Federal Register, Volume 83 Issue 151 (Monday, August 6, 2018)

[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Rules and Regulations]
[Pages 38460-38511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16133]

[[Page 38459]]

Vol. 83

Monday,

No. 151

August 6, 2018

Part II

Federal Reserve System

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12 CFR Part 252

Single-Counterparty Credit Limits for Bank Holding Companies and
Foreign Banking Organizations; Final Rule

Federal Register / Vol. 83 , No. 151 / Monday, August 6, 2018 / Rules
and Regulations

[[Page 38460]]

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FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Regulation YY; Docket No. R-1534]
RIN 7100-AE 48

Single-Counterparty Credit Limits for Bank Holding Companies and
Foreign Banking Organizations

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is adopting a final rule (final rule) to establish
single-counterparty credit limits for bank holding companies and
foreign banking organizations with $250 billion or more in total
consolidated assets, including any U.S. intermediate holding company of
such a foreign banking organization with $50 billion or more in total
consolidated assets, and any bank holding company identified as a
global systemically important bank holding company under the Board's
capital rules. The final rule implements section 165(e) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, which requires
the Board to impose limits on the amount of credit exposure that such a
bank holding company or foreign banking organization can have to an
unaffiliated company in order to reduce the risks arising from the
company's failure.

DATES: The final rule is effective October 5, 2018.

FOR FURTHER INFORMATION CONTACT: Laurie S. Schaffer, Associate General
Counsel, (202) 452-2272, Benjamin W. McDonough, Assistant General
Counsel, (202) 452-2036, Pamela G. Nardolilli, Special Counsel, (202)
452-3289, Christopher G. Callanan, Senior Attorney, (202) 452-3594, or
Lucy O. Chang, Senior Attorney, (202) 475-6331, Legal Division; or
Arthur Lindo, Deputy Director, (202) 452-2695, or Jeffery Zhang,
Economist, (202) 736-1968, Division of Supervision and Regulation;
Board of Governors of the Federal Reserve System, 20th and C Streets
NW, Washington, DC 20551. For the hearing impaired only,
Telecommunications Device for the Deaf (TDD) users may contact (202)
263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
A. Background
B. Notice of Proposed Rulemakings, General Summary of Comments,
and Enactment of the Economic Growth, Regulatory Relief, and
Consumer Protection Act
C. Overview of the Final Rule
II. SCCL for Covered Companies
A. Key Terminology and Concepts
B. Credit Exposure Limits
C. Gross Credit Exposure
D. Net Credit Exposure
E. Exposures to Securitization Funds, Investment Funds, or Other
Special Purpose Vehicles
F. Aggregation of Exposures to Connected Counterparties
G. Exemptions
H. Compliance and Timing of Applicability
III. Final Rule for Foreign Banking Organizations
A. Background
B. Summary of Comments on Proposal for Foreign Banking
Organizations
C. Overview of the Final Rule for Foreign Banking Organizations
D. Key Terminology and Concepts
E. Credit Exposure Limits
F. Gross Credit Exposure
G. Net Credit Exposure
H. Exposures to SPVs and Aggregation of Exposures to Connected
Counterparties
I. Exemptions
J. Compliance
K. Timing of Applicability
IV. Impact Analysis
V. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act Analysis
C. Solicitation of Comments on the Use of Plain Language

I. Introduction

A. Background

In March 2016, the Board invited public comment on a notice of
proposed rulemaking (``proposal'' or ``proposed rule'') to establish
single-counterparty credit limits for domestic and foreign bank holding
companies with $50 billion or more in total consolidated assets.\1\ The
proposed rule would have implemented section 165(e) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which
requires the Board to establish limits on the amount of credit exposure
that such a U.S. or foreign holding company can have to an unaffiliated
company in order to reduce the risks arising from the company's
failure. The March 2016 notice of proposed rulemaking followed earlier
proposals to implement section 165(e) for U.S. and foreign banking
organizations (FBOs).\2\
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\1\ See 81 FR 14328 (Mar. 16, 2016).
\2\ 77 FR 594 (Jan. 5, 2012); 77 FR 76628 (Dec. 28, 2012).
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During the 2007-2009 financial crisis, some of the largest
financial firms in the world collapsed or experienced material
financial distress. Counterparties of failing firms were placed under
severe strain when the failing firm could not meet its financial
obligations, in some cases resulting in the counterparties' inability
to meet their own financial obligations. Similarly, weakened financial
firms came under increased stress when counterparties with large
exposures to the firms suddenly attempted to reduce those exposures.
As demonstrated in the crisis, interconnectivity among major
financial companies poses risks to the financial stability of the
global financial system. The effect of a large financial institution's
failure or near collapse is transmitted and amplified by the
interconnectedness of large, systemically important firms--that is, the
degree to which they extend each other credit and serve as
counterparties to one another. Financial distress at a banking
organization may materially raise the likelihood of distress at other
firms, given the network of bilateral credit exposures between large,
systemically important firms throughout the financial system.
Accordingly, a large financial firm's systemic risk is likely to be
related directly to its interconnectedness vis-[agrave]-vis other
financial institutions and the financial sector as a whole. This
interconnectedness of financial firms also creates the potential for an
increase in the likelihood of distress at non-financial firms that are
dependent upon financial firms for funding.
The financial crisis also revealed shortcomings in the U.S.
regulatory approach to credit exposure limits, which limited only a
portion of the interconnectedness among large financial companies. For
example, certain commercial banks and U.S. branches and agencies of
foreign banking organizations were subject to single-borrower lending
and investment limits. However, these limits often excluded credit
exposures generated by derivatives and some securities financing
transactions, and the limits did not apply at the consolidated holding
company level.\3\
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\3\ Section 610 of the Dodd-Frank Act amended the term ``loans
and extensions of credit'' for purposes of the lending limits
applicable to national banks to include any credit exposure arising
from a derivative transaction, repurchase agreement, reverse
repurchase agreement, securities lending transaction, or securities
borrowing transaction. See Dodd-Frank Act, Pub. L. 111-203, section
610, 124 Stat. 1376, 1611 (2010), codified at 12 U.S.C. 84(b). As
discussed in more detail below, these types of transactions also are
subject to the single-counterparty credit limits of section 165(e).
12 U.S.C. 5365(e)(3).
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As noted, section 165(e) of the Dodd-Frank Act (section 165(e))
requires the Board to establish single-counterparty credit limits
(SCCL) for large U.S. and foreign bank holding companies and nonbank
financial companies, in order to limit the risks that the failure of
any

[[Page 38461]]

individual firm could pose to these firms.\4\ In particular, section
165(e) prohibits such firms from having credit exposure to any
unaffiliated company that exceeds 25 percent of the capital stock and
surplus of the firm.\5\ The Board is authorized to establish a lower
amount to mitigate the risks to the financial stability of the United
States.\6\
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\4\ See 12 U.S.C. 5365(e)(1).
\5\ 12 U.S.C. 5365(e)(2).
\6\ See id.
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Credit exposure to a company is defined in section 165(e) to mean
all extensions of credit to the company, including loans, deposits, and
lines of credit; all repurchase agreements, reverse repurchase
agreements, and securities borrowing and lending transactions with the
company (to the extent that such transactions create credit exposure
for the company); all guarantees, acceptances, and letters of credit
(including endorsement or standby letters of credit) issued on behalf
of the company; all purchases of, or investments in, securities issued
by the company; counterparty credit exposure to the company in
connection with derivative transactions between the covered company and
the company; and any other similar transaction that the Board, by
regulation, determines to be a credit exposure for purposes of section
165(e).\7\
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\7\ See 12 U.S.C. 5365(e)(3).
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Section 165(e) authorizes the Board to issue such regulations and
orders, including definitions consistent with section 165(e), as may be
necessary to administer and carry out the section.\8\ In addition, it
authorizes the Board to exempt transactions, in whole or in part, from
the definition of the term ``credit exposure,'' if the Board finds that
the exemption is in the public interest and consistent with the
purposes of section 165(e).\9\
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\8\ See 12 U.S.C. 5365(e)(5).
\9\ See 12 U.S.C. 5365(e)(6). Section 165(e) also authorizes the
Board to establish single-counterparty credit limits for nonbank
financial companies designated by the Financial Stability Oversight
Council (FSOC) for supervision by the Board. The final rule does not
at this time apply to any such nonbank financial company. The Board
intends to consider whether to apply similar requirements to these
companies separately by rule or order at a later time.
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The framework of SCCL established by the final rule is similar to
and builds upon existing credit exposure limits for depository
institutions, including the investment securities limits and the
lending limits imposed on certain depository institutions by the
National Bank Act and Federal Reserve Act.\10\ A national bank
generally is limited, subject to certain exceptions, in the total
amount of investment securities of any one obligor that it may purchase
for its own account to no more than 10 percent of its capital stock and
surplus.\11\ In addition, a national bank's total outstanding loans and
extensions of credit to any one borrower may not exceed 15 percent of
the bank's capital stock and surplus, plus an additional 10 percent of
the bank's capital stock and surplus, if the amount that exceeds the
bank's 15 percent general limit is fully secured by readily-marketable
collateral.\12\ U.S. branches of foreign banks are subject to similar
limits, albeit measured against the capital stock and surplus of the
top-tier parent foreign banking organization.\13\
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\10\ See, e.g., 12 U.S.C. 24(Seventh); 12 U.S.C. 84; 12 CFR 1
and 32; see also 12 U.S.C. 335 (applying the provisions of 12 U.S.C.
24(Seventh) to state member banks).
\11\ See 12 U.S.C. 24(Seventh); 12 CFR 1.3.
\12\ See 12 U.S.C. 84; 12 CFR 32.3. State-chartered banks, as
well as state- and federally-chartered savings associations, also
are subject to lending limits imposed by relevant state and federal
law.
\13\ See 12 CFR 211.28.
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The SCCL in section 165(e) operate separately and independently
from the investment securities limits and lending limits in the
National Bank Act and other statutes, and a covered company or covered
foreign entity must comply with all of the limits that are applicable
to it and its subsidiaries. Under the final rule, a covered company
would be required to ensure that it meets the SCCL on a consolidated
basis. Because of this, the final rule could affect the amount of a
subsidiary depository institution's loans and extensions of credit,
regardless of the subsidiary depository institution's applicable
lending limits.

B. Notices of Proposed Rulemakings, General Summary of Comments, and
Enactment of the Economic Growth, Regulatory Relief, and Consumer
Protection Act

The Board received 48 comments, representing approximately 60
parties, on the 2011 proposal on section 165(e) relating to U.S. bank
holding companies and 35 comments, representing over 45 organizations,
on the 2012 proposed rule relating to FBOs.\14\
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\14\ All of the comments are available on the Board's public
website. A summary of comments received on the 2011 and 2012
proposal appears in the March 2016 re-proposal. See 81 FR at 14329-
30.
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In March 2016, the Board re-proposed a rule to implement section
165(e) \15\ in order to take account of (1) the large volume of
comments received on the earlier proposed rules; (2) the revised
lending limits rules applicable to national banks; \16\ (3) the
introduction by the Basel Committee on Banking Supervision (BCBS) of a
large exposures standard (large exposure standard), which establishes
an international standard for the maximum amount of credit exposure
that an internationally active bank is permitted to have to a single
counterparty; \17\ and (4) the results of quantitative impact studies
and related analysis conducted by Board staff to assess the impact of
section 165(e).
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\15\ See 81 FR at 14328.
\16\ See 78 FR 37930 (June 25, 2013).
\17\ Basel Committee on Banking Supervision, Supervisory
framework for measuring and controlling large exposures (April
2014), http://www.bis.org/press/p140415.htm.
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The Board received approximately 30 comments in response to the
2016 proposed rule. Comments were received from a wide range of
individuals, banking organizations, industry and trade groups
representing banking, insurance, and the broader financial services
industry, and public interest groups. Board staff also met with a
number of commenters to discuss issues relating to the proposed rule,
and summaries of these meetings may be found on the Board's public
website.
Certain commenters expressed support for the broader goals of the
proposed rule to limit single-counterparty concentrations at large
financial companies. A number of commenters expressed concerns with
particular aspects of the proposed rules.
The Board received a large number of comments on the scope of
application of the proposal: How to define a ``covered company'' and a
``counterparty,'' terms that form the basis for the application of the
credit exposure limits under the proposed rules. The proposal would
have defined a covered company to include all of its subsidiaries.
``Subsidiary'' would have been defined to mean a company that is
directly or indirectly controlled by that company for purposes of the
Bank Holding Company Act of 1956 (BHC Act).\18\ The proposal defined a
counterparty to include a company and all entities with respect to
which the company (1) owns or controls 25 percent or more of a class of
voting securities; (2) owns or controls 25 percent or more of the total
equity; or (3) consolidates for financial reporting purposes.
Commenters urged the Board to adopt a financial consolidation standard
to define a ``covered company'' and

[[Page 38462]]

``counterparty.'' Commenters contended that moving to a financial
consolidation standard would capture true exposure risks and reduce the
complexity and compliance costs of the final rule.
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\18\ See proposed rule Sec. 252.71(cc). ``Control'' is defined
in the Board's Regulation YY by reference to the BHC Act. See 12 CFR
252.2(g); see also 12 U.S.C. 1841 et seq. The BHC Act generally
defines control to mean ownership or control of 25 percent or more
of any class of voting securities; control in any manner over the
election of a majority of the directors; or exercise of a
controlling influence over management or policies. 12 U.S.C.
1841(a)(2).
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In addition, the proposal would have required a covered company to
aggregate one or more counterparties that were economically
interdependent with or tied to the counterparty through certain control
relationships. A few commenters expressed support for this aspect of
the proposal. The large majority of commenters, however, contended that
these tests were highly subjective and could be costly and burdensome
to implement in practice because the tests relied on information that
might be difficult for a covered company to acquire from its
counterparty. To mitigate these concerns, commenters requested that the
Board adopt a threshold for counterparty exposures (for example, the
control relationship test should only apply if a counterparty exposure
exceeds 5 percent of the covered company's tier 1 capital). Certain
commenters urged the Board to use a financial consolidation standard to
define a counterparty and not to include any additional tests to
aggregate one or more counterparties under the final rule.
Commenters also objected to the inclusion of a natural person
together with members of the person's immediate family as a
counterparty under the proposed rule. Commenters argued that the Board
should exclude natural persons from the final rule's definition of
counterparty, suggesting that it is unlikely that a natural person
aggregated with members of its immediate family would ever approach the
applicable SCCL and that collecting information for this test would be
burdensome and unjustified on a cost-benefit basis. Commenters
recommended that, at a minimum, the Board include a materiality
threshold for exposures to a natural person to be subject to the
requirements of the final rule and that the final rule provide a longer
transition period for compliance with the requirements if natural
persons are included in the final rule.
Certain commenters questioned whether the limit of 25 percent of
tier 1 capital that would have applied to a large covered company (with
$250 billion or more in total consolidated assets or $10 billion or
more in on-balance-sheet foreign exposures) was authorized under the
statute. Commenters also questioned the basis for the 15 percent of
tier 1 capital limit for major covered companies' exposures to major
counterparties. In particular, commenters expressed the view that this
lower limit may not be necessary in light of other post-crisis
financial regulatory reforms adopted by the Board. By contrast, some
commenters argued that the proposal would continue to permit an
excessively high level of exposure. These commenters argued the
proposed limit of 15 percent of a major covered company's tier 1
capital for exposures of the largest financial institutions was too low
and did not take into account the greater social costs of the failure
of a systemically important institution as compared to a smaller
institution.
A number of commenters expressed concern with the Board's approach
to measuring exposures resulting from securities financing
transactions, including securities lending transactions, securities
borrowing transactions, repurchase agreements, and reverse repurchase
agreements. Under the proposal, a covered company would have been
required to measure credit exposure to a counterparty in a securities
financing transaction as the value of any cash and securities
transferred to that counterparty (adjusted upwards by a risk-based add-
on) minus the value of any cash and securities received from that
counterparty as collateral (adjusted downwards by a risk-based
haircut). Commenters contended that the proposed rule's application of
collateral volatility haircuts on both sides of the transaction did not
recognize the risk-mitigating value of positive correlations between
securities on loan and securities received as collateral. Commenters
urged the Board to adopt a more risk-sensitive standardized approach to
measuring securities financing transactions that has recently been
finalized by the BCBS or afford securities financing transactions
treatment similar to that provided for derivative transactions in the
proposal (that is, use of any methodology permitted under the Board's
capital rules), consistent with the large exposure standard.\19\
Commenters noted that the significantly more risk-sensitive treatment
of derivative transactions in the proposed rule would create an
incentive for covered companies and their counterparties to engage in
derivative transactions that replicate the economics of a securities
financing transaction.
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\19\ See Basel Committee on Banking Supervision, Basel III:
Finalising post-crisis reforms (Dec. 2017), https://www.bis.org/bcbs/publ/d424.pdf.
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The proposal contained a section addressing how investments in and
exposures to securitization vehicles, investment funds, and other
special purpose vehicles would be treated. This section of the proposal
specified the circumstances under which a covered company would be
required to look through the vehicle to the underlying exposures. A
number of commenters raised concerns about the breadth and scope of the
look-through approach and requested additional clarity around these
provisions. The commenters recommended that the Board limit the
application of these provisions to only certain types of exposures (for
example, investments in the securitization vehicle). Certain commenters
also requested that the Board not require aggregation of any exposure
to a third party connected to a securitization vehicle, investment
fund, or other special purpose vehicle.
Commenters generally expressed support for certain of the
exemptions and exclusions contained in the proposal, such as the
exemption for trade exposures to qualifying central counterparties, the
exclusion of certain sovereign issuers from the ``counterparty''
definition, and the exemption for intraday exposures. Some commenters
requested additional exemptions in the final rule, including exemptions
for short-dated exposures arising from traditional custody services. A
few commenters requested that the Board maintain flexibility in the
final rule to provide additional exemptions. The Federal Home Loan
Banks urged the Board to exempt credit exposures to the Federal Home
Loan Banks. Commenters also requested a longer initial compliance
period.
A number of commenters asked the Board to consider the costs and
benefits of the proposed rule. Commenters argued that certain aspects
of the proposed rule would make it difficult to implement and that the
Board should evaluate these aspects of the proposal on a cost-benefit
basis.
As required under the Dodd-Frank Act at the time, the proposed rule
would have applied the SCCL to any U.S. BHC or FBO with $50 billion or
more in total consolidated assets. The narrower scope of application of
the final rule reflects the passage of the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA).\20\ Subject to an
eighteen-month transition period, EGRRCPA recently amended section 165
of the Dodd-Frank Act to restrict the scope of application of most
enhanced prudential standards (including SCCL) to U.S. global
systemically important banking organizations (GSIBs) and to

[[Page 38463]]

U.S. bank holding companies (BHCs) and FBOs with $250 billion or more
in total consolidated assets.\21\ Under EGRRCPA, however, the Board may
apply an SCCL or any other enhanced prudential standard to U.S. BHCs or
FBOs with between $100 billion and $250 billion in total consolidated
assets, if the Board makes certain safety and soundness or financial
stability findings.
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\20\ Public Law 115-174, section 401, 132 Stat. 1296 (2018).
\21\ EGRRCPA raised the asset thresholds for application of
enhanced prudential standards under section 165 of the Dodd-Frank
Act in two stages. Immediately on the date of enactment of EGRRCPA,
bank holding companies with total consolidated assets less than $100
billion (other than any bank holding company that is a U.S. GSIB
under the Board's capital rules) were no longer subject to section
165. Eighteen months after the date of enactment of EGRRCPA, bank
holding companies with total consolidated assets less than $250
billion (other than any U.S. GSIB) will no longer be subject to
section 165 of the Dodd-Frank Act, unless the Board determines, by
order or regulation, to apply any enhanced prudential standard to
such firms after making certain statutory findings. See section 401
of EGRRCPA.
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As described below in detail, the Board has modified the proposed
rule in response to comments and in light of the enactment of EGRRCPA,
while taking into account the need to limit the credit exposure of
large financial firms.

C. Overview of the SCCL

Under the final rule, the aggregate net credit exposure of a U.S.
GSIB (major covered company) and any bank holding company with total
consolidated assets of $250 billion or more (collectively, covered
companies) to a single counterparty is subject to one of two credit
exposure limits that are tailored to the size and systemic footprint of
the firm. As discussed below in more detail, the final rule does not
apply to U.S. bank holding companies or FBOs with less than $250
billion in total consolidated assets.\22\
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\22\ The final rule applies to a U.S. intermediate holding
company (IHC) subsidiary of such an FBO that has $50 billion or more
in total consolidated assets. In some cases, these U.S. intermediate
holding companies also may be bank holding companies.
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The first limit under the final rule prohibits any covered company
that is not a major covered company from having aggregate net credit
exposure to an unaffiliated counterparty in excess of 25 percent of its
tier 1 capital.
The second limit prohibits any major covered company from having
aggregate net credit exposure in excess of 15 percent of its tier 1
capital to a major counterparty and in excess of 25 percent of its tier
1 capital to any other counterparty. A ``major counterparty'' is
defined as a global systemically important banking organization or a
nonbank financial company supervised by the Board. This framework is
consistent with the requirement in section 165(a)(1)(B) of the Dodd-
Frank Act that the enhanced standards established by the Board under
section 165 increase in stringency based on factors such as the nature,
scope, size, scale, concentration, interconnectedness, and mix of the
activities of the company.\23\ The framework also is consistent with
the authorization provided to the Board under section 165(e) to apply a
lower limit to the extent necessary to mitigate risks to financial
stability.\24\ The SCCL applicable to covered companies in the final
rule are summarized in Table 1.
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\23\ 12 U.S.C. 5365(a)(1)(B); see also 12 U.S.C. 5365(a)(2)(A).
\24\ 12 U.S.C. 5365(e); see Board of Governors of the Federal
Reserve System, Calibrating the Single-Counterparty Credit Limit
between Systemically Important Financial Institutions (Mar. 4,
2016), https://www.federalreserve.gov/aboutthefed/boardmeetings/sccl-paper-20160304.pdf.

