the

definition of covered debt instrument

for covered BHC and covered IHC debt

issuances.

2. Definition of ‘‘Covered Debt

Instrument’’ for Foreign GSIB Issuance

A ‘‘covered debt instrument’’ also

would have included any unsecured

debt instrument issued by a foreign

GSIB or any of its subsidiaries, other

than its covered IHC, for the purpose of

absorbing losses or recapitalizing the

issuer or any of its subsidiaries in

connection with a resolution,

receivership, insolvency, or similar

proceeding of the issuer or any of its

subsidiaries (foreign TLAC-eligible

debt). Further, covered debt instruments

would have also included any debt

instrument that is pari passu or

subordinated to any foreign TLAC-

eligible debt, other than an unsecured

debt instrument that is included in the

regulatory capital of the issuer.

Commenters suggested that the scope

of the definition of ‘‘covered debt

instrument’’ should be revised to

include only foreign TLAC-eligible debt

as determined under applicable home-

country standards.

23

Commenters stated

that the proposed scope of the definition

is broader than necessary because the

issuance of such liabilities is subject to

the Financial Stability Board (FSB)’s

TLAC term sheet’s limitation on

issuance of excluded liabilities.

24

Some

commenters suggested that liabilities

issued by foreign GSIBs that are

‘‘excluded liabilities’’ under the FSB’s

TLAC term sheet should be excluded

from the proposal’s definition of

covered debt instrument and therefore

exempted from the deduction

framework.

25

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standard, even if they rank pari passu or

subordinated to a TLAC instrument. Excluded

liabilities include deposits, liabilities arising from

derivatives, and structured notes, among other

items. The TLAC rule prohibits or limits covered

banking organizations from entering into financial

arrangements that may compromise an orderly

resolution process, including limiting the amount of

liabilities to unaffiliated companies.

26

Generally, a resolution regime that is consistent

with the FSB’s Key Attributes of Effective

Resolution Regimes for Financial Institutions would

be a special resolution regime that addresses the

failure or potential failure of a financial company.

See Financial Stability Board, ‘‘Key Attributes of

Effective Resolution Regimes for Financial

Institutions,’’ (October 15, 2014), https://

www.fsb.org/wp-content/uploads/r_141015.pdf.

Current examples of special resolution regimes that

address the failure or potential failure of a financial

company are those included in the International

Swaps and Derivatives Association (ISDA) 2015

Universal Resolution Stay Protocol and the ISDA

2018 U.S. Resolution Stay Protocol. See ISDA 2015

Universal Resolution Stay Protocol (November 4,

2015), http://assets.isda.org/media/ac6b533f-3/

5a7c32f8-pdf; ISDA 2018 U.S. Resolution Stay

Protocol (July 31, 2018), https://www.isda.org/a/

CIjEE/3431552_40ISDA-2018-U.S.-Protocol-

Final.pdf.

27

See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

and 12 CFR 324.2 (FDIC) (‘‘investment in the capital

of an unconsolidated financial institution,’’

‘‘investment in the banking organization’s own

capital instrument,’’ ‘‘indirect exposure,’’ and

‘‘synthetic exposure’’).

Some commenters reiterated that it is

not practical for banking organizations

to determine whether a given

instrument is pari passu or

subordinated to foreign TLAC-eligible

debt as such a determination requires

complex analyses of foreign law with

respect to insolvency regimes and

creditor hierarchies. Commenters also

asserted that there could be unintended

consequences of including instruments

that are pari passu or subordinated to

foreign TLAC-eligible debt, including

interference with ordinary interbank

transactions. As a result, banking

organizations would make conservative

assumptions and treat all unsecured

debt instruments issued by foreign

GSIBs as subject to the deduction

framework. Therefore, commenters

suggested that the final rule should not

include instruments pari passu or

subordinated to foreign TLAC-eligible

debt in the definition of ‘‘covered debt

instruments.’’

For the same reasons discussed above

with respect to instruments issued by

covered BHCs and covered IHCs, the

final rule defines debt instruments that

are pari passu or subordinated to

foreign TLAC-eligible debt as ‘‘covered

debt instruments.’’ As discussed, such

instruments would incur losses ahead of

or proportionally with foreign TLAC-

eligible debt and therefore should be

subject to the deduction framework.

However, the agencies recognize the

commenters’ concerns and revise in two

ways the definition of covered debt

instruments issued by foreign GSIBs and

their subsidiaries, other than covered

IHCs. First, the final rule provides that

an instrument is a covered debt

instrument if it is ‘‘eligible for use to

comply with an applicable law or

regulation’’ requiring the issuance of a

minimum amount of instruments to

absorb losses or to recapitalize the

issuer or any of its subsidiaries in

connection with a resolution,

receivership, insolvency, or similar

proceeding. The proposal’s definition

would not have explicitly considered

whether the instrument is eligible for

use to comply with such a law or

regulation.

Second, the final rule revises the

definition of a covered debt instrument

to exclude certain unsecured debt

instruments from the scope of the

definition. If the issuer may be subject

to a special resolution regime, in its

jurisdiction of incorporation or

organization, that addresses the failure

or potential failure of a financial

company and foreign TLAC-eligible

debt is eligible under that special

resolution regime to be written down or

converted into equity or any other

capital instrument, then an instrument

is pari passu or subordinated to foreign

TLAC-eligible debt if that instrument is

eligible to be written down or converted

into equity or another capital

instrument under that special resolution

regime ahead of or proportionally with

any foreign TLAC-eligible debt. These

revisions reflect the FSB’s TLAC term

sheet’s focus on having instruments and

liabilities that should be readily

available for bail-in, and that

instruments that cannot be bailed in

effectively rank senior to foreign TLAC-

eligible debt in bail-in.

26

These revisions should reduce the

burden associated with determining

whether unsecured debt instruments are

pari passu or subordinated to foreign

TLAC-eligible debt. For purposes of the

final rule, an advanced approaches

banking organization can rely on the

terms of any special resolution regime

and other applicable laws or regulations

for purposes of determining the

applicability of the final rule’s

deduction framework for an unsecured

debt instrument. For example, if the

applicable law or regulation specifies

the seniority of instruments that must be

issued, the advanced approaches

banking organization can rely on that

specification of seniority in determining

whether a different instrument is pari

passu or subordinated to TLAC-eligible

debt instruments.

These revisions also address concerns

raised by commenters that the proposal

could have interfered with ordinary

interbank transactions. For example, if

the special resolution regime applicable

to a foreign GSIB provides that deposits

are excluded from bail-in, those

deposits are not covered debt

instruments subject to the final rule’s

deduction framework.

3. Other Definitions

Similar to the measurement of

investments in the capital of

unconsolidated financial institutions, an

‘‘investment in a covered debt

instrument’’ would have been defined

in the proposal as a net long position in

a covered debt instrument, including

direct, indirect, and synthetic exposures

to such covered debt instruments.

Investments in covered debt

instruments would have excluded

underwriting positions held for five

business days or less. In addition, the

proposal would have amended the

definitions of ‘‘indirect exposure’’ and

‘‘synthetic exposure’’ in the capital rule

to add exposures to covered debt

instruments.

27

The agencies received no

comments on these technical elements

of the proposal, and are finalizing, as

proposed, the definitions for

‘‘investment in a covered debt

instrument,’’ ‘‘indirect exposure,’’ and

‘‘synthetic exposure.’’

D. Investments in Covered Banking

Organizations’ Own Covered Debt

Instruments and Reciprocal Cross

Holdings

Under the agencies’ capital rule, a

banking organization must deduct from

regulatory capital an investment in its

own capital instruments and

investments in the capital of other

financial institutions that it holds

reciprocally under sections __.22(c)(1)

and (3), respectively. The proposal

would have amended section

217.22(c)(1) to require a covered BHC or

a covered IHC to deduct from tier 2

capital its investments in its own

covered debt instruments. The proposal

also would have amended section __

.22(c)(3) to require advanced approaches

banking organizations to deduct from

tier 2 capital any investment in a

covered debt instrument that is held

reciprocally with another financial

institution.

As described earlier, some

commenters expressed concerns that

deducting a covered debt instrument

from an advanced approaches banking

organization’s own tier 2 capital is

overly restrictive, including in cases of

deductions for investments in its own

covered debt instruments, as applicable,

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28

See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC) (‘‘significant investment in the

capital of an unconsolidated financial institution’’

and ‘‘non-significant investment in the capital of an

unconsolidated financial institution’’).

29

See 12 CFR 3.22(c)(6) and (d)(2)(i)(C) (OCC); 12

CFR 217.22(c)(6) and (d)(2)(i)(C) (Board); and 12

CFR 324.22(c)(6) and (d)(2)(i)(C) (FDIC). In addition

to the 10 percent threshold, a banking organization

could be subject to additional deductions for

significant investments in financial institutions in

the form of common stock, if the amount not

deducted under the 10 percent limit, combined

with mortgage servicing assets and deferred tax

assets that are not deducted, exceed 15 percent of

the banking organization’s common equity tier 1

capital. See 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d)

(Board); and 12 CFR 324.22(d) (FDIC).

30

See 12 CFR 3.22(c)(5) (OCC); 12 CFR

217.22(c)(5) (Board); and 12 CFR 324.2(c)(5) (FDIC).

and reciprocal cross holdings with other

financial institutions. These

commenters asserted that a covered

BHC or a covered IHC should be able to

effectuate deductions from its own

TLAC-eligible long-term debt rather

than its own tier 2 capital for these

investments.

Requiring a deduction of a covered

debt instrument from tier 2 capital for

deductions related to investments in an

advanced approaches banking

organization’s own covered debt

instruments and reciprocal cross

holdings should be a sufficiently

prudent and simple approach that

discourages advanced approaches

banking organizations’ investments in

such instruments, as applicable, and

thereby supports the objectives of

reducing both interconnectedness

within the financial system and

systemic risks. As mentioned earlier,

effectuating deductions from a covered

BHC’s or a covered IHC’s own TLAC-

eligible debt, rather than its own tier 2

capital, could disproportionately favor

the largest and most internationally

active banking organizations. As such,

the agencies are finalizing, as proposed,

that an advanced approaches banking

organization will generally deduct

investments in own covered debt

instruments, as applicable, and

reciprocal cross holdings with other

financial institutions in covered debt

instruments from its own tier 2 capital.

Commenters asked that the final rule

include a separate deduction threshold

for market making activities in an

advanced approaches banking

organization’s own covered debt

instruments capped at five percent of a

covered BHC’s or advanced approaches

covered IHC’s own common equity tier

1 capital. Commenters stated that such

a threshold is necessary to better

facilitate deep and liquid markets for

TLAC-eligible debt instruments.

Further, commenters claimed that GSIBs

are often the biggest market makers in

their own covered debt instruments and,

under the U.S. GAAP accounting

standard, their own holdings of covered

debt instruments are not always

eliminated in full in consolidation. In

cases where a GSIB’s investments in its

own covered debt instruments are not

fully extinguished, the exposure amount

can be greater than zero and therefore

subject to deduction from tier 2 capital

under the proposal.

Commenters stated that a separate five

percent threshold for market making in

an advanced approaches banking

organization’s own covered debt

instruments in the final rule would

prevent a capital deduction for such

investments. However, finalizing the

rule with a separate threshold for

investments in an advanced approaches

banking organization’s own covered

debt instruments could create additional

balance sheet capacity for covered BHCs

and advanced approaches covered IHCs

to increase their investments in covered

debt instruments issued by other GSIBs.

Such an approach would not align with

the proposal’s goal of reducing

interconnectedness and systemic risks

among large and internationally active

banking organizations. Therefore, the

final rule does not implement this

suggested change.

E. Significant and Non-Significant

Investments in Covered Debt

Instruments

Under sections __.22(c)(5) and (6) of

the capital rule, an advanced

approaches banking organization must

deduct from regulatory capital certain

investments in the capital of

unconsolidated financial institutions.

The calculation of the deduction

depends on whether the banking

organization has a ‘‘significant’’ or a

‘‘non-significant’’ investment, with

‘‘significant’’ defined as ownership of

more than 10 percent of the common

stock of the unconsolidated financial

institution and ‘‘non-significant’’

defined as ownership of 10 percent or

less of the common stock of the

unconsolidated financial institution.

28

When a banking organization has a

‘‘significant investment’’ in an

unconsolidated financial institution, the

banking organization must deduct from

regulatory capital any investment in the

capital of the unconsolidated financial

institution that is not in the form of

common stock as measured on a net

long basis, and the banking organization

must also deduct from regulatory capital

any investment in the capital of the

unconsolidated financial institution in

the form of common stock that exceeds

10 percent of the advanced approaches

banking organization’s own common

equity tier 1 capital as measured on a

net long basis.

29

If an advanced

approaches banking organization has

one or more ‘‘non-significant

investments’’ in unconsolidated

financial institutions, it must aggregate

such investments and deduct from

regulatory capital any amount that

exceeds the 10 percent threshold for

non-significant investments, as

measured on a net long basis.

30

The proposal would have amended

the capital rule to require an advanced

approaches banking organization with

an investment in a covered debt

instrument issued by an unconsolidated

financial institution to deduct the

investment from tier 2 capital if the

advanced approaches banking

organization has a significant

investment in the capital of the

unconsolidated financial institution.

The agencies received no comments on

deductions for significant investments

in the capital of an unconsolidated

financial institution and are finalizing

this aspect of the rule as proposed.

The proposal would have amended

the capital rule to require an advanced

approaches banking organization with

an investment in a covered debt

instrument in a financial institution in

which the advanced approaches

banking organization does not also have

a significant investment in the form of

common stock to include such

investment in the covered debt

instrument in the aggregate amount of

non-significant investments in the

capital of unconsolidated financial

institutions. As under the existing

capital rule, the proposal would have

required an advanced approaches

banking organization to deduct from

regulatory capital the amount by which

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions

and such covered debt instruments

exceeds the 10 percent threshold for

non-significant investments. Any

investment in a covered debt instrument

subject to deduction would have been

deducted according to the

corresponding deduction approach

described below in section V.F. Any

investment in a covered debt instrument

not subject to deduction would have

been included in risk-weighted assets,

generally with a 100 percent risk

weight.

Some commenters suggested that the

agencies recalibrate the 10 percent

threshold for non-significant

investments in consideration of the

expanded scope of instruments that

would be included within that

threshold under the proposal. For

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31

See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC) (‘‘synthetic exposure’’).

32

See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC) (‘‘investment in the capital of

Continued

example, some commenters asked the

agencies to expand the non-significant

investments threshold to 10 percent of

an advanced approaches banking

organization’s own total capital from 10

percent of its own common equity tier

1 capital. Changing the non-significant

investments threshold in the manner the

commenters suggested could undermine

a main goal of the proposal—to reduce

interconnectedness among large and

internationally active banking

organizations. Accordingly, the final

rule requires an advanced approaches

banking organization with an

investment in a covered debt instrument

in a financial institution in which the

advanced approaches banking

organization does not have a significant

investment to include such investment

in the aggregate amount of non-

significant investments in the capital of

unconsolidated financial institutions, as

proposed. Further, the final rule

requires an advanced approaches

banking organization to deduct from

regulatory capital the amount by which

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions

exceeds the 10 percent threshold for

non-significant investments, as

proposed.

The proposal would have included

limited exclusions from the 10 percent

threshold for non-significant

investments’ deduction approach. The

exclusions would have depended on

whether an advanced approaches

banking organization is a U.S. GSIB or

a subsidiary of a U.S. GSIB (U.S. GSIB

banking organization). To help support

a deep and liquid market for covered

debt instruments, the proposal would

have permitted U.S. GSIB banking

organizations to exclude limited

amounts of market making exposures

(‘‘excluded covered debt instruments’’)

from the 10 percent threshold for non-

significant investments deduction. For

example, a U.S. GSIB could have

excluded covered debt instruments from

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions.

The aggregate amount of the exclusion,

measured on a gross long basis, was

limited to five percent of the GSIB’s

own common equity tier 1 capital

(market making exclusion). If the

aggregate amount of excluded covered

debt instruments were more than five

percent of the common equity tier 1

capital, then the excess over five percent

would have been subject to deduction

from tier 2 capital on a gross long basis.

In addition, if an excluded covered debt

instrument were held for more than 30

business days or ceased to be held in

connection with market making

activities, then the excluded covered

debt instrument would have been

subject to deduction from tier 2 capital

on a gross long basis. Finally, in order

to dissuade regulatory arbitrage, the

proposal would not have allowed U.S.

GSIB banking organizations to

subsequently move ‘‘excluded covered

debt instruments’’ from the market

making exclusion to the 10 percent

threshold for non-significant

investments.

Commenters stressed the importance

of derivatives to market making

activities in securities, particularly

covered debt instruments issued by

GSIBs. In market making transactions,

U.S. GSIBs will often act as financial

intermediaries between clients,

transferring risks related to covered debt

instruments. This risk transfer is often

conducted through offsetting derivative

transactions or directly buying and

selling covered debt instruments.

Commenters stated that this market

making activity supports deep and

liquid markets for covered debt

instruments by allowing investors to

reduce (or gain) exposure to covered

debt instruments without actually

selling (or buying) the securities.

Derivatives are essential to such

activities because they allow market

makers to establish and hedge these

exposures.

As such, these commenters asserted

that the agencies should eliminate the

proposed 30-business-day requirement

because it would make the proposed

market making exclusion unavailable

for many market making activities that

support the depth and liquidity of the

markets for TLAC-eligible debt, in

particular synthetic exposures from

derivatives used in market making

activities. These commenters noted that

bona fide market making activities,

including derivative- and hedging-

related activities, often involve holding

exposures for longer than 30 business

days. Commenters further indicated that

the 30-business-day requirement would

also create incentives for U.S. GSIB

banking organizations to arbitrage the

final rule by exiting and reestablishing

hedge positions to avoid a mandatory

deduction from tier 2 capital if the

position is held for more than 30

business days. Commenters indicated

that re-establishing hedge positions

would result in costs to banking

organizations and clients without

reducing the risks associated with the

transactions. Additionally, these

commenters indicated that the vast

majority of market making activity in

covered debt instruments is in the form

of derivative exposures. Therefore,

retaining the 30-business-day

requirement would arguably make the

five percent exclusion inoperable for

most market making activities in

covered debt instruments. As an

alternative to the proposed market

making standard and the proposed 30-

business-day requirement, commenters

suggested the agencies use the

regulatory framework implementing the

Volcker Rule to identify which positions

in covered debt instruments are held for

market making purposes and eliminate

the 30-business-day requirement. These

commenters stated that this approach

would promote effectiveness,

simplicity, and efficiency in the

regulation.

After considering commenters’

suggestions to eliminate the proposed

30-business-day requirement for market

making in covered debt instruments, the

agencies have revised the proposal by

removing the 30-business-day

requirement for market making in the

form of ‘‘synthetic exposures’’ as

defined in the agencies’ capital rule.

31

Synthetic market making exposures,

such as derivatives, may frequently be

held for more than 30 business days.

Removing the 30-business-day

requirement for synthetic exposures

would, relative to the proposal, better

align with the proposal’s goal of

supporting deep and liquid markets for

covered debt instruments by allowing

synthetic exposures arising from market

making activities to be included in the

market making exclusion, subject to

limits. As discussed, this exclusion is

limited to five percent of common

equity tier 1 capital, measured on a

gross long basis. These limits are

consistent with financial stability goals

of avoiding asset fire sales in times of

stress, encouraging risk-mitigating

hedges, and reducing

interconnectedness while still

supporting deep and liquid markets for

TLAC-eligible debt instruments.

Accordingly, the final rule reflects this

change. However, the agencies continue

to believe that the 30-business-day

requirement is an appropriate metric to

identify market making positions in

‘‘direct’’ investments in covered debt

instruments (i.e., holding the instrument

on the banking organization’s balance

sheet) and ‘‘indirect’’ investments in

covered debt instruments (i.e., exposure

to the instrument through investment

funds).

32

Direct investments in covered

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an unconsolidated financial institution’’ and

‘‘indirect exposure’’).

33

See 12 CFR 44.4 (OCC); 12 CFR 248.4 (Board);

12 CFR 351.4 (FDIC).

34

See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h)

(Board); 12 CFR 324.22(h) (FDIC).

debt instruments held in connection

with market making should turn over

regularly and the agencies seek to dis-

incentivize long-term direct and indirect

exposures to covered debt instruments,

given the risk of write-down or

conversion to equity of such

instruments.

Therefore, the final rule retains the

30-business-day requirement for

‘‘direct’’ and ‘‘indirect’’ investments in

excluded covered debt instruments, but

not for ‘‘synthetic’’ investments in

excluded covered debt instruments.

This change from the proposal should

balance the goals of limiting

interconnectedness among the largest

and most internationally active banking

organizations and promoting the

liquidity of TLAC-eligible debt

instruments. Additionally, the agencies

clarify that there is no requirement

under the final rule to assign

investments in covered debt

instruments held in connection with

market making as ‘‘excluded covered

debt instruments.’’ To the extent a U.S.

GSIB banking organization has available

capacity, all investments in covered

debt instruments could be held on a net

long basis as non-significant

investments in the capital of an

unconsolidated financial institution

subject to the 10 percent threshold for

non-significant investments.

After consideration of comments, the

agencies also have revised the rule to

use the Volcker Rule exemption for

market making activities to identify

covered debt instruments held for

market making for purposes of

qualifying for the final rule’s market

making exclusion. Relative to the

proposal, this change should decrease

compliance burden by allowing banking

organizations to use a single

methodology for identifying market

making activities, rather than two

similar, but non-identical regulatory

standards.

This approach would capture

essentially the same set of exposures as

the proposal’s standard. However, the

final rule’s definition of ‘‘excluded

covered debt instrument’’ differs from

the proposal by referring to the relevant

provisions of each agency’s rule

implementing the market making

exemption in the Volcker Rule.

33

The proposal also included a simpler

deduction approach for advanced

approaches banking organizations that

are not U.S. GSIB banking organizations

given that these banking organizations

pose less systemic risks than U.S.

GSIBs. Unlike a U.S. GSIB, these

banking organizations can include any

non-significant investments in covered

debt instruments of unconsolidated

financial institutions in the five percent

exclusion (i.e., use of the exclusion is

not restricted to only those investments

held in connection to market making

activities). Any amount in excess of this

five percent exclusion would be subject

to the 10 percent threshold for non-

significant investments deduction on a

net long basis. The agencies did not

receive comments on this provision of

the proposal. Therefore, the final rule

implements the five percent exclusion

for advanced approaches banking

organizations that are not U.S. GSIBs as

proposed.

As noted above, an advanced

approaches banking organization could

exclude certain investments in covered

debt instruments, as applicable, from

the 10 percent threshold for non-

significant investments calculation and

potential deduction under section __

.22(c)(4) if the aggregate amount of

covered debt instruments, measured by

gross long position, were five percent or

less of its common equity tier 1 capital.

To achieve consistency with the TLAC

Holdings standard and with the

calculation of the 10 percent threshold

for non-significant investments

deduction, the agencies are modifying

the calculation for determining the

amount of covered debt instruments that

can be omitted from the 10 percent

threshold for non-significant

investments calculation. Under the final

rule, an advanced approaches banking

organization can omit covered debt

instruments from the 10 percent

threshold calculation and potential

deduction under section __.22(c)(4) if

the aggregate amount of covered debt

instruments, measured by gross long

position, is five percent or less of the

sum of the banking organization’s

common equity tier 1 capital elements

minus all deductions from and

adjustments to common equity tier 1

capital elements required under section

__.22(a) through __.22(c)(3), net of

associated deferred tax liabilities

(DTLs). This includes, for example,

deductions related to goodwill,

intangibles, and deferred tax assets, and

adjustments related to accumulated net

gains and losses on cash flow hedges.

The agencies believe that to achieve

consistency and clarity throughout the

deduction framework, the amount of

covered debt instruments that can be

omitted from the 10 percent threshold

for non-significant investments

calculation should be computed using

the same basis as the 10 percent

threshold for non-significant

investments calculation itself.

The agencies intend to monitor

advanced approaches banking

organizations’ holdings of covered debt

instruments in the form of synthetic

exposures to ensure that the capital held

for these positions is commensurate

with risk and that such holdings do not

raise safety and soundness concerns.

Further, to better understand advanced

approaches banking organizations’ risk

from exposures to the capital of

unconsolidated financial institutions,

the agencies may issue an information

collection proposal to collect quarterly

data on advanced approaches banking

organizations’ non-significant

investments in the capital of

unconsolidated financial institutions

and excluded covered debt instruments,

as applicable.

Some commenters disagreed with the

proposal’s design of the exclusions for

covered debt instruments, which

measures positions on a gross long

basis. These commenters suggested that

the measurement of the exclusions for

covered debt instruments be based on

the ‘‘net long position,’’ in accordance

with the agencies’ capital rule, which

allows gross long positions to be offset

against qualifying short positions.

34

The

commenters noted that the 10 percent

threshold for non-significant

investments is based on the ‘‘net long

position’’ and suggested that the

exclusions for covered debt instrument

be consistent with that standard.

Further, commenters stated that

finalizing the exclusions for covered

debt instruments based on a net long

position measurement basis would

allow advanced approaches banking

organizations to better support the

depth and liquidity of market making in

TLAC-eligible debt instruments, because

market making activities are typically

well hedged and a ‘‘net long position’’

would allow more positions to qualify

for the exclusions.

The final rule maintains measurement

of the exclusions for covered debt

instruments based on the gross long

position. Moving to a ‘‘net long

position’’ measurement could

undermine the agencies’ goal of

reducing interconnectedness among

large and internationally active banking

organizations as it would allow such

banking organizations to accumulate

exposure to covered debt instruments

significantly beyond the threshold

envisioned in the proposal. Further,

advanced approaches banking

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35

See 12 CFR 3.22(c)(2) (OCC); 12 CFR

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2)

(FDIC).

36

See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR

217.22(c)(2) and (f) (Board); and 12 CFR 324.22(c)(2)

and (f) (FDIC).

37

See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f)

(Board); and 12 CFR 324.22(f) (FDIC).

38

See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR

217.12(h)(2)(iii) (Board); and 12 CFR 324.22(h)

(2)(iii) (FDIC).

39

See 12 CFR 3.22(h)(3) (OCC); 12 CFR

217.12(h)(3) (Board); and 12 CFR 324.22(h)(3)

(FDIC).

organizations are able to assign hedged

covered debt instrument exposures to

the 10 percent threshold for non-

significant investments on a net long

basis. The optional exclusions remain

available to support market making

activities such as accumulating short

term cash positions to meet customer

demand and to acquire additional long

positions in covered debt instruments to

facilitate market stabilization during

times of stress. Such an approach is

consistent with financial stability goals

of avoiding asset fire sales in times of

stress, encouraging risk-mitigating

hedges, and reducing

interconnectedness while still

supporting deep and liquid markets for

TLAC-eligible debt instruments.