Table 1--Single-Counterparty Credit Limits Applicable to Covered
Companies
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Category of covered company Applicable credit exposure limit
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Covered companies that are Aggregate net credit exposure to a
not major covered companies. counterparty cannot exceed 25 percent of
a covered company's tier 1 capital.
Major covered companies (U.S. Aggregate net credit exposure to a major
GSIBs). counterparty cannot exceed 15 percent of
a major covered company's tier 1
capital.
Aggregate net credit exposure to any
other counterparty cannot exceed 25
percent of a major covered company's
tier 1 capital.
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As discussed below, tier 1 capital provides a superior capital base
relative to capital stock and surplus as it has greater loss-absorbing
capacity. In addition, the 15 percent of tier 1 capital limit is based
on the heightened systemic risk presented by exposures between GSIBs.
In contrast to the proposal, the final rule applies only to FBOs
with $250 billion or more in total global consolidated assets, and
their subsidiary U.S. intermediate holding companies (IHCs) with total
assets of $50 billion or more (together, ``covered foreign entities'').
The proposal would have applied the SCCL to the combined U.S.
operations of any FBO with $50 billion or more in total global
consolidated assets and separately to any FBO's U.S. IHC with $50
billion or more in total consolidated assets. Unlike in the proposal,
an FBO subject to the final rule can comply with the combined U.S.
operations SCCL by certifying to the Board that it meets, on a
consolidated basis, an SCCL established by its home country supervisor
that is consistent with the large exposure standard. The SCCL for U.S.
IHCs that are covered foreign entities are largely unchanged from the
proposal and fall into three tailored tiers. These limits are
summarized in Table 2 below.

Table 2--Single-Counterparty Credit Limits Applicable to U.S. IHCs
------------------------------------------------------------------------
Category of U.S. IHC Applicable credit exposure limit
------------------------------------------------------------------------
U.S. IHCs that have total Aggregate net credit exposure of the U.S.
consolidated assets of at IHC to a counterparty cannot exceed 25
least $50 billion but less percent of the IHC's total regulatory
than $250 billion. capital plus the balance of its
allowance for loan and lease losses
(ALLL) not included in tier 2 capital
under the capital adequacy guidelines in
12 CFR part 252.
U.S. IHCs that have $250 Aggregate net credit exposure of the U.S.
billion or more in total IHC to a counterparty cannot exceed 25
consolidated assets but are percent of the IHC's tier 1 capital.
not major U.S. IHCs.

[[Page 38464]]

U.S. IHCs that have $500 Aggregate net credit exposure of a major
billion or more in total U.S. IHC to a major counterparty cannot
consolidated assets (major exceed 15 percent of the IHC's tier 1
U.S. IHCs). capital.
Aggregate net credit exposure of a major
U.S. IHC to any other counterparty
cannot exceed 25 percent of the IHC's
tier 1 capital.
------------------------------------------------------------------------

The SCCL in the final rule apply to the credit exposures of a
covered company on a consolidated basis, including any subsidiaries, to
any unaffiliated counterparty. As discussed below, subsidiary of a
covered company under the final rule is defined to mean a company that
is consolidated on the financial statements of the covered company.\25\
A counterparty includes a company (including any consolidated
affiliates of the company, as discussed below); a natural person
(including the person's immediate family) where the exposure to the
natural person exceeds 5 percent of the covered company's tier 1
capital; a U.S. state (including all of its agencies,
instrumentalities, and political subdivisions); certain foreign
sovereign entities (including their agencies and instrumentalities);
and political subdivisions of foreign sovereign entities (including
their agencies and instrumentalities).
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\25\ See final rule Sec. 252.71(gg).
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As noted, the SCCL in the final rule apply to a covered company's
aggregate net credit exposure, rather than aggregate gross credit
exposure, to a counterparty. The key difference between gross credit
exposure and net credit exposure is that a company's net credit
exposure takes into account any available credit risk mitigants--for
example, collateral, guarantees, credit or equity derivatives, and
other hedges--provided the credit risk mitigants meet certain
requirements in the rule, as discussed more fully below. To illustrate,
if a covered company had $100 in gross credit exposure to a
counterparty with respect to a particular credit transaction, and the
counterparty pledged collateral with an adjusted market value of $50,
the full amount of which qualified as ``eligible collateral'' under the
final rule, the covered company's net credit exposure to the
counterparty on the transaction would be $50, provided that the other
$50 would be ``risk-shifted'' to the eligible collateral issuer, as
described below.
In order to calculate its aggregate net credit exposure to a
counterparty, a covered company first must calculate its gross credit
exposure to the counterparty on each credit transaction in accordance
with certain valuation and other requirements under the final rule.
Second, the covered company must reduce its gross credit exposure
amount based on eligible credit risk mitigants to determine its net
credit exposure for each credit transaction with the counterparty.
Third and finally, the covered company must sum all of its net credit
exposures to the counterparty to calculate the covered company's
aggregate net credit exposure to the counterparty. It is this final
amount, the aggregate net credit exposure, that is subject to the SCCL
under the final rule.
The final rule applies a ``risk-shifting'' approach with respect to
a credit exposure involving eligible collateral or an eligible
guarantor. In general, any reduction in the exposure amount to the
original counterparty relating to the eligible collateral or eligible
guarantor would result in a dollar-for-dollar increase in exposure to
the eligible collateral issuer or eligible guarantor (as applicable).
For example, in the case discussed above where a covered company had
$100 in gross credit exposure to a counterparty and the counterparty
pledged collateral with an adjusted market value of $50, the covered
company would have net credit exposure to the counterparty on the
transaction of $50 and net credit exposure to the issuer of the
collateral of $50. In no case, however, would risk-shifting result in
credit exposure to a counterparty that is any larger than the credit
exposure being mitigated. As a specific example, in the foregoing
example, if the exposure was overcollateralized with $150 in
collateral, the exposure to the issuer of the collateral would be
capped at $100 while the exposure to the counterparty would be reduced
to $0.
In cases where a covered company hedges its exposure to an entity
that is not a ``financial entity'' (a non-financial entity) using an
eligible credit or equity derivative, and the underlying exposure is
subject to the Board's market risk capital rule (12 CFR part 217,
subpart F), the covered company must calculate its exposure to the
eligible guarantor using a methodology that it is permitted to use
under the Board's risk-based capital rules. For these purposes, a
``financial entity'' includes regulated U.S. financial institutions,
such as holding companies, insurance companies, broker-dealers, banks,
thrifts, and futures commission merchants, as well as foreign banking
organizations and non-U.S.-based securities firms and non-U.S.-based
insurance companies subject to consolidated supervision and regulation
comparable to that imposed on U.S. depository institutions, securities
broker-dealers, or insurance companies.\26\
---------------------------------------------------------------------------

\26\ See final rule Sec. 252.71(r).
---------------------------------------------------------------------------

II. SCCL for Covered Companies

A. Key Terminology and Concepts

The terms ``covered company'' and ``counterparty'' form the basis
for application of the SCCL in the final rule. The final rule contains
modifications from the proposal to these and other definitions in
response to concerns raised by commenters.
1. Covered Company and Counterparty
Under the proposal, ``covered company'' would have been defined to
mean any bank holding company (other than a foreign banking
organization that is subject to subpart Q of the Board's Regulation YY)
that has $50 billion or more in total consolidated assets and all of
its subsidiaries.\27\ The term ``subsidiary'' of a specified company
would have been defined under the proposal to mean a company that is
directly or indirectly controlled by the specified company.\28\ The
applicable definition of ``control'' was defined by reference to
section 2(a) of the BHC Act.\29\
---------------------------------------------------------------------------

\27\ See proposed rule Sec. 252.71(f).
\28\ See proposed rule Sec. 252.71(cc).
\29\ See section 252.2(g) of the Board's Regulation YY (12 CFR
252.2(g)). Control under the BHC Act is defined to mean a company
(1) owns, controls, or has the power to vote 25 percent or more of
any class of voting securities of another company; (2) controls in
any manner the election of a majority of trustees of the other
company; or (3) the Board determines, after notice and opportunity
for hearing, that the company indirectly exercises a controlling
influence over the management or policies of the other company. 12
U.S.C. 1841(a)(2).
---------------------------------------------------------------------------

In addition, the proposal would have defined ``counterparty'' to
mean a natural person and members of the

[[Page 38465]]

person's immediate family; a state \30\ including all of its agencies,
instrumentalities, and political subdivisions (including
municipalities); certain foreign sovereign entities and all of their
agencies and instrumentalities; and political subdivisions of a foreign
sovereign entity such as states, provinces, and municipalities.\31\
Under the proposal, a counterparty also would have included any company
and all persons that the counterparty (1) owns, controls, or holds with
the power to vote 25 percent or more of a class of voting securities;
(2) owns, controls, or holds 25 percent or more of the total equity; or
(3) consolidates for financial reporting purposes.\32\
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\30\ ``State'' would have been defined by reference to the
enhanced prudential standards to mean any state, commonwealth,
territory, or possession of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, American Samoa, Guam, or the United States
Virgin Islands. See 12 CFR 252.2(r).
\31\ See proposed rule Sec. 252.71(e).
\32\ See proposed rule Sec. 252.71(e)(2). The preamble to the
proposal explained that, to the extent that one or more of these
conditions are met with respect to a company's relationship to an
investment fund or vehicle, exposures to such fund or vehicle would
need to be aggregated with that counterparty. See 81 FR at 14,332.
---------------------------------------------------------------------------

The definitions of ``covered company'' and ``counterparty'' were
two of the most commented upon aspects of the proposal. A large number
of commenters urged the Board to use financial consolidation for
aggregating a covered company and its subsidiaries instead of BHC Act
control. These commenters argued that a standard based on financial
consolidation would bring within the scope of the final rule those
exposures that actually put a covered company's capital at risk.
Commenters contended that the financial reporting consolidation
approach would more accurately capture true economic exposures of
covered companies to their counterparties.
Commenters contended that basing the definition of ``covered
company'' on control, as defined under the BHC Act, would introduce
significant complexity into a covered company's management of its
credit limits. This approach also would capture exposures that are not
likely to be material to a covered company, including exposures of
subsidiaries for which a covered company does not have operational
control to actually monitor, measure, and conform credit exposures to
the limits of the final rule. Commenters indicated that opportunities
to use such a subsidiary to evade the final rule would be limited
because a covered company would not exercise operational control of the
subsidiary. Some commenters suggested that, to the extent evasion
remains a concern, the final rule could include an explicit reservation
of authority for the Board to address such concerns, and one commenter
suggested the Board could use its supervisory authority to address any
potential evasion of the final rule. Commenters also contended that
using BHC Act control would impose significant compliance costs to
capture risks that are not likely to be material to a covered company
(i.e., that compliance costs would exceed the limited incremental risk
mitigation benefits).
Commenters also argued that using the BHC Act to define a ``covered
company'' could result in some entities being included as part of both
the covered company and the counterparty at the same time (i.e., in the
case of certain joint venture subsidiaries). Commenters argued that if
financial consolidation is not used to define ``covered company,'' the
final rule must clarify the treatment of joint ventures that could fall
within the scope of being both a covered company and counterparty using
BHC Act control. In the alternative to financial consolidation, these
commenters suggested certain targeted modifications to the definition
of covered company and counterparty to ensure that a joint venture that
is controlled due to BHC Act control (for example, where the covered
company owns 51 percent and the counterparty owns 49 percent) would not
be considered both part of a covered company and of a counterparty
under the final rule.
Commenters urged that, if the final rule does not adopt a financial
consolidation standard to define subsidiaries of a covered company, the
final rule should define subsidiaries of covered companies based on a
simple percentage ownership test like the 2011 proposal and the
counterparty definition (i.e., ownership of 25 percent or more of the
voting securities and ownership of 25 percent or more of the total
equity). Under either this alternative or reference to BHC Act control,
commenters requested categorical exemptions for funds or investments
that are not consolidated for financial reporting purposes. In
particular, commenters urged the Board to provide exemptions for
registered investment companies and foreign public funds including
during the seeding period; certain covered funds as defined in section
13 of the BHC Act, also known as the Volcker Rule, and implementing
regulations, including during the seeding period; certain merchant
banking portfolio companies; companies acquired in the ordinary course
of collecting a debt previously contracted; small business investment
companies and community development investments; and bank collective
investment trusts.
Similar to the comments on the definition of covered company, a
number of commenters urged the Board to define ``counterparty'' with
respect to a company based on financial reporting consolidation and to
eliminate the additional tests based on percentage ownership.\33\ These
commenters asserted that the 25 percent ownership tests added
additional and unnecessary complexity to aggregating counterparty
exposure and would be inconsistent with the large exposure standard. As
with the definition of ``covered company,'' commenters argued that
aggregation of connected counterparties based on financial
consolidation would capture true connected exposure risks consistent
with the purposes of section 165(e) of the Dodd-Frank Act. A few
commenters also indicated that financial consolidation would address
joint venture issues. Other commenters requested that particular
entities not be treated as part of a counterparty for purposes of the
final rule even if they would be consolidated with the counterparty,
including a sponsored or advised registered fund (e.g., during the
seeding period) and special purpose vehicles.
---------------------------------------------------------------------------

\33\ These commenters also contended that the economic
interdependence and control tests to aggregate counterparty
exposures should be eliminated as described further below.
---------------------------------------------------------------------------

To address the concerns raised by commenters and to reduce the
burden of complying with the final rule, the Board has modified the
definitions of ``covered company,'' ``counterparty,'' and
``subsidiary,'' and has added a new term ``affiliate.'' The purpose of
these modifications is to apply a financial consolidation standard to
define both the bank holding companies that are subject to the final
rule and to define the counterparty exposures that are subject to the
SCCL in the final rule. Under the final rule, a ``subsidiary'' is
defined to include a company that is consolidated with the covered
company under applicable accounting standards, and an ``affiliate'' is
defined to include any subsidiary of the company and any other company
that is consolidated with the company under applicable accounting
standards.\34\ For example, a subsidiary of a covered company under the
final rule includes an insured depository institution that the covered

[[Page 38466]]

company consolidates for financial reporting purposes. Similarly, an
affiliate of a counterparty under the final rule includes a parent
company of the counterparty, as well as any other firm that is
consolidated with the counterparty under applicable accounting
standards. Applicable accounting standards can include U.S. Generally
Accepted Accounting Principles, the International Financial Reporting
Standards, or other similar standards. ``Subsidiary'' and ``affiliate''
would also include a company that is not subject to such principles or
standards, if consolidation would have occurred if such principles or
standards had applied.\35\
---------------------------------------------------------------------------

\34\ See final rule Sec. 252.71(b) & (gg).
\35\ Id.
---------------------------------------------------------------------------

Using financial accounting standards for purposes of the final
rule, rather than the control test in the BHC Act, should address many
of the concerns raised by commenters and serve to reduce burden and
complexity and mitigate costs of complying with the requirements of the
final rule, without allowing evasion of the SCCL. Although
consolidation tests under relevant accounting standards must also be
applied on a case-by-case basis, like the proposed rule's control
tests, the analysis already has been performed for companies that
prepare their financial statements in accordance with relevant
accounting standards. For companies that do not prepare these
statements, industry participants should be more familiar with the
relevant accounting standards and tests, and they will be less
burdensome to apply. Additionally, the accounting consolidation
standard typically results in consolidation at a higher level of
ownership than the 25 percent voting interest standard that applies
under the BHC Act control test, which is responsive to commenters'
concerns that the proposed definitions were overly inclusive.
This change in the final rule should also address the concerns
raised by commenters with respect to investment funds. Investment funds
generally are not consolidated with the asset manager other than during
the seeding period or other periods in which the manager holds an
outsize portion of the fund's interest, although this may depend on the
facts and circumstances. During these periods, when a covered company
may own up to 100 percent of the ownership interest of an investment
fund, the investment fund should be treated as a subsidiary. Similarly,
merchant banking portfolio companies and companies held pursuant to
debt previously contracted authorities would be treated as part of the
covered company if consolidated with the covered company.
Joint ventures that are consolidated with the covered company are
treated as part of a covered company even if a counterparty also has an
investment in such joint venture. If a covered company invests in a
minority-owned joint venture that is not consolidated, the final rule
requires the covered company to treat that joint venture as a
counterparty and recognize exposures to the joint venture.
The final rule also has adjusted the asset threshold for covered
companies. As noted, EGRRCPA raised the threshold, from $50 billion to
$250 billion in total consolidated assets, for the application of the
SCCL and other enhanced prudential standards to a bank holding company
in two stages.\36\ EGRRCPA also provides the Board with 18 months to
determine whether to apply the SCCL or other enhanced prudential
standards to BHCs with between $100 billion and $250 billion in total
consolidated assets. Accordingly, the final rule defines a ``covered
company'' to mean any U.S. GSIB and any BHC (other than an FBO that is
subject to the SCCL under subpart Q of Regulation YY) that has $250
billion or more in total consolidated assets. The Board is developing a
comprehensive proposal on application of enhanced prudential standards
to U.S. BHCs and FBOs with total consolidated assets of $100 billion
but less than $250 billion. In connection with this proposal and other
tailoring and implementation efforts related to EGRRCPA, the Board may
make amendments to the SCCL framework in this final rule.
---------------------------------------------------------------------------

\36\ This change took effect on the date of enactment of EGRRCPA
for U.S. BHCs with total consolidated assets of less than $100
billion, and will take effect 18 months after enactment for all
other firms. See section 401(d)(1) of EGRRCPA. Notwithstanding this
change, the enhanced prudential standards required under section
165, including the SCCL, continue to apply to U.S. GSIBs, regardless
of asset size. See section 401(f) of EGRRCPA. In addition and as
noted, the Board may determine to apply the SCCL, or any other
enhanced prudential standard, to U.S. BHCs or FBOs with between $100
billion and $250 billion in total consolidated assets, if the Board
makes certain safety and soundness or financial stability findings.
---------------------------------------------------------------------------

Additionally, the final rule maintains the economic interdependence
and aggregation due to control relationships for covered companies as
described below.\37\ These additional tests require a covered company
to aggregate counterparties in certain cases and further allow the
Board to aggregate counterparties. Specifically, these tests provide
for the aggregation of counterparties where the failure, default,
insolvency, or material financial distress of one counterparty would
cause the failure, default, insolvency, or material financial distress
of the other counterparty or due to the presence of significant control
relationships.
---------------------------------------------------------------------------

\37\ See final rule Sec. 252.76.
---------------------------------------------------------------------------

The final rule retains individuals and certain governmental
entities within the definition of a ``counterparty,'' because credit
exposures to such entities can create risks to the covered company that
are similar to those created by large exposures to companies.\38\ The
severe distress or failure of an individual, U.S. state or
municipality, sovereign entity, or political subdivision of a sovereign
entity, could have effects on a covered company that are comparable to
those caused by the failure of a financial firm or nonfinancial
corporation to which the covered company has a large credit exposure.
With respect to sovereign entities, these risks are most acute in the
case of sovereigns that present greater credit risk. Therefore, the
Board believes that it is appropriate to extend the SCCL to foreign
sovereign entities that do not receive a zero percent risk weight under
the standardized approach of the Board's risk-based capital rule in the
same manner as credit exposures to companies.\39\
---------------------------------------------------------------------------

\38\ See final rule Sec. 252.71(e); 12 U.S.C.
5365(b)(1)(B)(iv).
\39\ See final rule Sec. 252.71(e); 12 CFR part 217, subpart D.
The final rule would not apply to exposures of a U.S. IHC or of the
combined U.S. operations of an FBO to the FBO's home country
sovereign entity, regardless of the risk weight assigned to that
sovereign entity under the Board's capital rules (12 CFR part 217).
See section III.D.4 infra.
---------------------------------------------------------------------------

The Board is extending the SCCL to individuals, U.S. states and
municipalities, and certain foreign sovereigns using two legal
authorities. First, under section 165(b)(1)(B) of the Dodd-Frank Act,
the Board may impose such additional enhanced prudential standards as
the Board of Governors determines are appropriate.\40\ Second, under
section 5(b) of the BHC Act, the Board may issue such regulations as
may be necessary to enable it to administer and carry out the purposes
of this chapter and prevent evasions thereof.\41\ Such purposes include
examining the financial, operational, and other risks within the bank
holding company system that may pose a threat to (1) the safety and
soundness of the bank holding company or of any depository institution
subsidiary of the bank holding company; or (2) the stability of the
financial system of the United States.\42\ The final rule would

[[Page 38467]]

help to promote the safety and soundness of a covered company and
mitigate risks to financial stability by limiting a covered company's
maximum credit exposure to an individual, U.S. state, foreign sovereign
entity, or political subdivision of a foreign sovereign entity, and
thereby reduce the risk that the failure of such individual or entity
could cause the failure or material financial distress of a covered
company.
---------------------------------------------------------------------------

\40\ 12 U.S.C. 5365(b)(1)(B).
\41\ 12 U.S.C. 1844.
\42\ 12 U.S.C. 1844(c)(2).
---------------------------------------------------------------------------

i. Companies as Counterparties
To address the concerns raised by commenters and reduce burden on
covered companies, the Board has modified the definition of
``counterparty'' with respect to a company. Under the final rule, a
counterparty that is a company includes the company and all its
affiliates.\43\ As noted, the final rule applies a financial
consolidation test with respect to the definition of counterparty to
address concerns raised by commenters and to reduce the cost of
complying with the final rule for the same reasons as described above
with respect to covered company.
---------------------------------------------------------------------------