F. Corresponding Deduction Approach

Under the corresponding deduction

approach, a banking organization must

apply any required deduction to the

component of capital for which the

underlying instrument would qualify if

it were issued by the banking

organization.

35

If the banking

organization does not have enough of

the component of capital to fully effect

the deduction, the corresponding

deduction approach provides that any

amount of the investment that has not

already been deducted would be

deducted from the next, more

subordinated component of capital.

36

If,

for example, a banking organization has

insufficient amounts of tier 2 capital

and additional tier 1 capital to effect a

required deduction, the banking

organization would need to deduct from

common equity tier 1 capital the

amount of the investment that exceeds

the tier 2 and additional tier 1 capital of

the banking organization.

37

The

proposal would have amended the

corresponding deduction approach in

section __.22(c)(2) of the capital rule to

specify that an investment in a covered

debt instrument by an advanced

approaches banking organization would

have been subject to the corresponding

deduction approach, with the covered

debt instrument treated as a tier 2

capital instrument. Some commenters

disagreed with this approach and,

instead, asked the agencies to treat

investments in covered debt

instruments as a common equity tier 1

capital instrument or, as applicable,

allow deductions under the

corresponding deduction approach from

own TLAC-eligible debt instruments.

As stated earlier, requiring a

deduction of a covered debt instrument

from tier 2 capital should serve as a

sufficiently prudent and simple

approach that dis-incentivizes advanced

approaches banking organizations’

investments in such instruments and

thereby supports the objectives of

reducing both interconnectedness

within the financial system and

systemic risks. Accordingly, the

agencies are finalizing the proposal’s

amendments to the corresponding

deduction approach in section __

.22(c)(2) of the capital rule

G. Net Long Position Calculation

The proposal would have followed

the same general approach as currently

provided under the agencies’ capital

rule regarding the calculation of the

amount of any deduction and the

treatment of guarantees and indirect

investments for purposes of the

deductions. Under the capital rule, the

amount of a banking organization’s

investment in its own capital

instrument or in the capital of an

unconsolidated financial institution

subject to deduction is the banking

organization’s net long position in the

capital instrument as calculated under

section __.22(h) of the capital rule.

Under section __.22(h), a banking

organization may net certain qualifying

short positions in a capital instrument

against a gross long position in the same

instrument to determine the net long

position.

The proposal would have modified

section __.22(h) of the capital rule such

that an advanced approaches banking

organization would determine its net

long position in an exposure to its own

covered debt instrument, as applicable,

or in a covered debt instrument issued

by an unconsolidated financial

institution in the same manner as

currently provided for investments in an

institution’s own capital instruments or

investments in the capital of an

unconsolidated financial institution,

respectively. Consistent with the capital

rule, the calculation of a net long

position under the proposal would have

taken into account direct investments in

covered debt instruments as well as

indirect exposures to covered debt

instruments held through investment

funds.

A banking organization has three

options under the capital rule to

measure its gross long position in a

capital instrument held indirectly

through an investment fund.

38

The

proposal would have amended section _

_.22(h)(2)(iii) of the capital rule to

provide the same three options to

determine the gross long position in a

covered debt instrument held through

an investment fund. The agencies

received no comments on this aspect of

the proposal and the final rule adopts

the changes as proposed.

The agencies’ capital rule sets

qualifying criteria for recognizing short

positions that can be netted against

gross long positions; specifically, a short

position must be in the ‘‘same

instrument’’ as the gross long position

and must meet minimum maturity

requirements, among other

requirements.

39

The proposal would not

have changed these operational criteria

for recognizing short positions in the

calculation of a net long position. Some

commenters advocated for changes to

the capital rule’s requirements for

recognizing a short position under

section __.22(h)(3). These commenters

argued that the capital rule should be

modified to not require short positions

to be in the ‘‘same instrument’’ as the

gross long position when calculating the

net long position. Instead, commenters

recommended that the final rule allow

recognized short positions to be in any

instrument that is pari passu or

subordinated to the gross long position’s

instrument. These commenters

recommended that this change should

also apply to calculating the net long

position of investments in covered debt

instruments in the final rule.

The agencies have consistently

maintained that recognition of short

positions under the net long position

calculation are required to be in the

‘‘same instrument’’ as a matter of

prudent risk management and hedging

practices. To recognize short positions

in other than the ‘‘same instrument’’

would potentially undermine the

effectiveness of risk mitigating hedges.

Accordingly, the final rule adopts the

calculation of the net long position as

proposed.

Under the proposal, for purposes of

any deduction required for an advanced

approaches banking organization’s

investment in the capital of an

unconsolidated financial institution, the

amount of a covered debt instrument

would have included any contractual

obligations the advanced approaches

banking organization has to purchase

such covered debt instruments. The

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See 84 FR 35234 (July 22, 2019).

41

See 12 CFR 3.1(d)(1) (OCC); 12 CFR 217.1(d)(1)

(Board); 12 CFR 324.1(d)(1) (FDIC).

42

84 FR 59230 (November 1, 2019).

43

83 FR 17317, 17322 (April 19, 2018).

agencies received no comment on this

aspect of the proposal, and the final rule

adopts this change as proposed.

VI. Technical Amendment and Other

Comments

The agencies proposed amending the

definition of ‘‘investment in the capital

of an unconsolidated financial

institution’’ in section __.2 of the capital

rule to correct a drafting error in that

definition. The agencies did not receive

any comment with regard to the

proposed technical amendment.

However, in the period between the

issuance of the proposal and this final

rule, this technical amendment was

implemented by the agencies’ final rule

to simplify the capital rule.

40

A few commenters suggested that the

proposal should go further in limiting

the exposure of advanced approaches

banking organizations to GSIBs, given

their size and the risk their failure could

pose to the financial system. These

commenters argued that the final rule

should ensure that the cost of TLAC

debt better reflect heightened risks of

GSIBs and that the agencies should

require U.S. GSIBs to hold more

common equity tier 1 capital. Other

commenters suggested that the agencies

consider existing elements of the

regulatory framework—such as the

single counterparty credit limit and the

GSIB surcharge—when finalizing the

deduction framework.

Under the capital rule, each agency

has the authority to require a banking

organization to hold additional capital

based on the banking organization’s risk

profile.

41

Similarly, while other

elements of the regulatory framework

address the systemic risks of large,

internationally active banking

organizations or concentrations of

exposures to counterparties, no existing

regulation specifically address the risks

associated with investments in TLAC-

eligible debt instruments. The agencies,

therefore, are finalizing the proposal to

establish a regulatory capital treatment

for investments in covered debt

instruments with certain modifications,

as previously described.

The proposal did not contemplate

providing a transition period for

implementation of the final rule by

advanced approaches banking

organizations. Some commenters

requested that the agencies provide

banking organizations with a transition

period to ease compliance burden.

Specifically, commenters requested that

the agencies provide 18 months before

banking organizations must effectuate

the deduction treatment. These

commenters asserted that a transition

period would give banking

organizations more time to build out

systems to track which instruments are

covered debt instruments and therefore

subject to the deduction framework. A

commenter requested that the agencies

not require deduction of any unsecured

debt instrument issued by a GSIB until

the information necessary to determine

whether the instrument is a covered

debt instrument is available.

The agencies maintain the

supervisory expectation that large and

internationally active banking

organizations should be deeply

knowledgeable of the securities

exposures on their own balance sheets,

if only for the purposes of prudent risk

management. The final rule will become

effective on April 1, 2021. The agencies

believe this effective date provides

sufficient time for advanced approaches

banking organizations to evaluate

investments in covered debt

instruments and apply the final rule’s

deduction treatment.

In addition to the above, the agencies

are making certain technical

amendments to section __.10 of the

capital rule to more clearly differentiate

between requirements applicable to

advanced approaches banking

organizations and those applicable to

Category III banking organizations. In

section __.10 of the capital rule, as

amended by the recent interagency

tailoring rule,

42

paragraphs (c)(1)–(3)

describe the capital ratio calculations

applicable to advanced approaches

banking organizations, whereas

paragraph 10(c)(4) of the capital rule

describes the supplementary leverage

ratio calculations applicable to both

advanced approaches banking

organizations and Category III banking

organizations. To avoid confusion, the

agencies are amending section __.10 of

the capital rule such that paragraph (c)

will provide only the supplementary

leverage ratio requirements. The

advanced approaches capital

calculations will be moved to revised

paragraph (d) of section __.10 of the

capital rule. Current paragraph (d),

Capital adequacy, will be re-designated

as paragraph (e) of section __.10 of the

capital rule. The agencies are also

amending language in sections __.2 and

__.121 of the capital rule to correct

cross-references in light of the

amendments described above. These

technical amendments do not amend

any substantive requirements applicable

to banking organizations.

VII. Amendments to the Board’s TLAC

Rule

In 2018, the Board issued a notice of

proposed rulemaking that, among other

items, included minor proposed

amendments to the Board’s TLAC

rule.

43

The proposal included revisions

to ensure that the external TLAC risk-

weighted buffer level, TLAC leverage

buffer level, and the TLAC buffer level

for covered IHCs would be amended to

use the same haircuts applicable to LTD

instruments that are currently used to

calculate outstanding minimum

required TLAC amounts, which do not

include a 50 percent haircut on LTD

instruments with a remaining maturity

of between one and two years. Another

proposed amendment was to ensure that

the term ‘‘external TLAC risk-weighted

buffer’’ is used consistently in the TLAC

rule. The proposal also would have

provided that a new covered IHC would

always have three years to conform to

most of the requirements of the TLAC

rule, and to align the articulation of the

methodology for calculating the covered

IHC’s LTD instrument amount with the

same methodology used for GSIBs.

The Board received minimal

comments on these proposed revisions

to the TLAC rule within the comments

received on its proposal overall and the

comments received were supportive of

the specific proposed revisions. As a

result, the Board is issuing these

revisions in the final rule without

change from the proposal.

VIII. Changes to Regulatory Reporting

A. Deductions From Tier 2 Capital

Related to Investments in Covered Debt

Instruments and Excluded Covered Debt

Instruments

In the April 2019 rulemaking, the

Board proposed to modify the

instructions to the Consolidated

Financial Statements for Holding

Companies (FR Y–9C), Schedule HC–R,

Part I and Part II, to effectuate the

deductions from regulatory capital for

Board-regulated advanced approaches

banking organizations related to

investments in covered debt

instruments and excluded covered debt

instruments as described in the

proposal.

Specifically, the Board would have

modified the instructions of the FR Y–

9C for Schedule HC–R, Part I, item 33,

‘‘Tier 2 capital deductions.’’ On the FR

Y–9C, a covered BHC would have been

required to deduct from tier 2 capital

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The proposed modifications would not affect

the Consolidated Reports of Condition and Income

for a Bank with Domestic Offices Only and Total

Assets Less than $1 Billion (FFIEC 051) because

banks and savings associations that are advanced

approaches banking organizations are not eligible to

file the FFIEC 051 report.

45

See 84 FR 53227 (October 4, 2019).

46

See 85 FR 15776 (March 19, 2020).

47

See 84 FR 13823–13824 (April 8, 2019).

48

See 85 FR 15776 (March 19, 2020).

the aggregate amount of its investments

in covered debt instruments that, when

combined with the banking

organization’s other non-significant

investments in the capital of

unconsolidated financial institutions,

exceed 10 percent of the common equity

tier 1 capital of the banking

organization. Also, if an excluded

covered debt instrument were held by a

covered BHC for more than 30 business

days, or no longer held in connection

with market making-related activities,

the excluded covered debt instrument

would have been deducted from tier 2

capital.

In addition, for purposes of the

deduction requirements related to non-

significant investments in the capital of

unconsolidated financial institutions,

Board-regulated advanced approaches

banking organizations that are not

covered BHCs would have been

required to deduct from tier 2 capital

those investments in covered debt

instruments that exceed five percent of

common equity tier 1 capital, and that

also, when combined with the banking

organization’s other non-significant

investments in unconsolidated financial

institutions, exceed 10 percent of the

common equity tier 1 capital of the

banking organization. The Board also

would have modified the instructions

for calculating other deduction-related

and risk-weighted asset line items to

incorporate investments in covered debt

instruments and excluded covered debt

instruments, as applicable, by Board-

regulated advanced approaches banking

organizations.

In October 2019, the Federal Financial

Institutions Examination Council

(FFIEC) separately proposed to modify

the Consolidated Reports of Condition

and Income for a Bank with Domestic

and Foreign Offices (FFIEC 031),

Consolidated Reports of Condition and

Income for a Bank with Domestic

Offices Only (FFEIC 041) (collectively

with the FFIEC 031, the Call Report),

44

and Regulatory Capital Reporting for

Institutions Subject to the Advanced

Capital Adequacy Framework (FFIEC

101) in a manner consistent with the

changes described above to the FR Y–9C

to effectuate the proposal’s deduction

approach for investments in covered

debt instruments and excluded covered

debt instruments, as applicable.

45

In March 2020, the Board separately

proposed conforming changes to the FR

Y–14 to effectuate the proposed

deduction framework for investments in

covered debt instruments.

46

With respect to the FR Y–9C proposed

changes, one commenter requested

clarification on the sequencing of

reporting changes related to effectuating

deductions for covered debt instruments

and the effective date of the final rule.

Specifically, this commenter requested

that the effective date of the final rule

should precede any requirement to

begin effectuating deductions related to

investments in covered debt

instruments on regulatory reports. The

agencies confirm that the effective date

of the final rule will precede any

reporting requirements related to

implementing the deduction framework

for covered debt instruments. The Board

received no comments on the FR Y–14

proposed changes.

As described above, reporting changes

to effectuate the deduction framework

for investments in covered debt

instruments described in the proposal

were proposed separately for the (1) FR

Y–9C, (2) FFIEC 101 and Call Report,

and (3) FR Y–14. The Board is finalizing

as proposed, changes to the FR Y–9C

and FR Y–14, to effectuate the

deduction framework for investments in

covered debt instruments in this

Federal Register notice. The agencies

will address comments submitted in

connection with the FFIEC’s October

2019 proposal when those forms and

instructions are finalized in a separate

Federal Register notice, consistent with

the final rule.

B. Public Disclosure of Long-Term Debt

and TLAC by Covered BHCs and

Covered IHCs

In the April 2019 rulemaking, the

Board also proposed to modify Schedule

HC–R, Part I of the FR Y–9C by adding

new data items that would publicly

disclose: (1) The long-term debt and

TLAC for covered BHCs and covered

IHCs; (2) these banking organizations’

long-term debt and TLAC ratios to

ensure compliance with the TLAC rule;

(3) TLAC buffers; and (4) amendments

to the instructions for the calculation of

eligible retained income (item 47),

institution-specific capital buffer (items

46.a and 46.b), and distributions and

discretionary bonus payments (item 48)

for covered BHCs and covered IHCs.

47

Commenters suggested that the Board

clarify in the final rule when changes to

FR Y–9C related to long-term debt and

TLAC reporting disclosures will become

effective. Reporting changes for

deductions related to investments in

covered debt instruments on the FR Y–

9C will not go into effect until after the

final rule’s effective date.

In March 2020, the Board separately

proposed conforming changes to the FR

Y–14 to disclose new items related to

long-term debt and TLAC, as described

above.

48

In response to the proposal,

commenters requested that the Board

clarify how U.S. GSIBs are to calculate

the TLAC rule’s leverage ratios on the

FR Y–9C report. More specifically,

commenters suggested the Board clarify

that U.S. GSIBs should not be required

to report long-term debt and TLAC

leverage ratios based on total assets

because U.S. GSIBs’ applicable long-

term debt and TLAC leverage

requirement is based on the

denominator for the supplementary

leverage ratio. Commenters noted that

only covered IHCs are required to report

the long-term debt and TLAC leverage

ratios based on total assets. The Board

confirms that reporting of the long-term

debt and TLAC leverage requirement for

U.S. GSIBs will only be based upon the

supplementary leverage ratio

denominator, consistent with the TLAC

rule’s leverage requirement. The Board

received no comments on the FR Y–14

proposed changes.

The Board is finalizing the proposed

changes to the FR Y–9C and FR Y–14 to

require covered BHCs and covered IHCs

to report their long-term debt and TLAC

resources, with modifications in

response to comment as described

above, in this Federal Register notice.

Some commenters suggested the

Board develop a more robust disclosure

regime related to TLAC so that the level

of risk is appropriately priced into these

instruments. They stated that

disclosures will incentivize GSIBs to

meet their TLAC requirements with

equity rather than debt instruments.

Commenters offered suggestions for

improving disclosures by noting that the

agencies should collaborate with the

Securities and Exchange Commission to

require plain-language warnings

regarding risk of bail-in to investors (1)

when purchasing a TLAC instrument in

their brokerage account and (2) in

offering materials published by pension

and mutual funds that invest in TLAC

instruments. The Board does not have

the authority to change disclosures

required by the Securities and Exchange

Commission related to securities

issuances or sales to retail investors.

The interagency statement on retail

sales of nondeposit investments

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See ‘‘Interagency Statement on Retail Sales of

Nondeposit Investment Products.’’ OCC Bulletin

1994–13 (OCC); SR 94–11 (FIS) (Board); and FIL–

9–94 (FDIC).

50

44 U.S.C. 3501–3521.

products should ensure certain

disclosures for retail sales programs

involving mutual funds, annuities and

other nondeposit investment

products.

49

Further, the Board does not

have the authority to mandate

disclosures by pension or mutual funds.

The final rule does not incorporate these

suggestions.

IX. Regulatory Analyses

A. Paperwork Reduction Act

Certain provisions of the final rule

contain ‘‘collection of information’’

within the meaning of the Paperwork

Reduction Act of 1995 (PRA).

50

In

accordance with the requirements of the

PRA, the agencies may not conduct or

sponsor, and the respondent is not

required to respond to, an information

collection unless it displays a currently-

valid Office of Management and Budget

(OMB) control number.

The final rule revises section __.22(c),

(f), and (h) of the capital rule to

incorporate the proposed deduction

approach for investments in covered

debt instruments. Several new

definitions are added to section __.2 to

effectuate these deductions.

Each agency has an information

collection related to its regulatory

capital rules. The OMB control number

for the OCC is 1557–0318, Board is

7100–0313, and FDIC is 3064–0153. The

final rule will not, however, result in

changes to burden under these

information collections and therefore no

submissions will be made under section

3507(d) of the PRA (44 U.S.C. 3507(d))

and section 1320.11 of the OMB’s

implementing regulations (5 CFR 1320)

for each of the agencies’ regulatory

capital rules.

In addition, the final rule requires

changes to the Call Reports (OMB No.

1557–0081 (OCC), 7100–0036 (Board),

and 3064–0052 (FDIC)), and the FFIEC

101 (OMB No. 1557–0239 (OCC), 7100–

0319 (Board), and 3064–0159 (FDIC)),

which will be addressed in one or more

separate Federal Register notices.

The final rule requires changes to the

Consolidated Financial Statements for

Holding Companies (FR Y–9C; OMB No.

7100–0128) and the Capital

Assessments and Stress Testing Reports

(FR Y–14A/Q/M; OMB No. 7100–0341).

The Board reviewed the final rule under

the authority delegated to the Board by

OMB.

Revised Collection (Board only)

Title of Information Collection:

Consolidated Financial Statements for

Holding Companies.

Agency form number: FR Y–9C, FR Y–

9LP, FR Y–9SP, FR Y–9ES, and FR Y–

9CS.

OMB control number: 7100–0128.

Effective date: June 30, 2021.

Frequency: Quarterly, semiannually,

and annually.

Affected Public: Businesses or other

for-profit.

Respondents: Bank holding

companies (BHCs), savings and loan

holding companies (SLHCs), securities

holding companies (SHCs), and U.S.

Intermediate Holding Companies (IHCs)

(collectively, holding companies (HCs)).

Estimated number of respondents: FR

Y–9C (non-advanced approaches (AA)

HCs community bank leverage ratio

(CBLR)) with less than $5 billion in total

assets—71, FR Y–9C (non AA HCs

CBLR) with $5 billion or more in total

assets—35, FR Y–9C (non AA HCs non-

CBLR) with less than $5 billion in total

assets—84, FR Y–9C (non AA HCs non-

CBLR) with $5 billion or more in total

assets—154, FR Y–9C (AA HCs)—19, FR

Y–9LP—434, FR Y–9SP—3,960, FR Y–

9ES—83, FR Y–9CS—236.

Estimated average hours per response:

Reporting

FR Y–9C (non AA HCs CBLR) with

less than $5 billion in total assets—

29.17, FR Y–9C (non AA HCs CBLR)

with $5 billion or more in total assets—

35.14, FR Y–9C (non AA HCs non-

CBLR) with less than $5 billion in total

assets—41.01, FR Y–9C (non AA HCs

non-CBLR) with $5 billion or more in

total assets—46.98, FR Y–9C (AA

HCs)—49.30, FR Y–9LP—5.27, FR Y–

9SP—5.40, FR Y–9ES—0.50, FR Y–

9CS—0.50.

Recordkeeping

FR Y–9C (non-advanced approaches

HCs with less than $5 billion in total

assets), FR Y–9C (non-advanced

approaches HCs with $5 billion or more

in total assets), FR Y–9C (advanced

approaches HCs), and FR Y–9LP: 1.00

hour; FR Y–9SP, FR Y–9ES, and FR Y–

9CS: 0.50 hours.

Estimated annual burden hours:

Reporting

FR Y–9C (non AA HCs CBLR) with

less than $5 billion in total assets—

8,284, FR Y–9C (non AA HCs CBLR)

with $5 billion or more in total assets—

4,920, FR Y–9C (non AA HCs non-

CBLR) with less than $5 billion in total

assets—13,779, FR Y–9C (non AA HCs

non-CBLR) with $5 billion or more in

total assets—28,940, FR Y–9C (AA

HCs)—3,747, FR Y–9LP—9,149, FR Y–

9SP—42,768, FR Y–9ES—42, FR Y–

9CS—472.

Recordkeeping

FR Y–9C—1,452, FR Y–9LP—1,736,

FR Y–9SP—3,960, FR Y–9ES—42, FR

Y–9CS—472.

General description of report: The FR

Y–9 family of reporting forms continues

to be the primary source of financial

data on holding companies (HCs) on

which examiners rely between on-site

inspections. Financial data from these

reporting forms is used to detect

emerging financial problems, review

performance, conduct pre-inspection

analysis, monitor and evaluate capital

adequacy, evaluate HC mergers and

acquisitions, and analyze an HC’s

overall financial condition to ensure the

safety and soundness of its operations.

The FR Y–9C serves as the standardized

financial statements for certain

consolidated holding companies. The

Board requires HCs to provide

standardized financial statements to

fulfill the Board’s statutory obligation to

supervise these organizations. HCs file

the FR Y–9C on a quarterly basis.

Legal authorization and

confidentiality: The reporting and

recordkeeping requirements associated

with the FR Y–9 series of reports are

authorized for BHCs pursuant to section

5 of the Bank Holding Company Act

(‘‘BHC Act’’); for SLHCs pursuant to

section 10(b)(2) and (3) of the Home

Owners’ Loan Act, 12 U.S.C. 1467a(b)(2)

and (3), as amended by sections 369(8)

and 604(h)(2) of the Dodd-Frank Wall

Street and Consumer Protection Act

(‘‘Dodd-Frank Act’’); for IHCs pursuant

to section 5 of the BHC Act, as well as

pursuant to sections 102(a)(1) and 165

of the Dodd-Frank Act; and for

securities holding companies pursuant

to section 618 of the Dodd-Frank Act.

Except for the FR Y–9CS report, which

is expected to be collected on a

voluntary basis, the obligation to submit

the remaining reports in the FR Y–9

series of reports and to comply with the

recordkeeping requirements set forth in

the respective instructions to each of the

other reports, is mandatory.

With respect to the FR Y–9C report,

Schedule HI’s Memoranda item 7(g)

‘‘FDIC deposit insurance assessments,’’

Schedule HC–P’s item 7(a)

‘‘Representation and warranty reserves

for 1–4 family residential mortgage

loans sold to U.S. government agencies

and government sponsored agencies,’’

and Schedule HC–P’s item 7(b)

‘‘Representation and warranty reserves

for 1–4 family residential mortgage

loans sold to other parties’’ are

considered confidential commercial and

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financial information. Such treatment is

appropriate under exemption 4 of the

Freedom of Information Act (‘‘FOIA’’),

because these data items reflect

commercial and financial information

that is both customarily and actually

treated as private by the submitter, and

which the Board has previously assured

submitters will be treated as

confidential. It also appears that

disclosing these data items may reveal

confidential examination and

supervisory information, and in such

instances, the information also would be

withheld pursuant to exemption 8 of the

FOIA, which protects information

related to the supervision or

examination of a regulated financial

institution.

In addition, for both the FR Y–9C

report and the FR Y–9SP report,

Schedule HC’s Memoranda item 2.b.,

the name and email address of the

external auditing firm’s engagement

partner, is considered confidential

commercial information and protected

by exemption 4 of the FOIA, if the

identity of the engagement partner is

treated as private information by HCs.

The Board has assured respondents that

this information will be treated as

confidential since the collection of this

data item was proposed in 2004.

Additionally, items on the FR Y–9C,

Schedule HC–C for loans modified

under Section 4013, data items

Memorandum items 16.a, ‘‘Number of

Section 4013 loans outstanding’’; and

Memorandum items 16.b, ‘‘Outstanding

balance of Section 4013 loans’’ are

considered confidential. While the

Board generally makes institution-level

FR Y–9C report data publicly available,

the Board is collecting Section 4013

loan information as part of condition

reports for the impacted HCs and the

Board considers disclosure of these

items at the HC level would not be in

the public interest. Such information is

permitted to be collected on a

confidential basis, consistent with 5

U.S.C. 552(b)(8). In addition, holding

companies may be reluctant to offer

modifications under Section 4013 if

information on these modifications

made by each holding company is

publicly available, as analysts,

investors, and other users of public FR

Y–9C report information may penalize

an institution for using the relief

provided by the CARES Act. The Board

may disclose Section 4013 loan data on

an aggregated basis, consistent with

confidentiality or as otherwise required

by law.