\43\ See final rule Sec. 252.71(e)(2).
---------------------------------------------------------------------------

ii. Natural Persons as Counterparties
As noted, the proposal would have included in the definition of
``counterparty'' a natural person and members of the person's immediate
family as a counterparty. Commenters urged the Board to exclude natural
persons from the credit exposure limits of the final rule. These
commenters argued that a natural person, even when aggregated with the
person's immediate family, would be unlikely to approach 25 percent of
a covered company's eligible capital base. Commenters argued that it
would be impossible for such exposures to pose the types of systemic
interconnectivity risks that the Dodd-Frank Act was meant to address
and that section 165(e) prohibits a covered company from having credit
exposure to an ``unaffiliated company,'' which indicates that Congress
did not intend to cover exposures to natural persons. Further,
commenters contended that collecting information that would be required
to monitor exposures to natural persons aggregated with their immediate
family and developing systems to monitor and track these relationships
across millions of individual customers may not be possible and could
not be justified on a cost-benefit basis. Commenters suggested that if
exposure to a natural person is included in the final rule and required
to be aggregated with immediate family members for purposes of the
exposure limits under the final rule, a threshold of 5 percent of a
covered company's eligible capital base should apply. Commenters
pointed out that such a threshold would mitigate the need to engage in
an analysis of every individual that might require aggregation and
thereby reduce the burden of complying with the final rule.
The final rule continues to cover exposures to natural persons,
together with members of the person's immediate family, as
counterparties, subject to a threshold discussed below.\44\ ``Immediate
family'' is defined under the final rule in the same manner as under
the proposal to mean the spouse of an individual, the individual's
minor children, and any of the individual's children (including adults)
residing in the individual's home.\45\ To address concerns raised by
commenters, the final rule only requires a covered company to aggregate
a natural person with members of the person's immediate family if the
exposure of the covered company to the natural person exceeds 5 percent
of the company's tier 1 capital. This modification should reduce burden
and address concerns raised by commenters.
---------------------------------------------------------------------------

\44\ See final rule Sec. 252.71(e).
\45\ See final rule Sec. 252.71(u).
---------------------------------------------------------------------------

iii. Governmental Entities as Counterparties
a. States
As noted, the proposal would have included a State, collectively
with all of its agencies, instrumentalities and political subdivisions
(including municipalities) as a counterparty.\46\ Commenters argued
that the proposal provided no basis for the aggregation of states and
political subdivisions, ignored the different credit profiles that
exist among a State and its subdivisions, and is at odds with
historical default experience. As a result, certain commenters urged
the Board to use the economic interdependence and control aggregation
tests to determine if a covered company must aggregate its exposures to
a State with exposures to its political subdivisions subject to a
threshold of 5 percent or 10 percent of eligible capital.\47\ These
commenters argued that at a minimum, municipal revenue bonds, which are
generally issued to finance public projects, should not be aggregated
together with a State and its agencies, instrumentalities, and
political subdivisions as these bonds are contractually supported by a
specific stream of revenue derived from the relevant project, which is
expressly recognized in Chapter 9 of the U.S. Bankruptcy Code.
---------------------------------------------------------------------------

\46\ See 12 CFR 252.2(r).
\47\ The economic interdependence and control aggregation tests
are described further in Section II.F infra.
---------------------------------------------------------------------------

The events that would render a State incapable of repaying a loan
or bond would likely be highly correlated to the economic performance
of the State and would have similar effects on the revenue streams
underlying municipal revenue bonds. Accordingly, the final rule, like
the proposal, treats a State and all of its agencies,
instrumentalities, and political subdivisions (including any
municipalities), collectively, as a counterparty.\48\ In addition, the
final rule requires that a covered company aggregate municipal revenue
bonds with other types of municipal bonds, as well as exposures of the
State and its agencies, instrumentalities, and other political
subdivisions. Similarly, the Board has declined to adopt a 5 percent
threshold for aggregating States with their agencies,
instrumentalities, and political subdivisions. The Board believes that
a covered company should limits its exposure to such entities to no
more than 25 percent of its tier 1 capital given the high likelihood of
correlation in the economic performance of these entities.
---------------------------------------------------------------------------

\48\ See final rule Sec. 252.71(e)(3).
---------------------------------------------------------------------------

b. Foreign Sovereigns
The proposal would have included as a counterparty, a foreign
sovereign entity and all of its agencies and instrumentalities (not
including any political subdivision) that is not assigned a zero
percent risk weight under the standardized approach in the Board's
capital rules (12 CFR part 217, subpart D).\49\ In addition, under the
proposal, a covered company would have been required to treat a
political subdivision of a foreign sovereign entity, together with its
agencies and instrumentalities, as a single counterparty.\50\
---------------------------------------------------------------------------

\49\ See proposed rule Sec. 252.71(e)(4). ``Sovereign entity''
would have been defined under the proposal to mean a central
national government or an agency, department, ministry, or central
bank, but not including any political governmental subdivision such
as a state, province or municipality. See proposed rule Sec.
252.71(bb).
\50\ See proposed rule Sec. 252.71(e)(5).
---------------------------------------------------------------------------

A few commenters opposed the exemption for zero risk-weight
sovereign exposures on the basis that such exposures can be risky.
Other commenters urged that the carve-out for exposures to zero risk-
weight foreign sovereign entities should be extended to their zero
risk-weight public sector entities (PSEs), because they similarly pose
little risk of default, and this

[[Page 38468]]

treatment would align the treatment of such PSEs with the determination
of risk weights under the risk-based capital rules.
Some commenters urged the Board not to aggregate foreign sovereign
entities with their agencies and instrumentalities. These commenters
recommended an approach that foreign sovereign entities only be
aggregated with their agencies and instrumentalities if the entities
meet the economic interdependence test, including the 5 percent of a
covered company's eligible capital base threshold.
One commenter argued that the final rule should exempt exposures of
foreign subsidiaries of covered companies to the respective sovereign
entity of the jurisdiction in which such subsidiary is incorporated,
regardless of the risk weight assigned to the sovereign entity. This
commenter argued that foreign subsidiaries of covered companies need to
retain these exposures as part of the transactions in a host country in
order to manage their liquidity risk, to have access to intra-day
liquidity facilities provided by central banks, and to have collateral
to pledge at local central counterparties. Finally, this commenter
urged the Board to treat each political subdivision of a foreign
sovereign entity as a separate counterparty from any other political
subdivision, as is the case for U.S. states, and urged that entities
owned by a foreign government with their own revenue sources and
without government guarantees should be treated as different
counterparties since each poses its own credit risk characteristics.
The final rule retains the proposed approach to sovereign entities
without modification. The final rule continues to include certain
governmental entities within the definition of a ``counterparty''
because credit exposures to such entities create risks to the covered
company that are similar to those created by large exposures to
companies. The severe distress or failure of a sovereign entity could
have effects on a covered company that are comparable to those caused
by the failure of a financial firm or nonfinancial corporation to which
the covered company has a large credit exposure. These risks are most
acute in the case of sovereign entities that present greater credit
risk, as evidenced by the risk weight that applies to the sovereign
entity under the Board's capital rules.
In response to commenters who requested that the Board treat each
political subdivision of a foreign sovereign entity as a separate
counterparty from any other political subdivision, as is the case for
the states of the U.S., the Board is confirming that each political
subdivision of a foreign sovereign entity (together with any agencies
and instrumentalities of the political subdivision, collectively) would
be treated as a separate counterparty.\51\ This treatment is
appropriate because the events that would render a political
subdivision incapable of repaying a loan or bond would likely be highly
correlated to the economic performance of the agencies and
instrumentalities within the political subdivision.
---------------------------------------------------------------------------

\51\ See final rule Sec. 252.71(e)(5).
---------------------------------------------------------------------------

2. Major Company and Major Counterparty
The requirements of the proposal would have provided that no
``major covered company,'' defined as a covered company that is a U.S.
global systemically important banking organization and all of its
subsidiaries, could have aggregate net credit exposure to a major
counterparty in excess of 15 percent of the major covered company's
tier 1 capital.\52\ A ``major counterparty'' was defined as (1) any
major covered company and all of its subsidiaries, collectively; (2)
any foreign banking organization and all of its subsidiaries,
collectively, that would be considered a global systemically important
foreign banking organization; and (3) any nonbank financial company
supervised by the Board.\53\
---------------------------------------------------------------------------

\52\ See proposed rule Sec. 252.72(c).
\53\ See proposed rule Sec. 252.71(v).
---------------------------------------------------------------------------

Under the proposal, a foreign banking organization would have been
considered to be a global systemically important foreign banking
organization if (1) the foreign banking organization has the
characteristics of a global systemically important banking organization
under the global methodology; or (2) the Board, using any relevant
information determines that the foreign banking organization would be a
GSIB under the global methodology; that the top-tier foreign banking
organization, if it were subject to the Board's capital rules would be
identified as a GSIB; or that the U.S. IHC, if it were subject to the
Board's capital rules, would be identified as a GSIB.
No comments were received on the definition of ``major covered
company'' under the proposal. In terms of the identification of a
``major counterparty,'' commenters urged the Board to make this
determination by reference to the annual FSB Report listing GSIBs
identified by the BCBS.\54\ Commenters indicated this approach to
identifying major counterparties would harmonize with the BCBS approach
and allow reliance upon and integration with pre-existing data sources.
---------------------------------------------------------------------------

\54\ The Financial Stability Board maintains and periodically
publishes a list of entities that have the characteristics of a
global systemically important banking organization on its website,
http://www.fsb.org.
---------------------------------------------------------------------------

The methodology in the Board's GSIB surcharge rule identifies the
most systemically important U.S. banking organizations.\55\ This
methodology evaluates a banking organization's systemic importance on
the basis of its size, interconnectedness, cross-jurisdictional
activity, substitutability, and complexity. The firms that score
highest on these attributes are classified as GSIBs. While the GSIB
surcharge rule itself applies only to U.S bank holding companies, its
methodology is equally well suited to evaluating the systemic
importance of foreign banking organizations. Moreover, the method 1
methodology in the GSIB surcharge rule for identifying GSIBs is
consistent with the methodology developed by the BCBS to identify
GSIBs; foreign jurisdictions collect information from banking
organizations in connection with that framework that parallels the
information collected by the Board for purposes of the Board's GSIB
surcharge rule.
---------------------------------------------------------------------------

\55\ See 12 CFR part 217, subpart H.
---------------------------------------------------------------------------

Given that the global methodology and the method 1 methodology in
the GSIB surcharge rule to identify GSIBs are virtually identical, the
two methodologies should lead to the same outcomes, and the
requirements in the final rule to identify whether a foreign banking
organization is a GSIB should entail minimal additional burden for
foreign banking organizations. Accordingly, the final rule generally
adopts the same methodology as the proposal for determining whether a
foreign banking organization and all of its subsidiaries, collectively,
would be considered a global systemically important foreign banking
organization, with minor changes to clarify that this determination
applies at the top-tier foreign banking organization.\56\
---------------------------------------------------------------------------

\56\ ``Top-tier foreign banking organization,'' with respect to
a foreign banking organization, means the top-tier foreign banking
organization or, alternatively, a subsidiary of the top-tier foreign
banking organization designated by the Board. 12 CFR 252.2(aa).
---------------------------------------------------------------------------

The final rule applies certain notice requirements to foreign
banking organizations subject to the final rule. First, each top-tier
foreign banking organization that controls a U.S. IHC is required to
submit to the Board by

[[Page 38469]]

January 1 of each calendar year notice of whether the home country
supervisor (or other appropriate home country regulatory authority) of
the top-tier foreign banking organization of the U.S. IHC has adopted
standards consistent with the global methodology. In addition, these
firms are required to provide notice of whether the top-tier foreign
banking organization prepares the indicators used by the global
methodology to identify a banking organization as a global systemically
important banking organization and, if it does, whether the top-tier
foreign banking organization has determined that it has the
characteristics of a global systemically important banking organization
under the global methodology. This section also provides that a top-
tier foreign banking organization, which controls a U.S. IHC and
prepares or reports for any purpose the indicator amounts necessary to
determine whether the top-tier foreign banking organization is a global
systemically important banking organization under the global
methodology, must use the data to determine whether the top-tier
foreign banking organization has the characteristics of a global
systemically important banking organization under the global
methodology. These requirements mirror requirements in other Board
regulations to identify foreign GSIBs, and an FBO is not expected to
provide separate notice to the Board for purposes of the final rule if
the FBO has already provided notice related to other regulatory
requirements.\57\
---------------------------------------------------------------------------

\57\ See, e.g., 12 CFR 252.153(b)(4).
---------------------------------------------------------------------------

3. Aggregate Net Credit Exposure
As noted, aggregate net credit exposure is the credit exposure
amount to which the SCCL apply. The proposal would have defined
aggregate net credit exposure to mean the sum of all net credit
exposures of a covered company to a single counterparty. Under the
proposal, ``covered company'' would have been defined to include all of
the company's subsidiaries (that is, companies that were under common
control of the covered company for purposes of section 2 of the BHC
Act).\58\ As noted, the definitions of ``covered company'' and
``subsidiary'' in the final rule have been revised to incorporate
financial consolidation principles, and ``subsidiary'' is no longer
part of the definition of ``covered company.''
---------------------------------------------------------------------------

\58\ See proposed rule Sec. 252.71(f) & (cc); see also Sec.
252.2(g) of the Board's Regulation YY, 12 CFR 252.2(g).
---------------------------------------------------------------------------

Under the final rule, ``aggregate net credit exposure'' is defined
to mean the sum of all net credit exposures of a covered company and
its subsidiaries to a single counterparty as calculated under the final
rule.\59\ The purpose of this modification is to make clear that,
notwithstanding the changes to the definition of ``covered company''
and ``subsidiary'' from the proposal to the final rule, a covered
company must still aggregate exposures of its subsidiaries for purposes
of the final rule.
---------------------------------------------------------------------------

\59\ See final rule Sec. 252.71(c). ``Net credit exposure''
also is a defined term under the final rule. ``Net credit exposure''
is defined to mean, with respect to any credit transaction, the
gross credit exposure of a covered company and all its subsidiaries
calculated under Sec. 252.73, as adjusted in accordance with Sec.
252.74. See final rule Sec. 252.71(aa).
---------------------------------------------------------------------------

4. Financial Entity
Under the proposal, a covered company would not have been required
to include the notional amount of an eligible credit or equity
derivative for a hedged transaction where the counterparty is not a
financial entity. A ``financial entity'' would have included regulated
U.S. financial institutions, such as insurance companies, broker-
dealers, bank holding companies, banks, thrifts, and futures commission
merchants, as well as foreign banking organizations and certain non-
U.S.-based securities firms or non-U.S.-based insurance companies.\60\
A ``financial entity'' also would have included a company whose primary
business includes the management of financial assets, lending,
factoring, leasing, provision of credit enhancements, securitization,
investments, financial custody, central counterparty services,
proprietary trading, insurance, and other financial services.\61\
---------------------------------------------------------------------------

\60\ See proposed rule Sec. 252.71(q).
\61\ Id.
---------------------------------------------------------------------------

In order to achieve additional clarity, the definition of
``financial entity'' in the final rule has been modified from the
proposal to provide a list of discrete entities that would constitute
financial entities for purposes of the final rule.\62\ In developing
this definition of ``financial entity,'' the Board sought to provide
certainty and clarity to covered companies regarding the types of
financial firms that would require notional amount treatment of
eligible credit and equity derivatives and those that would not (that
is, where the counterparty on the underlying hedged transaction is not
a financial entity). The approach in the final rule is intended to
strike a balance between the desire to capture all financial entities,
without being overly broad and capturing commercial firms and sovereign
entities.
---------------------------------------------------------------------------

\62\ 12 CFR 252.71(r).
---------------------------------------------------------------------------

5. Eligible Collateral
Under the proposal, ``eligible collateral'' would have been defined
to include cash on deposit with a covered company (including cash held
for the covered company by a third-party custodian or trustee); debt
securities (other than mortgage- or asset-backed securities) that are
bank-eligible investments and that have an investment grade rating;
equity securities that are publicly traded; or convertible bonds that
are publicly traded.\63\ Section 252.74 of the proposal explained how
eligible collateral would have been taken into account in the
calculation of net credit exposure.\64\
---------------------------------------------------------------------------

\63\ See proposed rule Sec. 252.71(k); see also 12 CFR 252.2(p)
(defining ``publicly traded'').
\64\ See proposed rule Sec. 252.74.
---------------------------------------------------------------------------

A number of commenters argued that the list of ``eligible
collateral'' should be consistent with the definition of ``financial
collateral'' under the Board's regulatory capital rules and with the
large exposure standard. In particular, these commenters requested that
the final rule should include as ``eligible collateral'' gold, any
long- or short-term debt securities that are not resecuritization
exposures and that are investment grade (including mortgage- or asset-
backed securities), and money market fund shares and other mutual fund
shares if a price of such shares is publicly quoted daily.
As requested by certain commenters, the final rule makes clear that
cash in a foreign currency or U.S. dollars is an acceptable form of
eligible collateral and that cash held by a third-party custodian or
trustee may be held inside or outside the United States. For any asset
to count as eligible collateral under the final rule, as under the
proposal, the covered company generally is required to have a
perfected, first priority security interest in the collateral or the
legal equivalent thereof, if outside of the United States.
In response to comments, the Board has added gold bullion to the
list of eligible collateral. The Board has declined to add certain
other types of collateral such as mortgage-backed securities (MBS) and
shares in money market mutual funds (MMMF) as requested by commenters
even though these collateral types are recognized as eligible
collateral in the Board's capital rules. The Board has decided to limit
the scope of eligible collateral to restrict those collateral types
that would be likely to suffer from a bout of illiquidity and general
market dislocation in a period of financial stress when a

[[Page 38470]]

covered company may need to monetize collateral quickly in the face of
a large counterparty default. This stands in contrast to the purpose of
collateral for capital purposes, which serves to offset losses that may
arise in a variety of circumstances, not all of which coincide with the
default of a significant counterparty or a period of financial
distress. Unlike gold bullion, both MMMF and MBS have previously been
subject to bouts of illiquidity and dislocation during periods of
financial stress due to their complexity and lack of transparency. In
light of these structural features of both MBS and MMMF, the final rule
does not to recognize these collateral types as eligible collateral.
Accordingly, under the final rule, ``eligible collateral''
generally is defined in a similar manner as in the proposal to include
cash in foreign currency or U.S. dollars on deposit with a covered
company (including cash held for the covered company by a custodian or
trustee that is not an affiliate of the covered company whether inside
or outside the United States); debt securities (other than mortgage- or
asset-backed securities) that are bank-eligible investments and that
have an investment grade rating; equity securities that are publicly
traded; convertible bonds that are publicly traded; or gold.\65\ Like
the proposal, the final rule generally excludes mortgage-backed
securities and other asset-backed securities from the definition of
``eligible collateral'' because of concerns that those securities may
be more likely than other securities to become illiquid and lose value
during periods of financial instability. However, asset-backed
securities guaranteed by a U.S. government-sponsored entity, such as
Ginnie Mae, Fannie Mae, or Freddie Mac, qualify as eligible collateral
under the final rule so long as the entity remains under U.S.
government conservatorship. The final rule clarifies that eligible
collateral does not include debt securities or equity securities issued
by the covered company or its affiliate.
---------------------------------------------------------------------------

\65\ See proposed rule Sec. 252.71(k) and final rule Sec.
252.71(k); see also 12 CFR 252.2(p) (defining ``publicly traded'').
---------------------------------------------------------------------------

6. Credit Transaction
Consistent with the statutory definition of credit exposure, the
proposed rule would have defined ``credit transaction'' to mean, with
respect to a counterparty, any (i) extension of credit to the
counterparty, including loans, deposits, and lines of credit, but
excluding advised or other uncommitted lines of credit; (ii) repurchase
or reverse repurchase agreement with the counterparty; (iii) securities
lending or securities borrowing transaction with the counterparty; (iv)
guarantee, acceptance, or letter of credit (including any confirmed
letter of credit or standby letter of credit) issued on behalf of the
counterparty; (v) purchase of, or investment in, securities issued by
the counterparty; (vi) credit exposure to the counterparty in
connection with a derivative transaction between the covered company
and the counterparty; (vii) credit exposure to the counterparty in
connection with a credit derivative or equity derivative transaction
between the covered company and a third party, the reference asset of
which is an obligation or equity security issued by the counterparty;
\66\ and (viii) any transaction that is the functional equivalent of
the above, and any similar transaction that the Board determines to be
a credit transaction for purposes of this subpart.\67\
---------------------------------------------------------------------------

\66\ ``Credit derivative'' and ``equity derivative'' are defined
in Sec. 252.71(g) and (p) of the proposed rule, respectively.
\67\ See proposed rule Sec. 252.71(h). The definition of
``credit transaction'' in the proposed rule is similar to the
definition of ``credit exposure'' in section 165(e) of the Dodd-
Frank Act. See 12 U.S.C. 5365(e)(3).
---------------------------------------------------------------------------

One commenter urged the Board to exclude foreign demand deposits
associated with custody services from the credit exposure calculation
under the final rule. This commenter argued that cash deposits
denominated in a foreign currency are often received from custody
clients as a result of securities ownership and held in a demand
deposit account with sub-custodian banks in jurisdictions where it does
not self-custody.
The final rule retains the proposed definition of ``credit
transaction'' without modification. The final rule does not exclude
foreign demand deposits associated with custody services as requested
by certain commenters. Section 165(e) explicitly provides that ``credit
exposure'' means all extensions of credit including loans, deposits,
and lines of credit. The Board may only grant exemptions that are in
the public interest and consistent with the purposes of section 165(e)
of the Dodd-Frank Act. In light of the plain language of the statute,
the Board believes that if a covered company holds deposits at a
counterparty, those deposits should be subject to the limits of the
final rule and that an exclusion would not be appropriate in these
circumstances. The final rule exempts intra-day exposures to minimize
the impact of the proposal on payment and settlement transactions.
7. Other Terms
The final rule also defines a number of other terms, which are
defined largely in the same manner as under the proposal. Additionally,
there are certain newly defined terms that were not defined in the
proposal but which should provide additional clarity regarding the
application of the SCCL. These terms are discussed throughout the
remainder of this preamble.

B. Credit Exposure Limits

Section 252.72 of the proposed rule would have contained the key
SCCL.\68\ As noted, a number of commenters argued that the use of tier
1 capital as the eligible capital base for covered companies was
inconsistent with the statute, because section 165(e) defines the
general SCCL limit by reference to a firm's ``capital stock and
surplus.'' In addition, some commenters urged the Board to eliminate
the 15 percent limit for major covered companies to major
counterparties. These commenters expressed the view that before
proceeding with the application of the lower 15 percent limit, the
Federal Reserve should properly account for the probability of the
default of a major covered company or major counterparty taking into
account the impact of key components of regulatory reforms aimed
specifically at addressing both the probability and impact of such a
default. One commenter argued the more stringent limit could negatively
impact job creation and the economy and was unnecessary in light of
increased capital levels.
---------------------------------------------------------------------------

\68\ See proposed rule Sec. 252.72.
---------------------------------------------------------------------------

By contrast, other commenters expressed the view that the Board
should use the flexibility granted by Congress under the statute to
lower the credit exposure limits relative to the proposal. For
instance, one commenter noted that a 25 percent limit would mean that a
bank could expose 100 percent of its entire capital to four borrowers.
These commenters expressed the view that the 15 percent limit between
major covered companies and major counterparties was too high and did
not take into account the greater costs of a failure of a global
systemically importantant banking organization. These commenters argued
that the economic damage created by multiple defaults of the largest
firms would be catastrophic and that the credit exposure limit between
such firms should be much lower than the 15 percent level proposed. One
commenter,

[[Page 38471]]

for example, recommended a credit exposure limit of 5 percent of tier 1
capital. A few commenters expressed the view that the final rule should
use gross credit exposure rather than net credit exposure to establish
the SCCL.
The Board has considered the comments received as well as changes
to the final rule made in response to EGRRCPA. Section 252.72 of the
final rule now contains two credit exposure limits that are tailored to
the size and systemic footprint of the firm. No covered company may
have an aggregate net credit exposure to any counterparty that exceeds
25 percent of the tier 1 capital of the covered company. In addition,
no major covered company may have aggregate net credit exposure to any
major counterparty that exceeds 15 percent of the tier 1 capital of the
major covered company.
1. 25 Percent of Tier 1 Capital Limit
The Board continues to believe that the use of tier 1 capital is
the appropriate measurement for the SCCL applicable to covered
companies. Notwithstanding the arguments that the standard in SCCL
established under section 165(e) is based on a company's ``capital
stock and surplus,'' section 165(e) expressly authorizes the Board to
establish a lower amount as necessary to mitigate the risks to the
financial stability of the United States. Further, section 165 requires
the Board to tailor enhanced prudential standards to increase in
stringency based on certain factors (capital structure, riskiness,
complexity, financial activities (including the financial activities of
their subsidiaries), size, and other risk-related factors that the
Board deems appropriate).\69\
---------------------------------------------------------------------------

\69\ 12 U.S.C. 5365(a)(1)(B); 12 U.S.C. 5365(a)(2)(A).
---------------------------------------------------------------------------

As indicated, the SCCL in the final rule for covered companies are
calculated by reference to tier 1 capital as defined under the Board's
capital rules, rather than total regulatory capital plus ALLL.\70\ A
key financial stability benefit of the SCCL is that such limits help
reduce the likelihood that the failure of one financial institution
will lead to the failure of other financial institutions. By reducing
the likelihood of multiple simultaneous failures arising from
interconnectedness, the SCCL reduce the probability of future financial
crises and the social costs that would be associated with such crises.
For this benefit to be realized, SCCL for firms whose failure is more
likely to have an adverse impact on financial stability should be based
on a measure of capital that is available to absorb losses on a going-
concern basis.
---------------------------------------------------------------------------

\70\ See 12 CFR 217.2; 12 CFR 217.20.
---------------------------------------------------------------------------

Total regulatory capital plus ALLL includes capital elements that
do not absorb losses on a going-concern basis. For example, total
regulatory capital includes a covered company's subordinated debt,
which is senior in the creditor hierarchy to equity and therefore only
takes losses once a company's equity has been wiped out. In contrast, a
company's tier 1 capital consists only of equity claims on the company,
such as common equity and certain preferred shares. By definition,
these equity claims are available to absorb losses on a going-concern
basis. Therefore, in order to limit the aggregate net credit exposure
that a covered company can have to a single counterparty, the SCCL
applicable to such companies should be based on their tier 1 capital.
Basing single-counterparty credit limits for such companies on tier 1
capital also is consistent with the mandate in section 165(a)(1)(B) of
the Dodd-Frank Act to tailor enhanced prudential standards such that
they increase in stringency based on the systemic footprint of the
firms to which they apply.\71\
---------------------------------------------------------------------------

\71\ 12 U.S.C. 5365(a)(1)(B); 12 U.S.C. 5365(a)(2)(A).
---------------------------------------------------------------------------

Moreover, this approach would be consistent with lessons learned
during the financial crisis of 2007-2009. During the crisis,
counterparties and other creditors of distressed financial institutions
discounted lower-quality regulatory capital instruments issued by such
institutions, such as trust preferred shares, hybrid capital
instruments, and other term instruments. Instead, market participants
focused on a financial institution's common equity capital and other
simple, perpetual-maturity instruments that now qualify as tier 1
regulatory capital. For this reason, the Board's revised capital
framework introduced a new definition of common equity tier 1 capital,
restricted the set of instruments that qualify as additional tier 1
capital, and raised the tier 1 capital regulatory minimum from four to
six percent.\72\ In contrast, the Board's revised capital framework
left the total regulatory capital minimum requirement unchanged from
its pre-crisis calibration of 8 percent.
---------------------------------------------------------------------------

\72\ See 12 CFR part 217.
---------------------------------------------------------------------------

Thus, basing single-counterparty credit limits for such covered
companies on tier 1 capital would be consistent with the post-crisis
focus on higher-quality forms of capital and would provide a more
reliable capital base for the credit limits. In addition, the analysis
that follows suggests that using a narrower definition of capital for
covered companies should mitigate risks to U.S. financial stability.
The marginal impact of basing single-counterparty credit limits on
tier 1 capital for firms with $250 billion or more in total assets
appears to be limited. As of December 31, 2016, tier 1 capital
represented approximately 84 percent of the total regulatory capital
plus ALLL for these firms. Further, the quantitative impact study Board
staff conducted to help gauge the likely effects of the proposed
requirements suggests that using tier 1 capital as the eligible capital
base for bank holding companies with $250 billion or more in total
consolidated assets or $10 billion or more in total on-balance-sheet
foreign exposures likely would increase the total amount of excess
exposure among U.S. bank holding companies by approximately $30
billion. This incremental amount of excess credit exposure could be
largely eliminated by firms through compression of derivatives,
collection of additional collateral from counterparties, greater use of
central clearing, and modest rebalancing of portfolios among
counterparties. The revised treatment for calculating net credit
exposure from securities financing transactions should also reduce this
exposure. For all these reasons, the Board has determined that it is
appropriate to apply a more stringent SCCL of 25 percent of tier 1
capital to covered companies to mitigate risks to the financial
stability of the United States.\73\
---------------------------------------------------------------------------

\73\ See 12 U.S.C. 5365(e)(2). In contrast, the SCCL for a U.S.
IHC with $50 billion or more in total consolidated assets but less
than $250 billion in total consolidated assets are based on the U.S.
IHC's total regulatory capital plus ALLL. See final rule Sec.
252.172.
---------------------------------------------------------------------------

2. 15 Percent of Tier 1 Capital Limit
The 15 percent of tier 1 capital limit that applies to credit
exposures of a major covered company to a major counterparty reflects
the financial stability consequences associated with such credit
extensions. A credit extension between a major covered company and a
major counterparty is expected to result in a heightened degree of
credit risk to the major covered company relative to the case in which
a major covered company extends credit to a counterparty that is not a
major counterparty. The heightened credit risk arises because major
covered companies and major counterparties are often engaged in common
business lines and often have common counterparties and common funding
sources. This creates a significant degree of commonality in their
economic performance. In

[[Page 38472]]

particular, factors that would likely cause the distress of a major
counterparty would also likely be expected simultaneously to adversely
affect a major covered company that has extended credit to the major
counterparty. As a result, such credit extensions would be expected to
present more credit risk and greater potential for financial
instability than a credit extension made by a major covered company to
a counterparty that is not a major counterparty.
In the white paper that was released in conjunction with the
proposal, Board staff analyzed data on the default correlation between
systemically important financial institutions (SIFIs) as well as data
on the default correlation between SIFIs and a sample of non-SIFI
companies.\74\ The analysis supports the view that the correlation
between SIFIs, and hence the correlation between major covered
companies and major counterparties, is measurably higher than the
correlation between SIFIs and other companies. This finding further
supports the view that credit extensions between SIFIs, and hence by a
major covered company to a major counterparty, present a higher degree
of risk and the potential for greater financial instability than credit
extensions of a major covered company to a non-major counterparty.
---------------------------------------------------------------------------

\74\ See, ``Calibrating the Single-Counterparty Credit Limit
between Systemically Important Financial Institutions,'' May 4,
2016, https://www.federalreserve.gov/aboutthefed/boardmeetings/sccl-paper-20160304.pdf. For purposes of the white paper, SIFIs include
global systemically important banking organizations and nonbank
financial companies designated by FSOC for supervision by the Board.
---------------------------------------------------------------------------

Some commenters contended that the credit limit on exposures to
major counterparties should reflect a reduced probability of default of
such major counterparties resulting from a range of post-crisis
reforms. The Board disagrees with this approach. SCCL are, by their
nature, simple and transparent limits that do not depend on the
probability of default of any individual counterparty. As a specific
example, the general 25 percent limit does not recognize any difference
in the probability of default between counterparties. Moreover, the
SCCL are designed to protect against counterparty default and hence
explicitly assume the default of the counterparty in question
regardless of the likelihood of such an event. Accordingly, it would be
inconsistent with the general motivation for counterparty credit limits
to differentiate based on perceived differences in credit quality.
Because credit extensions of a major covered company to a major
counterparty present a heightened degree of credit risk and a greater
potential for heightened financial instability and to mitigate risks to
the financial stability of the United States, the Board has determined
that it is appropriate to apply a more stringent SCCL for credit
extensions between a major covered company and a major counterparty of
15 percent of tier 1 capital.\75\ The more stringent credit limit of 15
percent of tier 1 capital is informed by the results of a credit risk
model that is described in detail in the white paper. More
specifically, data on correlations, as described above, is used to
calibrate a credit risk model. The credit risk model is then used to
set the single-counterparty credit limit between SIFIs such that the
amount of credit risk that a SIFI is permitted to incur through
extensions of credit to another SIFI is no greater than the amount of
credit risk that the SIFI would be permitted to incur through
extensions of credit to a non-SIFI under the 25 percent limit
applicable to such exposures. The resulting calibrated model produces
inter-SIFI single-counterparty credit limits that are in line with the
proposed limit of 15 percent.
---------------------------------------------------------------------------

\75\ 12 U.S.C. 5365(e)(2).
---------------------------------------------------------------------------

An additional factor that is not considered explicitly in the
context of the white paper's credit risk model, but which should
influence the calibration of the credit limit between major covered
companies and major counterparties, is the relative difference in
adverse consequences arising from multiple SIFI defaults relative to
the default of a SIFI and non-SIFI counterparty. The financial
stability consequences of multiple SIFI defaults caused by the default
of a SIFI borrower and the resulting default of a SIFI lender are
likely substantially greater than the adverse consequences that would
result from the default of a single SIFI lender and a single non-SIFI
borrower. As a result, there is a compelling rationale to require that
credit risk posed by inter-SIFI credit extensions be materially smaller
than that posed by credit extensions between a SIFI lender and non-SIFI
borrower. This consideration suggests that an appropriate inter-SIFI
single-counterparty credit limit would be even lower than the 15
percent limit suggested by the calibrated credit risk model that is
presented in the white paper. The Board has considered the case for an
even more stringent credit limit on such inter-SIFI exposures and has
decided not to lower the limit so as not to unduly constrain the
ability of large banking organizations to engage in transactions that
are a necessary part of their business and banking models. Accordingly,
the 15 percent of tier 1 capital single-counterparty credit limit on
credit exposures of a major covered company to a major counterparty
should help to mitigate risks to U.S. financial stability while also
allowing large banking organizations to continue to transact with each
other as needed on a commercial basis.

C. Gross Credit Exposure

Under the proposal, gross credit exposure would have been defined
to mean, with respect to any credit transaction, the credit exposure of
the covered company to the counterparty before adjusting for the effect
of any qualifying master netting agreements, eligible collateral,
eligible guarantees, eligible credit derivatives and eligible equity
derivatives, other eligible hedges (i.e., a short position in the
counterparty's debt or equity securities), and any unused portion of
certain extensions of credit.\76\ No comments were received on the
definition of ``gross credit exposure'' or ``credit transaction,'' and
the final rule continues to define these terms in the same manner as
the proposal.\77\
---------------------------------------------------------------------------

\76\ See proposed rule Sec. 252.71(r). Section 252.74 of the
proposed rule explains how these adjustments are made.
\77\ See final rule Sec. 252.71(t) & (h).
---------------------------------------------------------------------------

Section 252.73 of the proposal described how the gross credit
exposure of a covered company to a counterparty would have been
calculated for each type of credit transaction described above.\78\ In
general, the methodologies contained in the proposed rule are similar
to those used to calculate credit exposure under the standardized risk-
based capital rules for bank holding companies.\79\
---------------------------------------------------------------------------

\78\ See proposed rule Sec. 252.73(a)(1)-(12).
\79\ 12 CFR part 217, subpart D.
---------------------------------------------------------------------------

Section 252.73 of the final rule describes how the gross credit
exposure of a covered company to a counterparty should be calculated
for each type of credit transaction. In general, the methodologies
contained in the final rule are the same as those under the proposal,
other than the calculation methodologies for certain derivative
transactions and securities financing transactions, which have been
modified to address comments received and are similar to those used to
calculate credit exposure under the standardized risk-based capital
rules for bank holding companies.\80\
---------------------------------------------------------------------------

\80\ Id.

---------------------------------------------------------------------------

[[Page 38473]]

1. Loans, Deposits, and Lines of Credit
Section 165(e) provides that credit exposure includes all extension
of credit to a company, including loans, deposits, and lines of
credit.\81\ Consistent with the statutory definition of credit
exposure, the proposed rule would have defined ``credit transaction''
to mean, with respect to a counterparty, any extension of credit to the
counterparty, including loans, deposits, and lines of credit, but
excluding advised or other uncommitted lines of credit. As noted, the
proposal provided that the gross credit exposure for loans by a covered
company to the counterparty and leases in which the covered company is
the lessor and the counterparty is the lessee, would have been equal to
the amount owed by the counterparty to the covered company under the
transaction. The final rule retains this treatment.\82\
---------------------------------------------------------------------------

\81\ 12 U.S.C. 5365(e)(3)(A).
\82\ See final rule Sec. 252.73(a)(1).
---------------------------------------------------------------------------

2. Debt and Equity Securities
Similar to the proposal, under the final rule, trading and
available-for-sale debt securities held by the covered company, as well
as equity securities, are valued for purposes of single-counterparty
credit limits based on their market value. This approach requires a
covered company to revalue upwards the amount of an investment in such
securities when the market value of the securities increases. In these
circumstances, the revaluation would reflect the covered company's
greater financial exposure to the counterparty and would reduce the
covered company's ability to engage in additional transactions with the
counterparty. In circumstances where the market value of the securities
falls, however, a covered company would revalue downwards its exposure
to the issuer of the securities. This reflects the fact that, just as
an increase in the value of a security results in greater exposure to
the issuer of that security, a decrease in the value of the security
leaves a firm with less exposure to that issuer.\83\
---------------------------------------------------------------------------

\83\ See final rule Sec. 252.73(a)(2) and (3).
---------------------------------------------------------------------------

3. Securities Financing Transactions
The proposal addressed the valuation of a securities financing
transaction that is subject to a bilateral netting agreement and meets
the definition of a ``repo-style'' transaction in the section dealing
with calculation of net credit exposure. To enhance clarity, the Board
now addresses the valuation of securities financing transactions,
including those subject to a bilateral netting agreement that meet the
definition of ``repo-style'' transaction, in the gross credit exposure
section of the final rule.
Under the proposal, exposure from such a transaction generally
would have been equal to an exposure at default amount as modified
based on certain standardized collateral haircuts.\84\ A covered
company would not have been permitted to apply its own internal
estimates for haircuts. Further, in calculating its net credit exposure
to a counterparty due to such transactions, a covered company would
have been required to disregard any collateral received from that
counterparty that is not eligible collateral.
---------------------------------------------------------------------------

\84\ See proposed rule Sec. 252.73(a)(4)-(7) & 252.74(b).
---------------------------------------------------------------------------

The proposal also would have required a covered company to
recognize a credit exposure to any issuer of eligible collateral
provided in connection with the securities financing transaction. The
amount of credit exposure to the issuer would have been equal to the
market value of the collateral minus standardized supervisory haircuts.
However, the amount of the credit exposure to the issuer of the
collateral would have been capped at the gross credit exposure to the
counterparty on the original credit transaction.
As noted, commenters objected to the proposed methodology for
netting securities financing transactions as overly conservative and
highly risk-insensitive. The commenters generally argued that the
proposed approach implied unrealistic assumptions about correlations
among securities that a covered company transfers to its counterparty
and receives from that counterparty. For example, if a covered company
loans equity securities to a counterparty and receives equity
securities from the counterparty as collateral, the proposed
methodology implied that, upon the counterparty's default, the value of
the equities transferred to the counterparty would increase in value
while the value of the equities received would decrease in value. These
commenters urged the Board to permit a covered company to use any
methodology permitted under the risk-based capital rules, consistent
with the proposal's approach for measuring derivative exposures,
including any revisions to the risk-based capital rules. Commenters
argued that securities lending plays a critical role in the broader
U.S. securities markets and flaws in the securities financing
transaction measurement methodology that have the potential to cause
covered companies to pull back from this activity as a result of a
significant overstatement of risk could have real market consequences.
In response to comments, the final rule includes a modified
approach to securities financing transactions. The methodology that
would have applied to securities financing transactions under the
proposal could have overstated exposure from some transactions. In
addition, the more risk-sensitive treatment of derivatives relative to
securities financing transactions under the proposal could have
artificially incentivized firms to engage in derivatives that are
economically equivalent to securities financing transactions.
Accordingly, the final rule allows covered companies to use any method
that the company is authorized to use under the Board's capital rules,
including, in certain circumstances, internal models to measure
exposure to securities financing transactions.\85\
---------------------------------------------------------------------------

\85\ See Sec. 252.73(a)(4) of the final rule. The Board may
revisit the approach to securities financing transactions permitted
under the capital rules in the future. See, e.g., Basel Committee on
Banking Supervision, Basel III: Finalising post-crisis reforms (Dec.
2017), https://www.bis.org/bcbs/publ/d424.pdf.
---------------------------------------------------------------------------

4. Derivatives
The proposed SCCL rule drew a distinction between derivative
transactions that were subject to a qualifying master netting agreement
(QMNA) and derivatives that were not subject to such an agreement.\86\
Derivative transactions between the covered company and the
counterparty that were not subject to a QMNA would have been valued
based on the current exposure of the derivatives contract and its
potential future exposure.\87\ Derivative transactions between the
covered company and the counterparty subject to a QMNA would have been
valued based on the exposure at default amount calculated using
methodologies the covered company is permitted to use under subparts D
and E of the Board's capital rules (12 CFR part 217).\88\ This approach
would have allowed certain covered companies to calculate counterparty
exposures for certain derivatives transactions subject to a QMNA using
internal models.
---------------------------------------------------------------------------

\86\ ``Qualifying master netting agreement'' is defined in Sec.
252.71(cc) of the final rule by reference to the Board's capital
rules.
\87\ See proposed rule Sec. 252.73(a)(10).
\88\ See proposed rule Sec. 252.73(a)(11).
---------------------------------------------------------------------------

With respect to credit derivative transactions between a covered
company and a third party, where the covered company is the protection
provider and the reference asset is a debt investment in the
counterparty, the credit exposure of the covered company to the
counterparty is equal to the

[[Page 38474]]

maximum potential loss to the covered company on the transaction.\89\
---------------------------------------------------------------------------

\89\ Under the proposal, this treatment would have applied to
both equity derivatives and credit derivatives. See proposed rule
Sec. 252.73(a)(12). Under the final rule, a covered company that is
the protection provider on an equity derivative will apply the same
treatment as under the Board's capital rules. See final rule Sec.
252.73(7)-(8). ``Credit derivative'' is defined in Sec. 252.71(g)
of the final rule, and ``equity derivative'' is defined in Sec.
252.71(p) of the final rule. ``Derivative transaction'' is defined
in Sec. 252.71(j) of the final rule in the same manner as it is
defined in the National Bank Act, as amended by section 610 of the
Dodd-Frank Act. See 12 U.S.C. 84(b)(3).
---------------------------------------------------------------------------

While commenters generally supported the valuation of derivative
transactions under the proposal, certain commenters recommended that
the final rule measure the credit exposure amount for derivatives that
are not subject to a QMNA in a manner consistent with the proposed
rule's measurement of the credit exposure amount for derivatives that
are subject to a QMNA--that is, by permitting measurement using
internal model methodologies for measuring credit exposure amounts
(IMM). These commenters argued that requiring a different approach
would introduce unnecessary operational complexity by subjecting the
same set of derivative transactions to two different credit exposure
calculations depending on whether the derivatives are subject to a QMNA
without any apparent prudential benefit. These commenters also
expressed the view that allowing IMM with respect to derivatives that
are not subject to a QMNA would maintain internal consistency within
the final rule and be consistent with the risk-based capital rules more
generally.
In response to comments, the Board has modified the proposed rule
to allow a covered company to use any methodology that the covered
company is authorized to use under the capital rules to value a
derivatives transaction. Thus, to the extent that a covered company is
authorized to use a particular approach, including an internal model,
to value a derivatives transaction under the capital rules, the covered
company is authorized to use the same approach to value the transaction
under the final rule.
5. Collateral in Custody
The proposal explained that, with respect to cleared and uncleared
derivatives, the amount of initial margin and excess variation margin
(that is, variation margin in excess of that needed to secure the mark-
to-market value of a derivative) posted to a bilateral or central
counterparty would have been treated as credit exposure to the
counterparty unless the margin is held in a segregated account at a
third-party custodian. Certain commenters urged the Board to make clear
that all collateral posted to counterparties and held in segregated
accounts at third-party custodians would not be treated as credit
exposure to the counterparty (i.e., the custodian) and that this
treatment be codified in the final rule. The Board notes that initial
margin and excess variation margin that is posted to a bilateral or
central counterparty and held in a segregated account by a third-party
custodian are not subject to counterparty risk with respect to the
third-party custodian. Therefore, a covered company is not required
under the final rule to calculate gross credit exposure to a third
party acting solely as a custodian with respect to collateral held in a
segregated account with that custodian.
6. Investments in and Exposures to Securitization Vehicles, Investment
Funds, and Other Special Purpose Vehicles That Are Not Subsidiaries
Under the proposal, a covered company with $250 billion in total
consolidated assets or $10 billion in total on-balance-sheet foreign
exposures would have calculated its gross credit exposure arising from
investments in and exposures to securitization vehicles, investment
funds, and other special purpose vehicles that are not subsidiaries of
the covered company pursuant to Sec. 252.75 of the proposed rule. The
final rule, like the proposal, directs a covered company to calculate
its gross credit exposure to such entities pursuant to Sec. 252.75 of
the final rule. A discussion of this valuation methodology, including
comments received on the proposal's valuation methodology, follows in
section II.E. infra.
7. Attribution Rule
Just as in the proposal, Sec. 252.73(c) of the final rule includes
the statutory attribution rule, which provides that a covered company
must treat a transaction with any person as a credit exposure to a
counterparty to the extent the proceeds of the transaction are used for
the benefit of, or transferred to, that party.\90\ This attribution
rule seeks to prevent firms from evading the single-counterparty credit
limits by using intermediaries and thereby avoiding a direct credit
transaction with a particular counterparty. The attribution rule in the
final rule is similar to that of the proposed rule, except that the
final rule refers to a ``party'' rather than a ``counterparty'' to
follow more closely the terms of section 165(e).
---------------------------------------------------------------------------

\90\ See final rule Sec. 252.73(c); see also 12 U.S.C.
5365(e)(4).
---------------------------------------------------------------------------

It is the Board's intention to avoid interpreting the attribution
rule in a manner that would impose undue burden on covered companies by
requiring firms to monitor and trace the proceeds of transactions made
in the ordinary course of business. In general, credit exposures
resulting from transactions made in the ordinary course of business
will not be subject to the attribution rule.