Aside from the data items described

above, the remaining data items

collected on the FR Y–9C report and the

FR Y–9SP report are generally not

accorded confidential treatment. The

data items collected on FR Y–9LP, FR

Y–9ES, and FR Y–9CS reports, are also

generally not accorded confidential

treatment. As provided in the Board’s

Rules Regarding Availability of

Information, however, a respondent may

request confidential treatment for any

data items the respondent believes

should be withheld pursuant to a FOIA

exemption. The Board will review any

such request to determine if confidential

treatment is appropriate, and will

inform the respondent if the request for

confidential treatment has been granted

or denied.

To the extent the instructions to the

FR Y–9C, FR Y–9LP, FR Y–9SP, and FR

Y–9ES reports each respectively direct

the financial institution to retain the

workpapers and related materials used

in preparation of each report, such

material would only be obtained by the

Board as part of the examination or

supervision of the financial institution.

Accordingly, such information is

considered confidential pursuant to

exemption 8 of the FOIA. In addition,

the workpapers and related materials

may also be protected by exemption 4

of the FOIA, to the extent such financial

information is treated as confidential by

the respondent.

Current Actions: As discussed in

detail in section VIII above, several

comments were received on the

proposed changes to the FR Y–9C.

Commenters requested that the effective

date of the final rule precede proposed

changes to regulatory reports. The

agencies confirmed that the final rule

will be effective before changes are

implemented to regulatory reports. The

final rule is effective April 1, 2021, and

the changes to the FR Y–9C are effective

June 30, 2021. Also, commenters

requested that the Board clarify that

U.S. GSIBs will report long-term debt

and TLAC leverage requirements based

upon the supplementary leverage ratio

denominator. The Board agreed and

clarified this requirement. Finally, some

commenters suggested that the Board

develop a more robust disclosure regime

related to TLAC, including collaborating

with the SEC. The Board did not accept

this comment for the reasons noted

above. Some of the item numbers below

have changed since the proposed rule

due to other FR Y–9C reporting changes

to Schedule HC–R that have been

implemented since that time.

To implement the reporting

requirements of the final rule, the Board

revises the FR Y–9C, Schedule HC–R,

Part I, Regulatory Capital Components

and Ratios, to amend instructions for

line items 11, 17, 24, and 43 to

effectuate the deductions from

regulatory capital for advanced

approaches holding companies related

to investments in covered debt

instruments and excluded covered debt

instruments as described above. Further,

the Board proposes to revise the FR Y–

9C, Schedule HC–R, Part II, Risk-

Weighted Assets, to amend instructions

for line items 2(a), 2(b), 7, and 8 to

incorporate investments in covered debt

instruments and excluded debt

instruments, as applicable, by advanced

approaches holding companies in their

calculation of risk-weighted assets.

In addition, the Board revises the FR

Y–9C, Schedule HC–R, Part I,

Regulatory Capital Components and

Ratios, to create new line items and

instructions to allow the BHCs of U.S.

GSIBs and the IHCs of foreign GSIBs to

publicly report their long-term debt

(LTD) and total loss-absorbing capacity

(TLAC) in accordance, respectively,

with 12 CFR part 252, subpart G and 12

CFR part 252, subpart P. Specifically,

new line items are created to report, as

applicable, BHCs of U.S GSIBs’ and

IHCs of foreign GSIBs’ (1) outstanding

eligible LTD (item 50); (2) TLAC (item

51); (3) LTD standardized risk-weighted

asset ratio (item 52, column A); (4)

TLAC standardized risk-weighted asset

ratio (item 52, column B); (5) LTD

advanced approaches risk-weighted

asset ratio (item 53, column A); (6)

TLAC advanced approaches risk-

weighted asset ratio (item 53, column

B); (7) IHCs of foreign GSIBs only: LTD

leverage ratio (item 54, column A); (8)

IHCs of foreign GSIBs only: TLAC

leverage ratio (item 54, column B); (9)

LTD supplementary leverage ratio (item

55, column A); (10) TLAC

supplementary leverage ratio (item 55,

column B); (11) institution-specific

TLAC risk-weighted asset buffer

necessary to avoid limitations on

distributions and discretionary bonus

payments (item 57(a)); and (12) TLAC

leverage buffer necessary to avoid

limitations on distributions and

discretionary bonus payments (item

57(b)). Existing line items 50(a), 50(b),

51, 52, and 53 are re-numbered to 56(a),

56(b), 58, 59, and 60, respectively, and

instructions’ references updated, to

account for the proposed inclusion of

the new data collection items described

above. Finally, the instructions for re-

numbered line item 59, ‘‘Distributions

and discretionary bonus payments

during the quarter,’’ are amended for the

BHCs of U.S. GSIBs and the IHCs of

foreign GSIBs to reflect maximum

payout amounts that take into account

a firm’s TLAC risk-weighted and

leverage buffers reported in line items

57(a) and 57(b), respectively. The final

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SLHCs with $100 billion or more in total

consolidated assets became members of the FR Y–

14Q and FR Y–14M panels effective June 30, 2020,

and will join the FR Y–14A panel effective

December 31, 2020. See 84 FR 59032 (November 1,

2019).

52

The estimated number of respondents for the

FR Y–14M is lower than for the FR Y–14Q and FR

Y– 14A because, in recent years, certain

respondents to the FR Y–14A and FR Y–14Q have

not met the materiality thresholds to report the FR

Y–14M due to their lack of mortgage and credit

activities. The Board expects this situation to

continue for the foreseeable future.

53

On October 10, 2019, the Board issued a final

rule that eliminated the requirement for firms

subject to Category IV standards to conduct and

publicly disclose the results of a company-run

stress test. See 84 FR 59032 (Nov. 1, 2019). That

final rule maintained the existing FR Y–14

substantive reporting requirements for these firms

in order to provide the Board with the data it needs

to conduct supervisory stress testing and inform the

Board’s ongoing monitoring and supervision of its

supervised firms. However, as noted in the final

rule, the Board intends to provide greater flexibility

to banking organizations subject to Category IV

standards in developing their annual capital plans

and consider further change to the FR Y–14 forms

as part of a separate proposal. See 84 FR 59032,

59063.

54

See 85 FR 15776 (March 19, 2020).

reporting forms and instructions will

become available in the near future on

the Board’s public website at https://

www.federalreserve.gov/apps/

reportforms/review.aspx.

Revised Collection (Board only)

Title of Information Collection:

Capital Assessments and Stress Testing

Reports.

Agency form number: FR Y–14A/Q/

M.

OMB control number: 7100–0341.

Effective date: June 30, 2021.

Frequency: Annually, quarterly, and

monthly.

Respondents: These collections of

information are applicable to bank

holding companies (BHCs), U.S.

intermediate holding companies (IHCs),

and savings and loan holding

companies (SLHCs)

51

with $100 billion

or more in total consolidated assets, as

based on: (i) The average of the firm’s

total consolidated assets in the four

most recent quarters as reported

quarterly on the firm’s Consolidated

Financial Statements for Holding

Companies (FR Y–9C; OMB No. 7100–

0128); or (ii) if the firm has not filed an

FR Y–9C for each of the most recent four

quarters, then the average of the firm’s

total consolidated assets in the most

recent consecutive quarters as reported

quarterly on the firm’s FR Y–9Cs.

Reporting is required as of the first day

of the quarter immediately following the

quarter in which the respondent meets

this asset threshold, unless otherwise

directed by the Board.

Estimated number of respondents: FR

Y–14A/Q: 36; FR Y–14M: 34.

52

Estimated average hours per response:

FR Y–14A: 929 hours; FR Y–14Q: 2,201

hours; FR Y–14M: 1,072 hours.

On-going Automation Revisions: 480

hours; FR Y–14 Attestation On-going

Attestation: 2,560 hours.

Estimated annual burden hours: FR

Y–14A: 33,444 hours; FR Y–14Q:

316,944 hours; FR Y–14M: 437,376

hours; FR Y–14 On-going Automation

Revisions: 17,280 hours; FR Y–14

Attestation On-going Attestation: 33,280

hours.

General description of report: This

family of information collections is

composed of the following three reports:

•The FR Y–14A collects quantitative

projections of balance sheet, income,

losses, and capital across a range of

macroeconomic scenarios and

qualitative information on

methodologies used to develop internal

projections of capital across scenarios.

53

•The quarterly FR Y–14Q collects

granular data on various asset classes,

including loans, securities, trading

assets, and PPNR for the reporting

period.

•The monthly FR Y–14M is

comprised of three retail portfolio- and

loan-level schedules, and one detailed

address-matching schedule to

supplement two of the portfolio and

loan-level schedules.

The data collected through the FR Y–

14A/Q/M reports provide the Board

with the information needed to help

ensure that large firms have strong, firm-

wide risk measurement and

management processes supporting their

internal assessments of capital adequacy

and that their capital resources are

sufficient given their business focus,

activities, and resulting risk exposures.

The reports are used to support the

Board’s annual Comprehensive Capital

Analysis and Review (CCAR) and Dodd

Frank Act Stress Test (DFAST)

exercises, which complement other

Board supervisory efforts aimed at

enhancing the continued viability of

large firms, including continuous

monitoring of firms’ planning and

management of liquidity and funding

resources, as well as regular assessments

of credit, market and operational risks,

and associated risk management

practices. Information gathered in this

data collection is also used in the

supervision and regulation of

respondent financial institutions.

Respondent firms are currently required

to complete and submit up to 17 filings

each year: One annual FR Y–14A filing,

four quarterly FR Y–14Q filings, and 12

monthly FR Y–14M filings. Compliance

with the information collection is

mandatory.

Current actions: On March 19, 2020,

the Board proposed to revise the FR Y–

14 reports to collect TLAC and LTD

information.

54

The Board did not

receive any comments on the proposed

TLAC and LTD revisions. The Board has

modified the Capital Assessments and

Stress Testing (FR Y–14A and Q; OMB

No. 7100–0341) in a manner consistent

with the changes described above to the

FR Y–9C. In addition, the Board has

renumbered items in the FR Y–14A,

Schedule A.1.d (Capital) instructions to

correspond with related items on the FR

Y–9C. The Board has adopted, as

proposed, the following revisions to FR

Y–14A, Schedule A.1.d, and FR Y–14Q,

Schedule D, effective for the June 30,

2021, as of date:

FR Y–14A, Schedule A.1.d (Capital)

In order to align Schedule A.1.d with

the FR Y–9C, the Board has added the

following items to Schedule A.1.d:

•‘‘Outstanding eligible long-term

debt’’;

•‘‘Total loss-absorbing capacity’’;

•‘‘LTD and TLAC total risk-weighted

assets ratios’’;

•‘‘IHCs of foreign GSIBs only: LTD

and TLAC leverage ratios’’;

•‘‘LTD and TLAC supplementary

leverage ratios’’;

•‘‘Institution-specific TLAC buffer

necessary to avoid limitations on

distributions discretionary bonus

payments’’;

•‘‘TLAC risk-weighted buffer’’; and

•‘‘TLAC leverage buffer.’’

FR Y–14Q, Schedule D (Regulatory

Capital)

The Board has revised the

instructions for item 1 (‘‘Aggregate

amount of non-significant investments

in the capital of unconsolidated

financial institutions’’) to require

banking organizations subject to

Category I and II standards to include

covered debt instruments.

B. Regulatory Flexibility Act Analysis

OCC: The Regulatory Flexibility Act,

5 U.S.C. 601 et seq., (RFA), requires an

agency either to provide a final

regulatory flexibility analysis with a

final rule for which a general notice of

proposed rulemaking is required or to

certify that the final rule will not have

a significant, economic impact on a

substantial number of small entities.

The Small Business Administration

(SBA) establishes size standards that

define which entities are small

businesses for purposes of the RFA to

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55

The OCC calculated the number of small

entities using the SBA’s size thresholds for

commercial banks and savings institutions, and

trust companies, which are $600 million and $41.5

million, respectively. Consistent with the General

Principles of Affiliation, 13 CFR 121.103(a), the

OCC counted the assets of affiliated financial

institutions when determining whether to classify

a national bank or Federal savings association as a

small entity.

56

See 13 CFR 121.201. Effective August 19, 2019,

the SBA revised the size standards for banking

organizations to $600 million in assets from $550

million in assets. 84 FR 34261 (July 18, 2019).

57

5 U.S.C. 605(b).

58

With respect to the revisions to the Board’s

total loss-absorbing capacity rule, the scope of

impacted institutions is different—Covered BHCs

and Covered IHCs—but also only applies to

institutions significantly above the threshold to be

considered a ‘‘small entity.’’

59

5 U.S.C. 601 et seq.

60

The SBA defines a small banking organization

as having $600 million or less in assets, where ‘‘a

financial institution’s assets are determined by

averaging the assets reported on its four quarterly

financial statements for the preceding year.’’ See 13

CFR 121.201 (as amended, effective August 19,

2019). ‘‘SBA counts the receipts, employees, or

other measure of size of the concern whose size is

at issue and all of its domestic and foreign

affiliates.’’ See 13 CFR 121.103. Following these

regulations, the FDIC uses a covered entity’s

affiliated and acquired assets, averaged over the

preceding four quarters, to determine whether the

covered entity is ‘‘small’’ for the purposes of RFA.

61

FDIC-supervised institutions are set forth in 12

U.S.C. 1813(q)(2).

62

Call Report data, June 30, 2020.

63

Call Report data, June 30, 2020.

64

Public Law 106–102, section 722, 113 Stat.

1338, 1471 (1999).

include commercial banks and savings

institutions with total assets of $600

million or less and trust companies with

total assets of $41.5 million of less) or

to certify that the final rule would not

have a significant economic impact on

a substantial number of small entities.

As of December 31, 2019, the OCC

supervises 745 small entities.

55

As part of the OCC’s analysis, we

consider whether the final rule will

have a significant economic impact on

a substantial number of small entities,

pursuant to the RFA Because the final

rule only applies to advanced

approaches banking organizations it will

not impact any OCC-supervised small

entities. Therefore, the final rule will

not have a significant economic impact

on a substantial number of small

entities.

Therefore, the OCC certifies that the

final rule will not have a significant

economic impact on a substantial

number of OCC-supervised small

entities.

Board: The Regulatory Flexibility Act

(RFA) generally requires that, in

connection with a final rulemaking, an

agency prepare and make available for

public comment a final regulatory

flexibility analysis describing the

impact of the proposed rule on small

entities. However, a final regulatory

flexibility analysis is not required if the

agency certifies that the final rule will

not have a significant economic impact

on a substantial number of small

entities. The Small Business

Administration (SBA) has defined

‘‘small entities’’ to include banking

organizations with total assets of less

than or equal to $600 million that are

independently owned and operated or

owned by a holding company with less

than or equal to $600 million in total

assets.

56

For the reasons described

below and under section 605(b) of the

RFA, the Board certifies that the final

rule will not have a significant

economic impact on a substantial

number of small entities.

57

As of

December 31, 2019, there were 2,799

bank holding companies, 171 savings

and loan holding companies, and 497

state member banks that would fit the

SBA’s current definition of ‘‘small

entity’’ for purposes of the RFA.

The Board has considered the

potential impact of the final rule on

small entities in accordance with the

RFA. Based on its analysis and for the

reasons stated below, the Board believes

that this final rule will not have a

significant economic impact on a

substantial number of small entities.

As discussed in detail above, the final

rule amends the capital rule to require

advanced approaches banking

organizations to deduct exposures to

covered debt instruments issued by

covered BHCs, covered IHCs, and

foreign GSIBs and their subsidiaries.

These deductions are subject to

regulatory thresholds, as described

above. Deductions related to

investments in and exposures to

covered debt instruments are effectuated

by deduction from tier 2 capital

according to the corresponding

deduction approach, subject to

applicable deduction thresholds.

However, the assets of institutions

subject to this final rule substantially

exceed the $600 million asset threshold

under which a banking organization is

considered a ‘‘small entity’’ under SBA

regulations.

58

Because the final rule is

not likely to apply to any depository

institution or company with assets of

$600 million or less, it is not expected

to apply to any small entity for purposes

of the RFA. In light of the foregoing, the

Board certifies that the final rule will

not have a significant economic impact

on a substantial number of small entities

supervised.

FDIC: The Regulatory Flexibility Act

(RFA), 5 U.S.C. 601 et seq., generally

requires an agency, in connection with

a final rule, to prepare and make

available for public comment a final

regulatory flexibility analysis that

describes the impact of a final rule on

small entities.

59

However, a regulatory

flexibility analysis is not required if the

agency certifies that the rule will not

have a significant economic impact on

a substantial number of small entities.

The Small Business Administration

(SBA) has defined ‘‘small entities’’ to

include banking organizations with total

assets of less than or equal to $600

million who are independently owned

and operated or owned by a holding

company with less than $600 million in

total assets.

60

Generally, the FDIC

considers a significant effect to be a

quantified effect in excess of 5 percent

of total annual salaries and benefits per

institution, or 2.5 percent of total

noninterest expenses. The FDIC believes

that effects in excess of these thresholds

typically represent significant effects for

FDIC-supervised institutions. For the

reasons described below and under

section 605(b) of the RFA, the FDIC

certifies that the final rule will not have

a significant economic impact on a

substantial number of small entities.

The FDIC supervises 3,270

institutions,

61

of which 2,492 are

considered small entities for the

purposes of RFA.

62

This final rule will affect all

institutions subject to the Category I and

Category II capital standards, and their

subsidiaries. The FDIC supervises one

institution that is a subsidiary of an

institution that is subject to the Category

I capital standards, and no FDIC-

supervised institutions are subsidiaries

of institutions that are subject to the

Category II capital standards.

63

The one

FDIC-supervised institution that would

be subject to this final rule is not

considered a small entity for the

purposes of the RFA since it is owned

by a holding company with over $600

million in total assets. Since this final

rule does not affect any FDIC-supervised

institutions that are defined as small

entities for the purposes of the RFA, the

FDIC certifies that the final rule will not

have a significant economic impact on

a substantial number of small entities.

C. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act

64

requires the Federal

banking agencies to use plain language

in all proposed and final rules

published after January 1, 2000. The

agencies have sought to present the final

rule in a simple and straightforward

manner and did not receive any

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65

2 U.S.C. 1532.

66

Based on available supervisory information, the

OCC determined that no OCC-supervised advanced

approaches institutions currently hold TLAC

instruments. Thus, there would no cost of capital

associated with the implementation of this

proposal. The OCC estimates that, if implemented,

non-mandated, but anticipated compliance costs

associated with activities such as modifying

procedures and internal audit would be less than

$1 million.

67

12 U.S.C. 4802(a).

68

12 U.S.C. 4802.

69

5 U.S.C. 801 et seq.

70

5 U.S.C. 801(a)(3).

71

5 U.S.C. 804(2).

comments on the use of plain language

in the proposed rule.

D. OCC Unfunded Mandates Reform Act

of 1995 Determination

The OCC analyzed the proposed rule

under the factors set forth in the

Unfunded Mandates Reform Act of 1995

(UMRA).

65

Under this analysis, the OCC

considered whether the final rule

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

(adjusted for inflation). Because the rule

does not specifically require banks to

modify their policies and procedures,

the OCC has determined that there are

no expenditures for the purposes of

UMRA. Therefore, the OCC concludes

that this final rule will not result in

expenditures of $100 million or more

annually by State, local, and Tribal

governments, or by the private sector.

66

E. Riegle Community Development and

Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the

Riegle Community Development and

Regulatory Improvement Act

(RCDRIA),

67

in determining the effective

date and administrative compliance

requirements for new regulations that

impose additional reporting, disclosure,

or other requirements on insured

depository institutions (IDIs), each

Federal banking agency must consider,

consistent with principles of safety and

soundness and the public interest, any

administrative burdens that such

regulations would place on depository

institutions, including small depository

institutions, and customers of

depository institutions, as well as the

benefits of such regulations. In addition,

section 302(b) of RCDRIA requires new

regulations and amendments to

regulations that impose additional

reporting, disclosures, or other new

requirements on IDIs generally to 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.

68

The Federal banking agencies

considered the administrative burdens

and benefits of the final rule and its

elective framework in determining its

effective date and administrative

compliance requirements. As such, the

final rule will be effective on April 1,

2021.

F. Congressional Review Act

For purposes of Congressional Review

Act, the OMB makes a determination as

to whether a final rule constitutes a

‘‘major’’ rule.

69

If a rule is deemed a

‘‘major rule’’ by the Office of

Management and Budget (OMB), the

Congressional Review Act generally

provides that the rule may not take

effect until at least 60 days following its

publication.

70

The Congressional Review Act defines

a ‘‘major rule’’ as any rule that the

Administrator of the Office of

Information and Regulatory Affairs of

the OMB finds has resulted in or is

likely to result in (A) an annual effect

on the economy of $100,000,000 or

more; (B) a major increase in costs or

prices for consumers, individual

industries, Federal, State, or local

government agencies or geographic

regions, or (C) significant adverse effects

on competition, employment,

investment, productivity, innovation, or

on the ability of United States-based

enterprises to compete with foreign-

based enterprises in domestic and

export markets.

71

As required by the

Congressional Review Act, the agencies

will submit the final rule and other

appropriate reports to Congress and the

Government Accountability Office for

review.

List of Subjects

12 CFR Part 3

Administrative practice and

procedure, Capital, National banks,

Risk.

12 CFR Part 217

Administrative practice and

procedure, Banks, Banking, Capital,

Federal Reserve System, Holding

companies.

12 CFR Part 252

Administrative practice and

procedure, Banks, banking, Credit,

Federal Reserve System, Holding

companies, Investments, Qualified

financial contracts, Reporting and

recordkeeping requirements, Securities.

12 CFR Part 324

Administrative practice and

procedure, Banks, banking, Capital

adequacy, Reporting and recordkeeping

requirements, Savings associations,

State non-member banks.

Office of the Comptroller of the

Currency

For the reasons set out in the joint

preamble, the OCC amends 12 CFR part

3 as follows.

PART 3—CAPITAL ADEQUACY

STANDARDS

■1. The authority citation for part 3

continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1462,

1462a, 1463, 1464, 1818, 1828(n), 1828 note,

1831n note, 1835, 3907, 3909, 5412(b)(2)(B),

and Pub. L. 116–136, 134 Stat. 281.

■2. In § 3.2:

■a. Add definitions in alphabetical

order for ‘‘Covered debt instrument’’

and ‘‘Excluded covered debt

instrument’’;

■b. In the definition of ‘‘Fiduciary or

custodial and safekeeping accounts’’,

remove ‘‘§ 3.10(c)(4)(ii)(J)’’ and add

‘‘§ 3.10(c)(2)(x)’’ in its place;

■c. Revise the definition of ‘‘Indirect

exposure’’;

■d. Add a definition in alphabetical

order for ‘‘Investment in a covered debt

instrument’’;

■e. Revise the definition of ‘‘Synthetic

exposure’’; and

■f. In the definition of ‘‘Total leverage

exposure’’, remove ‘‘§ 3.10(c)(4)(ii)’’ and

add ‘‘§ 3.10(c)(2)’’ in its place.

The additions and revisions read as

follows:

§ 3.2 Definitions.

* * * * *

Covered debt instrument means an

unsecured debt instrument that is:

(1) Issued by a global systemically

important BHC, as defined in 12 CFR

217.2, and that is an eligible debt

security, as defined in 12 CFR 252.61,

or that is pari passu or subordinated to

any eligible debt security issued by the

global systemically important BHC; or

(2) Issued by a Covered IHC, as

defined in 12 CFR 252.161, and that is

an eligible Covered IHC debt security, as

defined in 12 CFR 252.161, or that is

pari passu or subordinated to any

eligible Covered IHC debt security

issued by the Covered IHC; or

(3) Issued by a global systemically

important banking organization, as

defined in 12 CFR 252.2 other than a

global systemically important BHC, as

defined in 12 CFR 217.2; or issued by

a subsidiary of a global systemically

important banking organization that is

not a global systemically important

BHC, other than a Covered IHC, as

defined in 12 CFR 252.161; and where

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(i) The instrument is eligible for use

to comply with an applicable law or

regulation requiring the issuance of a

minimum amount of instruments to

absorb losses or recapitalize the issuer

or any of its subsidiaries in connection

with a resolution, receivership,

insolvency, or similar proceeding of the

issuer or any of its subsidiaries; or

(ii) The instrument is pari passu or

subordinated to any instrument

described in paragraph (3)(i) of this

definition; for purposes of this

paragraph (3)(ii) of this definition, if the

issuer may be subject to a special

resolution regime, in its jurisdiction of

incorporation or organization, that

addresses the failure or potential failure

of a financial company and any

instrument described in paragraph (3)(i)

of this definition is eligible under that

special resolution regime to be written

down or converted into equity or any

other capital instrument, then an

instrument is pari passu or

subordinated to any instrument

described in paragraph (3)(i) of this

definition if that instrument is eligible

under that special resolution regime to

be written down or converted into

equity or any other capital instrument

ahead of or proportionally with any

instrument described in paragraph (3)(i)

of this definition; and

(4) Provided that, for purposes of this

definition, covered debt instrument does

not include a debt instrument that

qualifies as tier 2 capital pursuant to 12

CFR 3.20(d) or that is otherwise treated

as regulatory capital by the primary

supervisor of the issuer.

* * * * *

Excluded covered debt instrument

means an investment in a covered debt

instrument held by a national bank or

Federal savings association that is a

subsidiary of a global systemically

important BHC, as defined in 12 CFR

252.2, that:

(1) Is held in connection with market

making-related activities permitted

under 12 CFR 44.4, provided that a

direct exposure or an indirect exposure

to a covered debt instrument is held for

30 business days or less; and

(2) Has been designated as an

excluded covered debt instrument by

the national bank or Federal savings

association that is a subsidiary of a

global systemically important BHC, as

defined in 12 CFR 252.2, pursuant to 12

CFR 3.22(c)(5)(iv)(A).

* * * * *

Indirect exposure means an exposure

that arises from the national bank’s or

Federal savings association’s investment

in an investment fund which holds an

investment in the national bank’s or

Federal savings association’s own

capital instrument, or an investment in

the capital of an unconsolidated

financial institution. For an advanced

approaches national bank or Federal

savings association, indirect exposure

also includes an investment in an

investment fund that holds a covered

debt instrument.

* * * * *

Investment in a covered debt

instrument means a national bank’s or

Federal savings association’s net long

position calculated in accordance with

§ 3.22(h) in a covered debt instrument,

including direct, indirect, and synthetic

exposures to the debt instrument,

excluding any underwriting positions

held by the national bank or Federal

savings association for five or fewer

business days.