D. Net Credit Exposure

Section 252.74 of the proposed rule explained how a covered company
would have converted gross credit exposure amounts to net credit
exposure amounts by taking into account eligible collateral, eligible
guarantees, eligible credit and equity derivatives, other eligible
hedges (for example, a short position in the counterparty's debt or
equity securities), and for securities financing transactions, the
effect also of bilateral netting agreements.\91\ The key difference
between these two amounts is that a company's net credit exposure would
take into account any available credit risk mitigants, such as
collateral, guarantees, credit or equity derivatives, and other hedges,
provided the credit risk mitigants meet certain requirements in the
rule, as discussed more fully below. For example, if a covered company
had $100 in gross credit exposure to a counterparty with respect to a
particular credit transaction, and the counterparty pledged collateral
with an adjusted market value of $50, the full amount of which
qualified as ``eligible collateral'' under the rule, the covered
company's net credit exposure to the counterparty on the transaction
would be $50.
---------------------------------------------------------------------------

\91\ See proposed rule Sec. 252.74.
---------------------------------------------------------------------------

In order to calculate its aggregate net credit exposure to a
counterparty under the proposed rule, a covered company first would
have calculated its gross credit exposure to a counterparty on each
credit transaction in accordance with certain valuation and other
requirements under the rule. Second, the covered company would have
reduced its gross credit exposure amount, based on eligible credit risk
mitigants, to determine its net credit exposure for each credit
transaction with the counterparty. Third and finally, the covered
company would have summed all of its net credit exposures to the
counterparty to calculate the covered company's aggregate net credit
exposure to the counterparty. It is this final amount, the

[[Page 38475]]

aggregate net credit exposure, that would have been subject to the
SCCL.
With respect to a credit exposure involving eligible collateral or
an eligible guarantor,\92\ the proposed rule would have applied a
``risk-shifting'' approach. In general, any reduction in the exposure
amount to the original counterparty relating to the eligible collateral
or eligible guarantor would result in a dollar-for-dollar increase in
exposure to the eligible collateral issuer or eligible guarantor (as
applicable). For example, in the case discussed above where a covered
company had $100 in gross credit exposure to a counterparty and the
counterparty pledged collateral with an adjusted market value of $50,
the covered company would have net credit exposure to the counterparty
on the transaction of $50 and net credit exposure to the issuer of the
collateral of $50.
---------------------------------------------------------------------------

\92\ The proposal referred to an ``eligible protection
provider'' instead of an ``eligible guarantor.'' For simplicity, the
final rule refers to ``eligible guarantor,'' which is the term used
in the Board's capital rules. The definition of ``eligible
guarantor'' in the final rule is unchanged from the proposal. See
final rule Sec. 252.71(o).
---------------------------------------------------------------------------

However, in cases where a covered company hedged its exposure to an
entity that is not a ``financial entity'' (a non-financial entity)
using an eligible credit or equity derivative, and the underlying
exposure is subject to the Board's market risk capital rule (12 CFR
part 217, subpart F), the covered company would have calculated its
exposure to the eligible guarantor using methodologies that it is
permitted to use under the Board's risk-based capital rules.\93\ The
final rule follows the same general approach to the calculation of net
credit exposure as the proposal, with modifications as discussed below.
---------------------------------------------------------------------------

\93\ See proposed rule Sec. 252.74(e)(2)(ii).
---------------------------------------------------------------------------

1. Collateral
Section 252.74(c) of the proposed rule describes how eligible
collateral would have been taken into account in the calculation of net
credit exposure.\94\ Under the proposal, the net credit exposure of a
covered company to a counterparty on a credit transaction would have
been the gross credit exposure of the covered company on the
transaction minus the adjusted market value of any eligible collateral
related to the transaction. In addition, under the proposal, a covered
company generally would have been required to recognize a credit
exposure to the collateral issuer in an amount equal to the adjusted
market value of the collateral.
---------------------------------------------------------------------------

\94\ See proposed rule Sec. Sec. 252.71(k) & 252.74(c).
---------------------------------------------------------------------------

Certain commenters argued that eligible margin loans should not be
subject to the risk-shifting requirement under the final rule. These
commenters contended that ``risk-shifting'' to the eligible collateral
issuer in the case of margin lending accounts would introduce a
significant and unnecessary operational burden as it would require a
covered company to identify each collateral issuer and shift
individually relatively small dollar amounts of such exposures to each
collateral issuer for each of these small exposures.
The final rule does not exclude margin loans from the risk-shifting
requirements. The final rule contains no de minimis risk-shifting
exception for any specific loan type, and margin loans do not have any
special characteristics that would justify special treatment for margin
loans relative to other credit transactions.
In computing its net credit exposure to a counterparty with respect
to a credit transaction under the proposed rule, a covered company
would have been required to reduce its gross credit exposure on the
transaction by the adjusted market value of any eligible
collateral.\95\ Other than in the context of repo-style transactions,
the ``adjusted market value'' of eligible collateral would have been
defined to mean the fair market value of the eligible collateral after
the application of certain haircuts.\96\
---------------------------------------------------------------------------

\95\ See proposed rule Sec. 252.74(c).
\96\ Table 1 to section 217.132 of the Board's capital rules (12
CFR 217.132, tbl. 1) provides haircuts for multiple collateral
types, including some types that do not meet the proposed definition
of ``eligible collateral.'' Notwithstanding the inclusion of those
collateral types in the reference table, a company cannot reduce its
gross credit exposure for a transaction with a counterparty based on
the adjusted market value of collateral that does not meet the
definition of ``eligible collateral.''
---------------------------------------------------------------------------

The final rule follows the same general approach. The net credit
exposure of a covered company to a counterparty on a credit transaction
under the final rule is the gross credit exposure of the covered
company on the transaction minus the adjusted market value of any
eligible collateral related to the transaction.\97\ In addition, under
the final rule, a covered company generally must recognize a credit
exposure to the collateral issuer in an amount equal to the adjusted
market value of the collateral.
---------------------------------------------------------------------------

\97\ As discussed below, the final rule treats eligible
collateral as a gross credit exposure to the collateral issuer under
the Board's authority under 12 U.S.C. 5365(e)(3)(F).
---------------------------------------------------------------------------

The final rule treats eligible collateral as a gross credit
exposure to the collateral issuer under the Board's authority under
section 165(e) to determine that any other similar transaction is a
credit exposure.\98\ This approach will help to promote a covered
company's careful monitoring of its direct and indirect credit
exposures. In order not to discourage overcollateralization, however, a
covered company's maximum credit exposure to the collateral issuer is
limited to the credit exposure to the original counterparty (unless the
counterparty is exempt or excluded from the rule).\99\ A covered
company would continue to have credit exposure to the original
counterparty to the extent that the adjusted market value of the
eligible collateral does not equal the full amount of the credit
exposure to the original counterparty.
---------------------------------------------------------------------------

\98\ See 12 U.S.C. 5365(e)(3)(F).
\99\ See final rule Sec. 252.74(b)(3).
---------------------------------------------------------------------------

The amount of credit exposure to the original counterparty and the
issuer of the eligible collateral would fluctuate over time based on
the adjusted market value of the eligible collateral. Collateral that
previously met the definition of eligible collateral under the rule but
over time ceases to do so would no longer be eligible to reduce gross
credit exposure to the original counterparty. Covered companies will
need to monitor the adjusted market value and eligibility of all
collateral under the final rule. To the extent the adjusted market
value of collateral has increased or declined, the covered company
would need to adjust its exposures to the original counterparty and
issuer of collateral as appropriate. To the extent that collateral no
longer meets the definition of eligible collateral, the covered company
would need to recognize an exposure to the original counterparty.
Example: A covered company (Company A) makes a $1,000 loan to a
counterparty (Company B), creating $1,000 of gross credit exposure to
that counterparty, and the counterparty provides eligible collateral
issued by a third party (Company C) that has an adjusted market value
of $700 on day 1. Company A is required to reduce its credit exposure
to Company B by the adjusted market value of the eligible collateral.
As a result, on day 1, Company A has gross credit exposure of $700 to
Company C and $300 net credit exposure to Company B.
As noted, the amount of credit exposure to the original
counterparty and the issuer of the eligible collateral will fluctuate
over time based on movements in the adjusted market value of the
eligible collateral. If the adjusted market value of the eligible
collateral decreased to $400 on day 2 in the previous example, on day 2
Company A's net credit exposure to Company B would increase to $600,
and its gross

[[Page 38476]]

credit exposure to Company C would decrease to $400. By contrast, if on
day 3 the adjusted market value of the eligible collateral increased to
$800, on day 3 Company A's net credit exposure to Company B would
decrease to $200, and its gross credit exposure to Company C would
increase to $800. In each case, the covered company's total credit
exposure would be capped at the original amount of the exposure created
by the loan or $1,000--even if the adjusted market value of the
eligible collateral exceeded $1,000.
Finally, in cases where eligible collateral is issued by an issuer
covered by one of the exemptions in Sec. 252.77 of the final rule or
that is excluded from the definition of ``counterparty,'' the
requirement to recognize an exposure to the collateral issuer does not
apply.\100\
---------------------------------------------------------------------------

\100\ See final rule Sec. 252.74(g)(1).
---------------------------------------------------------------------------

Example: A covered company makes a $1,000 loan to a counterparty
and that counterparty has pledged as collateral U.S. government bonds
with an adjusted market value of $1,000. In this case, the covered
company does not have any net credit exposure to the original
counterparty because the value of the loan and the adjusted market
value of the U.S. government bonds are equal. Although the covered
company has $1,000 of exposure to the U.S. government, single-
counterparty credit limits do not apply to that exposure because U.S.
government bonds are excluded from the single-counterparty credit
limits of the final rule.
2. Eligible Guarantees
Section 252.74(d) of the proposed rule described how to reflect
eligible guarantees in calculations of net credit exposure to a
counterparty.\101\ Eligible guarantees would have been defined as
guarantees that meet certain conditions, including having been written
by an eligible protection provider.\102\ The proposal would have
defined ``eligible protection provider'' in the same way as ``eligible
guarantor'' in Sec. 217.2 of the Board's capital rules. As such, an
eligible protection provider would have included a sovereign entity,
the Bank for International Settlements, the International Monetary
Fund, the European Central Bank, the European Commission, a Federal
Home Loan Bank, the Federal Agricultural Mortgage Corporation (Farmer
Mac), a multilateral development bank (MDB), a depository institution,
a bank holding company, a savings and loan holding company, a credit
union, a foreign bank, or a qualifying central counterparty. An
eligible protection provider also would have included any entity, other
than a special purpose entity, (i) that at the time the guarantee is
issued or anytime thereafter, has issued and maintains outstanding an
unsecured debt security without credit enhancement that is investment
grade, (ii) whose creditworthiness is not positively correlated with
the credit risk of the exposures for which it has provided guarantees,
and (iii) that is not an insurance company engaged predominantly in the
business of providing credit protection (such as a monoline bond
insurer or re-insurer). No comments were received on this aspect of the
proposal, and the final rule is substantively the same as the proposal
with respect to the treatment of eligible guarantees. However, for
simplicity, the final rule refers to ``eligible guarantor'' instead of
``eligible protection provider,'' as that is the term used in the
Board's capital rules. The definition of ``eligible guarantor'' in the
final rule is unchanged from the proposal.\103\
---------------------------------------------------------------------------

\101\ See proposed rule Sec. 252.74(d).
\102\ See proposed rule Sec. 252.71(n) for the definition of
``eligible guarantee,'' including a description of the requirements
of an eligible guarantee.
\103\ See final rule Sec. 252.71(o).
---------------------------------------------------------------------------

In calculating its net credit exposure to the counterparty under
the final rule, as in the proposal, a covered company is required to
reduce its gross credit exposure to the counterparty by the amount of
any eligible guarantee from an eligible guarantor.\104\ As with other
types of eligible collateral, the covered company would then include
the amount of the eligible guarantee when calculating its gross credit
exposure to the eligible guarantor.\105\ In addition, as with eligible
collateral, a covered company's gross credit exposure to an eligible
guarantor (with respect to an eligible guarantee) could not exceed its
gross credit exposure to the original counterparty on the credit
transaction prior to recognition of the eligible guarantee.\106\
Accordingly, the exposure to the eligible guarantor would be capped at
the amount of the credit exposure to the original counterparty, even if
the amount of the eligible guarantee is larger than the original
exposure. A covered company would continue to have credit exposure to
the original counterparty to the extent that the eligible guarantee is
for an amount less than the full amount of the credit exposure to the
original counterparty.
---------------------------------------------------------------------------

\104\ See final rule Sec. 252.74(c).
\105\ See id.
\106\ See id.
---------------------------------------------------------------------------

Example: A covered company makes a $1,000 loan to an unaffiliated
counterparty and obtains a $700 eligible guarantee on the loan from an
eligible guarantor. The covered company has gross credit exposure of
$700 to the protection provider as a result of the eligible guarantee
and $300 net credit exposure to the original counterparty.
Example: A covered company makes a $1,000 loan to an unaffiliated
counterparty and obtains a $1,500 eligible guarantee from an eligible
guarantor. The covered company has $1,000 gross credit exposure to the
protection provider (capped at the amount of the exposure to the
unaffiliated counterparty), but the covered company has no net credit
exposure to the original counterparty as a result of the eligible
guarantee.
As with eligible collateral, a covered company is required to
reduce its gross exposure to a counterparty by the amount of an
eligible guarantee in order to ensure that concentrations in exposures
to guarantors are captured by the risk-shifting approach. This
requirement was meant to limit the ability of a covered company to
extend loans or other forms of credit to a large number of high-risk
borrowers that are guaranteed by a single guarantor.
3. Eligible Credit and Equity Derivative Hedges
Under the proposal, a covered company would have been required to
reduce its gross credit exposure to a counterparty by the notional
amount of any eligible credit or equity derivative that references the
counterparty if the covered company obtains the derivative from an
eligible protection provider.\107\ In these circumstances, the covered
company generally would have been required to include the notional
amount of the eligible credit or equity derivative hedge in calculating
its gross credit exposure to the eligible protection provider.\108\
However, in cases where the eligible credit or equity derivative was
used to hedge covered positions subject to the Board's market risk rule
(12 CFR part 217, subpart F) \109\ and the counterparty on the hedged
transaction was not a financial entity, the covered company would only
have been required to recognize a credit exposure to the eligible
protection provider using methodologies that the covered company is
authorized to use under the Board's capital rules (12 CFR part 217,
subparts D and E), rather than the notional amount. Under the proposal,
an eligible protection provider would have been defined to have the
same

[[Page 38477]]

meaning as the definition of ``eligible guarantor'' in the Board's
capital rules.\110\
---------------------------------------------------------------------------

\107\ See proposed rule Sec. 252.74(e).
\108\ Id.
\109\ ``Covered position'' is defined in 12 CFR 217.202.
\110\ See proposed rule Sec. 252.71(o).
---------------------------------------------------------------------------

One commenter expressed support for the notional amount transfer of
exposure to the protection provider. This commenter, however, objected
to the transfer of exposure to the protection provider using the
Board's risk-based capital rules in the case where the hedged
transaction is a non-financial entity. This commenter argued that this
approach was effectively a loophole in the exposure calculation that
would create incentives for a bank to transfer risks to third parties
rather than developing a solid underwriting analysis of their
counterparties.
Certain commenters objected to the treatment of equity derivatives
under the proposal. These commenters argued that equity derivatives
that are covered positions under the market risk rule should be
calculated as part of a covered company's net long or net short
position with respect to a given issuer in a manner more generally
aligned with how exposure amounts are calculated for such positions
under the market risk rule. Commenters contended that this approach,
rather than the approach under the proposal to treat equity derivatives
in a manner equivalent to instruments designed to offer credit
protection, would be consistent with the applicable risk-based capital
rules and the large exposure standard.
Some commenters argued that purchased credit and equity derivatives
when calculating net exposure for covered positions in the trading book
should not be subject to the requirement to be purchased from an
eligible protection provider. These commenters argued that permitting
only credit and equity derivatives purchased from eligible protection
providers to reduce a gross exposure conflicts with the nature of
trading book positions and impacts the utility of derivatives purchased
from protection providers that do not meet the eligibility criteria. As
such, these commenters requested that the rule allow risk-shifting to a
protection provider that is not an ``eligible protection provider.''
More broadly, a few commenters expressed the view that credit
default swaps should not be used to reduce the calculation of exposure,
noting that the experience of American International Group during the
crisis demonstrates how the credit default swap itself can be worthless
and argued this could be a potential loophole in the final rule. For
example, one commenter requested that any obligations of a counterparty
to a covered company be recognized directly, regardless of whether the
covered company has taken an offsetting position. This commenter
generally opposed the netting of derivative positions. Another
commenter urged that dollar-for-dollar risk shifting is appropriate but
calculation of exposure based upon any method permitted in the risk-
based capital rules where the reference asset obligor is not a
financial entity would result in much less than dollar-for-dollar risk
shifting since the risk-based capital rules do not require derivatives
to be measured at their full notional value.
After considering the comments on the proposal, the Board has
determined not to modify the treatment of eligible credit and equity
derivatives in the manner suggested by commenters. The Board believes
that the treatment in the final rule is reflective of the nature of
credit and equity derivatives. Equity derivatives shift risk from
underlying equities in the same manner as credit derivatives shift risk
from underlying credit instruments. Moreover, there is no basis for a
distinction between trading book and banking book products under a
credit exposure regime.
Section 252.74(d) of the final rule sets forth the treatment of
eligible credit and equity derivatives, in the case where the covered
company is the protection purchaser.\111\ In the case where a covered
company is a protection purchaser, such derivatives can be used to
mitigate gross credit exposure. A covered company may only recognize
eligible credit and equity derivative hedges for purposes of
calculating net credit exposure under the final rule. These derivatives
are required to meet certain criteria, including having been written by
an eligible guarantor.\112\ An eligible credit derivative hedge is
required to be simple in form, meaning a single-name or standard, non-
tranched index credit derivative.
---------------------------------------------------------------------------

\111\ See final rule Sec. 252.74(d).
\112\ See final rule Sec. Sec. 252.71(l) and (m) defining
``eligible credit derivative'' and ``eligible equity derivative,''
respectively. ``Eligible guarantor'' is defined in Sec. 252.71(o)
of the final rule. The same types of organizations that are eligible
guarantors for the purposes of eligible guarantees are eligible
guarantors for purposes of eligible credit and equity derivatives.
---------------------------------------------------------------------------

Where protection is obtained, a covered company must recognize
exposure to an eligible guarantor.\113\ Accordingly, under the final
rule, a covered company is required to reduce its gross credit exposure
to a counterparty by the notional amount of any eligible credit
derivative hedge that references the counterparty if the covered
company obtains the derivative from an eligible guarantor.\114\ In
these circumstances, the covered company generally will be required to
include the notional amount of the eligible credit derivative hedge in
calculating its gross credit exposure to the eligible guarantor.\115\
Similarly, a covered company is required to shift its gross credit
exposure from a counterparty to an eligible guarantor in any case where
the covered company obtains an eligible equity derivative hedge that
references the counterparty from such eligible guarantor. As is the
case for eligible collateral and eligible guarantees, the gross
exposure to the eligible guarantor would in no event be greater than it
was to the original counterparty prior to recognition of the eligible
credit or equity derivative.\116\ In cases where a covered company is
required to shift its credit exposure from the counterparty to an
eligible guarantor under the final rule, the covered company is
permitted to exclude the relevant equity or credit derivative when
calculating its gross exposure to the eligible guarantor. This is to
avoid requiring covered companies to double count the same exposures.
---------------------------------------------------------------------------

\113\ As noted, the final rule replaces the term ``eligible
protection provider'' with ``eligible guarantor,'' as that is the
term used in the Board's capital rules. The definition of the term
in the final rule is unchanged from the proposal.
\114\ See final rule Sec. 252.74(d).
\115\ See final rule Sec. Sec. 252.74(d)(1)-(2).
\116\ See final rule Sec. 252.74(d).
---------------------------------------------------------------------------

The Board also has determined not to make the changes requested by
commenters to allow requiring risk-shifting to protection providers
that do not meet the definition of ``eligible guarantor.'' Limiting
exposures to a large protection provider is an important feature of the
final rule. As with eligible collateral and eligible guarantees, a
covered company is required to reduce its gross exposure to a
counterparty by the amount of an eligible equity or credit derivative,
and to recognize an exposure to an eligible guarantor, in order to
ensure that concentrations in exposures to eligible guarantors are
captured in the regime.
The Board believes that the quality and creditworthiness of the
protection provider is an important consideration when assessing the
likelihood that the purchased protection would be provided in the event
of a large counterparty default. Moreover, the Board notes that many
positions subject to the Board's market risk rule represent mark-to-
market positions that are intended to hedge market movement on a day-
to-day basis and are not always intended to hedge against extreme
default events. Accordingly, there is no inconsistency in the final
rule's

[[Page 38478]]

requirement that protection be purchased from an eligible guarantor.
For eligible credit and equity derivatives that are used to hedge
covered positions subject to the Board's market risk rule (12 CFR part
217, subpart F),\117\ the approach is the same as that explained above,
except in the case of credit derivatives where the counterparty on the
hedged transaction is not a financial entity.\118\ In this case, a
covered company is required to reduce its gross credit exposure to the
counterparty on the hedged transaction by the notional amount of the
eligible credit derivative that references the counterparty if the
covered company obtains the derivative from an eligible guarantor. In
addition, the covered company is required to recognize a credit
exposure to the eligible guarantor that is measured using methodologies
that the covered company is authorized to use under the Board's risk-
based capital rules (12 CFR part 217, subparts D and E), rather than
the notional amount.
---------------------------------------------------------------------------

\117\ ``Covered position'' is defined in 12 CFR 217.202.
\118\ The revised definition of ``financial entity'' is
explained above.
---------------------------------------------------------------------------

The final rule includes this treatment for credit and equity
derivatives that are used to hedge covered positions subject to the
market risk rule, where the credit or equity derivative is used to
hedge an exposure to an entity that is not a financial entity. The
final rule requires full notional risk-shifting for credit derivatives
used to hedge exposures to financial entities because most protection
providers are financial entities, and when both the protection provider
and the reference entity are financial entities, the probability of
correlated defaults generally is substantially greater than when
protection is sold on non-financial reference entities.
Example: A covered company holds a $1,000 bond issued by a non-
financial entity (for example, a commercial firm or non-excluded
sovereign) that is a covered position subject to the Board's market
risk rule, and the covered company purchases an eligible credit
derivative in a notional amount of $800 from Protection Provider X,
which is an eligible guarantor, to hedge its exposure to the non-
financial entity. The covered company continues to have $200 in net
credit exposure to the non-financial entity. In addition, the covered
company would treat Protection Provider X as a counterparty, and would
measure its exposure to Protection Provider X using any methodology
that the covered company is permitted to use under the Board's capital
rules to calculate its risk-based capital requirements.
Example: A covered company holds as a covered position subject to
the Board's market risk rule a $1,000 bond issued by a financial entity
(for example, a banking organization), and the covered company
purchases an eligible credit derivative in a notional amount of $800
from Protection Provider X, which is an eligible guarantor, to hedge
its exposure to the financial entity. The covered company continues to
have credit exposure of $200 to the underlying financial entity. In
addition, the covered company now treats Protection Provider X as a
counterparty, and has an $800 credit exposure to Protection Provider X.
4. Treatment of Maturity Mismatches
Under the proposal, if the residual maturity of a credit risk
mitigant was less than that of the underlying exposure, the credit risk
mitigant would only have been recognized if the credit risk mitigant's
original maturity were equal to or greater than one year and its
residual maturity were not less than three months from the current
date.\119\ In that case, the reduction in the underlying exposure would
have been adjusted based on the same approach that is used in the
Board's capital rules (12 CFR part 217) to address a maturity mismatch.
---------------------------------------------------------------------------

\119\ See proposed rule Sec. 252.74(b)-(e).
---------------------------------------------------------------------------

Commenters argued that credit and equity derivatives that are
covered positions under the Board's market risk rule should not be
subject to the maturity mismatch adjustments. These commenters argued
that, in the trading book, maturity of purchased protection is less
important as positions change frequently, are often not held to
maturity, and additional extending protection can and would be
purchased if necessary. Other commenters argued that no maturity
mismatch should exist for securities financing transactions, consistent
with the Board's capital rules.
The Board has determined not to make the changes to the proposal
recommended by commenters. The SCCL are point-in-time measures of
exposure and generally are not designed to respond to anticipated
future actions but to reflect actual credit exposure at the time the
exposure amount is measured. If the residual maturity of a credit risk
mitigant is less than that of the underlying exposure, the credit risk
mitigant is only recognized under the final rule if the credit risk
mitigant's original maturity is equal to or greater than one year and
its residual maturity is not less than three months from the current
date.\120\ In that case, the reduction in the underlying exposure would
be adjusted based on the same approach that is used in the Board's
capital rules (12 CFR part 217) to address a maturity mismatch.\121\
---------------------------------------------------------------------------

\120\ See final rule Sec. 252.74(i).
\121\ A credit risk mitigant would be adjusted using the formula
Pa = P x (t - 0.25)/(T - 0.25), where Pa is the value of the credit
protection adjusted for maturity mismatch; P is the credit
protection adjusted for any haircuts; t is the lesser of (1) T or
(2) the residual maturity of the credit protection, expressed in
years; and T is the lesser of (1) 5 or (2) the residual maturity of
the exposure, expressed in years. See 12 CFR 217.36(d).
---------------------------------------------------------------------------

With respect to the amount of exposure that a covered company is
required to recognize to the issuer of eligible collateral or to an
eligible guarantor in cases of maturity mismatch, such amount generally
is equal to the amount by which the relevant form of credit risk
mitigation has reduced the exposure to the original counterparty.
However, in the case of credit and equity derivatives used to hedge
exposures subject to the Board's market risk rule (12 CFR 217, subpart
F) that are to counterparties that are non-financial entities, the
covered company is permitted to recognize a credit exposure with regard
to the eligible guarantor measured using methodologies that the covered
company is authorized to use under the Board's capital rules (12 CFR
217, subparts D and E).
Example: A covered company makes a loan to a counterparty and
hedges the resulting exposure by obtaining an eligible guarantee from
an eligible guarantor. If the residual maturity of the guarantee were
less than that of the loan, the covered company would adjust the value
assigned to the guarantee using the formula in the Board's capital
rules (12 CFR part 217). The covered company would then reduce its
gross credit exposure to the underlying counterparty by the adjusted
value of the guarantee and would set its exposure to the eligible
guarantor equal to the adjusted value of the guarantee.
Example: A covered company holds bonds issued by a non-financial
entity that are subject to the Board's market risk rule, and hedges the
exposure using an eligible credit derivative obtained from an eligible
guarantor. If the residual maturity of the eligible credit derivative
were less than that of the bonds, the covered company would reduce its
exposure to the issuer of the bonds by the adjusted value of the credit
derivative using the formula in the Board's capital rules. The covered

[[Page 38479]]

company would measure its exposure to the eligible guarantor using
methodologies that the covered company is permitted to use under the
Board's capital rules (12 CFR part 217, subparts D and E), without any
specific adjustment to reflect the maturity mismatch between the bonds
and the credit derivative.
5. Treatment of Currency Mismatch
To provide additional clarity, the final rule includes a section
regarding application of currency mismatch adjustments to certain
credit risk mitigants--namely, eligible collateral, eligible
guarantees, eligible equity derivatives, and eligible credit
derivatives--in cases where the collateral or hedge is denominated in a
different currency than the hedged exposure. As with several other
aspects of the final rule, this treatment is consistent with the
Board's capital rules. This section clarifies that a covered company
that reduces its credit exposure to a counterparty under the final rule
as a result of eligible collateral, an eligible guarantee, an eligible
equity derivative, or an eligible credit derivative must apply the
currency mismatch adjustment approach in the Board's capital rules, if
applicable, when calculating the covered company's gross credit
exposure to the issuer of eligible collateral or an eligible
guarantor.\122\ As noted, a covered company that reduces its credit
exposure to a counterparty as a result of such credit risk mitigants
must calculate its gross credit exposure to an issuer of eligible
collateral or an eligible guarantor even in cases where the underlying
credit transaction would not be subject the credit limits of the final
rule.\123\
---------------------------------------------------------------------------

\122\ See final rule Sec. 252.74(h); see also 12 CFR
217.37(c)(3)(ii) (providing the currency mismatch adjustments
relevant to eligible collateral); 12 CFR 217.36(f) (providing the
currency mismatch adjustments relevant to eligible guarantees,
eligible credit deriatives, and eligible equity derivatives).
\123\ See final rule Sec. 252.74(b)-(d).
---------------------------------------------------------------------------

To provide additional clarity, the final rule includes a section
regarding application of cross-currency haircuts to certain credit risk
mitigants, including eligible credit and equity derivatives. This
section clarifies that a covered company that reduces its credit
exposure to a counterparty under the final rule must apply the currency
mismatch adjustment approach in the Board's capital rules (12 CFR
217.36(f)), if applicable, when calculating the covered company's gross
credit exposure to the eligible guarantor, including in instances where
the underlying credit transaction would not be subject the credit
limits of the final rule.\124\
---------------------------------------------------------------------------

\124\ See final rule Sec. 252.74(d) & (h).
---------------------------------------------------------------------------

6. Other Eligible Hedges
Under the proposal, a covered company would have been allowed to
reduce its credit exposure to a counterparty by the face amount of a
short sale of the counterparty's debt or equity securities, provided
that the instrument in which the covered company has a short position
was junior to, or pari passu with, the instrument in which the covered
company has the long position.\125\ This restriction on the set of
short positions permitted to offset long positions would have helped to
reduce the risk that any loss arising from the covered company's long
exposure were not offset by a gain in the covered company's short
exposure. No comments were received on this aspect of the proposal, and
the final rule retains the approach from the proposal.\126\
---------------------------------------------------------------------------

\125\ See proposed rule Sec. 252.74(f).
\126\ See final rule Sec. 252.74(e).
---------------------------------------------------------------------------

Example: A covered company holds $100 of bonds issued by Company X.
If the covered company sells short $100 of equity shares issued by
Company X, the covered company would not have any net credit exposure
to Company X. Similarly, the covered company would not have any net
credit exposure to Company X if it sells short $100 of Company X's debt
obligations, provided that those obligations are junior to, or pari
passu with, the Company X bonds that the covered company holds.
7. Unused Credit Lines
Section 252.74(g) of the proposed rule addressed the calculation of
the net credit exposure for any unused portion of certain extensions of
credit. In computing its net credit exposure to a counterparty for a
credit line or revolving credit facility, a covered company would have
been permitted to reduce its gross credit exposure by the amount of the
unused portion of the credit extension to the extent that the covered
company did not have any legal obligation to advance additional funds
under the facility until the counterparty provided the amount of
adjusted market value of collateral that qualifies under the credit
line or revolving credit facility with respect to the entire used
portion of the facility.\127\ To qualify for this reduction, the credit
contract governing the extension of credit would have been required to
specify that any used portion of the credit extension must be fully
secured at all times by collateral that is either (i) cash; (ii)
obligations of the United States or its agencies; (iii) obligations
directly and fully guaranteed as to principal and interest by, the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation, but only while operating under the conservatorship or
receivership of the Federal Housing Finance Agency, or any additional
obligations issued by a U.S. government-sponsored entity, as determined
by the Board.\128\
---------------------------------------------------------------------------

\127\ See proposed rule Sec. 252.74(g).
\128\ Id.
---------------------------------------------------------------------------

Commenters urged the Board to permit the full list of eligible
collateral to qualify for this provision. Commenters also requested
that the Board allow covered companies to apply the same credit
conversion factors (CCF) to unfunded, off-balance sheet commitments as
under the Board's capital rules rather than the proposed uniform 100
percent CCF to all such commitments regardless of contractual
provisions, to better reflect actual economic exposure.
Under the final rule, in calculating net credit exposure to a
counterparty for a credit line or revolving credit facility, a covered
company is permitted to reduce its gross credit exposure by the amount
of the unused portion of the credit extension, to the extent that the
covered company does not have any legal obligation to advance
additional funds under the facility until the counterparty provides the
amount of adjusted market value of eligible collateral that qualifies
under the credit line or revolving credit facility with respect to the
entire used portion of the facility.\129\ In response to comments, this
provision has been modified to make clear that any form of eligible
collateral as defined in the final rule (and described above) can be
used as collateral for this purpose. To ensure that the methodology is
simple and transparent and reflects the true value of the exposure, the
final rule does not, however, include credit conversion factors similar
to the Board's capital rules.
---------------------------------------------------------------------------

\129\ See final rule Sec. 252.74(f).
---------------------------------------------------------------------------

8. Credit Transactions Involving Exempt and Excluded Persons
Under the proposed rule, if a covered company obtained eligible
collateral from an entity that would have been exempt or excluded from
the SCCL (e.g., the U.S. government or a foreign sovereign entity that
receives a zero percent risk weight under the Board's capital rules),
or obtained an eligible guarantee or an eligible credit or equity
derivative from an eligible protection provider on an exposure to an
exempt

[[Page 38480]]

or excluded entity, the covered company would have been required to
recognize an exposure to the collateral issuer or eligible protection
provider to the same extent as if the underlying exposure were to an
entity that is not exempt.\130\ The Board did not receive comments on
this aspect of the proposal, and the final rule follows the same
approach to exempt and excluded entities as the proposal.\131\
---------------------------------------------------------------------------

\130\ See proposed rule Sec. 252.74(g).
\131\ See final rule Sec. 252.74(g). As noted, the final rule
replaces the term ``eligible protection provider'' with ``eligible
guarantor,'' as that is the term used in the Board's capital rules.
The definition of the term in the final rule is unchanged from the
proposal.
---------------------------------------------------------------------------

Example: A covered company has purchased a credit derivative from
an eligible guarantor to hedge the credit risk on a portfolio of U.S.
government bonds. The covered company needs to recognize an exposure to
the credit protection provider equal to the full notional of the credit
derivative (if the bonds are subject to the Board's risk-based capital
rules in 12 CFR part 217, subparts D and E) or to the counterparty
credit risk measurements obtained by using methodologies that the
covered company is permitted to use under the market risk capital rules
(if the bonds are subject to the Board's market risk rule in 12 CFR
part 217, subpart F).

E. Exposures to Securitization Funds, Investment Funds, or Other
Special Purpose Vehicles

1. Look-Through Approach
Special considerations arise in connection with measuring credit
exposures of a covered company to a securitization fund, investment
fund, or other special purpose vehicle (collectively, ``SPVs''). Under
the proposed rule, large covered companies would have been required to
analyze their credit exposure to the issuers of the underlying assets
in an SPV in which the large covered company invests or to which the
large covered company otherwise has credit exposure.\132\ If such
company was able to demonstrate that its exposure to each underlying
asset in an SPV were less than 0.25 percent of its tier 1 capital
(considering only exposures that arise from the SPV), then the covered
company would have been allowed to recognize an exposure solely to the
SPV and not to the underlying assets.\133\ Conversely, if a large
covered company was not able to demonstrate that its exposure to the
issuer of each underlying asset held by an SPV were less than 0.25
percent of the covered company's tier 1 capital, then the company would
have been required to apply a ``look-through approach'' and recognize
an exposure to each issuer of the assets held by the SPV that exceeded
0.25 percent of its tier 1 capital.\134\ In the latter case, if a large
covered company were required to apply the look-through approach, but
was unable to identify an issuer of assets underlying an SPV, the
covered company would have been required to attribute the exposure to a
single ``unknown counterparty'' and aggregate all exposures to such
unknown counterparties to a single counterparty.\135\
---------------------------------------------------------------------------

\132\ See proposed rule Sec. 252.75(a).
\133\ See proposed rule Sec. 252.75(a)(3). The Board notes that
a covered company's exposure to each underlying asset in an SPV
necessarily would be less than 0.25 percent of the covered company's
tier 1 capital if the covered company's entire investment in the SPV
is less than 0.25 percent of the covered company's tier 1 capital.
\134\ See proposed rule Sec. 252.75(a)(2).
\135\ See id.
---------------------------------------------------------------------------

The application of the look-through approach would have depended on
the nature of the investment of the covered company in the SPV. Where
all investors in an SPV are pari passu, the covered company would have
calculated its exposure to an issuer of assets held by the SPV as an
amount equal to the covered company's pro rata share in the SPV
multiplied by the value of the SPV's underlying assets issued by that
issuer.\136\ Otherwise, where the investors do not rank pari passu,
then the exposure to an issuer would have been calculated as the lower
of either the value of the tranche in which the covered company has
invested or the value of each asset attributed to the issuer--then
multiplied by the covered company's pro rata share.\137\
---------------------------------------------------------------------------

\136\ See proposed rule Sec. 252.75(b)(3)(i).
\137\ See proposed rule Sec. 252.75(b)(3)(ii).
---------------------------------------------------------------------------

While one commenter expressed support for the look-through
requirement, a number of commenters expressed the view that the look-
through approach was overbroad, complex, and unworkable as proposed.
Commenters requested a number of modifications related to the
proposal's look-through approach. Commenters urged the Board to clarify
the scope of the look-through requirement. In particular, commenters
argued that the look-through approach should only apply to exposures
arising from cash investments in a securitization vehicle, investment
fund, or other SPV and synthetic positions, such as derivative
contracts or other instruments, that mirror the economics of a cash
investment that are held in the banking book and exposures arising from
extensions of credit and liquidity facilities that mimic the risks of
such cash investments and that exceed 0.25 percent of the large covered
company's tier 1 capital. A few commenters urged clarification that the
look-through approach would not extend to exposures resulting from the
provision of traditional custody services to an investment fund client,
including payment, settlement, and asset administration. Certain
commenters expressed concerns that covered companies would have to
attribute excessive exposures to a single unknown counterparty, which
could chill investment in funds and vehicles. Commenters requested
clarification as to whether the attribution to a single unknown
counterparty was required for a covered company's entire exposure to a
securitization vehicle or merely the portion that it is unable to link
back to an individual issuer.
Certain commenters argued that the Board should adopt a more risk-
based approach to the look-through requirement by only requiring the
look-through to underlying assets for which the exposure value is at
least 0.25 percent of the company's tier 1 capital (the partial look-
through approach available under the large exposure standard). These
commenters also requested that the look-through be undertaken at less
frequent intervals (e.g., monthly or when asset-level disclosures are
publicly filed) and using the most recently available information. Some
commenters urged the Board to eliminate the requirement that exposures
be attributed to a single, unknown counterparty across all SPVs when a
large covered company is unable to identify each issuer of assets.
Commenters requested that the final rule exempt from the look-
through requirement exposures such as retail asset-backed securities
(including those funds or vehicles backed by credit card receivables,
auto-loans, and residential mortgages), pools of finance receivables in
which the underlying assets are comprised of small business borrower
receivables (such as equipment loans and leases, trade receivables, and
loans to auto dealers), and commercial mortgage-backed securities.
Commenters also argued that investment funds registered under the
Investment Company Act of 1940 (or governed by similar legislation in
other jurisdictions) should be exempt based on the stringent
diversification requirements to which such funds are subject.\138\
Commenters argued that it is unlikely that any of the underlying assets
would materially contribute to a

[[Page 38481]]

covered company's exposure to a given counterparty given the granular
nature of such assets.
---------------------------------------------------------------------------

\138\ See, e.g., 15 U.S.C. 80a-5(b)(1).
---------------------------------------------------------------------------

Some commenters recommended that the Board exclude exposures from
the look-through requirement that are required under other legal
standards, such as the risk retention rule, since these exposures
cannot be sold down. Commenters contended that the significant
practical challenges of complying with the proposal could result in
covered companies not investing in SPVs which could have a negative
effect on credit markets. For example, certain commenters argued that
covered companies may not have access to information at the frequency
and level of granularity required.
In order to address the concerns raised by commenters, the Board
has narrowed the scope of the look-through approach and reduced the
burden of its implementation. The final rule requires application of
the look-through approach only to individual underlying assets for
which the exposure value is at least 0.25 percent of the company's tier
1 capital, even in cases where the covered company cannot demonstrate
that each underlying asset in an SPV is less than 0.25 percent of the
covered company's tier 1 capital. This approach is referred to as the
partial look-through in this SUPPLEMENTARY INFORMATION.\139\
---------------------------------------------------------------------------

\139\ See final rule Sec. 252.75(b)(1).
---------------------------------------------------------------------------