* * * * *

Synthetic exposure means an

exposure whose value is linked to the

value of an investment in the national

bank or Federal savings association’s

own capital instrument or to the value

of an investment in the capital of an

unconsolidated financial institution. For

an advanced approaches national bank

or Federal savings association, synthetic

exposure includes an exposure whose

value is linked to the value of an

investment in a covered debt

instrument.

* * * * *

■3. Section 3.10 is amended by:

■a. Revising paragraph (c);

■b. Redesignating paragraph (d) as (e);

and

■c. Adding new paragraph (d).

The revision and addition read as

follows:

§ 3.10 Minimum capital requirements.

* * * * *

(c) Supplementary leverage ratio. (1)

A Category III national bank or Federal

savings association or advanced

approaches national bank or Federal

savings association must determine its

supplementary leverage ratio in

accordance with this paragraph,

beginning with the calendar quarter

immediately following the quarter in

which the national bank or Federal

savings association is identified as a

Category III national bank or Federal

savings association. An advanced

approaches national bank’s or Federal

savings association’s or a Category III

national bank’s or Federal savings

association’s supplementary leverage

ratio is the ratio of its tier 1 capital to

total leverage exposure, the latter of

which is calculated as the sum of:

(i) The mean of the on-balance sheet

assets calculated as of each day of the

reporting quarter; and

(ii) The mean of the off-balance sheet

exposures calculated as of the last day

of each of the most recent three months,

minus the applicable deductions under

§ 3.22(a), (c), and (d).

(2) For purposes of this part, total

leverage exposure means the sum of the

items described in paragraphs (c)(2)(i)

through (viii) of this section, as adjusted

pursuant to paragraph (c)(2)(ix) of this

section for a clearing member national

bank and Federal savings association

and paragraph (c)(2)(x) of this section

for a custody bank:

(i) The balance sheet carrying value of

all of the national bank or Federal

savings association’s on-balance sheet

assets, plus the value of securities sold

under a repurchase transaction or a

securities lending transaction that

qualifies for sales treatment under

GAAP, less amounts deducted from tier

1 capital under § 3.22(a), (c), and (d),

and less the value of securities received

in security-for-security repo-style

transactions, where the national bank or

Federal savings association acts as a

securities lender and includes the

securities received in its on-balance

sheet assets but has not sold or re-

hypothecated the securities received,

and, for a national bank or Federal

savings association that uses the

standardized approach for counterparty

credit risk under § 3.132(c) for its

standardized risk-weighted assets, less

the fair value of any derivative

contracts;

(ii)(A) For a national bank or Federal

savings association that uses the current

exposure methodology under § 3.34(b)

for its standardized risk-weighted assets,

the potential future credit exposure

(PFE) for each derivative contract or

each single-product netting set of

derivative contracts (including a cleared

transaction except as provided in

paragraph (c)(2)(ix) of this section and,

at the discretion of the national bank or

Federal savings association, excluding a

forward agreement treated as a

derivative contract that is part of a

repurchase or reverse repurchase or a

securities borrowing or lending

transaction that qualifies for sales

treatment under GAAP), to which the

national bank or Federal savings

association is a counterparty as

determined under § 3.34, but without

regard to § 3.34(c), provided that:

(1) A national bank or Federal savings

association may choose to exclude the

PFE of all credit derivatives or other

similar instruments through which it

provides credit protection when

calculating the PFE under § 3.34, but

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without regard to § 3.34(c), provided

that it does not adjust the net-to-gross

ratio (NGR); and

(2) A national bank or Federal savings

association that chooses to exclude the

PFE of credit derivatives or other similar

instruments through which it provides

credit protection pursuant to this

paragraph (c)(2)(ii)(A) must do so

consistently over time for the

calculation of the PFE for all such

instruments; or

(B)(1) For a national bank or Federal

savings association that uses the

standardized approach for counterparty

credit risk under section § 3.132(c) for

its standardized risk-weighted assets,

the PFE for each netting set to which the

national bank or Federal savings

association is a counterparty (including

cleared transactions except as provided

in paragraph (c)(2)(ix) of this section

and, at the discretion of the national

bank or Federal savings association,

excluding a forward agreement treated

as a derivative contract that is part of a

repurchase or reverse repurchase or a

securities borrowing or lending

transaction that qualifies for sales

treatment under GAAP), as determined

under § 3.132(c)(7), in which the term C

in § 3.132(c)(7)(i) equals zero, and, for

any counterparty that is not a

commercial end-user, multiplied by 1.4.

For purposes of this paragraph

(c)(2)(ii)(B)(1), a national bank or

Federal savings association may set the

value of the term C in § 3.132(c)(7)(i)

equal to the amount of collateral posted

by a clearing member client of the

national bank or Federal savings

association in connection with the

client-facing derivative transactions

within the netting set; and

(2) A national bank or Federal savings

association may choose to exclude the

PFE of all credit derivatives or other

similar instruments through which it

provides credit protection when

calculating the PFE under § 3.132(c),

provided that it does so consistently

over time for the calculation of the PFE

for all such instruments;

(iii)(A)(1) For a national bank or

Federal savings association that uses the

current exposure methodology under

§ 3.34(b) for its standardized risk-

weighted assets, the amount of cash

collateral that is received from a

counterparty to a derivative contract

and that has offset the mark-to-fair value

of the derivative asset, or cash collateral

that is posted to a counterparty to a

derivative contract and that has reduced

the national bank or Federal savings

association’s on-balance sheet assets,

unless such cash collateral is all or part

of variation margin that satisfies the

conditions in paragraphs (c)(2)(iii)(C)

through (G) of this section; and

(2) The variation margin is used to

reduce the current credit exposure of

the derivative contract, calculated as

described in § 3.34(b), and not the PFE;

and

(3) For the purpose of the calculation

of the NGR described in

§ 3.34(b)(2)(ii)(B), variation margin

described in paragraph (c)(2)(iii)(A)(2)

of this section may not reduce the net

current credit exposure or the gross

current credit exposure; or

(B)(1) For a national bank or Federal

savings association that uses the

standardized approach for counterparty

credit risk under § 3.132(c) for its

standardized risk-weighted assets, the

replacement cost of each derivative

contract or single product netting set of

derivative contracts to which the

national bank or Federal savings

association is a counterparty, calculated

according to the following formula, and,

for any counterparty that is not a

commercial end-user, multiplied by 1.4:

Replacement Cost = max{V¥CVM

r

+

CVM

p

;0}

Where:

V equals the fair value for each derivative

contract or each single-product netting set of

derivative contracts (including a cleared

transaction except as provided in paragraph

(c)(2)(ix) of this section and, at the discretion

of the national bank or Federal savings

association, excluding a forward agreement

treated as a derivative contract that is part of

a repurchase or reverse repurchase or a

securities borrowing or lending transaction

that qualifies for sales treatment under

GAAP);

CVM

r

equals the amount of cash collateral

received from a counterparty to a derivative

contract and that satisfies the conditions in

paragraphs (c)(2)(iii)(C) through (G) of this

section, or, in the case of a client-facing

derivative transaction, the amount of

collateral received from the clearing member

client; and

CVM

p

equals the amount of cash collateral

that is posted to a counterparty to a

derivative contract and that has not offset the

fair value of the derivative contract and that

satisfies the conditions in paragraphs

(c)(2)(iii)(C) through (G) of this section, or, in

the case of a client-facing derivative

transaction, the amount of collateral posted

to the clearing member client;

(2) Notwithstanding paragraph

(c)(2)(iii)(B)(1) of this section, where multiple

netting sets are subject to a single variation

margin agreement, a national bank or Federal

savings association must apply the formula

for replacement cost provided in

§ 3.132(c)(10)(i), in which the term C

MA

may

only include cash collateral that satisfies the

conditions in paragraphs (c)(2)(iii)(C) through

(G) of this section; and

(3) For purposes of paragraph

(c)(2)(iii)(B)(1), a national bank or Federal

savings association must treat a derivative

contract that references an index as if it were

multiple derivative contracts each

referencing one component of the index if the

national bank or Federal savings association

elected to treat the derivative contract as

multiple derivative contracts under

§ 3.132(c)(5)(vi);

(C) For derivative contracts that are not

cleared through a QCCP, the cash collateral

received by the recipient counterparty is not

segregated (by law, regulation, or an

agreement with the counterparty);

(D) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative contract;

(E) The variation margin transferred under

the derivative contract or the governing rules

of the CCP or QCCP for a cleared transaction

is the full amount that is necessary to fully

extinguish the net current credit exposure to

the counterparty of the derivative contracts,

subject to the threshold and minimum

transfer amounts applicable to the

counterparty under the terms of the

derivative contract or the governing rules for

a cleared transaction;

(F) The variation margin is in the form of

cash in the same currency as the currency of

settlement set forth in the derivative contract,

provided that for the purposes of this

paragraph (c)(2)(iii)(F), currency of

settlement means any currency for settlement

specified in the governing qualifying master

netting agreement and the credit support

annex to the qualifying master netting

agreement, or in the governing rules for a

cleared transaction; and

(G) The derivative contract and the

variation margin are governed by a qualifying

master netting agreement between the legal

entities that are the counterparties to the

derivative contract or by the governing rules

for a cleared transaction, and the qualifying

master netting agreement or the governing

rules for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net basis,

taking into account any variation margin

received or provided under the contract if a

credit event involving either counterparty

occurs;

(iv) The effective notional principal

amount (that is, the apparent or stated

notional principal amount multiplied by any

multiplier in the derivative contract) of a

credit derivative, or other similar instrument,

through which the national bank or Federal

savings association provides credit

protection, provided that:

(A) The national bank or Federal savings

association may reduce the effective notional

principal amount of the credit derivative by

the amount of any reduction in the mark-to-

fair value of the credit derivative if the

reduction is recognized in common equity

tier 1 capital;

(B) The national bank or Federal savings

association may reduce the effective notional

principal amount of the credit derivative by

the effective notional principal amount of a

purchased credit derivative or other similar

instrument, provided that the remaining

maturity of the purchased credit derivative is

equal to or greater than the remaining

maturity of the credit derivative through

which the national bank or Federal savings

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association provides credit protection and

that:

(1) With respect to a credit derivative that

references a single exposure, the reference

exposure of the purchased credit derivative

is to the same legal entity and ranks pari

passu with, or is junior to, the reference

exposure of the credit derivative through

which the national bank or Federal savings

association provides credit protection; or

(2) With respect to a credit derivative that

references multiple exposures, the reference

exposures of the purchased credit derivative

are to the same legal entities and rank pari

passu with the reference exposures of the

credit derivative through which the national

bank or Federal savings association provides

credit protection, and the level of seniority of

the purchased credit derivative ranks pari

passu to the level of seniority of the credit

derivative through which the national bank

or Federal savings association provides credit

protection;

(3) Where a national bank or Federal

savings association has reduced the effective

notional amount of a credit derivative

through which the national bank or Federal

savings association provides credit protection

in accordance with paragraph (c)(2)(iv)(A) of

this section, the national bank or Federal

savings association must also reduce the

effective notional principal amount of a

purchased credit derivative used to offset the

credit derivative through which the national

bank or Federal savings association provides

credit protection, by the amount of any

increase in the mark-to-fair value of the

purchased credit derivative that is recognized

in common equity tier 1 capital; and

(4) Where the national bank or Federal

savings association purchases credit

protection through a total return swap and

records the net payments received on a credit

derivative through which the national bank

or Federal savings association provides credit

protection in net income, but does not record

offsetting deterioration in the mark-to-fair

value of the credit derivative through which

the national bank or Federal savings

association provides credit protection in net

income (either through reductions in fair

value or by additions to reserves), the

national bank or Federal savings association

may not use the purchased credit protection

to offset the effective notional principal

amount of the related credit derivative

through which the national bank or Federal

savings association provides credit

protection;

(v) Where a national bank or Federal

savings association acting as a principal has

more than one repo-style transaction with the

same counterparty and has offset the gross

value of receivables due from a counterparty

under reverse repurchase transactions by the

gross value of payables under repurchase

transactions due to the same counterparty,

the gross value of receivables associated with

the repo-style transactions less any on-

balance sheet receivables amount associated

with these repo-style transactions included

under paragraph (c)(2)(i) of this section,

unless the following criteria are met:

(A) The offsetting transactions have the

same explicit final settlement date under

their governing agreements;

(B) The right to offset the amount owed to

the counterparty with the amount owed by

the counterparty is legally enforceable in the

normal course of business and in the event

of receivership, insolvency, liquidation, or

similar proceeding; and

(C) Under the governing agreements, the

counterparties intend to settle net, settle

simultaneously, or settle according to a

process that is the functional equivalent of

net settlement, (that is, the cash flows of the

transactions are equivalent, in effect, to a

single net amount on the settlement date),

where both transactions are settled through

the same settlement system, the settlement

arrangements are supported by cash or

intraday credit facilities intended to ensure

that settlement of both transactions will

occur by the end of the business day, and the

settlement of the underlying securities does

not interfere with the net cash settlement;

(vi) The counterparty credit risk of a repo-

style transaction, including where the

national bank or Federal savings association

acts as an agent for a repo-style transaction

and indemnifies the customer with respect to

the performance of the customer’s

counterparty in an amount limited to the

difference between the fair value of the

security or cash its customer has lent and the

fair value of the collateral the borrower has

provided, calculated as follows:

(A) If the transaction is not subject to a

qualifying master netting agreement, the

counterparty credit risk (E*) for transactions

with a counterparty must be calculated on a

transaction by transaction basis, such that

each transaction i is treated as its own netting

set, in accordance with the following

formula, where E

i

is the fair value of the

instruments, gold, or cash that the national

bank or Federal savings association has lent,

sold subject to repurchase, or provided as

collateral to the counterparty, and C

i

is the

fair value of the instruments, gold, or cash

that the national bank or Federal savings

association has borrowed, purchased subject

to resale, or received as collateral from the

counterparty:

E

i

* = max {0, [E

i

¥ C

i

]}; and

(B) If the transaction is subject to a

qualifying master netting agreement, the

counterparty credit risk (E*) must be

calculated as the greater of zero and the total

fair value of the instruments, gold, or cash

that the national bank or Federal savings

association has lent, sold subject to

repurchase or provided as collateral to a

counterparty for all transactions included in

the qualifying master netting agreement (SE

i

),

less the total fair value of the instruments,

gold, or cash that the national bank or

Federal savings association borrowed,

purchased subject to resale or received as

collateral from the counterparty for those

transactions (SC

i

), in accordance with the

following formula:

E* = max {0, [SE

i

¥ SC

i

]}

(vii) If a national bank or Federal savings

association acting as an agent for a repo-style

transaction provides a guarantee to a

customer of the security or cash its customer

has lent or borrowed with respect to the

performance of the customer’s counterparty

and the guarantee is not limited to the

difference between the fair value of the

security or cash its customer has lent and the

fair value of the collateral the borrower has

provided, the amount of the guarantee that is

greater than the difference between the fair

value of the security or cash its customer has

lent and the value of the collateral the

borrower has provided;

(viii) The credit equivalent amount of all

off-balance sheet exposures of the national

bank or Federal savings association,

excluding repo-style transactions, repurchase

or reverse repurchase or securities borrowing

or lending transactions that qualify for sales

treatment under GAAP, and derivative

transactions, determined using the applicable

credit conversion factor under § 3.33(b),

provided, however, that the minimum credit

conversion factor that may be assigned to an

off-balance sheet exposure under this

paragraph is 10 percent; and

(ix) For a national bank or Federal savings

association that is a clearing member:

(A) A clearing member national bank or

Federal savings association that guarantees

the performance of a clearing member client

with respect to a cleared transaction must

treat its exposure to the clearing member

client as a derivative contract for purposes of

determining its total leverage exposure;

(B) A clearing member national bank or

Federal savings association that guarantees

the performance of a CCP with respect to a

transaction cleared on behalf of a clearing

member client must treat its exposure to the

CCP as a derivative contract for purposes of

determining its total leverage exposure;

(C) A clearing member national bank or

Federal savings association that does not

guarantee the performance of a CCP with

respect to a transaction cleared on behalf of

a clearing member client may exclude its

exposure to the CCP for purposes of

determining its total leverage exposure;

(D) A national bank or Federal savings

association that is a clearing member may

exclude from its total leverage exposure the

effective notional principal amount of credit

protection sold through a credit derivative

contract, or other similar instrument, that it

clears on behalf of a clearing member client

through a CCP as calculated in accordance

with paragraph (c)(2)(iv) of this section; and

(E) Notwithstanding paragraphs

(c)(2)(ix)(A) through (C) of this section, a

national bank or Federal savings association

may exclude from its total leverage exposure

a clearing member’s exposure to a clearing

member client for a derivative contract, if the

clearing member client and the clearing

member are affiliates and consolidated for

financial reporting purposes on the national

bank’s or Federal savings association’s

balance sheet.

(x) A custodial bank shall exclude from its

total leverage exposure the lesser of:

(A) The amount of funds that the custody

bank has on deposit at a qualifying central

bank; and

(B) The amount of funds that the custody

bank’s clients have on deposit at the custody

bank that are linked to fiduciary or custodial

and safekeeping accounts. For purposes of

this paragraph (c)(2)(x), a deposit account is

linked to a fiduciary or custodial and

safekeeping account if the deposit account is

provided to a client that maintains a

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The national bank or Federal savings

association must calculate amounts deducted under

paragraphs (c) through (f) of this section after it

calculates the amount of ALLL or AACL, as

applicable, includable in tier 2 capital under

§3.20(d)(3).

fiduciary or custodial and safekeeping

account with the custody bank, and the

deposit account is used to facilitate the

administration of the fiduciary or custody

and safekeeping account.

(d) Advanced approaches capital ratio

calculations. An advanced approaches

national bank or Federal savings association

that has completed the parallel run process

and received notification from the OCC

pursuant to § 3.121(d) must determine its

regulatory capital ratios as described in

paragraphs (d)(1) through (3) of this section.

(1) Common equity tier 1 capital ratio. The

national bank’s or Federal savings

association’s common equity tier 1 capital

ratio is the lower of:

(i) The ratio of the national bank’s or

Federal savings association’s common equity

tier 1 capital to standardized total risk-

weighted assets; and

(ii) The ratio of the national bank’s or

Federal savings association’s common equity

tier 1 capital to advanced approaches total

risk-weighted assets.

(2) Tier 1 capital ratio. The national bank’s

or Federal savings association’s tier 1 capital

ratio is the lower of:

(i) The ratio of the national bank’s or

Federal savings association’s tier 1 capital to

standardized total risk-weighted assets; and

(ii) The ratio of the national bank’s or

Federal savings association’s tier 1 capital to

advanced approaches total risk-weighted

assets.

(3) Total capital ratio. The national bank’s

or Federal savings association’s total capital

ratio is the lower of:

(i) The ratio of the national bank’s or

Federal savings association’s total capital to

standardized total risk-weighted assets; and

(ii) The ratio of the national bank’s or

Federal savings association’s advanced-

approaches-adjusted total capital to advanced

approaches total risk-weighted assets. A

national bank’s or Federal savings

association’s advanced-approaches-adjusted

total capital is the national bank’s or Federal

savings association’s total capital after being

adjusted as follows:

(A) An advanced approaches national bank

or Federal savings association must deduct

from its total capital any allowance for loan

and lease losses or adjusted allowance for

credit losses, as applicable, included in its

tier 2 capital in accordance with § 3.20(d)(3);

and

(B) An advanced approaches national bank

or Federal savings association must add to its

total capital any eligible credit reserves that

exceed the national bank’s or Federal savings

association’s total expected credit losses to

the extent that the excess reserve amount

does not exceed 0.6 percent of the national

bank’s or Federal savings association’s credit

risk-weighted assets.

(4) Federal savings association tangible

capital ratio. A Federal savings association’s

tangible capital ratio is the ratio of the

Federal savings association’s core capital (tier

1 capital) to average total assets as calculated

under this subpart B. For purposes of this

paragraph (d)(4), the term ‘‘total assets’’

means ‘‘total assets’’ as defined in part 6,

subpart A of this chapter, subject to subpart

G of this part.

* * * * *

■4. In § 3.22, revise paragraphs (c), (f),

and (h) to read as follows:

§ 3.22 Regulatory capital adjustments and

deductions.

* * * * *

(c) Deductions from regulatory capital

related to investments in capital

instruments or covered debt

instruments

23

—(1) Investment in the

national bank’s or Federal savings

association’s own capital instruments. A

national bank or Federal savings

association must deduct an investment

in the national bank’s or Federal savings

association’s own capital instruments,

as follows:

(i) A national bank or Federal savings

association must deduct an investment

in the national bank’s or Federal savings

association’s own common stock

instruments from its common equity tier

1 capital elements to the extent such

instruments are not excluded from

regulatory capital under § 3.20(b)(1);

(ii) A national bank or Federal savings

association must deduct an investment

in the national bank’s or Federal savings

association’s own additional tier 1

capital instruments from its additional

tier 1 capital elements; and

(iii) A national bank or Federal

savings association must deduct an

investment in the national bank’s or

Federal savings association’s own tier 2

capital instruments from its tier 2

capital elements.

(2) Corresponding deduction

approach. For purposes of subpart C of

this part, the corresponding deduction

approach is the methodology used for

the deductions from regulatory capital

related to reciprocal cross holdings (as

described in paragraph (c)(3) of this

section), investments in the capital of

unconsolidated financial institutions for

a national bank or Federal savings

association that is not an advanced

approaches national bank or Federal

savings association (as described in

paragraph (c)(4) of this section), non-

significant investments in the capital of

unconsolidated financial institutions for

an advanced approaches national bank

or Federal savings association (as

described in paragraph (c)(5) of this

section), and non-common stock

significant investments in the capital of

unconsolidated financial institutions for

an advanced approaches national bank

or Federal savings association (as

described in paragraph (c)(6) of this

section). Under the corresponding

deduction approach, a national bank or

Federal savings association must make

deductions from the component of

capital for which the underlying

instrument would qualify if it were

issued by the national bank or Federal

savings association itself, as described

in paragraphs (c)(2)(i) through (iii) of

this section. If the national bank or

Federal savings association does not

have a sufficient amount of a specific

component of capital to effect the

required deduction, the shortfall must

be deducted according to paragraph (f)

of this section.

(i) If an investment is in the form of

an instrument issued by a financial

institution that is not a regulated

financial institution, the national bank

or Federal savings association must treat

the instrument as:

(A) A common equity tier 1 capital

instrument if it is common stock or

represents the most subordinated claim

in a liquidation of the financial

institution; and

(B) An additional tier 1 capital

instrument if it is subordinated to all

creditors of the financial institution and

is senior in liquidation only to common

shareholders.

(ii) If an investment is in the form of

an instrument issued by a regulated

financial institution and the instrument

does not meet the criteria for common

equity tier 1, additional tier 1 or tier 2

capital instruments under § 3.20, the

national bank or Federal savings

association must treat the instrument as:

(A) A common equity tier 1 capital

instrument if it is common stock

included in GAAP equity or represents

the most subordinated claim in

liquidation of the financial institution;

(B) An additional tier 1 capital

instrument if it is included in GAAP

equity, subordinated to all creditors of

the financial institution, and senior in a

receivership, insolvency, liquidation, or

similar proceeding only to common

shareholders;

(C) A tier 2 capital instrument if it is

not included in GAAP equity but

considered regulatory capital by the

primary supervisor of the financial

institution; and

(D) For an advanced approaches

national bank or Federal savings

association, a tier 2 capital instrument if

it is a covered debt instrument.

(iii) If an investment is in the form of

a non-qualifying capital instrument (as

defined in § 3.300(c)), the national bank

or Federal savings association must treat

the instrument as:

(A) An additional tier 1 capital

instrument if such instrument was

included in the issuer’s tier 1 capital

prior to May 19, 2010; or

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With the prior written approval of the OCC, for

the period of time stipulated by the OCC, a national

bank or Federal savings association is not required

to deduct a non-significant investment in the

capital instrument of an unconsolidated financial

institution or an investment in a covered debt

instrument pursuant to this paragraph if the

financial institution is in distress and if such

investment is made for the purpose of providing

financial support to the financial institution, as

determined by the OCC.

25

Any non-significant investments in the capital

of an unconsolidated financial institution that is not

required to be deducted under this paragraph (c)(4)

or otherwise under this section must be assigned

the appropriate risk weight under subparts D, E, or

F of this part, as applicable.

26

With the prior written approval of the OCC, for

the period of time stipulated by the OCC, an

advanced approaches a national bank or Federal

savings association is not required to deduct a non-

significant investment in the capital instrument of

an unconsolidated financial institution or an

investment in a covered debt instrument pursuant

to this paragraph if the financial institution is in

distress and if such investment is made for the

purpose of providing financial support to the

financial institution, as determined by the OCC.

27

Any non-significant investment in the capital

of an unconsolidated financial institution or any

investment in a covered debt instrument that is not

required to be deducted under this paragraph (c)(4)

or otherwise under this section must be assigned

the appropriate risk weight under subpart D, E, or

F of this part, as applicable.

(B) A tier 2 capital instrument if such

instrument was included in the issuer’s

tier 2 capital (but not includable in tier

1 capital) prior to May 19, 2010.

(3) Reciprocal cross holdings in the

capital of financial institutions. (i) A

national bank or Federal savings

association must deduct an investment

in the capital of other financial

institutions that it holds reciprocally

with another financial institution,

where such reciprocal cross holdings

result from a formal or informal

arrangement to swap, exchange, or

otherwise intend to hold each other’s

capital instruments, by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

(ii) An advanced approaches national

bank or Federal savings association

must deduct an investment in any

covered debt instrument that the

institution holds reciprocally with

another financial institution, where

such reciprocal cross holdings result

from a formal or informal arrangement

to swap, exchange, or otherwise intend

to hold each other’s capital or covered

debt instruments, by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

(4) Investments in the capital of

unconsolidated financial institutions. A

national bank or Federal savings

association that is not an advanced

approaches national bank or Federal

savings association must deduct its

investments in the capital of

unconsolidated financial institutions (as

defined in § 3.2) that exceed 25 percent

of the sum of the national bank or

Federal savings association’s common

equity tier 1 capital elements minus all

deductions from and adjustments to

common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

24

The

deductions described in this section are

net of associated DTLs in accordance

with paragraph (e) of this section. In

addition, with the prior written

approval of the OCC, a national bank or

Federal savings association that

underwrites a failed underwriting, for

the period of time stipulated by the

OCC, is not required to deduct an

investment in the capital of an

unconsolidated financial institution

pursuant to this paragraph (c) to the

extent the investment is related to the

failed underwriting.

25

(5) Non-significant investments in the

capital of unconsolidated financial

institutions. (i) An advanced approaches

national bank or Federal savings

association must deduct its non-

significant investments in the capital of

unconsolidated financial institutions (as

defined in § 3.2) that, in the aggregate

and together with any investment in a

covered debt instrument (as defined in

§ 3.2) issued by a financial institution in

which the national bank or Federal

savings association does not have a

significant investment in the capital of

the unconsolidated financial institution

(as defined in § 3.2), exceeds 10 percent

of the sum of the advanced approaches

national bank’s or Federal savings

association’s common equity tier 1

capital elements minus all deductions

from and adjustments to common equity

tier 1 capital elements required under

paragraphs (a) through (c)(3) of this

section (the 10 percent threshold for

non-significant investments) by

applying the corresponding deduction

approach in paragraph (c)(2) of this

section.

26

The deductions described in

this paragraph are net of associated

DTLs in accordance with paragraph (e)

of this section. In addition, with the

prior written approval of the OCC, an

advanced approaches national bank or

Federal savings association that

underwrites a failed underwriting, for

the period of time stipulated by the

OCC, is not required to deduct from

capital a non-significant investment in

the capital of an unconsolidated

financial institution or an investment in

a covered debt instrument pursuant to

this paragraph (c)(5) to the extent the

investment is related to the failed

underwriting.

27

For any calculation

under this paragraph (c)(5)(i), an

advanced approaches national bank or

Federal savings association may exclude

the amount of an investment in a

covered debt instrument under

paragraph (c)(5)(iii) or (iv) of this

section, as applicable.

(ii) For an advanced approaches

national bank or Federal savings

association, the amount to be deducted

under this paragraph (c)(5) from a

specific capital component is equal to:

(A) The advanced approaches

national bank’s or Federal savings

association’s aggregate non-significant

investments in the capital of an

unconsolidated financial institution

and, if applicable, any investments in a

covered debt instrument subject to

deduction under this paragraph (c)(5),

exceeding the 10 percent threshold for

non-significant investments, multiplied

by

(B) The ratio of the advanced

approaches national bank’s or Federal

savings association’s aggregate non-

significant investments in the capital of

an unconsolidated financial institution

(in the form of such capital component)

to the national bank’s or Federal savings

association’s total non-significant

investments in unconsolidated financial

institutions, with an investment in a

covered debt instrument being treated as

tier 2 capital for this purpose.

(iii) For purposes of applying the

deduction under paragraph (c)(5)(i) of

this section, an advanced approaches

national bank or Federal savings

association that is not a subsidiary of a

global systemically important banking

organization, as defined in 12 CFR

252.2, may exclude from the deduction

the amount of the national bank’s or

Federal savings association’s gross long

position, in accordance with

§ 3.22(h)(2), in investments in covered

debt instruments issued by financial

institutions in which the national bank

or Federal savings association does not

have a significant investment in the

capital of the unconsolidated financial

institutions up to an amount equal to 5

percent of the sum of the national

bank’s or Federal savings association’s

common equity tier 1 capital elements

minus all deductions from and

adjustments to common equity tier 1

capital elements required under

paragraphs (a) through (c)(3) of this

section, net of associated DTLs in

accordance with paragraph (e) of this

section.

(iv) Prior to applying the deduction

under paragraph (c)(5)(i) of this section:

(A) A national bank or Federal savings

association that is a subsidiary of a

global systemically important BHC, as

defined in 12 CFR 252.2, may designate

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With prior written approval of the OCC, for the

period of time stipulated by the OCC, an advanced

approaches national bank or Federal savings

association is not required to deduct an investment

in a covered debt instrument under this paragraph

(c)(5) or otherwise under this section if such

investment is made for the purpose of providing

financial support to the financial institution as

determined by the OCC.

any investment in a covered debt

instrument as an excluded covered debt

instrument, as defined in § 3.2.

(B) A national bank or Federal savings

association that is a subsidiary of a

global systemically important BHC, as

defined in 12 CFR 252.2, must deduct

according to the corresponding

deduction approach in paragraph (c)(2)

of this section, its gross long position,

calculated in accordance with paragraph

(h)(2) of this section, in a covered debt

instrument that was originally

designated as an excluded covered debt

instrument, in accordance with

paragraph (c)(5)(iv)(A) of this section,

but no longer qualifies as an excluded

covered debt instrument.

(C) A national bank or Federal savings

association that is a subsidiary of a

global systemically important BHC, as

defined in 12 CFR 252.2, must deduct

according to the corresponding

deduction approach in paragraph (c)(2)

of this section the amount of its gross

long position, calculated in accordance

with paragraph (h)(2) of this section, in

a direct or indirect investment in a

covered debt instrument that was

originally designated as an excluded

covered debt instrument, in accordance

with paragraph (c)(5)(iv)(A) of this

section, and has been held for more than

thirty business days.

(D) A national bank or Federal savings

association that is a subsidiary of a

global systemically important BHC, as

defined in 12 CFR 252.2, must deduct

according to the corresponding

deduction approach in paragraph (c)(2)

of this section its gross long position,

calculated in accordance with paragraph

(h)(2) of this section, of its aggregate

investment in excluded covered debt

instruments that exceeds 5 percent of

the sum of the national bank’s or

Federal savings association’s common

equity tier 1 capital elements minus all

deductions from and adjustments to

common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section, net of associated

DTLs in accordance with paragraph (e)

of this section.

(6) Significant investments in the

capital of unconsolidated financial

institutions that are not in the form of

common stock. If an advanced

approaches national bank or Federal

savings association has a significant

investment in the capital of an

unconsolidated financial institution, the

advanced approaches national bank or

Federal savings association must deduct

from capital any such investment issued

by the unconsolidated financial

institution that is held by the national

bank or Federal savings association

other than an investment in the form of

common stock, as well as any

investment in a covered debt instrument

issued by the unconsolidated financial

institution, by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

28

The

deductions described in this section are

net of associated DTLs in accordance

with paragraph (e) of this section. In

addition, with the prior written

approval of the OCC, for the period of

time stipulated by the OCC, an

advanced approaches national bank or

Federal savings association that

underwrites a failed underwriting is not

required to deduct the significant

investment in the capital of an

unconsolidated financial institution or

an investment in a covered debt

instrument pursuant to this paragraph

(c)(6) if such investment is related to

such failed underwriting.

* * * * *

(f) Insufficient amounts of a specific

regulatory capital component to effect

deductions. Under the corresponding

deduction approach, if a national bank

or Federal savings association does not

have a sufficient amount of a specific

component of capital to effect the full

amount of any deduction from capital

required under paragraph (d) of this

section, the national bank or Federal

savings association must deduct the

shortfall amount from the next higher

(that is, more subordinated) component

of regulatory capital. Any investment by

an advanced approaches national bank

or Federal savings association in a

covered debt instrument must be treated

as an investment in the tier 2 capital for

purposes of this paragraph.

Notwithstanding any other provision of

this section, a qualifying community

banking organization (as defined in

§ 3.12) that has elected to use the

community bank leverage ratio

framework pursuant to § 3.12 is not

required to deduct any shortfall of tier

2 capital from its additional tier 1

capital or common equity tier 1 capital.

* * * * *

(h) Net long position—(1) In general.

For purposes of calculating the amount

of a national bank’s or Federal savings

association’s investment in the national

bank’s or Federal savings association’s

own capital instrument, investment in

the capital of an unconsolidated

financial institution, and investment in

a covered debt instrument under this

section, the institution’s net long

position is the gross long position in the

underlying instrument determined in

accordance with paragraph (h)(2) of this

section, as adjusted to recognize any

short position by the national bank or

Federal savings association in the same

instrument subject to paragraph (h)(3) of

this section.

(2) Gross long position. A gross long

position is determined as follows:

(i) For an equity exposure that is held

directly by the national bank or Federal

savings association, the adjusted

carrying value of the exposure as that

term is defined in § 3.51(b);

(ii) For an exposure that is held

directly and that is not an equity

exposure or a securitization exposure,

the exposure amount as that term is

defined in § 3.2;

(iii) For each indirect exposure, the

national bank’s or Federal savings

association’s carrying value of its

investment in an investment fund or,

alternatively:

(A) A national bank or Federal savings

association may, with the prior approval

of the OCC, use a conservative estimate

of the amount of its indirect investment

in the national bank’s or Federal savings

association’s own capital instruments,

its indirect investment in the capital of

an unconsolidated financial institution,

or its indirect investment in a covered

debt instrument held through a position

in an index, as applicable; or

(B) A national bank or Federal savings

association may calculate the gross long

position for an indirect exposure to the

national bank’s or Federal savings

association’s own capital the capital in

an unconsolidated financial institution,

or a covered debt instrument by

multiplying the national bank’s or

Federal savings association’s carrying

value of its investment in the

investment fund by either:

(1) The highest stated investment

limit (in percent) for an investment in

the national bank’s or Federal savings

association’s own capital instruments,

an investment in the capital of an

unconsolidated financial institution, or

an investment in a covered debt

instrument, as applicable, as stated in

the prospectus, partnership agreement,

or similar contract defining permissible

investments of the investment fund; or

(2) The investment fund’s actual

holdings (in percent) of the investment

in the national bank’s or Federal savings

association’s own capital instruments,

investment in the capital of an

unconsolidated financial institution, or

investment in a covered debt

instrument, as applicable; and

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(iv) For a synthetic exposure, the

amount of the national bank’s or Federal

savings association’s loss on the

exposure if the reference capital

instrument or covered debt instrument

were to have a value of zero.

(3) Adjustments to reflect a short

position. In order to adjust the gross

long position to recognize a short

position in the same instrument under

paragraph (h)(1) of this section, the

following criteria must be met:

(i) The maturity of the short position

must match the maturity of the long

position, or the short position must have

a residual maturity of at least one year

(maturity requirement); or

(ii) For a position that is a trading

asset or trading liability (whether on- or

off-balance sheet) as reported on the

national bank’s or Federal savings

association’s Call Report, if the national

bank or Federal savings association has

a contractual right or obligation to sell

the long position at a specific point in

time and the counterparty to the

contract has an obligation to purchase

the long position if the national bank or

Federal savings association exercises its

right to sell, this point in time may be

treated as the maturity of the long

position such that the maturity of the

long position and short position are

deemed to match for purposes of the

maturity requirement, even if the

maturity of the short position is less

than one year; and

(iii) For an investment in a national

bank’s or Federal savings association’s

own capital instrument under paragraph

(c)(1) of this section, an investment in

the capital of an unconsolidated

financial institution under paragraphs

(c)(4) through (6) and (d) of this section

(as applicable), and an investment in a

covered debt instrument under

paragraphs (c)(1), (5), and (6) of this

section:

(A) The national bank or Federal

savings association may only net a short

position against a long position in an

investment in the national bank’s or

Federal savings association’s own

capital instrument under paragraph

(c)(1) of this section if the short position

involves no counterparty credit risk;

(B) A gross long position in an

investment in the national bank’s or

Federal savings association’s own

capital instrument, an investment in the

capital of an unconsolidated financial

institution, or an investment in a

covered debt instrument due to a

position in an index may be netted

against a short position in the same

index;

(C) Long and short positions in the

same index without maturity dates are

considered to have matching maturities;

and

(D) A short position in an index that

is hedging a long cash or synthetic

position in an investment in the

national bank’s or Federal savings

association’s own capital instrument, an

investment in the capital instrument of

an unconsolidated financial institution,

or an investment in a covered debt

instrument can be decomposed to

provide recognition of the hedge. More

specifically, the portion of the index

that is composed of the same underlying

instrument that is being hedged may be

used to offset the long position if both

the long position being hedged and the

short position in the index are reported

as a trading asset or trading liability

(whether on- or off-balance sheet) on the

national bank’s or Federal savings

association’s Call Report, and the hedge

is deemed effective by the national

bank’s or Federal savings association’s

internal control processes, which have

not been found to be inadequate by the

OCC.

§ 3.121 [Amended]

■5. Section 3.121 is amended by

removing ‘‘§ 3.10(c)(1) through (3)’’ and

adding ‘‘§ 3.10(d)(1) through (3)’’ in its

place in paragraph (c).

§ 3.132 [Amended]

■6. Section 3.132 is amended by

removing ‘‘§ 3.10(c)(4)(ii)(B)’’ and

adding ‘‘§ 3.10(c)(2)(ii)(B)’’ in

paragraphs (c)(7)(iii) and (iv).

§ 3.304 [Amended]

■7. Section 3.304 is amended by:

■a. Removing ‘‘§ 3.10(c)(4)’’ and adding

in its place ‘‘§ 3.10(d)’’ in paragraph (a)

introductory text; and

■b. Removing ‘‘§ 3.10(c)(4)(ii)(J)(1)’’ and

adding in its place ‘‘§ 3.10(c)(2)(x)(A)’’

in paragraph (e).

Board of Governors of the Federal

Reserve System

For the reasons set forth in the joint

preamble, the Board amends part 217 of

chapter II of title 12 of the Code of

Federal Regulations as follows:

PART 217—CAPITAL ADEQUACY OF

BANK HOLDING COMPANIES,

SAVINGS AND LOAN HOLDING

COMPANIES, AND STATE MEMBER

BANKS (REGULATION Q).

■8. The authority citation for part 217

continues to read as follows:

Authority: 12 U.S.C. 248(a), 321–338a,

481–486, 1462a, 1467a, 1818, 1828, 1831n,

1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,

3904, 3906–3909, 4808, 5365, 5368, 5371,

and 5371 note; Pub. L. 116–136, 134 Stat.

281.

■9. In § 217.2:

■a. Add definitions in alphabetical

order for ‘‘Covered debt instrument’’

and ‘‘Excluded covered debt

instrument’’;

■b. In the definition of ‘‘Fiduciary or

custodial and safekeeping accounts’’,

remove ‘‘§ 217.10(c)(4)(ii)(J)’’ and add

‘‘§ 217.10(c)(2)(x)’’ in its place;

■c. Revise the definition of ‘‘Indirect

exposure’’;

■d. Add a definition in alphabetical

order for ‘‘Investment in a covered debt

instrument’’;

■e. Revise the definition of ‘‘Synthetic

exposure’’; and

■f. In the definition of ‘‘Total leverage

exposure’’, remove ‘‘§ 217.10(c)(4)(ii)’’

and add ‘‘§ 217.10(c)(2)’’ in its place.

The additions and revisions read as

follows:

§ 217.2 Definitions.

* * * * *

Covered debt instrument means an

unsecured debt instrument that is:

(1) Issued by a global systemically

important BHC and that is an eligible

debt security, as defined in 12 CFR

252.61, or that is pari passu or

subordinated to any eligible debt

security issued by the global

systemically important BHC; or

(2) Issued by a Covered IHC, as

defined in 12 CFR 252.161, and that is

an eligible Covered IHC debt security, as

defined in 12 CFR 252.161, or that is

pari passu or subordinated to any

eligible Covered IHC debt security

issued by the Covered IHC; or

(3) Issued by a global systemically

important banking organization, as

defined in 12 CFR 252.2 other than a

global systemically important BHC; or

issued by a subsidiary of a global

systemically important banking

organization that is not a global

systemically important BHC, other than

a Covered IHC, as defined in 12 CFR

252.161; and where,

(i) The instrument is eligible for use

to comply with an applicable law or

regulation requiring the issuance of a

minimum amount of instruments to

absorb losses or recapitalize the issuer

or any of its subsidiaries in connection

with a resolution, receivership,

insolvency, or similar proceeding of the

issuer or any of its subsidiaries; or

(ii) The instrument is pari passu or

subordinated to any instrument

described in paragraph (3)(i) of this

definition; for purposes of this

paragraph (3)(ii) of this definition, if the

issuer may be subject to a special

resolution regime, in its jurisdiction of

incorporation or organization, that

addresses the failure or potential failure

of a financial company and any

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instrument described in paragraph (3)(i)

of this definition is eligible under that

special resolution regime to be written

down or converted into equity or any

other capital instrument, then an

instrument is pari passu or

subordinated to any instrument

described in paragraph (3)(i) of this

definition if that instrument is eligible

under that special resolution regime to

be written down or converted into

equity or any other capital instrument

ahead of or proportionally with any

instrument described in paragraph (3)(i)

of this definition; and

(4) Provided that, for purposes of this

definition, covered debt instrument does

not include a debt instrument that

qualifies as tier 2 capital pursuant to 12

CFR 217.20(d) or that is otherwise

treated as regulatory capital by the

primary supervisor of the issuer.

* * * * *

Excluded covered debt instrument

means an investment in a covered debt

instrument held by a global systemically

important BHC or a Board-regulated

institution that is a subsidiary of a

global systemically important BHC that:

(1) Is held in connection with market

making-related activities permitted

under 12 CFR 248.4, provided that a

direct exposure or an indirect exposure

to a covered debt instrument is held for

30 business days or less; and

(2) Has been designated as an

excluded covered debt instrument by

the global systemically important BHC

or the subsidiary of a global

systemically important BHC pursuant to

12 CFR 217.22(c)(5)(iv)(A).

* * * * *

Indirect exposure means an exposure

that arises from the Board-regulated

institution’s investment in an

investment fund which holds an

investment in the Board-regulated

institution’s own capital instrument or

an investment in the capital of an

unconsolidated financial institution. For

an advanced approaches Board-

regulated institution, indirect exposure

also includes an investment in an

investment fund that holds a covered

debt instrument.

* * * * *

Investment in a covered debt

instrument means a Board-regulated

institution’s net long position calculated

in accordance with § 217.22(h) in a

covered debt instrument, including

direct, indirect, and synthetic exposures

to the debt instrument, excluding any

underwriting positions held by the

Board-regulated institution for five or

fewer business days.

* * * * *

Synthetic exposure means an

exposure whose value is linked to the

value of an investment in the Board-

regulated institution’s own capital

instrument or to the value of an

investment in the capital of an

unconsolidated financial institution. For

an advanced approaches Board-

regulated institution, synthetic exposure

includes an exposure whose value is

linked to the value of an investment in

a covered debt instrument.

* * * * *

■10. Section 217.10 is amended by:

■a. Revising paragraph (c);

■b. Redesignating paragraph (d) as (e);

and

■c. Adding new paragraph (d).

The revision and addition read as

follows:

§ 217.10 Minimum capital requirements.

* * * * *

(c) Supplementary leverage ratio. (1)

A Category III Board-regulated

institution or advanced approaches

Board-regulated institution must

determine its supplementary leverage

ratio in accordance with this paragraph,

beginning with the calendar quarter

immediately following the quarter in

which the Board-regulated institution is

identified as a Category III Board-

regulated institution. An advanced

approaches Board-regulated institution’s

or a Category III Board-regulated

institution’s supplementary leverage

ratio is the ratio of its tier 1 capital to

total leverage exposure, the latter of

which is calculated as the sum of:

(i) The mean of the on-balance sheet

assets calculated as of each day of the

reporting quarter; and

(ii) The mean of the off-balance sheet

exposures calculated as of the last day

of each of the most recent three months,

minus the applicable deductions under

§ 217.22(a), (c), and (d).

(2) For purposes of this part, total

leverage exposure means the sum of the

items described in paragraphs (c)(2)(i)

through (viii) of this section, as adjusted

pursuant to paragraph (c)(2)(ix) of this

section for a clearing member Board-

regulated institution and paragraph

(c)(2)(x) of this section for a custodial

banking organization:

(i) The balance sheet carrying value of

all of the Board-regulated institution’s

on-balance sheet assets, plus the value

of securities sold under a repurchase

transaction or a securities lending

transaction that qualifies for sales

treatment under GAAP, less amounts

deducted from tier 1 capital under

§ 217.22(a), (c), and (d), and less the

value of securities received in security-

for-security repo-style transactions,

where the Board-regulated institution

acts as a securities lender and includes

the securities received in its on-balance

sheet assets but has not sold or re-

hypothecated the securities received,

and, for a Board-regulated institution

that uses the standardized approach for

counterparty credit risk under

§ 217.132(c) for its standardized risk-

weighted assets, less the fair value of

any derivative contracts;

(ii)(A) For a Board-regulated

institution that uses the current

exposure methodology under

§ 217.34(b) for its standardized risk-

weighted assets, the potential future

credit exposure (PFE) for each

derivative contract or each single-

product netting set of derivative

contracts (including a cleared

transaction except as provided in

paragraph (c)(2)(ix) of this section and,

at the discretion of the Board-regulated

institution, excluding a forward

agreement treated as a derivative

contract that is part of a repurchase or

reverse repurchase or a securities

borrowing or lending transaction that

qualifies for sales treatment under

GAAP), to which the Board-regulated

institution is a counterparty as

determined under § 217.34, but without

regard to § 217.34(c), provided that:

(1) A Board-regulated institution may

choose to exclude the PFE of all credit

derivatives or other similar instruments

through which it provides credit

protection when calculating the PFE

under § 217.34, but without regard to

§ 217.34(c), provided that it does not

adjust the net-to-gross ratio (NGR); and

(2) A Board-regulated institution that

chooses to exclude the PFE of credit

derivatives or other similar instruments

through which it provides credit

protection pursuant to paragraph

(c)(2)(ii)(A) of this section must do so

consistently over time for the

calculation of the PFE for all such

instruments; or

(B)(1) For a Board-regulated

institution that uses the standardized

approach for counterparty credit risk

under section § 217.132(c) for its

standardized risk-weighted assets, the

PFE for each netting set to which the

Board-regulated institution is a

counterparty (including cleared

transactions except as provided in

paragraph (c)(2)(ix) of this section and,

at the discretion of the Board-regulated

institution, excluding a forward

agreement treated as a derivative

contract that is part of a repurchase or

reverse repurchase or a securities

borrowing or lending transaction that

qualifies for sales treatment under

GAAP), as determined under

§ 217.132(c)(7), in which the term C in

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§ 217.132(c)(7)(i) equals zero, and, for

any counterparty that is not a

commercial end-user, multiplied by 1.4.

For purposes of this paragraph

(c)(2)(ii)(B)(1), a Board-regulated

institution may set the value of the term

C in § 217.132(c)(7)(i) equal to the

amount of collateral posted by a clearing

member client of the Board-regulated

institution in connection with the

client-facing derivative transactions

within the netting set; and

(2) A Board-regulated institution may

choose to exclude the PFE of all credit

derivatives or other similar instruments

through which it provides credit

protection when calculating the PFE

under § 217.132(c), provided that it does

so consistently over time for the

calculation of the PFE for all such

instruments;

(iii)(A)(1) For a Board-regulated

institution that uses the current

exposure methodology under

§ 217.34(b) for its standardized risk-

weighted assets, the amount of cash

collateral that is received from a

counterparty to a derivative contract

and that has offset the mark-to-fair value

of the derivative asset, or cash collateral

that is posted to a counterparty to a

derivative contract and that has reduced

the Board-regulated institution’s on-

balance sheet assets, unless such cash

collateral is all or part of variation

margin that satisfies the conditions in

paragraphs (c)(2)(iii)(C) through (G) of

this section; and

(2) The variation margin is used to

reduce the current credit exposure of

the derivative contract, calculated as

described in § 217.34(b), and not the

PFE; and

(3) For the purpose of the calculation

of the NGR described in

§ 217.34(b)(2)(ii)(B), variation margin

described in paragraph (c)(2)(iii)(A)(2)

of this section may not reduce the net

current credit exposure or the gross

current credit exposure; or

(B)(1) For a Board-regulated

institution that uses the standardized

approach for counterparty credit risk

under § 217.132(c) for its standardized

risk-weighted assets, the replacement

cost of each derivative contract or single

product netting set of derivative

contracts to which the Board-regulated

institution is a counterparty, calculated

according to the following formula, and,

for any counterparty that is not a

commercial end-user, multiplied by 1.4:

Replacement Cost = max{V¥CVM

r

+

CVM

p

;0}

Where:

V equals the fair value for each derivative

contract or each single-product netting set of

derivative contracts (including a cleared

transaction except as provided in paragraph

(c)(2)(ix) of this section and, at the discretion

of the Board-regulated institution, excluding

a forward agreement treated as a derivative

contract that is part of a repurchase or reverse

repurchase or a securities borrowing or

lending transaction that qualifies for sales

treatment under GAAP);

CVM

r

equals the amount of cash collateral

received from a counterparty to a derivative

contract and that satisfies the conditions in

paragraphs (c)(2)(iii)(C) through (G) of this

section, or, in the case of a client-facing

derivative transaction, the amount of

collateral received from the clearing member

client; and

CVM

p

equals the amount of cash collateral

that is posted to a counterparty to a

derivative contract and that has not offset the

fair value of the derivative contract and that

satisfies the conditions in paragraphs

(c)(2)(iii)(C) through (G) of this section, or, in

the case of a client-facing derivative

transaction, the amount of collateral posted

to the clearing member client;

(2) Notwithstanding paragraph

(c)(2)(iii)(B)(1) of this section, where multiple

netting sets are subject to a single variation

margin agreement, a Board-regulated

institution must apply the formula for

replacement cost provided in

§ 217.132(c)(10)(i), in which the term C

MA

may only include cash collateral that satisfies

the conditions in paragraphs (c)(2)(iii)(C)

through (G) of this section; and

(3) For purposes of paragraph

(c)(2)(iii)(B)(1), a Board-regulated institution

must treat a derivative contract that

references an index as if it were multiple

derivative contracts each referencing one

component of the index if the Board-

regulated institution elected to treat the

derivative contract as multiple derivative

contracts under § 217.132(c)(5)(vi);

(C) For derivative contracts that are not

cleared through a QCCP, the cash collateral

received by the recipient counterparty is not

segregated (by law, regulation, or an

agreement with the counterparty);

(D) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative contract;

(E) The variation margin transferred under

the derivative contract or the governing rules

of the CCP or QCCP for a cleared transaction

is the full amount that is necessary to fully

extinguish the net current credit exposure to

the counterparty of the derivative contracts,

subject to the threshold and minimum

transfer amounts applicable to the

counterparty under the terms of the

derivative contract or the governing rules for

a cleared transaction;

(F) The variation margin is in the form of

cash in the same currency as the currency of

settlement set forth in the derivative contract,

provided that for the purposes of this

paragraph (c)(2)(iii)(F), currency of

settlement means any currency for settlement

specified in the governing qualifying master

netting agreement and the credit support

annex to the qualifying master netting

agreement, or in the governing rules for a

cleared transaction; and

(G) The derivative contract and the

variation margin are governed by a qualifying

master netting agreement between the legal

entities that are the counterparties to the

derivative contract or by the governing rules

for a cleared transaction, and the qualifying

master netting agreement or the governing

rules for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net basis,

taking into account any variation margin

received or provided under the contract if a

credit event involving either counterparty

occurs;