The Board has not modified the look-through approach to exclude
explicitly certain types of SPVs. However, certain information provided
by commenters (e.g., that some retail exposures are unlikely to have
large underlying exposures) bears on the potential compliance burden of
the look-through and partial look-through approaches. In particular,
covered companies may be able to ascertain that an SPV does not contain
any exposures greater than or equal to 0.25 percent of tier 1 capital
based on characteristics of the SPV without having to measure each
specific exposure within the SPV.
Finally, to address the concerns that covered companies may not
have access to information at the frequency and level of granularity
required, the final rule allows covered companies to rely in good faith
on the most recent available information. In other words, covered
companies are allowed to fill in any missing values to the best of
their ability (i.e., in a reasonable manner and based on the most
recently available information).
Example: An SPV holds $10 of bonds issued by Company A, $10 of
bonds issued by Company B, and $20 of bonds issued by Company C. Assume
that all investors in the SPV are pari passu and that a covered
company's pro rata share in the SPV is 50 percent. Assume further that
the ratio of the covered company's pro rata investment in each bond (A,
B, C) to its tier 1 capital is 0.26 percent, 0.26 percent, and 0.52
percent. The covered company needs to recognize a $5 exposure to
Company A and Company B (i.e., 50 percent of $10) and a $10 exposure to
Company C (i.e., 50 percent of $20).
The foregoing example considers a case in which all of the
underlying investments are at least 0.25 percent of the covered
company's tier 1 capital. The following example illustrates application
of the partial look-through approach.
Example: An SPV holds $10 of bonds issued by Company A, $10 of
bonds issued by Company B, and $20 of bonds issued by Company C. Assume
that all investors in the SPV are pari passu and that a covered
company's pro rata share in the SPV is 50 percent. Assume further that
the ratio of the covered company's pro rata investment in each bond (A,
B, C) to its tier 1 capital is 0.24 percent, 0.24 percent, and 0.48
percent. The covered company needs to recognize a $10 exposure to the
SPV (i.e., 50 percent of the $10 exposure to Company A plus 50 percent
of the $10 exposure to Company B). Note that the covered company only
recognizes the exposure to the SPV--and not individually to Companies A
and B--because those two exposures are under 0.25 percent of tier 1
capital. Finally, the covered company must recognize a $10 exposure to
Company C (i.e., 50 percent of the $20 exposure to Company C), as the
exposure to Company C is above 0.25 percent of tier 1 capital.
The previous two examples consider situations in which the covered
company can identify the counterparty associated with each underlying
investment in the SPV. In certain cases, a covered company may not be
able to identify the counterparty in each underlying investment of the
SPV. In such cases, the underlying investments must be allocated to an
unknown counterparty if the pro rata size of the investment exceeds
0.25 percent of tier 1 capital, as demonstrated in the following
example.\140\
---------------------------------------------------------------------------

\140\ See final rule Sec. 252.75(a)(3)(iii).
---------------------------------------------------------------------------

Example: An SPV holds $10 of bonds issued by one unidentified
company, $14 of bonds issued by another unidentified company, and $20
of bonds issued by a third unidentified company. Assume that all
investors in the SPV are pari passu and that a covered company's pro
rata share in the SPV is 50 percent. Assume further that the ratio of
the covered company's pro rata investment in each bond (A, B, C) to its
tier 1 capital is 0.24 percent, 0.34 percent, and 0.48 percent. A
covered company would need to recognize a $5 exposure to the SPV (i.e.,
50 percent of the $10 exposure to the first unidentified company) and a
$17 exposure to an unknown counterparty (i.e., 50 percent of the $14
exposure to the second unidentified company and 50 percent of the $20
exposure to the third unidentified company).
Note that the example above applies both the partial look-through
approach, as the exposure to the first unidentified company is
allocated to the SPV since it represents less than 0.25 percent of tier
1 capital, and the unknown counterparty treatment since the exposures
to the second and third unknown companies are allocated to a single
unknown counterparty, as each pro rata investment in the second and
third investment exceeds 0.25 percent of the covered company's tier 1
capital. Finally, note that the foregoing example only considers a
single SPV and accordingly the effect of applying the unknown
counterparty treatment is to allocate some portion of the underlying
investments of the SPV to a single unknown counterparty. To the extent
that a covered company cannot identify the counterparty associated with
several underlying investments across several SPVs, all of these
unidentified investments must be allocated to a single unknown
counterparty to the extent that the pro rata size of each investment
exceeded 0.25 percent of the covered company's tier 1 capital.
If all investors in an SPV are not pari passu, a covered company
that is required to use the look-through approach would measure its
exposure to an issuer of assets held by the SPV for each tranche in the
SPV in which the covered company invests. The covered company would do
this using a two-step process. First, the covered company would assume
that the total exposure to an issuer of assets held by the SPV among
all investors in a given SPV tranche is equal to the lesser of the
value of the tranche and the value of the assets issued by the issuer
that are held by the SPV. Second, the covered company would multiply
this exposure amount by the percentage of the SPV tranche that the
covered company holds.
Example: An SPV holds $10 of bonds issued by Company A. The SPV has
issued $4 of junior notes and $6 of senior notes to the SPV's
investors. A covered company holds 50 percent of the junior notes and
50 percent of the

[[Page 38482]]

senior notes. With respect to the junior tranche of the SPV, the lesser
of the value of the tranche (i.e., $4) and the value of the underlying
assets issued by Company A (i.e., $10) is $4. With respect to the
senior tranche of the SPV, the lesser of the value of the tranche
(i.e., $6) and the value of the underlying assets issued by Company A
(i.e., $10) is $6. Because the covered company's pro rata share of each
tranche is 50 percent, it would need to recognize $2 of exposure to
Company A because of its investment in the junior tranche (i.e., 50
percent of $4), and $3 of exposure to Company A because of its
investment in the senior tranche (i.e., 50 percent of $6), assuming the
look-through approach is required.
2. Aggregation of Exposures to Certain Third Parties
Under the proposal, a large covered company would have been
required to recognize a gross credit exposure to each third party with
a contractual or other business relationship with an SPV whose failure
or material financial distress would cause a loss in the value of the
covered company's investment in or exposure to the SPV.\141\ A covered
company would have been required to recognize gross credit exposure to
such a third party in addition to the covered company's gross credit
exposure to an SPV.
---------------------------------------------------------------------------

\141\ See proposed rule Sec. 252.75(c).
---------------------------------------------------------------------------

A number of commenters urged the Board to eliminate the third-party
exposure requirement. Commenters argued that this requirement would
have required a covered company to recognize additional exposures
without a consideration of the actual amount of risk to which the
covered company is exposed as a result of such exposures. Commenters
contended that the requirement under the proposal referenced a ``loss''
to a covered company's investment in a securitization vehicle or
investment fund without reference to the materiality of such an
investment relative to the covered company. Moreover, commenters argued
that the proposal did not limit in any manner the universe of third
parties, which could make it impossible for a covered company to
identify all relevant third parties. As an alternative to eliminating
this requirement, commenters urged the Board to limit this requirement
to third parties that provide credit support or liquidity facilities to
an SPV and only apply the requirement where the large covered company's
investment in the vehicle exceeds 0.25 percent of its tier 1 capital,
consistent with the look-through requirement. Commenters further argued
that this requirement should only be on a reasonable ``best efforts''
basis, because covered companies may lack access to information to
comply with this requirement (e.g., a covered company may not know the
identity of currency or interest rate providers). Commenters noted that
in any case this requirement would overstate exposures by requiring a
covered company to recognize an exposure to two different parties: The
SPV and the third-party credit provider to the SPV.
The Board has modified the final rule to address the concerns
raised by commenters, thereby reducing burden on covered companies.
First, the Board has narrowed the scope of the requirement. The
proposed rule would have applied to third parties that have a
contractual or other business relationship with an SPV.\142\ Based on
suggestions from commenters, the final rule applies solely to third
parties that have a contractual obligation to provide credit or
liquidity support to an SPV.\143\
---------------------------------------------------------------------------

\142\ See proposed rule Sec. 252.75(c)(1).
\143\ See final rule Sec. 252.75(c)(1).
---------------------------------------------------------------------------

Second, the final rule explicitly limits the exposure that a
covered company has to attribute to a third party under this
requirement. The proposed rule would have required a large covered
company to recognize an exposure to the third party in an amount equal
to the large covered company's exposure to the SPV.\144\ The final rule
caps the recognized exposure to the maximum contractual obligation of
that third party to the SPV.\145\ This should mitigate the concern that
the requirement would have required a covered company to recognize
additional exposures without consideration of the actual amount of risk
to which the covered company is exposed.
---------------------------------------------------------------------------

\144\ See proposed rule Sec. 252.75(c)(2).
\145\ See final rule Sec. 252.75(c)(2).
---------------------------------------------------------------------------

Third, under the final rule, covered companies may rely in good
faith on the most recent available information. In other words, covered
companies are allowed to rely on a reasonable best effort in the event
that they lack access to information to comply with this requirement.

F. Aggregation of Exposures to Connected Counterparties

The proposed rule would have required a covered company to
aggregate counterparties based on tests of economic interdependence or
due to certain control relationships.\146\ In cases where the total
exposures to a single counterparty exceeded five percent of the covered
company's eligible capital base, the covered company would have had to
aggregate exposures to that counterparty with its exposures to all
other counterparties that are ``economically interdependent'' with the
first counterparty.\147\ The purpose of this proposed requirement was
to limit a covered company's overall credit exposure to two or more
counterparties where the underlying risk of one counterparty's
financial distress or failure would cause the financial distress or
failure of another counterparty. For similar reasons, under the
proposed rule, a covered company would have been required to aggregate
exposures of an unaffiliated counterparty with its exposures to all
other counterparties connected by control relationships.\148\
---------------------------------------------------------------------------

\146\ See proposed rule Sec. 252.76.
\147\ See proposed rule Sec. 252.76(a).
\148\ See proposed rule Sec. 252.76(b).
---------------------------------------------------------------------------

Commenters argued that it would be very difficult and burdensome
for covered companies to obtain the information required under the
proposed rule to aggregate their counterparties on the basis of the
economic interdependence and control tests. Certain commenters argued
that if the control relationship tests were retained in the final rule,
it should apply only to exposures exceeding five percent of the
eligible capital base, similar to the threshold under the proposal for
the economic interdependence test. Commenters urged the Board to make
clear that any determinations regarding economic interdependence and
control relationships, if retained in the final rule, would be subject
to a reasonable inquiry standard (that is, there should be good faith
due diligence into the relationship between the counterparty and other
potentially related entities). Commenters also requested that the Board
make clear these tests applied only within, and not across, different
categories of counterparties (that is, the tests would not be used to
aggregate a natural person with a company or a company with a State).
1. Economic Interdependence
The Board has incorporated two key provisions into the economic
interdependency assessment in the final rule to address the concerns
raised by commenters and to reduce burden on covered companies.\149\
First, the Board has revised the relevant factors to clarify when firms
must aggregate exposures to counterparties. For instance, the proposed
rule would have required a

[[Page 38483]]

covered company to consider whether a counterparty (counterparty A) has
fully or partly guaranteed the credit exposure of another counterparty
(counterparty B), or is liable by other means, and the credit exposure
is significant enough that counterparty B is likely to default if
presented with a claim relating to the guarantee or liability.\150\ The
final rule reframes this standard to make it more concrete and more
formulaic: Whether one counterparty has fully or partly guaranteed the
credit exposure of the other counterparty, or is liable by other means,
in an amount that is 50 percent or more of the covered company's net
credit exposure to the counterparty.\151\
---------------------------------------------------------------------------

\149\ See final rule Sec. 252.76(b).
\150\ See proposed rule Sec. 252.76(a)(2)(ii) (emphasis added).
\151\ See final rule Sec. 252.76(b)(2)(ii) (emphasis added).
---------------------------------------------------------------------------

Second, the final rule allows firms to request in writing a
determination from the Board that two counterparties are not
economically interdependent, even if one or more factors in the final
rule are met.\152\ Upon such a request, the Board may grant temporary
relief to the covered company and not require the covered company to
aggregate one counterparty with another counterparty provided that the
counterparty could modify its business relationships, such as by
reducing its reliance on the other counterparty, and provided that such
relief is in the public interest and is consistent with the purpose of
the final rule and section 165(e).\153\
---------------------------------------------------------------------------

\152\ See final rule Sec. 252.76(b)(3).
\153\ See final rule Sec. 252.76(b)(3)(ii).
---------------------------------------------------------------------------

In addition, as under the proposal, this economic interdependency
assessment in the final rule is required only when exposure to a
counterparty exceeds five percent of a covered company's tier 1
capital. The Board investigated the potential burden of the above
requirement using supervisory data covering U.S. GSIBs and their
largest credit counterparties from 2008 to 2017. Although the specific
definition of credit exposure in the supervisory data did not match
precisely the exposure calculation that will be required under the
final rule, the analysis does provide general insight into the
frequency of large credit exposures. Based on this data, credit
exposures exceeding the five-percent threshold occurred only 20 times
per year since 2012, for all firms combined.
Example: A covered company has a credit exposure to a bank that is
equal to 4.5 percent of tier 1 capital. This covered company does not
have to apply the economic interdependency test to the bank because the
credit exposure does not exceed five percent of its tier 1 capital.
Example: A covered company has credit exposures to both a car
manufacturer and a tire manufacturer. The exposure to the car
manufacturer is equal to 5.5 percent of its tier 1 capital. The
exposure to the tire manufacturer is 1.5 percent of its tier 1 capital.
The tire manufacturer sells all of its output to the car manufacturer.
This satisfies Sec. 252.76(b)(2)(i) of the final rule, so the covered
company has to aggregate the credit exposures to both counterparties,
which yields a total credit exposure of 7.0 percent of its tier 1
capital. Notably, this example also satisfies Sec. 252.76(b)(2)(iii)
of the final rule.
Example: A covered company has credit exposures to a bank and an
insurance company. The exposure to the bank is equal to 6.0 percent of
its tier 1 capital, or $3 billion. The exposure to the insurance
company is 1.0 percent of its tier 1 capital, or $1 billion. As part of
its business, the insurance company guaranteed half of the bank's
exposures to the covered company, i.e., $1.5 billion. This partial
guarantee of $1.5 billion is greater than 50 percent of the covered
company's exposure to the insurance company, as $1.5 billion is greater
than $0.5 billion. This threshold exceeds the standard in the final
rule, which means the covered company must aggregate the exposures to
the bank and the insurance company.
2. Control Relationships
Similar to the approach to economically interdependent
counterparties, the Board has modified the control relationship tests
in the final rule to address the concerns raised by commenters and to
reduce burden. First, the control test in the final rule applies only
when exposures exceed a threshold of five percent of tier 1 capital,
similar to the economic interdependence standard. In practice, the
likelihood of a counterparty exceeding this five percent threshold is
unlikely.
Second, covered companies will be required to apply only two clear
control tests, based on 25 percent voting control and majority control
of the board of directors.\154\
---------------------------------------------------------------------------

\154\ See final rule Sec. 252.76(c)(1). For purposes of the
final rule, one counterparty (counterparty A) is deemed to control
the other counterparty (counterparty B) if (i) counterparty A owns,
controls, or holds with the power to vote 25 percent or more of any
class of voting securities of counterparty B; or (ii) counterparty A
controls in any manner the election of a majority of the directors,
trustees, general partners (or individuals exercising similar
functions) of counterparty B.
---------------------------------------------------------------------------

Third and finally, the final rule allows covered companies to
request a determination in writing from the Board that two
counterparties are not under common control, even if one or more of the
control factors are met.\155\ Upon such a request, the Board may grant
temporary relief to the covered company and not require the covered
company to aggregate one counterparty with another counterparty
provided that, taking into account the specific facts and
circumstances, such indicia of control does not result in entities
being connected by control relationships for purposes of the final
rule, and provided that such relief is in the public interest and is
consistent with the purpose of the final rule and section 165(e).\156\
---------------------------------------------------------------------------

\155\ See final rule Sec. 252.76(c)(2)(i).
\156\ See final rule Sec. 252.76(c)(2)(ii).
---------------------------------------------------------------------------

Lastly, it should be noted that the final rule authorizes the Board
to determine, after notice to the covered company and opportunity for
hearing, that one or more counterparties of the covered company are
economically interdependent or connected by control relationships for
the purposes of this section, based on consideration of the factors in
the final rule as well as related indicia.\157\ Moreover, the Board can
determine, after notice to the covered company and opportunity for
hearing, that the exposures to two counterparties must be aggregated to
prevent evasion of the final rule and section 165(e).\158\
---------------------------------------------------------------------------

\157\ See final rule Sec. 252.76(d).
\158\ See final rule Sec. 252.76(e).
---------------------------------------------------------------------------

Example: A covered company has a credit exposure to a bank that is
equal to 4.5 percent of its tier 1 capital. This covered company does
not have to apply the control test because the exposure level does not
exceed five percent of its tier 1 capital.
Example: A covered company has credit exposures to both a bank and
a fund that is sponsored by the bank. The exposure to the bank is equal
to 6.5 percent of its tier 1 capital. The exposure to the fund is 2.0
percent of its tier 1 capital. The bank does not own, control, or hold
the power to vote 25 percent or more of any class of voting securities
of the fund; however, the bank does have the ability to appoint a
majority of the directors of the fund. Under the final rule, this
covered company is required to aggregate its credit exposures to the
fund with its credit exposures to the bank, which yields 8.5 percent of
its tier 1 capital.

G. Exemptions

Section 165(e)(6) of the Dodd-Frank Act states that the Board may,
by regulation or order, exempt transactions, in whole or in part, from
the definition of the term ``credit exposure'' for purposes of that
subsection, if the Board

[[Page 38484]]

finds that the exemption is in the public interest and is consistent
with the purposes of that subsection.\159\ The proposed rule would have
included several exemptions for credit transactions from the SCCL,
including (1) direct claims on, and portions of claims that are
directly and fully guaranteed as to principal and interest by the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, while these entities are operating under the
conservatorship or receivership of the Federal Housing Finance Agency;
(2) intraday credit exposure to a counterparty; and (3) trade exposures
to a central counterparty that meets the definition of a qualifying
central counterparty.\160\ The proposal also would have exempted any
Federal Home Loan Bank from the definition of covered company.\161\
---------------------------------------------------------------------------

\159\ See 12 U.S.C. 5365(e)(6).
\160\ See proposed rule Sec. 252.77(a).
\161\ See proposed rule Sec. 252.77(b).
---------------------------------------------------------------------------

Many commenters expressed support for the proposed exemptions to
qualifying central counterparties and for intraday credit exposures to
a counterparty. Certain commenters requested an additional exemption
for short-dated exposures arising from the provision of traditional
custody services or, in the alternative, the implementation of a five-
day cure period for such exposures. A few commenters requested an
express exemption for credit exposures to the Federal Home Loan Banks.
One commenter urged the Board to include regulatory exemptive authority
in the final rule that would provide explicit flexibility for tailoring
the rule for a particular covered company based on the company's risk
profile.
Certain commenters also requested exemptions for multilateral banks
and certain supranational entities, including the Bank of International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, and multilateral development banks that
are assigned a zero percent risk weight under the Board's capital
rules. One commenter argued it is inappropriate to exclude sovereign
exposures to zero percent risk weight foreign sovereign entities, which
can be risky. Other commenters urged that the exclusion for exposures
to zero percent risk weight foreign sovereign entities be extended to
their zero percent risk weight public sector entities. These commenters
argued that these entities similarly pose little risk of default and
such treatment would align with the determination of risk weights under
the Board's risk-based capital rules. Certain commenters requested that
the Board allow covered companies to exclude any credit exposures to a
counterparty that are deducted from their tier 1 capital as credit
exposure since the covered company has already reduced its regulatory
capital by these amounts. The Board's capital rules require certain
unconsolidated investments in financial institutions to be deducted
once certain thresholds are reached.
In response to comments, the Board has decided not to allow covered
companies to exclude exposures that have been deducted from capital for
two reasons. First, the deduction only occurs after a certain threshold
is reached and so the full amount of the exposure cannot be excluded as
only part of the exposure is deducted from capital. Second, the
deduction from capital serves better to reflect the actual loss
absorbing capacity of a company's capital base. These deductions are
intended to result in a more accurate measure of equity capital;
accordingly, no corresponding adjustment to the value of the related
credit exposure is required.
Section 252.77 of the final rule sets forth additional exemptions
from the single-counterparty credit limits.\162\ The Board has retained
the exemptions from the proposal and added two additional exemptions.
---------------------------------------------------------------------------

\162\ See final rule Sec. 252.77.
---------------------------------------------------------------------------

The first exemption from the final rule is for direct claims on,
and the portions of claims that are directly and fully guaranteed as to
principal and interest by, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation, while these entities
are operating under the conservatorship or receivership of the Federal
Housing Finance Agency. This exemption reflects a policy decision that
credit exposures to these government-sponsored entities should not be
subject to a regulatory limit for so long as the entities are in the
conservatorship or receivership of the U.S. government.\163\ This
approach is consistent with the approach that the Board used in its
risk retention rules.\164\ As determined by the Board, obligations
issued by other U.S. government-sponsored entities also would be
exempt.
---------------------------------------------------------------------------

\163\ See final rule Sec. 252.77(a)(1).
\164\ See 12 CFR 244.8.
---------------------------------------------------------------------------

The second exemption from the final rule is for intraday credit
exposure to a counterparty.\165\ This exemption will help minimize the
impact of the rule on the payment and settlement of financial
transactions. The Board has declined to broaden this exemption as
requested by commenters to ensure that the credit exposure measures
accurately reflect actual credit exposures assumed by covered
companies. Moreover, the operational and logistical difficulties that
extend to measuring intraday credit extensions do not extend in the
same manner to longer-term credit extensions.
---------------------------------------------------------------------------

\165\ See final rule Sec. 252.77(a)(2).
---------------------------------------------------------------------------

The third exemption from the final rule is for trade exposures to a
central counterparty that meets the definition of a qualifying central
counterparty under the Board's capital rules (QCCP).\166\ These
exposures include potential future exposure arising from transactions
cleared by a QCCP and pre-funded default fund contributions. The final
rule exempts these exposures to QCCPs from single-counterparty credit
limits because of the concern that application of single-counterparty
credit limits to these exposures would require firms to spread activity
across a greater number of CCPs, which could lead to a reduction in
multilateral netting benefits.\167\
---------------------------------------------------------------------------

\166\ See final rule Sec. 252.77(a)(3). Qualifying central
counterparty is defined to have the same meaning as in Sec. 217.2
of the Board's risk-based capital rules. See final rule Sec.
252.71(bb); See also 12 CFR 217.2.
\167\ As initial margin and excess variation margin posted to
the QCCP and held in a segregated account by a third-party custodian
are not subject to counterparty risk, these amounts would not be
considered credit exposures under the final rule.
---------------------------------------------------------------------------

In response to comments, the final rule includes two new
exemptions. The fourth exemption from the final rule is for any credit
transaction with the Bank for International Settlements, the
International Monetary Fund, or institutions that are members of the
World Bank Group (namely, the International Bank for Reconstruction and
Development, the International Finance Corporation, the International
Development Association, the Multilateral Investment Guarantee Agency,
and the International Centre for Settlement of Investment Disputes).
Although the Bank for International Settlements is not itself a central
bank of any sovereign entity, the membership of the Bank for
International Settlements is comprised entirely of central banks of
sovereign entities, which are generally not defined as counterparties
in the final rule.\168\ With respect to the other entities, the Board
notes that the United States is a shareholder or contributing member of
each of those entities, along with other sovereign entities. In light
of

[[Page 38485]]

the generally high-credit quality of these institutions and considering
that each has a membership structure comprised of a significant
proportion of sovereign entities or agencies with strong
creditworthiness, the Board is of the view that this treatment is
appropriate. The fifth exemption from the final rule is for any credit
transaction with the European Commission or European Central Bank.
These international organizations share many features of sovereign
entities that have been excluded from the final SCCL rule, including
the assignment of a zero percent risk weight under the Board's capital
rules. The Board believes that these exemptions are in the public
interest, given the public purpose of each of these entities, and given
the low credit risk of these entities, are consistent with the purposes
of section 165(e) and this final rule. Accordingly, for the reasons
discussed above and in the proposal, the Board has determined that each
of these exemptions is in the public interest and is consistent with
the purpose of section 165(e).
---------------------------------------------------------------------------

\168\ Central banks of sovereign entities would only be
considered counterparties under the final rule if the central bank's
foreign sovereign entity was not assigned a zero percent risk weight
under the Board's capital rules. See final rule Sec. 252.71(e).
---------------------------------------------------------------------------

The sixth exemption category implements section 165(e)(6) of the
Dodd-Frank Act and provides a catch-all category to exempt any
transaction which the Board determines to be in the public interest and
consistent with the purposes of section 165(e).\169\
---------------------------------------------------------------------------

\169\ See 12 U.S.C. 5365(e)(6); final rule Sec. 252.77(a)(6).
---------------------------------------------------------------------------

Section 252.77(b) of the final rule implements section 165(e)(6) of
the Dodd-Frank Act, which provides a statutory exemption for the
Federal Home Loan Banks. The Board views section 165(e)(6) as providing
an exemption for Federal Home Loan Banks from the definition of covered
company but as not providing an exemption for a covered company's
credit exposure to the Federal Home Loan Banks. As such, a covered
company's exposure to a Federal Home Loan Bank is subject to the SCCL
in the final rule.