(iv) The effective notional principal

amount (that is, the apparent or stated

notional principal amount multiplied by any

multiplier in the derivative contract) of a

credit derivative, or other similar instrument,

through which the Board-regulated

institution provides credit protection,

provided that:

(A) The Board-regulated institution may

reduce the effective notional principal

amount of the credit derivative by the

amount of any reduction in the mark-to-fair

value of the credit derivative if the reduction

is recognized in common equity tier 1

capital;

(B) The Board-regulated institution may

reduce the effective notional principal

amount of the credit derivative by the

effective notional principal amount of a

purchased credit derivative or other similar

instrument, provided that the remaining

maturity of the purchased credit derivative is

equal to or greater than the remaining

maturity of the credit derivative through

which the Board-regulated institution

provides credit protection and that:

(1) With respect to a credit derivative that

references a single exposure, the reference

exposure of the purchased credit derivative

is to the same legal entity and ranks pari

passu with, or is junior to, the reference

exposure of the credit derivative through

which the Board-regulated institution

provides credit protection; or

(2) With respect to a credit derivative that

references multiple exposures, the reference

exposures of the purchased credit derivative

are to the same legal entities and rank pari

passu with the reference exposures of the

credit derivative through which the Board-

regulated institution provides credit

protection, and the level of seniority of the

purchased credit derivative ranks pari passu

to the level of seniority of the credit

derivative through which the Board-regulated

institution provides credit protection;

(3) Where a Board-regulated institution has

reduced the effective notional amount of a

credit derivative through which the Board-

regulated institution provides credit

protection in accordance with paragraph

(c)(2)(iv)(A) of this section, the Board-

regulated institution must also reduce the

effective notional principal amount of a

purchased credit derivative used to offset the

credit derivative through which the Board-

regulated institution provides credit

protection, by the amount of any increase in

the mark-to-fair value of the purchased credit

derivative that is recognized in common

equity tier 1 capital; and

(4) Where the Board-regulated institution

purchases credit protection through a total

return swap and records the net payments

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received on a credit derivative through which

the Board-regulated institution provides

credit protection in net income, but does not

record offsetting deterioration in the mark-to-

fair value of the credit derivative through

which the Board-regulated institution

provides credit protection in net income

(either through reductions in fair value or by

additions to reserves), the Board-regulated

institution may not use the purchased credit

protection to offset the effective notional

principal amount of the related credit

derivative through which the Board-regulated

institution provides credit protection;

(v) Where a Board-regulated institution

acting as a principal has more than one repo-

style transaction with the same counterparty

and has offset the gross value of receivables

due from a counterparty under reverse

repurchase transactions by the gross value of

payables under repurchase transactions due

to the same counterparty, the gross value of

receivables associated with the repo-style

transactions less any on-balance sheet

receivables amount associated with these

repo-style transactions included under

paragraph (c)(2)(i) of this section, unless the

following criteria are met:

(A) The offsetting transactions have the

same explicit final settlement date under

their governing agreements;

(B) The right to offset the amount owed to

the counterparty with the amount owed by

the counterparty is legally enforceable in the

normal course of business and in the event

of receivership, insolvency, liquidation, or

similar proceeding; and

(C) Under the governing agreements, the

counterparties intend to settle net, settle

simultaneously, or settle according to a

process that is the functional equivalent of

net settlement, (that is, the cash flows of the

transactions are equivalent, in effect, to a

single net amount on the settlement date),

where both transactions are settled through

the same settlement system, the settlement

arrangements are supported by cash or

intraday credit facilities intended to ensure

that settlement of both transactions will

occur by the end of the business day, and the

settlement of the underlying securities does

not interfere with the net cash settlement;

(vi) The counterparty credit risk of a repo-

style transaction, including where the Board-

regulated institution acts as an agent for a

repo-style transaction and indemnifies the

customer with respect to the performance of

the customer’s counterparty in an amount

limited to the difference between the fair

value of the security or cash its customer has

lent and the fair value of the collateral the

borrower has provided, calculated as follows:

(A) If the transaction is not subject to a

qualifying master netting agreement, the

counterparty credit risk (E*) for transactions

with a counterparty must be calculated on a

transaction by transaction basis, such that

each transaction i is treated as its own netting

set, in accordance with the following

formula, where E

i

is the fair value of the

instruments, gold, or cash that the Board-

regulated institution has lent, sold subject to

repurchase, or provided as collateral to the

counterparty, and C

i

is the fair value of the

instruments, gold, or cash that the Board-

regulated institution has borrowed,

purchased subject to resale, or received as

collateral from the counterparty:

E

i

* = max {0, [E

i

¥ C

i

]}; and

(B) If the transaction is subject to a

qualifying master netting agreement, the

counterparty credit risk (E*) must be

calculated as the greater of zero and the total

fair value of the instruments, gold, or cash

that the Board-regulated institution has lent,

sold subject to repurchase or provided as

collateral to a counterparty for all

transactions included in the qualifying

master netting agreement (SE

i

), less the total

fair value of the instruments, gold, or cash

that the Board-regulated institution

borrowed, purchased subject to resale or

received as collateral from the counterparty

for those transactions (SC

i

), in accordance

with the following formula:

E* = max {0, [SE

i

¥ SC

i

]}

(vii) If a Board-regulated institution acting

as an agent for a repo-style transaction

provides a guarantee to a customer of the

security or cash its customer has lent or

borrowed with respect to the performance of

the customer’s counterparty and the

guarantee is not limited to the difference

between the fair value of the security or cash

its customer has lent and the fair value of the

collateral the borrower has provided, the

amount of the guarantee that is greater than

the difference between the fair value of the

security or cash its customer has lent and the

value of the collateral the borrower has

provided;

(viii) The credit equivalent amount of all

off-balance sheet exposures of the Board-

regulated institution, excluding repo-style

transactions, repurchase or reverse

repurchase or securities borrowing or lending

transactions that qualify for sales treatment

under GAAP, and derivative transactions,

determined using the applicable credit

conversion factor under § 217.33(b),

provided, however, that the minimum credit

conversion factor that may be assigned to an

off-balance sheet exposure under this

paragraph is 10 percent; and

(ix) For a Board-regulated institution that

is a clearing member:

(A) A clearing member Board-regulated

institution that guarantees the performance of

a clearing member client with respect to a

cleared transaction must treat its exposure to

the clearing member client as a derivative

contract for purposes of determining its total

leverage exposure;

(B) A clearing member Board-regulated

institution that guarantees the performance of

a CCP with respect to a transaction cleared

on behalf of a clearing member client must

treat its exposure to the CCP as a derivative

contract for purposes of determining its total

leverage exposure;

(C) A clearing member Board-regulated

institution that does not guarantee the

performance of a CCP with respect to a

transaction cleared on behalf of a clearing

member client may exclude its exposure to

the CCP for purposes of determining its total

leverage exposure;

(D) A Board-regulated institution that is a

clearing member may exclude from its total

leverage exposure the effective notional

principal amount of credit protection sold

through a credit derivative contract, or other

similar instrument, that it clears on behalf of

a clearing member client through a CCP as

calculated in accordance with paragraph

(c)(2)(iv) of this section; and

(E) Notwithstanding paragraphs

(c)(2)(ix)(A) through (C) of this section, a

Board-regulated institution may exclude from

its total leverage exposure a clearing

member’s exposure to a clearing member

client for a derivative contract, if the clearing

member client and the clearing member are

affiliates and consolidated for financial

reporting purposes on the Board-regulated

institution’s balance sheet.

(x) A custodial banking organization shall

exclude from its total leverage exposure the

lesser of:

(A) The amount of funds that the custodial

banking organization has on deposit at a

qualifying central bank; and

(B) The amount of funds in deposit

accounts at the custodial banking

organization that are linked to fiduciary or

custodial and safekeeping accounts at the

custodial banking organization. For purposes

of this paragraph (c)(2)(x), a deposit account

is linked to a fiduciary or custodial and

safekeeping account if the deposit account is

provided to a client that maintains a

fiduciary or custodial and safekeeping

account with the custodial banking

organization, and the deposit account is used

to facilitate the administration of the

fiduciary or custodial and safekeeping

account.

(d) Advanced approaches capital ratio

calculations. An advanced approaches

Board-regulated institution that has

completed the parallel run process and

received notification from the Board

pursuant to § 217.121(d) must determine its

regulatory capital ratios as described in

paragraphs (d)(1) through (3) of this section.

(1) Common equity tier 1 capital ratio. The

Board-regulated institution’s common equity

tier 1 capital ratio is the lower of:

(i) The ratio of the Board-regulated

institution’s common equity tier 1 capital to

standardized total risk-weighted assets; and

(ii) The ratio of the Board-regulated

institution’s common equity tier 1 capital to

advanced approaches total risk-weighted

assets.

(2) Tier 1 capital ratio. The Board-

regulated institution’s tier 1 capital ratio is

the lower of:

(i) The ratio of the Board-regulated

institution’s tier 1 capital to standardized

total risk-weighted assets; and

(ii) The ratio of the Board-regulated

institution’s tier 1 capital to advanced

approaches total risk-weighted assets.

(3) Total capital ratio. The Board-regulated

institution’s total capital ratio is the lower of:

(i) The ratio of the Board-regulated

institution’s total capital to standardized total

risk-weighted assets; and

(ii) The ratio of the Board-regulated

institution’s advanced-approaches-adjusted

total capital to advanced approaches total

risk-weighted assets. A Board-regulated

institution’s advanced-approaches-adjusted

total capital is the Board-regulated

institution’s total capital after being adjusted

as follows:

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(A) An advanced approaches Board-

regulated institution must deduct from its

total capital any allowance for loan and lease

losses or adjusted allowance for credit losses,

as applicable, included in its tier 2 capital in

accordance with § 217.20(d)(3); and

(B) An advanced approaches Board-

regulated institution must add to its total

capital any eligible credit reserves that

exceed the Board-regulated institution’s total

expected credit losses to the extent that the

excess reserve amount does not exceed 0.6

percent of the Board-regulated institution’s

credit risk-weighted assets.

* * * * *

■11. In § 217.22, revise paragraphs (c),

(f) and (h) to read as follows:

§ 217.22 Regulatory capital adjustments

and deductions.

* * * * *

(c) Deductions from regulatory capital

related to investments in capital

instruments or covered debt

instruments

23

—(1) Investment in the

Board-regulated institution’s own

capital or covered debt instruments. A

Board-regulated institution must deduct

an investment in the Board-regulated

institution’s own capital instruments,

and an advanced approaches Board-

regulated institution also must deduct

an investment in the Board-regulated

institution’s own covered debt

instruments, as follows:

23

The Board-regulated institution must

calculate amounts deducted under

paragraphs (c) through (f) of this section after

it calculates the amount of ALLL or AACL,

as applicable, includable in tier 2 capital

under § 217.20(d)(3).

(i) A Board-regulated institution must

deduct an investment in the Board-

regulated institution’s own common

stock instruments from its common

equity tier 1 capital elements to the

extent such instruments are not

excluded from regulatory capital under

§ 217.20(b)(1);

(ii) A Board-regulated institution must

deduct an investment in the Board-

regulated institution’s own additional

tier 1 capital instruments from its

additional tier 1 capital elements;

(iii) A Board-regulated institution

must deduct an investment in the

Board-regulated institution’s own tier 2

capital instruments from its tier 2

capital elements; and

(iv) An advanced approaches Board-

regulated institution must deduct an

investment in the institution’s own

covered debt instruments from its tier 2

capital elements, as applicable. If the

advanced approaches Board-regulated

institution does not have a sufficient

amount of tier 2 capital to effect this

deduction, the institution must deduct

the shortfall amount from the next

higher (that is, more subordinated)

component of regulatory capital.

(2) Corresponding deduction

approach. For purposes of subpart C of

this part, the corresponding deduction

approach is the methodology used for

the deductions from regulatory capital

related to reciprocal cross holdings (as

described in paragraph (c)(3) of this

section), investments in the capital of

unconsolidated financial institutions for

a Board-regulated institution that is not

an advanced approaches Board-

regulated institution (as described in

paragraph (c)(4) of this section), non-

significant investments in the capital of

unconsolidated financial institutions for

an advanced approaches Board-

regulated institution (as described in

paragraph (c)(5) of this section), and

non-common stock significant

investments in the capital of

unconsolidated financial institutions for

an advanced approaches Board-

regulated institution (as described in

paragraph (c)(6) of this section). Under

the corresponding deduction approach,

a Board-regulated institution must make

deductions from the component of

capital for which the underlying

instrument would qualify if it were

issued by the Board-regulated

institution itself, as described in

paragraphs (c)(2)(i) through (iii) of this

section. If the Board-regulated

institution does not have a sufficient

amount of a specific component of

capital to effect the required deduction,

the shortfall must be deducted

according to paragraph (f) of this

section.

(i) If an investment is in the form of

an instrument issued by a financial

institution that is not a regulated

financial institution, the Board-

regulated institution must treat the

instrument as:

(A) A common equity tier 1 capital

instrument if it is common stock or

represents the most subordinated claim

in a liquidation of the financial

institution; and

(B) An additional tier 1 capital

instrument if it is subordinated to all

creditors of the financial institution and

is senior in liquidation only to common

shareholders.

(ii) If an investment is in the form of

an instrument issued by a regulated

financial institution and the instrument

does not meet the criteria for common

equity tier 1, additional tier 1 or tier 2

capital instruments under § 217.20, the

Board-regulated institution must treat

the instrument as:

(A) A common equity tier 1 capital

instrument if it is common stock

included in GAAP equity or represents

the most subordinated claim in

liquidation of the financial institution;

(B) An additional tier 1 capital

instrument if it is included in GAAP

equity, subordinated to all creditors of

the financial institution, and senior in a

receivership, insolvency, liquidation, or

similar proceeding only to common

shareholders;

(C) A tier 2 capital instrument if it is

not included in GAAP equity but

considered regulatory capital by the

primary supervisor of the financial

institution; and

(D) For an advanced approaches

Board-regulated institution, a tier 2

capital instrument if it is a covered debt

instrument.

(iii) If an investment is in the form of

a non-qualifying capital instrument (as

defined in § 217.300(c)), the Board-

regulated institution must treat the

instrument as:

(A) An additional tier 1 capital

instrument if such instrument was

included in the issuer’s tier 1 capital

prior to May 19, 2010; or

(B) A tier 2 capital instrument if such

instrument was included in the issuer’s

tier 2 capital (but not includable in tier

1 capital) prior to May 19, 2010.

(3) Reciprocal cross holdings in the

capital of financial institutions. (i) A

Board-regulated institution must deduct

an investment in the capital of other

financial institutions that it holds

reciprocally, where such reciprocal

cross holdings result from a formal or

informal arrangement to swap,

exchange, or otherwise intend to hold

each other’s capital instruments, by

applying the corresponding deduction

approach in paragraph (c)(2) of this

section.

(ii) An advanced approaches Board-

regulated institution must deduct an

investment in any covered debt

instrument that the institution holds

reciprocally with another financial

institution, where such reciprocal cross

holdings result from a formal or

informal arrangement to swap,

exchange, or otherwise intend to hold

each other’s capital or covered debt

instruments, by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

(4) Investments in the capital of

unconsolidated financial institutions. A

Board-regulated institution that is not

an advanced approaches Board-

regulated institution must deduct its

investments in the capital of

unconsolidated financial institutions (as

defined in § 217.2) that exceed 25

percent of the sum of the Board-

regulated institution’s common equity

tier 1 capital elements minus all

deductions from and adjustments to

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common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

24

The

deductions described in this section are

net of associated DTLs in accordance

with paragraph (e) of this section. In

addition, with the prior written

approval of the Board, a Board-regulated

institution that underwrites a failed

underwriting, for the period of time

stipulated by the Board, is not required

to deduct an investment in the capital

of an unconsolidated financial

institution pursuant to this paragraph

(c) to the extent the investment is

related to the failed underwriting.

25

24

With the prior written approval of the

Board, for the period of time stipulated by

the Board, a Board-regulated institution that

is not an advanced approaches Board-

regulated institution is not required to deduct

an investment in the capital of an

unconsolidated financial institution pursuant

to this paragraph if the financial institution

is in distress and if such investment is made

for the purpose of providing financial

support to the financial institution, as

determined by the Board.

25

Any investments in the capital of

unconsolidated financial institutions that do

not exceed the 25 percent threshold for

investments in the capital of unconsolidated

financial institutions under this section must

be assigned the appropriate risk weight under

subparts D or F of this part, as applicable.

(5) Non-significant investments in the

capital of unconsolidated financial

institutions. (i) An advanced approaches

Board-regulated institution must deduct

its non-significant investments in the

capital of unconsolidated financial

institutions (as defined in § 217.2) that,

in the aggregate and together with any

investment in a covered debt instrument

(as defined in § 217.2) issued by a

financial institution in which the Board-

regulated institution does not have a

significant investment in the capital of

the unconsolidated financial institution

(as defined in § 217.2), exceeds 10

percent of the sum of the advanced

approaches Board-regulated institution’s

common equity tier 1 capital elements

minus all deductions from and

adjustments to common equity tier 1

capital elements required under

paragraphs (a) through (c)(3) of this

section (the 10 percent threshold for

non-significant investments) by

applying the corresponding deduction

approach in paragraph (c)(2) of this

section.

26

The deductions described in

this paragraph are net of associated

DTLs in accordance with paragraph (e)

of this section. In addition, with the

prior written approval of the Board, an

advanced approaches Board-regulated

institution that underwrites a failed

underwriting, for the period of time

stipulated by the Board, is not required

to deduct from capital a non-significant

investment in the capital of an

unconsolidated financial institution or

an investment in a covered debt

instrument pursuant to this paragraph

(c)(5) to the extent the investment is

related to the failed underwriting.

27

For

any calculation under this paragraph

(c)(5)(i), an advanced approaches Board-

regulated institution may exclude the

amount of an investment in a covered

debt instrument under paragraph

(c)(5)(iii) or (iv) of this section, as

applicable.

26

With the prior written approval of the

Board, for the period of time stipulated by

the Board, an advanced approaches Board-

regulated institution is not required to deduct

a non-significant investment in the capital of

an unconsolidated financial institution or an

investment in a covered debt instrument

pursuant to this paragraph if the financial

institution is in distress and if such

investment is made for the purpose of

providing financial support to the financial

institution, as determined by the Board.

27

Any non-significant investment in the

capital of an unconsolidated financial

institution or any investment in a covered

debt instrument that is not required to be

deducted under this paragraph (c)(5) or

otherwise under this section must be

assigned the appropriate risk weight under

subparts D, E, or F of this part, as applicable.

(ii) For an advanced approaches

Board-regulated institution, the amount

to be deducted under this paragraph

(c)(5) from a specific capital component

is equal to:

(A) The advanced approaches Board-

regulated institution’s aggregate non-

significant investments in the capital of

an unconsolidated financial institution

and, if applicable, any investments in a

covered debt instrument subject to

deduction under this paragraph (c)(5),

exceeding the 10 percent threshold for

non-significant investments, multiplied

by

(B) The ratio of the advanced

approaches Board-regulated institution’s

aggregate non-significant investments in

the capital of an unconsolidated

financial institution (in the form of such

capital component) to the advanced

approaches Board-regulated institution’s

total non-significant investments in

unconsolidated financial institutions,

with an investment in a covered debt

instrument being treated as tier 2 capital

for this purpose.

(iii) For purposes of applying the

deduction under paragraph (c)(5)(i) of

this section, an advanced approaches

Board-regulated institution that is not a

global systemically important BHC or a

subsidiary of a global systemically

important banking organization, as

defined in 12 CFR 252.2, may exclude

from the deduction the amount of the

Board-regulated institution’s gross long

position, in accordance with

§ 217.22(h)(2), in investments in

covered debt instruments issued by

financial institutions in which the

Board-regulated institution does not

have a significant investment in the

capital of the unconsolidated financial

institutions up to an amount equal to 5

percent of the sum of the Board-

regulated institution’s common equity

tier 1 capital elements minus all

deductions from and adjustments to

common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section, net of associated

DTLs in accordance with paragraph (e)

of this section.

(iv) Prior to applying the deduction

under paragraph (c)(5)(i) of this section:

(A) A global systemically important

BHC or a Board-regulated institution

that is a subsidiary of a global

systemically important BHC may

designate any investment in a covered

debt instrument as an excluded covered

debt instrument, as defined in § 217.2.

(B) A global systemically important

BHC or a Board-regulated institution

that is a subsidiary of a global

systemically important BHC must

deduct, according to the corresponding

deduction approach in paragraph (c)(2)

of this section, its gross long position,

calculated in accordance with paragraph

(h)(2) of this section, in a covered debt

instrument that was originally

designated as an excluded covered debt

instrument, in accordance with

paragraph (c)(5)(iv)(A) of this section,

but no longer qualifies as an excluded

covered debt instrument.

(C) A global systemically important

BHC or a Board-regulated institution

that is a subsidiary of a global

systemically important BHC must

deduct according to the corresponding

deduction approach in paragraph (c)(2)

of this section the amount of its gross

long position, calculated in accordance

with paragraph (h)(2) of this section, in

a direct or indirect investment in a

covered debt instrument that was

originally designated as an excluded

covered debt instrument, in accordance

with paragraph (c)(5)(iv)(A) of this

section, and has been held for more than

thirty business days.

(D) A global systemically important

BHC or a Board-regulated institution

that is a subsidiary of a global

systemically important BHC must

deduct according to the corresponding

deduction approach in paragraph (c)(2)

of this section its gross long position,

calculated in accordance with paragraph

(h)(2) of this section, of its aggregate

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position in excluded covered debt

instruments that exceeds 5 percent of

the sum of the Board-regulated

institution’s common equity tier 1

capital elements minus all deductions

from and adjustments to common equity

tier 1 capital elements required under

paragraphs (a) through (c)(3) of this

section, net of associated DTLs in

accordance with paragraph (e) of this

section.

(6) Significant investments in the

capital of unconsolidated financial

institutions that are not in the form of

common stock. If an advanced

approaches Board-regulated institution

has a significant investment in the

capital of an unconsolidated financial

institution, the advanced approaches

Board-regulated institution must deduct

from capital any such investment issued

by the unconsolidated financial

institution that is held by the Board-

regulated institution other than an

investment in the form of common

stock, as well as any investment in a

covered debt instrument issued by the

unconsolidated financial institution, by

applying the corresponding deduction

approach in paragraph (c)(2) of this

section.

28

The deductions described in

this section are net of associated DTLs

in accordance with paragraph (e) of this

section. In addition, with the prior

written approval of the Board, for the

period of time stipulated by the Board,

an advanced approaches Board-

regulated institution that underwrites a

failed underwriting is not required to

deduct the significant investment in the

capital of an unconsolidated financial

institution or an investment in a

covered debt instrument pursuant to

this paragraph (c)(6) if such investment

is related to such failed underwriting.

28

With prior written approval of the Board,

for the period of time stipulated by the

Board, an advanced approaches Board-

regulated institution is not required to deduct

a significant investment in the capital of an

unconsolidated financial institution,

including an investment in a covered debt

instrument, under this paragraph (c)(6) or

otherwise under this section if such

investment is made for the purpose of

providing financial support to the financial

institution as determined by the Board.

* * * * *

(f) Insufficient amounts of a specific

regulatory capital component to effect

deductions. Under the corresponding

deduction approach, if a Board-

regulated institution does not have a

sufficient amount of a specific

component of capital to effect the full

amount of any deduction from capital

required under paragraph (d) of this

section, the Board-regulated institution

must deduct the shortfall amount from

the next higher (that is, more

subordinated) component of regulatory

capital. Any investment by an advanced

approaches Board-regulated institution

in a covered debt instrument must be

treated as an investment in the tier 2

capital for purposes of this paragraph

(f). Notwithstanding any other provision

of this section, a qualifying community

banking organization (as defined in

§ 217.12) that has elected to use the

community bank leverage ratio

framework pursuant to § 217.12 is not

required to deduct any shortfall of tier

2 capital from its additional tier 1

capital or common equity tier 1 capital.

* * * * *

(h) Net long position—(1) In general.

For purposes of calculating the amount

of a Board-regulated institution’s

investment in the Board regulated

institution’s own capital instrument,

investment in the capital of an

unconsolidated financial institution,

and investment in a covered debt

instrument under this section, the

institution’s net long position is the

gross long position in the underlying

instrument determined in accordance

with paragraph (h)(2) of this section, as

adjusted to recognize any short position

by the Board-regulated institution in the

same instrument subject to paragraph

(h)(3) of this section.

(2) Gross long position. A gross long

position is determined as follows:

(i) For an equity exposure that is held

directly by the Board-regulated

institution, the adjusted carrying value

of the exposure as that term is defined

in § 217.51(b);

(ii) For an exposure that is held

directly and that is not an equity

exposure or a securitization exposure,

the exposure amount as that term is

defined in § 217.2;

(iii) For each indirect exposure, the

Board-regulated institution’s carrying

value of its investment in an investment

fund or, alternatively:

(A) A Board-regulated institution

may, with the prior approval of the

Board, use a conservative estimate of the

amount of its indirect investment in the

Board-regulated institution’s own

capital instruments, its indirect

investment in the capital of an

unconsolidated financial institution, or

its indirect investment in a covered debt

instrument held through a position in

an index, as applicable; or

(B) A Board-regulated institution may

calculate the gross long position for an

indirect exposure to the Board-regulated

institution’s own capital instruments,

the capital of an unconsolidated

financial institution, or a covered debt

instrument by multiplying the Board-

regulated institution’s carrying value of

its investment in the investment fund by

either:

(1) The highest stated investment

limit (in percent) for an investment in

the Board-regulated institution’s own

capital instruments, an investment in

the capital of an unconsolidated

financial institution, or an investment in

a covered debt instrument, as

applicable, as stated in the prospectus,

partnership agreement, or similar

contract defining permissible

investments of the investment fund; or

(2) The investment fund’s actual

holdings (in percent) of the investment

in the Board-regulated institution’s own

capital instruments, investment in the

capital of an unconsolidated financial

institution, or investment in a covered

debt instrument, as applicable; and

(iv) For a synthetic exposure, the

amount of the Board-regulated

institution’s loss on the exposure if the

reference capital or covered debt

instrument were to have a value of zero.

(3) Adjustments to reflect a short

position. In order to adjust the gross

long position to recognize a short

position in the same instrument under

paragraph (h)(1) of this section, the

following criteria must be met:

(i) The maturity of the short position

must match the maturity of the long

position, or the short position must have

a residual maturity of at least one year

(maturity requirement); or

(ii) For a position that is a trading

asset or trading liability (whether on- or

off-balance sheet) as reported on the

Board-regulated institution’s Call

Report, for a state member bank, or FR

Y–9C, for a bank holding company,

savings and loan holding company, or

intermediate holding company, as

applicable, if the Board-regulated

institution has a contractual right or

obligation to sell the long position at a

specific point in time and the

counterparty to the contract has an

obligation to purchase the long position

if the Board-regulated institution

exercises its right to sell, this point in

time may be treated as the maturity of

the long position such that the maturity

of the long position and short position

are deemed to match for purposes of the

maturity requirement, even if the

maturity of the short position is less

than one year; and

(iii) For an investment in a Board-

regulated institution’s own capital

instrument under paragraph (c)(1) of

this section, an investment in the capital

of an unconsolidated financial

institution under paragraphs (c)(4)

through (6) and (d) of this section (as

applicable), and an investment in a

covered debt instrument under

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paragraphs (c)(1), (5), and (6) of this

section:

(A) The Board-regulated institution

may only net a short position against a

long position in an investment in the

Board-regulated institution’s own

capital instrument or own covered debt

instrument under paragraph (c)(1) of

this section if the short position

involves no counterparty credit risk;

(B) A gross long position in an

investment in the Board-regulated

institution’s own capital instrument, an

investment in the capital of an

unconsolidated financial institution, or

an investment in a covered debt

instrument due to a position in an index

may be netted against a short position

in the same index;

(C) Long and short positions in the

same index without maturity dates are

considered to have matching maturities;

and

(D) A short position in an index that

is hedging a long cash or synthetic

position in an investment in the Board-

regulated institution’s own capital

instrument, an investment in the capital

instrument of an unconsolidated

financial institution, or an investment in

a covered debt instrument can be

decomposed to provide recognition of

the hedge. More specifically, the portion

of the index that is composed of the

same underlying instrument that is

being hedged may be used to offset the

long position if both the long position

being hedged and the short position in

the index are reported as a trading asset

or trading liability (whether on- or off-

balance sheet) on the Board-regulated

institution’s Call Report, for a state

member bank, or FR Y–9C, for a bank

holding company, savings and loan

holding company, or intermediate

holding company, as applicable, and the

hedge is deemed effective by the Board-

regulated institution’s internal control

processes, which have not been found to

be inadequate by the Board.

§ 217.121 [Amended]

■12. Section 217.121 is amended by

removing ‘‘§ 217.10(c)(1) through (3)’’

and adding ‘‘§ 217.10(d)(1) through (3)’’

in paragraph (c).

§ 217.132 [Amended]

■13. Section 217.132 is amended by

removing ‘‘§ 217.10(c)(4)(ii)(B)(2)’’ and

adding ‘‘§ 217.10(c)(2)(ii)(B)’’ in

paragraphs (c)(7)(iii) and (iv).

§ 217.303 [Amended]

■14. Section 217.303 is amended by:

■a. Removing ‘‘§ 217.10(c)(4)’’ and

adding in its place ‘‘§ 217.10(c)’’ in

paragraph (a); and

■b. Removing ‘‘§ 217.10(c)(4)(ii)(J)(1)’’

and adding in its place

‘‘§ 217.10(c)(2)(x)(A)’’ in paragraph (e).

PART 252—ENHANCED PRUDENTIAL

STANDARDS (REGULATION YY)

■15. The authority citation for part 252

continues to read as follows:

Authority: 12 U.S.C. 321–338a, 481–486,

1467a, 1818, 1828, 1831n, 1831o, 1831p–l,

1831w, 1835, 1844(b), 1844(c), 3101 et seq.,

3101 note, 3904, 3906–3909, 4808, 5361,

5362, 5365, 5366, 5367, 5368, 5371.

Subpart G—External Long-Term Debt

Requirement, External Total Loss-

Absorbing Capacity Requirement and

Buffer, and Restrictions on Corporate

Practices for U.S. Global Systemically

Important Banking Organizations

■16. In § 252.61, remove the definition

of ‘‘External TLAC buffer’’ and add a

definition for ‘‘External TLAC risk-

weighted buffer’’ in alphabetical order.

The addition reads as follows:

§ 252.61 Definitions.

* * * * *

External TLAC risk-weighted buffer

means, with respect to a global

systemically important BHC, the sum of

2.5 percent, any applicable

countercyclical capital buffer under 12

CFR 217.11(b) (expressed as a

percentage), and the global systemically

important BHC’s method 1 capital

surcharge.

* * * * *

■17. In § 252.63, revise paragraphs

(c)(3)(i)(C) and (c)(5)(iii)(A)(2) to read as

follows:

§ 252.63 External total loss-absorbing

capacity requirement and buffer.

* * * * *

(c) * * *

(3) * * *

(i) * * *

(C) The ratio (expressed as a

percentage) of the global systemically

important BHC’s outstanding eligible

external long-term debt amount plus 50

percent of the amount of unpaid

principal of outstanding eligible debt

securities issued by the global

systemically important BHC due to be

paid in, as calculated in § 252.62(b)(2),

greater than or equal to 365 days (one

year) but less than 730 days (two years)

to total risk-weighted assets.

* * * * *

(5) * * *

(iii) * * *

(A) * * *

(2) The ratio (expressed as a

percentage) of the global systemically

important BHC’s outstanding eligible

external long-term debt amount plus 50

percent of the amount of unpaid

principal of outstanding eligible debt

securities issued by the global

systemically important BHC due to be

paid in in, as calculated in

§ 252.62(b)(2), greater than or equal to

365 days (one year) but less than 730

days (two years) to total leverage

exposure.

* * * * *

Subpart P—Covered IHC Long-Term

Debt Requirement, Covered IHC Total

Loss-Absorbing Capacity Requirement

and Buffer, and Restrictions on

Corporate Practices for Intermediate

Holding Companies of Global

Systemically Important Foreign

Banking Organizations

■18. In § 252.160, revise paragraph

(b)(2) to read as follows:

§ 252.160 Applicability.

* * * * *

(b) * * *

(2) 1095 days (three years) after the

later of the date on which:

(i) The U.S. non-branch assets of the

global systemically important foreign

banking organization that controls the

Covered IHC equaled or exceeded $50

billion; and

(ii) The foreign banking organization

that controls the Covered IHC became a

global systemically important foreign

banking organization.

* * * * *

■19. In § 252.162, revise paragraph

(b)(1) to read as follows:

§ 252.162 Covered IHC long-term debt

requirement.

* * * * *

(b) * * *

(1) A Covered IHC’s outstanding

eligible Covered IHC long-term debt

amount is the sum of:

(i) One hundred (100) percent of the

amount due to be paid of unpaid

principal of the outstanding eligible

Covered IHC debt securities issued by

the Covered IHC in greater than or equal

to 730 days (two years); and

(ii) Fifty (50) percent of the amount

due to be paid of unpaid principal of the

outstanding eligible Covered IHC debt

securities issued by the Covered IHC in

greater than or equal to 365 days (one

year) and less than 730 days (two years);

and

(iii) Zero (0) percent of the amount

due to be paid of unpaid principal of the

outstanding eligible Covered IHC debt

securities issued by the Covered IHC in

less than 365 days (one year).

* * * * *

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■20. In § 252.165, revise paragraph

(d)(3)(i)(C) to read as follows:

§ 252.165 Covered IHC total loss-

absorbing capacity requirement and buffer.

* * * * *

(d) * * *

(3) * * *

(i) * * *

(C) The ratio (expressed as a

percentage) of the Covered IHC’s

outstanding eligible Covered IHC long-

term debt amount plus 50 percent of the

amount of unpaid principal of

outstanding eligible Covered IHC debt

securities issued by the Covered IHC

due to be paid in, as calculated in

§ 252.162(b)(2), greater than or equal to

365 days (one year) but less than 730

days (two years) to total risk-weighted

assets.

* * * * *

12 CFR Part 324

FEDERAL DEPOSIT INSURANCE

CORPORATION

For the reasons set out in the joint

preamble, the FDIC amends 12 CFR part

324 as follows.

PART 324—CAPITAL ADEQUACY OF

FDIC–SUPERVISED INSTITUTIONS

■21. The authority citation for part 324

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; 5371; 5412; 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);

Pub. L. 111–203, 124 Stat. 1376, 1887 (15

U.S.C. 78o–7 note), Pub. L. 115–174; section

4014, Pub. L. 116–136, 134 Stat. 281 (15

U.S.C. 9052).

■22. In § 324.2:

■a. Add in alphabetical order

definitions for ‘‘Covered debt

instrument’’ and ‘‘Excluded covered

debt instrument’’;

■b. Revise the definitions of ‘‘Fiduciary

or custodial and safekeeping account’’

and ‘‘Indirect exposure’’;

■c. Add in alphabetical order and

definition for ‘‘Investment in a covered

debt instrument’’; and

■d. Revise the definitions of ‘‘Synthetic

exposure’’ and ‘‘Total leverage

exposure’’.

The additions and revisions read as

follows:

§ 324.2 Definitions.

* * * * *

Covered debt instrument means an

unsecured debt instrument that is:

(1) Issued by a global systemically

important BHC, as defined in 12 CFR

217.2, and that is an eligible debt

security, as defined in 12 CFR 252.61,

or that is pari passu or subordinated to

any eligible debt security issued by the

global systemically important BHC; or

(2) Issued by a Covered IHC, as

defined in 12 CFR 252.161, and that is

an eligible Covered IHC debt security, as

defined in 12 CFR 252.161, or that is

pari passu or subordinated to any

eligible Covered IHC debt security

issued by the Covered IHC; or

(3) Issued by a global systemically

important banking organization, as

defined in 12 CFR 252.2 other than a

global systemically important BHC, as

defined in 12 CFR 217.2; or issued by

a subsidiary of a global systemically

important banking organization that is

not a global systemically important

BHC, other than a Covered IHC, as

defined in 12 CFR 252.161; and where,

(i) The instrument is eligible for use

to comply with an applicable law or

regulation requiring the issuance of a

minimum amount of instruments to

absorb losses or recapitalize the issuer

or any of its subsidiaries in connection

with a resolution, receivership,

insolvency, or similar proceeding of the

issuer or any of its subsidiaries; or

(ii) The instrument is pari passu or

subordinated to any instrument

described in paragraph (3)(i) of this

definition; for purposes of this

paragraph (3)(ii) of this definition, if the

issuer may be subject to a special

resolution regime, in its jurisdiction of

incorporation or organization, that

addresses the failure or potential failure

of a financial company and any

instrument described in paragraph (3)(i)

of this definition is eligible under that

special resolution regime to be written

down or converted into equity or any

other capital instrument, then an

instrument is pari passu or

subordinated to any instrument

described in paragraph (3)(i) of this

definition if that instrument is eligible

under that special resolution regime to

be written down or converted into

equity or any other capital instrument

ahead of or proportionally with any

instrument described in paragraph (3)(i)

of this definition; and

(4) Provided that, for purposes of this

definition, covered debt instrument does

not include a debt instrument that

qualifies as tier 2 capital pursuant to 12

CFR 324.20(d) or that is otherwise

treated as regulatory capital by the

primary supervisor of the issuer.

* * * * *

Excluded covered debt instrument

means an investment in a covered debt

instrument held by an FDIC-supervised

institution that is a subsidiary of a

global systemically important BHC, as

defined in 12 CFR 252.2, that:

(1) Is held in connection with market

making-related activities permitted

under 12 CFR 351.4, provided that a

direct exposure or an indirect exposure

to a covered debt instrument is held for

30 business days or less; and

(2) Has been designated as an

excluded covered debt instrument by

the FDIC-supervised institution that is a

subsidiary of a global systemically

important BHC, as defined in 12 CFR

252.2, pursuant to 12 CFR

324.22(c)(5)(iv)(A).

* * * * *

Fiduciary or custodial and

safekeeping account means, for

purposes of § 324.10(c)(2)(x), an account

administered by a custody bank for

which the custody bank provides

fiduciary or custodial and safekeeping

services, as authorized by applicable

Federal or state law.

* * * * *

Indirect exposure means an exposure

that arises from the FDIC-supervised

institution’s investment in an

investment fund which holds an

investment in the FDIC-supervised

institution’s own capital instrument or

an investment in the capital of an

unconsolidated financial institution. For

an advanced approaches FDIC-

supervised institution, indirect

exposure also includes an investment in

an investment fund that holds a covered

debt instrument.

* * * * *

Investment in a covered debt

instrument means an FDIC-supervised

institution’s net long position calculated

in accordance with § 324.22(h) in a

covered debt instrument, including

direct, indirect, and synthetic exposures

to the debt instrument, excluding any

underwriting positions held by the

FDIC-supervised institution for five or

fewer business days.

* * * * *

Synthetic exposure means an

exposure whose value is linked to the

value of an investment in the FDIC-

supervised institution’s own capital

instrument or to the value of an

investment in the capital of an

unconsolidated financial institution. For

an advanced approaches FDIC-

supervised institution, synthetic

exposure includes an exposure whose

value is linked to the value of an

investment in a covered debt

instrument.

* * * * *

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Total leverage exposure is defined in

§ 324.10(c)(2).

* * * * *

■23. Section 324.10 is amended by:

■a. Revising paragraph (c);

■b. Redesignating paragraph (d) as (e);

and

■c. Adding new paragraph (d).

The revision and addition read as

follows:

§ 324.10 Minimum capital requirements.

* * * * *

(c) Supplementary leverage ratio. (1)

A Category III FDIC-supervised

institution or advanced approaches

FDIC-supervised institution must

determine its supplementary leverage

ratio in accordance with this paragraph,

beginning with the calendar quarter

immediately following the quarter in

which the FDIC-supervised institution

is identified as a Category III FDIC-

supervised institution. An advanced

approaches FDIC-supervised

institution’s or a Category III FDIC-

supervised institution’s supplementary

leverage ratio is the ratio of its tier 1

capital to total leverage exposure, the

latter of which is calculated as the sum

of:

(i) The mean of the on-balance sheet

assets calculated as of each day of the

reporting quarter; and

(ii) The mean of the off-balance sheet

exposures calculated as of the last day

of each of the most recent three months,

minus the applicable deductions under

§ 324.22(a), (c), and (d).

(2) For purposes of this part, total

leverage exposure means the sum of the

items described in paragraphs (c)(2)(i)

through (viii) of this section, as adjusted

pursuant to paragraph (c)(2)(ix) of this

section for a clearing member FDIC-

supervised institution and paragraph

(c)(2)(x) of this section for a custody

bank:

(i) The balance sheet carrying value of

all of the FDIC-supervised institution’s

on-balance sheet assets, plus the value

of securities sold under a repurchase

transaction or a securities lending

transaction that qualifies for sales

treatment under GAAP, less amounts

deducted from tier 1 capital under

§ 324.22(a), (c), and (d), and less the

value of securities received in security-

for-security repo-style transactions,

where the FDIC-supervised institution

acts as a securities lender and includes

the securities received in its on-balance

sheet assets but has not sold or re-

hypothecated the securities received,

and, for an FDIC-supervised institution

that uses the standardized approach for

counterparty credit risk under

§ 324.132(c) for its standardized risk-

weighted assets, less the fair value of

any derivative contracts;

(ii)(A) For an FDIC-supervised

institution that uses the current

exposure methodology under

§ 324.34(b) for its standardized risk-

weighted assets, the potential future

credit exposure (PFE) for each

derivative contract or each single-

product netting set of derivative

contracts (including a cleared

transaction except as provided in

paragraph (c)(2)(ix) of this section and,

at the discretion of the FDIC-supervised

institution, excluding a forward

agreement treated as a derivative

contract that is part of a repurchase or

reverse repurchase or a securities

borrowing or lending transaction that

qualifies for sales treatment under

GAAP), to which the FDIC-supervised

institution is a counterparty as

determined under § 324.34, but without

regard to § 324.34(c), provided that:

(1) An FDIC-supervised institution

may choose to exclude the PFE of all

credit derivatives or other similar

instruments through which it provides

credit protection when calculating the

PFE under § 324.34, but without regard

to § 324.34(c), provided that it does not

adjust the net-to-gross ratio (NGR); and

(2) An FDIC-supervised institution

that chooses to exclude the PFE of credit

derivatives or other similar instruments

through which it provides credit

protection pursuant to this paragraph

(c)(2)(ii)(A) must do so consistently over

time for the calculation of the PFE for

all such instruments; or

(B)(1) For an FDIC-supervised

institution that uses the standardized

approach for counterparty credit risk

under section § 324.132(c) for its

standardized risk-weighted assets, the

PFE for each netting set to which the

FDIC-supervised institution is a

counterparty (including cleared

transactions except as provided in

paragraph (c)(2)(ix) of this section and,

at the discretion of the FDIC-supervised

institution, excluding a forward

agreement treated as a derivative

contract that is part of a repurchase or

reverse repurchase or a securities

borrowing or lending transaction that

qualifies for sales treatment under

GAAP), as determined under

§ 324.132(c)(7), in which the term C in

§ 324.132(c)(7)(i) equals zero, and, for

any counterparty that is not a

commercial end-user, multiplied by 1.4.

For purposes of this paragraph

(c)(2)(ii)(B)(1), an FDIC-supervised

institution may set the value of the term

C in § 324.132(c)(7)(i) equal to the

amount of collateral posted by a clearing

member client of the FDIC-supervised

institution in connection with the

client-facing derivative transactions

within the netting set; and

(2) An FDIC-supervised institution

may choose to exclude the PFE of all

credit derivatives or other similar

instruments through which it provides

credit protection when calculating the

PFE under § 324.132(c), provided that it

does so consistently over time for the

calculation of the PFE for all such

instruments;

(iii)(A)(1) For an FDIC-supervised

institution that uses the current

exposure methodology under

§ 324.34(b) for its standardized risk-

weighted assets, the amount of cash

collateral that is received from a

counterparty to a derivative contract

and that has offset the mark-to-fair value

of the derivative asset, or cash collateral

that is posted to a counterparty to a

derivative contract and that has reduced

the FDIC-supervised institution’s on-

balance sheet assets, unless such cash

collateral is all or part of variation

margin that satisfies the conditions in

paragraphs (c)(2)(iii)(C) through (G) of

this section; and

(2) The variation margin is used to

reduce the current credit exposure of

the derivative contract, calculated as

described in § 324.34(b), and not the

PFE; and

(3) For the purpose of the calculation

of the NGR described in

§ 324.34(b)(2)(ii)(B), variation margin

described in paragraph (c)(2)(iii)(A)(2)

of this section may not reduce the net

current credit exposure or the gross

current credit exposure; or

(B)(1) For an FDIC-supervised

institution that uses the standardized

approach for counterparty credit risk

under § 324.132(c) for its standardized

risk-weighted assets, the replacement

cost of each derivative contract or single

product netting set of derivative

contracts to which the FDIC-supervised

institution is a counterparty, calculated

according to the following formula, and,

for any counterparty that is not a

commercial end-user, multiplied by 1.4:

Replacement Cost = max{V¥CVM

r

+

CVM

p

; 0}

Where:

V equals the fair value for each derivative

contract or each single-product netting set of

derivative contracts (including a cleared

transaction except as provided in paragraph

(c)(2)(ix) of this section and, at the discretion

of the FDIC-supervised institution, excluding

a forward agreement treated as a derivative

contract that is part of a repurchase or reverse

repurchase or a securities borrowing or

lending transaction that qualifies for sales

treatment under GAAP);

CVM

r

equals the amount of cash collateral

received from a counterparty to a derivative

contract and that satisfies the conditions in

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paragraphs (c)(2)(iii)(C) through (G) of this

section, or, in the case of a client-facing

derivative transaction on behalf of a clearing

member client, the amount of collateral

received from the clearing member client;

and

CVM

p

equals the amount of cash collateral

that is posted to a counterparty to a

derivative contract and that has not offset the

fair value of the derivative contract and that

satisfies the conditions in paragraphs

(c)(2)(iii)(C) through (G) of this section, or, in

the case of a client-facing derivative

transaction on behalf of a clearing member

client, the amount of collateral posted to the

clearing member client;

(2) Notwithstanding paragraph

(c)(2)(iii)(B)(1) of this section, where multiple

netting sets are subject to a single variation

margin agreement, an FDIC-supervised

institution must apply the formula for

replacement cost provided in

§ 324.132(c)(10)(i), in which the term C

MA

may only include cash collateral that satisfies

the conditions in paragraphs (c)(2)(iii)(C)

through (G) of this section; and

(3) For purposes of paragraph

(c)(2)(iii)(B)(1), an FDIC-supervised

institution must treat a derivative contract

that references an index as if it were multiple

derivative contracts each referencing one

component of the index if the FDIC-

supervised institution elected to treat the

derivative contract as multiple derivative

contracts under § 324.132(c)(5)(vi);

(C) For derivative contracts that are not

cleared through a QCCP, the cash collateral

received by the recipient counterparty is not

segregated (by law, regulation, or an

agreement with the counterparty);

(D) Variation margin is calculated and

transferred on a daily basis based on the

mark-to-fair value of the derivative contract;

(E) The variation margin transferred under

the derivative contract or the governing rules

of the CCP or QCCP for a cleared transaction

is the full amount that is necessary to fully

extinguish the net current credit exposure to

the counterparty of the derivative contracts,

subject to the threshold and minimum

transfer amounts applicable to the

counterparty under the terms of the

derivative contract or the governing rules for

a cleared transaction;

(F) The variation margin is in the form of

cash in the same currency as the currency of

settlement set forth in the derivative contract,

provided that for the purposes of this

paragraph (c)(2)(iii)(F), currency of

settlement means any currency for settlement

specified in the governing qualifying master

netting agreement and the credit support

annex to the qualifying master netting

agreement, or in the governing rules for a

cleared transaction; and

(G) The derivative contract and the

variation margin are governed by a qualifying

master netting agreement between the legal

entities that are the counterparties to the

derivative contract or by the governing rules

for a cleared transaction, and the qualifying

master netting agreement or the governing

rules for a cleared transaction must explicitly

stipulate that the counterparties agree to

settle any payment obligations on a net basis,

taking into account any variation margin

received or provided under the contract if a

credit event involving either counterparty

occurs;

(iv) The effective notional principal

amount (that is, the apparent or stated

notional principal amount multiplied by any

multiplier in the derivative contract) of a

credit derivative, or other similar instrument,

through which the FDIC-supervised

institution provides credit protection,

provided that:

(A) The FDIC-supervised institution may

reduce the effective notional principal

amount of the credit derivative by the

amount of any reduction in the mark-to-fair

value of the credit derivative if the reduction

is recognized in common equity tier 1

capital;

(B) The FDIC-supervised institution may

reduce the effective notional principal

amount of the credit derivative by the

effective notional principal amount of a

purchased credit derivative or other similar

instrument, provided that the remaining

maturity of the purchased credit derivative is

equal to or greater than the remaining

maturity of the credit derivative through

which the FDIC-supervised institution

provides credit protection and that:

(1) With respect to a credit derivative that

references a single exposure, the reference

exposure of the purchased credit derivative

is to the same legal entity and ranks pari

passu with, or is junior to, the reference

exposure of the credit derivative through

which the FDIC-supervised institution

provides credit protection; or

(2) With respect to a credit derivative that

references multiple exposures, the reference

exposures of the purchased credit derivative

are to the same legal entities and rank pari

passu with the reference exposures of the

credit derivative through which the FDIC-

supervised institution provides credit

protection, and the level of seniority of the

purchased credit derivative ranks pari passu

to the level of seniority of the credit

derivative through which the FDIC-

supervised institution provides credit

protection;

(3) Where an FDIC-supervised institution

has reduced the effective notional amount of

a credit derivative through which the FDIC-

supervised institution provides credit

protection in accordance with paragraph

(c)(2)(iv)(A) of this section, the FDIC-

supervised institution must also reduce the

effective notional principal amount of a

purchased credit derivative used to offset the

credit derivative through which the FDIC-

supervised institution provides credit

protection, by the amount of any increase in

the mark-to-fair value of the purchased credit

derivative that is recognized in common

equity tier 1 capital; and

(4) Where the FDIC-supervised institution

purchases credit protection through a total

return swap and records the net payments

received on a credit derivative through which

the FDIC-supervised institution provides

credit protection in net income, but does not

record offsetting deterioration in the mark-to-

fair value of the credit derivative through

which the FDIC-supervised institution

provides credit protection in net income

(either through reductions in fair value or by

additions to reserves), the FDIC-supervised

institution may not use the purchased credit

protection to offset the effective notional

principal amount of the related credit

derivative through which the FDIC-

supervised institution provides credit

protection;

(v) Where an FDIC-supervised institution

acting as a principal has more than one repo-

style transaction with the same counterparty

and has offset the gross value of receivables

due from a counterparty under reverse

repurchase transactions by the gross value of

payables under repurchase transactions due

to the same counterparty, the gross value of

receivables associated with the repo-style

transactions less any on-balance sheet

receivables amount associated with these

repo-style transactions included under

paragraph (c)(2)(i) of this section, unless the

following criteria are met:

(A) The offsetting transactions have the

same explicit final settlement date under

their governing agreements;

(B) The right to offset the amount owed to

the counterparty with the amount owed by

the counterparty is legally enforceable in the

normal course of business and in the event

of receivership, insolvency, liquidation, or

similar proceeding; and

(C) Under the governing agreements, the

counterparties intend to settle net, settle

simultaneously, or settle according to a

process that is the functional equivalent of

net settlement, (that is, the cash flows of the

transactions are equivalent, in effect, to a

single net amount on the settlement date),

where both transactions are settled through

the same settlement system, the settlement

arrangements are supported by cash or

intraday credit facilities intended to ensure

that settlement of both transactions will

occur by the end of the business day, and the

settlement of the underlying securities does

not interfere with the net cash settlement;

(vi) The counterparty credit risk of a repo-

style transaction, including where the FDIC-

supervised institution acts as an agent for a

repo-style transaction and indemnifies the

customer with respect to the performance of

the customer’s counterparty in an amount

limited to the difference between the fair

value of the security or cash its customer has

lent and the fair value of the collateral the

borrower has provided, calculated as follows:

(A) If the transaction is not subject to a

qualifying master netting agreement, the

counterparty credit risk (E*) for transactions

with a counterparty must be calculated on a

transaction by transaction basis, such that

each transaction i is treated as its own netting

set, in accordance with the following

formula, where E

i

is the fair value of the

instruments, gold, or cash that the FDIC-

supervised institution has lent, sold subject

to repurchase, or provided as collateral to the

counterparty, and C

i

is the fair value of the

instruments, gold, or cash that the FDIC-

supervised institution has borrowed,

purchased subject to resale, or received as

collateral from the counterparty:

E

i

* = max {0, [E

i

¥ C

i

]}; and

(B) If the transaction is subject to a

qualifying master netting agreement, the

counterparty credit risk (E*) must be

calculated as the greater of zero and the total

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23

The FDIC-supervised institution must calculate

amounts deducted under paragraphs (c) through (f)

of this section after it calculates the amount of

ALLL or AACL, as applicable, includable in tier 2

capital under §324.20(d)(3).

fair value of the instruments, gold, or cash

that the FDIC-supervised institution has lent,

sold subject to repurchase or provided as

collateral to a counterparty for all

transactions included in the qualifying

master netting agreement (SE

i

), less the total

fair value of the instruments, gold, or cash

that the FDIC-supervised institution

borrowed, purchased subject to resale or

received as collateral from the counterparty

for those transactions (SC

i

), in accordance

with the following formula:

E* = max {0, [SE

i

¥ SC

i

]}

(vii) If an FDIC-supervised institution

acting as an agent for a repo-style transaction

provides a guarantee to a customer of the

security or cash its customer has lent or

borrowed with respect to the performance of

the customer’s counterparty and the

guarantee is not limited to the difference

between the fair value of the security or cash

its customer has lent and the fair value of the

collateral the borrower has provided, the

amount of the guarantee that is greater than

the difference between the fair value of the

security or cash its customer has lent and the

value of the collateral the borrower has

provided;

(viii) The credit equivalent amount of all

off-balance sheet exposures of the FDIC-

supervised institution, excluding repo-style

transactions, repurchase or reverse

repurchase or securities borrowing or lending

transactions that qualify for sales treatment

under GAAP, and derivative transactions,

determined using the applicable credit

conversion factor under § 324.33(b),

provided, however, that the minimum credit

conversion factor that may be assigned to an

off-balance sheet exposure under this

paragraph is 10 percent; and

(ix) For an FDIC-supervised institution that

is a clearing member:

(A) A clearing member FDIC-supervised

institution that guarantees the performance of

a clearing member client with respect to a

cleared transaction must treat its exposure to

the clearing member client as a derivative

contract for purposes of determining its total

leverage exposure;

(B) A clearing member FDIC-supervised

institution that guarantees the performance of

a CCP with respect to a transaction cleared

on behalf of a clearing member client must

treat its exposure to the CCP as a derivative

contract for purposes of determining its total

leverage exposure;

(C) A clearing member FDIC-supervised

institution that does not guarantee the

performance of a CCP with respect to a

transaction cleared on behalf of a clearing

member client may exclude its exposure to

the CCP for purposes of determining its total

leverage exposure;

(D) An FDIC-supervised institution that is

a clearing member may exclude from its total

leverage exposure the effective notional

principal amount of credit protection sold

through a credit derivative contract, or other

similar instrument, that it clears on behalf of

a clearing member client through a CCP as

calculated in accordance with paragraph

(c)(2)(iv) of this section; and

(E) Notwithstanding paragraphs

(c)(2)(ix)(A) through (C) of this section, an

FDIC-supervised institution may exclude

from its total leverage exposure a clearing

member’s exposure to a clearing member

client for a derivative contract, if the clearing

member client and the clearing member are

affiliates and consolidated for financial

reporting purposes on the FDIC-supervised

institution’s balance sheet.

(x) A custody bank shall exclude from its

total leverage exposure the lesser of:

(A) The amount of funds that the custody

bank has on deposit at a qualifying central

bank; and

(B) The amount of funds in deposit

accounts at the custody bank that are linked

to fiduciary or custodial and safekeeping

accounts at the custody bank. For purposes

of this paragraph (c)(2)(x), a deposit account

is linked to a fiduciary or custodial and

safekeeping account if the deposit account is

provided to a client that maintains a

fiduciary or custodial and safekeeping

account with the custody bank, and the

deposit account is used to facilitate the

administration of the fiduciary or custodial

and safekeeping account.

(d) Advanced approaches capital ratio

calculations. An advanced approaches FDIC-

supervised institution that has completed the

parallel run process and received notification

from the FDIC pursuant to § 324.121(d) must

determine its regulatory capital ratios as

described in paragraphs (d)(1) through (3) of

this section.

(1) Common equity tier 1 capital ratio. The

FDIC-supervised institution’s common equity

tier 1 capital ratio is the lower of:

(i) The ratio of the FDIC-supervised

institution’s common equity tier 1 capital to

standardized total risk-weighted assets; and

(ii) The ratio of the FDIC-supervised

institution’s common equity tier 1 capital to

advanced approaches total risk-weighted

assets.

(2) Tier 1 capital ratio. The FDIC-

supervised institution’s tier 1 capital ratio is

the lower of:

(i) The ratio of the FDIC-supervised

institution’s tier 1 capital to standardized

total risk-weighted assets; and

(ii) The ratio of the FDIC-supervised

institution’s tier 1 capital to advanced

approaches total risk-weighted assets.

(3) Total capital ratio. The FDIC-

supervised institution’s total capital ratio is

the lower of:

(i) The ratio of the FDIC-supervised

institution’s total capital to standardized total

risk-weighted assets; and

(ii) The ratio of the FDIC-supervised

institution’s advanced-approaches-adjusted

total capital to advanced approaches total

risk-weighted assets. An FDIC-supervised

institution’s advanced-approaches-adjusted

total capital is the FDIC-supervised

institution’s total capital after being adjusted

as follows:

(A) An advanced approaches FDIC-

supervised institution must deduct from its

total capital any allowance for loan and lease

losses or adjusted allowance for credit losses,

as applicable, included in its tier 2 capital in

accordance with § 324.20(d)(3); and

(B) An advanced approaches FDIC-

supervised institution must add to its total

capital any eligible credit reserves that

exceed the FDIC-supervised institution’s total

expected credit losses to the extent that the

excess reserve amount does not exceed 0.6

percent of the FDIC-supervised institution’s

credit risk-weighted assets.

(4) State savings association tangible

capital ratio. (i) Until January 1, 2014, a state

savings association shall determine its

tangible capital ratio in accordance with 12

CFR 390.468.

(ii) As of January 1, 2014, a state savings

association’s tangible capital ratio is the ratio

of the state savings association’s core capital

(tier 1 capital) to total assets. For purposes of

this paragraph, the term total assets shall

have the meaning provided in 12 CFR

324.401(g).

* * * * *

■24. In § 324.22, revise paragraphs (c),

(f), and (h) to read as follows:

§ 324.22 Regulatory capital adjustments

and deductions.

* * * * *

(c) Deductions from regulatory capital

related to investments in capital

instruments or covered debt

instruments

23

—(1) Investment in the

FDIC-supervised institution’s own

capital instruments. An FDIC-

supervised institution must deduct an

investment in its own capital

instruments, as follows:

(i) An FDIC-supervised institution

must deduct an investment in the FDIC-

supervised institution’s own common

stock instruments from its common

equity tier 1 capital elements to the

extent such instruments are not

excluded from regulatory capital under

§ 324.20(b)(1);

(ii) An FDIC-supervised institution

must deduct an investment in the FDIC-

supervised institution’s own additional

tier 1 capital instruments from its

additional tier 1 capital elements; and

(iii) An FDIC-supervised institution

must deduct an investment in the FDIC-

supervised institution’s own tier 2

capital instruments from its tier 2

capital elements.

(2) Corresponding deduction

approach. For purposes of subpart C of

this part, the corresponding deduction

approach is the methodology used for

the deductions from regulatory capital

related to reciprocal cross holdings (as

described in paragraph (c)(3) of this

section), investments in the capital of

unconsolidated financial institutions for

an FDIC-supervised institution that is

not an advanced approaches FDIC-

supervised institution (as described in

paragraph (c)(4) of this section), non-

significant investments in the capital of

unconsolidated financial institutions for

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24

With the prior written approval of the FDIC, for

the period of time stipulated by the FDIC, an FDIC-

supervised institution that is not an advanced

approaches FDIC-supervised institution, is not

required to deduct an investment in the capital of

an unconsolidated financial institution pursuant to

this paragraph if the financial institution is in

distress and if such investment is made for the

purpose of providing financial support to the

financial institution, as determined by the FDIC.

25

Any investments in the capital of an

unconsolidated financial institution that do not

exceed the 25 percent threshold for investments in

the capital of unconsolidated financial institutions

under this section must be assigned the appropriate

risk weight under subparts D or F of this part, as

applicable.

26

With the prior written approval of the FDIC, for

the period of time stipulated by the FDIC, an

advanced approaches FDIC-supervised institution is

not required to deduct a non-significant investment

in the capital of an unconsolidated financial

institution or an investment in a covered debt

instrument pursuant to this paragraph if the

financial institution is in distress and if such

investment is made for the purpose of providing

financial support to the financial institution, as

determined by the FDIC.

an advanced approaches FDIC-

supervised institution (as described in

paragraph (c)(5) of this section), and

non-common stock significant

investments in the capital of

unconsolidated financial institutions for

an advanced approaches FDIC-

supervised institution (as described in

paragraph (c)(6) of this section). Under

the corresponding deduction approach,

an FDIC-supervised institution must

make deductions from the component of

capital for which the underlying

instrument would qualify if it were

issued by the FDIC-supervised

institution itself, as described in

paragraphs (c)(2)(i) through (iii) of this

section. If the FDIC-supervised

institution does not have a sufficient

amount of a specific component of

capital to effect the required deduction,

the shortfall must be deducted

according to paragraph (f) of this

section.

(i) If an investment is in the form of

an instrument issued by a financial

institution that is not a regulated

financial institution, the FDIC-

supervised institution must treat the

instrument as:

(A) A common equity tier 1 capital

instrument if it is common stock or

represents the most subordinated claim

in a liquidation of the financial

institution; and

(B) An additional tier 1 capital

instrument if it is subordinated to all

creditors of the financial institution and

is senior in liquidation only to common

shareholders.

(ii) If an investment is in the form of

an instrument issued by a regulated

financial institution and the instrument

does not meet the criteria for common

equity tier 1, additional tier 1 or tier 2

capital instruments under § 324.20, the

FDIC-supervised institution must treat

the instrument as:

(A) A common equity tier 1 capital

instrument if it is common stock

included in GAAP equity or represents

the most subordinated claim in

liquidation of the financial institution;

(B) An additional tier 1 capital

instrument if it is included in GAAP

equity, subordinated to all creditors of

the financial institution, and senior in a

receivership, insolvency, liquidation, or

similar proceeding only to common

shareholders;

(C) A tier 2 capital instrument if it is

not included in GAAP equity but

considered regulatory capital by the

primary supervisor of the financial

institution; and

(D) For an advanced approaches

FDIC-supervised institution, a tier 2

capital instrument if it is a covered debt

instrument.

(iii) If an investment is in the form of

a non-qualifying capital instrument (as

defined in § 324.300(c)), the FDIC-

supervised institution must treat the

instrument as:

(A) An additional tier 1 capital

instrument if such instrument was

included in the issuer’s tier 1 capital

prior to May 19, 2010; or

(B) A tier 2 capital instrument if such

instrument was included in the issuer’s

tier 2 capital (but not includable in tier

1 capital) prior to May 19, 2010.

(3) Reciprocal cross holdings in the

capital of financial institutions. (i) An

FDIC-supervised institution must

deduct an investment in the capital of

other financial institutions that it holds

reciprocally, where such reciprocal

cross holdings result from a formal or

informal arrangement to swap,

exchange, or otherwise intend to hold

each other’s capital instruments, by

applying the corresponding deduction

approach in paragraph (c)(2) of this

section.

(ii) An advanced approaches FDIC-

supervised institution must deduct an

investment in any covered debt

instrument that the institution holds

reciprocally with another financial

institution, where such reciprocal cross

holdings result from a formal or

informal arrangement to swap,

exchange, or otherwise intend to hold

each other’s capital or covered debt

instruments, by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

(4) Investments in the capital of

unconsolidated financial institutions.

An FDIC-supervised institution that is

not an advanced approaches FDIC-

supervised institution must deduct its

investments in the capital of

unconsolidated financial institutions (as

defined in § 324.2) that exceed 25

percent of the sum of the FDIC-

supervised institution’s common equity

tier 1 capital elements minus all

deductions from and adjustments to

common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

24

The

deductions described in this section are

net of associated DTLs in accordance

with paragraph (e) of this section. In

addition, with the prior written

approval of the FDIC, an FDIC-

supervised institution that underwrites

a failed underwriting, for the period of

time stipulated by the FDIC, is not

required to deduct an investment in the

capital of an unconsolidated financial

institution pursuant to this paragraph

(c) to the extent the investment is

related to the failed underwriting.

25

(5) Non-significant investments in the

capital of unconsolidated financial

institutions. (i) An advanced approaches

FDIC-supervised institution must

deduct its non-significant investments

in the capital of unconsolidated

financial institutions (as defined in

§ 324.2) that, in the aggregate and

together with any investment in a

covered debt instrument (as defined in

§ 324.2) issued by a financial institution

in which the FDIC-supervised

institution does not have a significant

investment in the capital of the

unconsolidated financial institution (as

defined in § 324.2), exceeds 10 percent

of the sum of the advanced approaches

FDIC-supervised institution’s common

equity tier 1 capital elements minus all

deductions from and adjustments to

common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section (the 10 percent

threshold for non-significant

investments) by applying the

corresponding deduction approach in

paragraph (c)(2) of this section.

26

The

deductions described in this paragraph

are net of associated DTLs in accordance

with paragraph (e) of this section. In

addition, with the prior written

approval of the FDIC, an advanced

approaches FDIC-supervised institution

that underwrites a failed underwriting,

for the period of time stipulated by the

FDIC, is not required to deduct from

capital a non-significant investment in

the capital of an unconsolidated

financial institution or an investment in

a covered debt instrument pursuant to

this paragraph (c)(5) to the extent the

investment is related to the failed

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27

Any non-significant investment in the capital

of an unconsolidated financial institution or any

investment in a covered debt instrument that is not

required to be deducted under this paragraph (c)(5)

or otherwise under this section must be assigned

the appropriate risk weight under subparts D, E, or

F of this part, as applicable.

28

With prior written approval of the FDIC, for the

period of time stipulated by the FDIC, an advanced

approaches FDIC-supervised institution is not

required to deduct a significant investment in the

capital of an unconsolidated financial institution,

including an investment in a covered debt

instrument, under this paragraph (c)(6) or otherwise

under this section if such investment is made for

the purpose of providing financial support to the

financial institution as determined by the FDIC.

underwriting.

27

For any calculation

under this paragraph (c)(5)(i), an

advanced approaches FDIC-supervised

institution may exclude the amount of

an investment in a covered debt

instrument under paragraph (c)(5)(iii) or

(iv) of this section, as applicable.

(ii) For an advanced approaches FDIC-

supervised institution, the amount to be

deducted under this paragraph (c)(5)

from a specific capital component is

equal to:

(A) The advanced approaches FDIC-

supervised institution’s aggregate non-

significant investments in the capital of

an unconsolidated financial institution

and, if applicable, any investments in a

covered debt instrument subject to

deduction under this paragraph (c)(5),

exceeding the 10 percent threshold for

non-significant investments, multiplied

by

(B) The ratio of the advanced

approaches FDIC-supervised

institution’s aggregate non-significant

investments in the capital of an

unconsolidated financial institution (in

the form of such capital component) to

the advanced approaches FDIC-

supervised institution’s total non-

significant investments in

unconsolidated financial institutions,

with an investment in a covered debt

instrument being treated as tier 2 capital

for this purpose.

(iii) For purposes of applying the

deduction under paragraph (c)(5)(i) of

this section, an advanced approaches

FDIC-supervised institution that is not a

subsidiary of a global systemically

important banking organization, as

defined in 12 CFR 252.2, may exclude

from the deduction the amount of the

FDIC-supervised institution’s gross long

position, in accordance with

§ 324.22(h)(2), in investments in

covered debt instruments issued by

financial institutions in which the FDIC-

supervised institution does not have a

significant investment in the capital of

the unconsolidated financial

institutions up to an amount equal to 5

percent of the sum of the FDIC-

supervised institution’s common equity

tier 1 capital elements minus all

deductions from and adjustments to

common equity tier 1 capital elements

required under paragraphs (a) through

(c)(3) of this section, net of associated

DTLs in accordance with paragraph (e)

of this section.

(iv) Prior to applying the deduction

under paragraph (c)(5)(i) of this section:

(A) An FDIC-supervised institution

that is a subsidiary of a global

systemically important BHC, as defined

in 12 CFR 252.2, may designate any

investment in a covered debt instrument

as an excluded covered debt instrument,

as defined in § 324.2.

(B) An FDIC-supervised institution

that is a subsidiary of a global

systemically important BHC, as defined

in 12 CFR 252.2, must deduct, according

to the corresponding deduction

approach in paragraph (c)(2) of this

section, its gross long position,

calculated in accordance with paragraph

(h)(2) of this section, in a covered debt

instrument that was originally

designated as an excluded covered debt

instrument, in accordance with

paragraph (c)(5)(iv)(A) of this section,

but no longer qualifies as an excluded

covered debt instrument.

(C) An FDIC-supervised institution

that is a subsidiary of a global

systemically important BHC, as defined

in 12 CFR 252.2, must deduct according

to the corresponding deduction

approach in paragraph (c)(2) of this

section the amount of its gross long

position, calculated in accordance with

paragraph (h)(2) of this section, in a

direct or indirect investment in a

covered debt instrument that was

originally designated as an excluded

covered debt instrument, in accordance

with paragraph (c)(5)(iv)(A) of this

section, and has been held for more than

thirty business days.

(D) An FDIC-supervised institution

that is a subsidiary of a global

systemically important BHC, as defined

in 12 CFR 252.2, must deduct according

to the corresponding deduction

approach in paragraph (c)(2) of this

section its gross long position,

calculated in accordance with paragraph

(h)(2) of this section, of its aggregate

position in excluded covered debt

instruments that exceeds 5 percent of

the sum of the FDIC-supervised

institution’s common equity tier 1

capital elements minus all deductions

from and adjustments to common equity

tier 1 capital elements required under

paragraphs (a) through (c)(3) of this

section, net of associated DTLs in

accordance with paragraph (e) of this

section.

(6) Significant investments in the

capital of unconsolidated financial

institutions that are not in the form of

common stock. If an advanced

approaches FDIC-supervised institution

has a significant investment in the

capital of an unconsolidated financial

institution, the advanced approaches

FDIC-supervised institution must

deduct from capital any such

investment issued by the

unconsolidated financial institution that

is held by the FDIC-supervised

institution other than an investment in

the form of common stock, as well as

any investment in a covered debt

instrument issued by the

unconsolidated financial institution, by

applying the corresponding deduction

approach in paragraph (c)(2) of this

section.

28

The deductions described in

this section are net of associated DTLs

in accordance with paragraph (e) of this

section. In addition, with the prior

written approval of the FDIC, for the

period of time stipulated by the FDIC,

an advanced approaches FDIC-

supervised institution that underwrites

a failed underwriting is not required to

deduct the significant investment in the

capital of an unconsolidated financial

institution or an investment in a

covered debt instrument pursuant to

this paragraph (c)(6) if such investment

is related to such failed underwriting.

* * * * *

(f) Insufficient amounts of a specific

regulatory capital component to effect

deductions. Under the corresponding

deduction approach, if an FDIC-

supervised institution does not have a

sufficient amount of a specific

component of capital to effect the full

amount of any deduction from capital

required under paragraph (d) of this

section, the FDIC-supervised institution

must deduct the shortfall amount from

the next higher (that is, more

subordinated) component of regulatory

capital. Any investment by an advanced

approaches FDIC-supervised institution

in a covered debt instrument must be

treated as an investment in the tier 2

capital for purposes of this paragraph

(f). Notwithstanding any other provision

of this section, a qualifying community

banking organization (as defined in

§ 324.12) that has elected to use the

community bank leverage ratio

framework pursuant to § 324.12 is not

required to deduct any shortfall of tier

2 capital from its additional tier 1

capital or common equity tier 1 capital.

* * * * *

(h) Net long position—(1) In general.

For purposes of calculating the amount

of an FDIC-supervised institution’s

investment in the FDIC-supervised

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institution’s own capital instrument,

investment in the capital of an

unconsolidated financial institution,

and investment in a covered debt

instrument under this section, the

institution’s net long position is the

gross long position in the underlying

instrument determined in accordance

with paragraph (h)(2) of this section, as

adjusted to recognize any short position

by the FDIC-supervised institution in

the same instrument subject to

paragraph (h)(3) of this section.

(2) Gross long position. A gross long

position is determined as follows:

(i) For an equity exposure that is held

directly by the FDIC-supervised

institution, the adjusted carrying value

of the exposure as that term is defined

in § 324.51(b);

(ii) For an exposure that is held

directly and that is not an equity

exposure or a securitization exposure,

the exposure amount as that term is

defined in § 324.2;

(iii) For each indirect exposure, the

FDIC-supervised institution’s carrying

value of its investment in an investment

fund or, alternatively:

(A) An FDIC-supervised institution

may, with the prior approval of the

FDIC, use a conservative estimate of the

amount of its indirect investment in the

FDIC-supervised institution’s own

capital instruments, its indirect

investment in the capital of an

unconsolidated financial institution, or

its indirect investment in a covered debt

instrument held through a position in

an index, as applicable; or

(B) An FDIC-supervised institution

may calculate the gross long position for

an indirect exposure to the FDIC-

supervised institution’s own capital

instruments, the capital of an

unconsolidated financial institution, or

a covered debt instrument by

multiplying the FDIC-supervised

institution’s carrying value of its

investment in the investment fund by

either:

(1) The highest stated investment

limit (in percent) for an investment in

the FDIC-supervised institution’s own

capital instruments, an investment in

the capital of an unconsolidated

financial institution, or an investment in

a covered debt instrument, as

applicable, as stated in the prospectus,

partnership agreement, or similar

contract defining permissible

investments of the investment fund; or

(2) The investment fund’s actual

holdings (in percent) of the investment

in the FDIC-supervised institution’s

own capital instruments, investment in

the capital of an unconsolidated

financial institution, or investment in a

covered debt instrument, as applicable;

and

(iv) For a synthetic exposure, the

amount of the FDIC-supervised

institution’s loss on the exposure if the

reference capital or covered debt

instrument were to have a value of zero.

(3) Adjustments to reflect a short

position. In order to adjust the gross

long position to recognize a short

position in the same instrument under

paragraph (h)(1) of this section, the

following criteria must be met:

(i) The maturity of the short position

must match the maturity of the long

position, or the short position must have

a residual maturity of at least one year

(maturity requirement); or

(ii) For a position that is a trading

asset or trading liability (whether on- or

off-balance sheet) as reported on the

FDIC-supervised institution’s Call

Report, if the FDIC-supervised

institution has a contractual right or

obligation to sell the long position at a

specific point in time and the

counterparty to the contract has an

obligation to purchase the long position

if the FDIC-supervised institution

exercises its right to sell, this point in

time may be treated as the maturity of

the long position such that the maturity

of the long position and short position

are deemed to match for purposes of the

maturity requirement, even if the

maturity of the short position is less

than one year; and

(iii) For an investment in an FDIC-

supervised institution’s own capital

instrument under paragraph (c)(1) of

this section, an investment in the capital

of an unconsolidated financial

institution under paragraphs (c)(4)

through (6) and (d) of this section (as

applicable), and an investment in a

covered debt instrument under

paragraphs (c)(1), (5), and (6) of this

section:

(A) The FDIC-supervised institution

may only net a short position against a

long position in an investment in the

FDIC-supervised institution’s own

capital instrument under paragraph

(c)(1) of this section if the short position

involves no counterparty credit risk;

(B) A gross long position in an

investment in the FDIC-supervised

institution’s own capital instrument, an

investment in the capital of an

unconsolidated financial institution, or

an investment in a covered debt

instrument due to a position in an index

may be netted against a short position

in the same index;

(C) Long and short positions in the

same index without maturity dates are

considered to have matching maturities;

and

(D) A short position in an index that

is hedging a long cash or synthetic

position in an investment in the FDIC-

supervised institution’s own capital

instrument, an investment in the capital

instrument of an unconsolidated

financial institution, or an investment in

a covered debt instrument can be

decomposed to provide recognition of

the hedge. More specifically, the portion

of the index that is composed of the

same underlying instrument that is

being hedged may be used to offset the

long position if both the long position

being hedged and the short position in

the index are reported as a trading asset

or trading liability (whether on- or off-

balance sheet) on the FDIC-supervised

institution’s Call Report, and the hedge

is deemed effective by the FDIC-

supervised institution’s internal control

processes, which have not been found to

be inadequate by the FDIC.

§ 324.121 [Amended]

■25. Section 324.121 is amended by

removing ‘‘§ 324.10(c)(1) through (3)’’

and adding ‘‘§ 324.10(d)(1) through (3)’’

in paragraph (c).

§ 324.132 [Amended]

■6. Section 324.132 is amended by

removing ‘‘§ 324.10(c)(4)(ii)(B)’’ and

adding ‘‘§ 324.10(c)(2)(ii)(B)’’ in

paragraph (c)(7)(iii) and (iv).

§ 324.304 [Amended]

■27. Section 324.304 is amended by:

■a. Removing ‘‘§ 324.10(c)(4)’’ and

adding in its place ‘‘§ 324.10(c)’’ in

paragraph (a) introductory text; and

■b. Removing ‘‘§ 324.10(c)(4)(ii)(J)(1)’’

and adding in its place

‘‘§ 324.10(c)(2)(x)(A)’’ in paragraph (e).

Brian P. Brooks,

Acting Comptroller of the Currency.

By order of the Board of Governors of the

Federal Reserve System.

Ann E. Misback,

Secretary of the Board.

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, on or about

October 20, 2020.

James P. Sheesley,

Assistant Executive Secretary.

[FR Doc. 2020–27046 Filed 1–5–21; 8:45 am]

BILLING CODE 4810–33–6210–01–6714–01–P

VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 PO 00000 Frm 00039 Fmt 4701 Sfmt 9990 E:\FR\FM\06JAR2.SGM 06JAR2

jbell on DSKJLSW7X2PROD with RULES2

Published date	06 January 2021
Citation	86 FR 708
Record Number	2020-27046
Section	Rules and Regulations
Court	Federal Deposit Insurance Corporation,The Comptroller Of The Currency Office

Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total Loss-Absorbing Capacity Requirements

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