H. Compliance and Timing of Applicability

1. Scope of Compliance
Under the proposed rule, a covered company with $250 billion or
more in total consolidated assets would have been required to comply
with the requirements of the proposed rule on a daily basis. These
covered companies also would have been required to submit a monthly
compliance report to the Board.
Certain commenters requested clarification that the daily
compliance requirement for a covered company should be based on the
most recent information available with respect to counterparties,
consistent with the company's internal risk management processes, and
not on information that is updated on a daily basis. Other commenters
believed that daily compliance constitutes a significant operational
challenge, especially with respect to the look-through approach for
SPVs. These commenters noted that the composition of SPVs is typically
reported only on a monthly or less frequent basis. To address these
concerns, the final rule allows covered companies to rely in good faith
on the most recent available information about an SPV. For example,
consistent with the final rule, a covered company may fill in values,
in a reasonable manner, based on available information.
Similar to the proposal, under Sec. 252.78(a) of the final rule, a
covered company is required to comply with the requirements on a daily
basis, as of the end of each business day.\170\ To address commenters'
concerns regarding the ability to access certain information (including
information regarding SPVs), the final rule allows covered companies to
rely in good faith on the most recent available information. In other
words, covered companies are allowed to fill in missing values, in a
reasonable manner, based on available information. In addition, under
the final rule, a covered company must report its compliance to the
Federal Reserve on a quarterly basis, as of the end of the quarter,
rather than a monthly basis, unless the Board determines and notifies
that company in writing that more frequent reporting is required.\171\
---------------------------------------------------------------------------

\170\ See final rule Sec. 252.78(a)(1).
\171\ See final rule Sec. 252.78(a)(2).
---------------------------------------------------------------------------

The Board has approved proposed forms, published elsewhere in this
issue of the Federal Register, for covered companies to report credit
exposures to their counterparties as those credit exposures would be
measured under the final rule and section 165(e). The comment period on
the proposed reporting expires on October 5, 2018.
2. Noncompliance
Section 252.78(c) of the proposed rule addressed the consequences
if a covered company were to fail to comply with the credit exposure
limits.\172\ The proposed rule stated that, if a covered company were
not in compliance with respect to a counterparty due to any of four
factors--(1) a decrease in the covered company's capital stock and
surplus; (2) the merger of the covered company with another covered
company; (3) a merger of two unaffiliated counterparties; or (4) any
other circumstance the Board determines is appropriate--then the
covered company would not have been subject to enforcement actions with
respect to such noncompliance for a period of 90 days,\173\ so long as
the company were to use reasonable efforts to return to compliance with
the proposed rule during this period. The covered company would have
been prohibited from engaging in any additional credit transactions
with such a counterparty in contravention of this requirement during
the noncompliance period, except in cases where the Board determined
that such additional credit transactions were necessary or appropriate
to preserve the safety and soundness of the covered company or
financial stability.\174\ In granting approval for any such special
temporary exceptions, the Board could have imposed supervisory
oversight and reporting measures that it determined would have been
appropriate to monitor compliance with the foregoing standards.\175\
---------------------------------------------------------------------------

\172\ See proposed rule Sec. 252.78(c).
\173\ This period could have been adjusted by the Board as
appropriate to preserve the safety and soundness of the covered
company or U.S. financial stability. Id.
\174\ Id.
\175\ See proposed rule Sec. 252.78(d).
---------------------------------------------------------------------------

A number of commenters suggested broadening the cure period to
mitigate potential disruptions to proper market activities. In
particular, these commenters requested that the cure period be
broadened to apply to any breach that is beyond the covered company's
control and could be reasonably remediated within the 90-day period.
Commenters also requested appropriate transition periods if an exposure
or counterparty changes status or loses an exemption under the final
rule (e.g., if a sovereign's risk-weight increases or if a qualifying
central counterparty loses its status). A few commenters suggested that
any breaches of the proposal's credit exposure limits should be
promptly reported to the Board.
To address the concerns of commenters, the final rule includes an
additional factor for relief during a period of noncompliance: An
unforeseen and abrupt change in the status of a counterparty as a
result of which the covered company's credit exposure to the
counterparty becomes limited by the requirements of this section.\176\
Along with the proposed

[[Page 38486]]

discretionary factor (``[a]ny other factor(s) the Board determines, in
its discretion, is appropriate''),\177\ this factor should sufficiently
broaden the scope of the cure period to mitigate the risk of an
enforcement action due to circumstances outside the control of the
covered company.
---------------------------------------------------------------------------

\176\ See final rule Sec. 252.78(c)(2). The factors are (i) a
decrease in the covered company's capital stock and surplus; (ii)
the merger of the covered company with another covered company;
(iii) a merger of two unaffiliated counterparties; (iv) an
unforeseen and abrupt change in the status of a counterparty as a
result of which the covered company's credit exposure to the
counterparty becomes limited by the requirements of this section; or
(v) any other factor(s) the Board determines, in its discretion, is
appropriate.
\177\ This prong is Sec. 252.78(c)(4) in the proposed rule and
Sec. 252.78(c)(2) in the final rule.
---------------------------------------------------------------------------

3. Initial Applicability and Ongoing Applicability
Under the proposed rule, covered companies with $250 billion or
more in total consolidated assets would have been required to comply
one year from the effective date of the rule, unless that time were
extended by the Board in writing.\178\ In addition, under the proposed
rule, any company that becomes a covered company after the effective
date of the rule would have been required to comply with the
requirements of the rule beginning on the first day of the fifth
calendar quarter after it becomes a covered company, unless that time
were accelerated or extended by the Board in writing.\179\
---------------------------------------------------------------------------

\178\ See proposed rule Sec. 252.70(g)(2).
\179\ See proposed rule Sec. 252.70(h).
---------------------------------------------------------------------------

A number of commenters urged the Board to provide covered companies
additional time to comply with the requirements of the final rule. Most
of these commenters argued that two years from the date the applicable
reporting form is finalized is the minimum amount of time covered
companies would need to develop the infrastructure to comply with the
requirements.\180\ These commenters pointed out that compliance with
the final rule would entail the deployment of significant resources and
development of entirely new systems and procedures, which would depend
on the final rule and the associated reporting requirements. Moreover,
certain commenters argued that if retail exposures were not exempted
from the scope of the final rule, then a minimum of three years from
finalization of the applicable reporting form would be necessary for
covered companies to develop and implement systems capable of tracking
and calculating exposures to millions of individual customers, their
intermediate family members, and any other entities a covered company
may be required to aggregate.
---------------------------------------------------------------------------

\180\ Section 252.78(a) of the proposal would have required
covered companies to comply with the requirements on a daily basis
at the end of each business day and submit on a monthly basis a
report demonstrating its daily compliance. The preamble to the
proposal explained that the Board plans to develop reporting forms
for covered companies to use to report credit exposures to their
counterparties as those exposures would be measured under rules
implementing section 165(e) of the Dodd-Frank Act. 81 FR at 14344
(Mar. 16, 2016).
---------------------------------------------------------------------------

The Board has simplified the final rule to address the concerns
raised by commenters regarding the compliance period of the final rule.
The final rule gives major covered companies (i.e., GSIBs) until
January 1, 2020, to comply,\181\ and gives all other covered companies
until July 1, 2020, to comply.\182\
---------------------------------------------------------------------------

\181\ See final rule Sec. 252.70(c)(1)(ii).
\182\ See final rule Sec. 252.70(c)(1)(i). A covered company
that becomes subject to the final rule after its effective date is
also given two years from the date on which it becomes a covered
company to comply, unless that time is accelerated or extended by
the Board in writing. See final rule Sec. 252.70(c)(2). The Board
may, for instance, exercise its discretion to apply the SCCL to a
covered company in a period of less than two years if the Board
determined that there was a rapid expansion of risk in that company.
---------------------------------------------------------------------------

III. Final Rule for Foreign Banking Organizations

A. Background

In February 2014, the Board adopted a final rule establishing
enhanced prudential standards for FBOs with U.S. banking operations and
total consolidated assets of $50 billion or more.\183\ Under that rule,
an FBO with U.S. non-branch assets of $50 billion or more is required
to form a U.S. IHC to hold its interests in U.S. bank and nonbank
subsidiaries.\184\ An FBO's U.S. IHC is subject to enhanced prudential
standards on a consolidated basis, including risk-based and leverage
capital requirements, liquidity requirements, and risk management
standards. Certain enhanced prudential standards also apply to an FBO's
``combined U.S. operations,'' which would include an FBO's U.S.
branches and agencies, as well as its U.S. IHC and its subsidiaries.
---------------------------------------------------------------------------

\183\ See Enhanced Prudential Standards for Bank Holding
Companies and Foreign Banking Organizations, 79 FR 17240 (Mar. 27,
2014). The definition of ``foreign banking organization'' is the
same as in section 211.21(o) of the Board's Regulation K (12 CFR
211.21(o)), provided that, if the top-tier foreign banking
organization is incorporated in or organized under the laws of any
State, the foreign banking organization shall not be treated as a
foreign banking organization for purposes of this part. See 12 CFR
252.2(j).
\184\ An FBO's U.S. IHC is not required to hold the FBO's
interest in any company held under section 2(h)(2) of the BHC Act,
12 U.S.C. 1841(h)(2).
---------------------------------------------------------------------------

As with covered companies, and consistent with the amendments to
section 165(e) made by EGRRCPA, the single-counterparty credit limits
in this final rule would apply to the U.S. operations of an FBO with
$250 billion or more in total global consolidated assets. The single-
counterparty credit limits also would apply to any U.S. IHC of such an
FBO with $50 billion or more in total consolidated assets. However, the
final rule makes clear that the SCCL applicable to the U.S. operations
of an FBO would not apply if an FBO certifies to the Board that it
meets large exposure or SCCL standards on a consolidated basis
established by its home country supervisor that are consistent with the
large exposure standard, unless the Board determines, in writing, after
notice to the FBO, that compliance with the final rule is required.

B. Summary of Comments on Proposal for Foreign Banking Organizations

As noted, under the proposal, an FBO was subject to two SCCL: One
for its IHC measured against the IHC's capital base and one for its
combined U.S. operations (including U.S. branches) measured against the
capital base of the entire FBO. With respect to an FBO's combined U.S.
operations (rather than its U.S. IHC), the proposal would have applied
SCCL with respect to exposures of any U.S. branch or agency of the
foreign banking organization; exposures of the U.S. subsidiaries of the
foreign banking organization, including any U.S. IHC; and all
subsidiaries of such subsidiaries (other than any companies held under
section 2(h)(2) of the BHC Act).\185\ The U.S. IHC and the FBO itself,
with respect to its combined U.S. operations, each would have been a
``covered entity'' under the proposal. A number of commenters argued
that application of SCCL to those FBOs that are subject to comparable
large exposure or single-counterparty credit limit regimes in their
home country is inconsistent with the statutory mandate to give due
regard to principles of national treatment and competitive
equality.\186\ These commenters also noted that certain provisions of
the Dodd-Frank Act expressly provide for the recognition of comparable
home country regulation.\187\ These commenters argued that the
development of the large exposure standard made it more likely that
other jurisdictions would have comparable single-counterparty credit
limit regimes to that of section 165(e) and its implementing
regulation.
---------------------------------------------------------------------------

\185\ 12 U.S.C. 1841(h)(2).
\186\ See 12 U.S.C. 5365(b)(2).
\187\ See, e.g., 12 U.S.C. 5365(b)(2)(B).
---------------------------------------------------------------------------

Commenters also argued that the proposal would have had a
materially disproportionate and adverse effect on

[[Page 38487]]

FBOs relative to covered companies due to the scope of FBOs subject to
the proposal and the existence of limits for both the combined U.S.
operations of FBOs and the U.S. IHCs of FBOs. In particular, commenters
expressed concern that the proposed rule would apply to all FBOs with
$50 billion or more in total global consolidated assets, regardless of
the size of their U.S. operations. As a result, these commenters
contended that the proposal would subject FBOs to materially greater
costs and burdens than their covered company counterparts (e.g., by
requiring FBOs to prepare, monitor, and keep records for limits at
multiple levels of an FBO's U.S. operations).
Further, commenters expressed the view that the proposal
potentially could interfere with the safety and soundness and
enterprise-wide risk management of FBOs by applying multiple,
redundant, and inconsistent regimes for calculating credit exposures.
Commenters also expressed concerns with the noncompliance cross-trigger
to FBOs (that is, the prohibition against either the U.S. IHC or the
combined U.S. operations of an FBO engaging in additional credit
transactions with a counterparty if either entity exceeds its SCCL) as
discriminatory and unwarranted. Certain commenters urged that, before
applying SCCL to only a portion of the FBO's operations, the Board be
required to find that existing federal and state lending limits
applicable to an FBO's U.S. branches and agencies and comparable home
country SCCL currently applicable to FBOs are not sufficient and that a
lower SCCL is necessary to mitigate risks to the financial stability of
the United States.
In light of these concerns, some commenters recommended that the
final rule apply to a U.S. IHC as if it were a covered company and that
an FBO, with respect to their combined U.S. operations, be required to
comply with a comparable home country SCCL regime consistent with the
large exposure standard. These commenters noted that such an approach
would comport with the Board's approach to implementing regulatory
capital and stress testing components and meet the requirements of
section 165 of the Dodd-Frank Act.
Commenters representing FBOs also expressed substantive concerns
with many of the same issues as commenters representing covered
companies, such as the definitions of ``covered company'' and
``counterparty,'' the look-through approach for SPVs, and the
aggregation of counterparties based on the economic interdependence and
control relationship tests. To address these concerns, the final rule
for FBOs generally contains the same modifications as those described
above for covered companies.

C. Overview of the Final Rule for Foreign Banking Organizations

As noted, the final rule retains both sets of proposed limits that
would have applied to FBOs; however, also as noted, an FBO that is
subject on a consolidated basis to a home country SCCL framework will
be able to comply with the SCCL for its combined U.S. operations by
certifying to the Board that the FBO complies with its home country
SCCL framework. This modification should address, in large part, the
concerns raised by commenters regarding the multiple limits applicable
to FBOs under the proposal and mitigate the compliance costs of the
final rule for FBOs subject to the requirements in the final rule.\188\
---------------------------------------------------------------------------

\188\ The U.S. IHC and the FBO itself, with respect to its
combined U.S. operations, are each a ``covered foreign entity''
under the final rule. For improved clarity, the final rule uses the
term ``covered foreign entity'' rather than the term ``covered
entity'' that was used in the proposal.
---------------------------------------------------------------------------

An FBO that cannot make such a certification would be subject to
one of two credit exposure limits with respect to its U.S. operations
that are tailored to the size and systemic footprint of the firm.
Similar to the final rule's provisions for covered companies, the first
category of limits applies to any entity that is part of the combined
U.S. operations of an FBO with total consolidated assets that equal or
exceed $250 billion.\189\ These covered foreign entities would be
prohibited from having aggregate net credit exposure to an unaffiliated
counterparty in excess of 25 percent of the FBO's tier 1 capital.
---------------------------------------------------------------------------

\189\ See final rule Sec. 252.170(a)(2)(i).
---------------------------------------------------------------------------

The second category of limits prohibits any top-tier FBO that has
the characteristics of a GSIB under the global methodology \190\ (major
FBO) from having aggregate net credit exposure in excess of 15 percent
of the FBO's tier 1 capital to a major counterparty (a GSIB or a
nonbank financial company supervised by the Board) and in excess of 25
percent of the FBO's tier 1 capital to any other counterparty. This
standard is similar to the standard in the final rule for covered
companies and consistent with the requirements in section 165(a)(1)(B)
and section 165(e) of the Dodd-Frank Act, as discussed above.\191\ The
SCCL applicable to the combined U.S. operations of an FBO that cannot
certify to the Board that it complies with a home country SCCL regime
consistent with the large exposure standard are summarized in Table 3.
---------------------------------------------------------------------------

\190\ ``Global methodology'' is defined in the Board's
Regulation YY as ``the assessment methodology and the higher loss
absorbency requirement for global systemically important banks
issued by the Basel Committee on Banking Supervision, as updated
from time to time.'' 12 CFR 252.2(o).
\191\ 12 U.S.C. 5365(a)(1)(B), (e); See, ``Calibrating the
Single-Counterparty Credit Limit between Systemically Important
Financial Institutions,'' May 4, 2016, https://www.federalreserve.gov/aboutthefed/boardmeetings/sccl-paper-20160304.pdf.

Table 3--Single-Counterparty Credit Limits Applicable to the Combined
U.S. Operations of Foreign Banking Organizations
------------------------------------------------------------------------
Applicable credit exposure
Category of covered foreign entity limit
------------------------------------------------------------------------
Combined U.S. operations of FBOs with Aggregate net credit exposure
total consolidated assets that equal to a counterparty cannot
or exceed $250 billion but are not exceed 25 percent of the FBO's
major FBOs. tier 1 capital.
Major FBOs............................. Aggregate net credit exposure
to a major counterparty cannot
exceed 15 percent of the FBO's
tier 1 capital.
Aggregate net credit exposure
to any other counterparty
cannot exceed 25 percent of
the FBO's tier 1 capital.
------------------------------------------------------------------------

Under the final rule, as in the proposal, the SCCL for a U.S. IHC
of such an FBO with total consolidated assets that equal or exceed $50
billion to a single counterparty falls into one of three tailored
tiers. First, a U.S. IHC with total consolidated assets of at least $50
billion but less than $250 billion is prohibited from having aggregate
net

[[Page 38488]]

credit exposure to a single counterparty in excess of 25 percent of the
company's total regulatory capital plus ALLL.\192\ Second, a U.S. IHC
with total consolidated assets of $250 billion or more but less than
$500 billion is prohibited from having aggregate net credit exposure to
a single counterparty in excess of 25 percent of the U.S. IHC's tier 1
capital. (This limit is based on tier 1 capital for the same reasons as
described above with respect to the limit applied to covered
companies.) Third, a U.S. IHC with $500 billion or more in total
consolidated assets is prohibited from having aggregate net credit
exposure to a major counterparty in excess of 15 percent of the U.S.
IHC's tier 1 capital and faces a 25 percent of tier 1 capital limit for
any other counterparty. (This 15 percent limit of tier 1 capital limit
is premised on the same rationale as described above with respect to
the 15 percent of tier 1 capital limit that applies to major covered
companies.) Similar to the final rule applicable to covered companies,
a ``major counterparty'' is defined as a U.S. or foreign GSIB or a
nonbank financial company supervised by the Board. These limits are
summarized in Table 2 above.
---------------------------------------------------------------------------

\192\ The final rule's definition of ``capital stock and
surplus'' with respect to a foreign banking organization reflects
differences in international accounting standards. See final rule
Sec. 252.171(e).
---------------------------------------------------------------------------

In determining whether a U.S. IHC complies with these limits,
exposures of the U.S. IHC itself and its subsidiaries needs to be taken
into account. Similar to the final rule's requirements for covered
companies, ``subsidiary'' is defined as any company that is
consolidated by the other company under applicable accounting
standards.\193\ Definitions of ``counterparty,'' ``affiliate,'' and
other related terms in the final rule also are similar to the final
rule applicable to covered companies. The attribution requirements and
application of the economic interdependence and control relationship
tests also are generally the same as under the portions of the final
rule applicable to covered companies.\194\
---------------------------------------------------------------------------

\193\ See final rule Sec. 252.171(gg). For a company that is
not subject to applicable accounting standards, ``subsidiary''
includes a company that would have been consolidated if such
principles or standards had applied.
\194\ A U.S. IHC with total consolidated assets of $50 billion
or more but less than $250 billion generally would not be required
to apply the economic interdependence or control relationship tests.
See final rule Sec. 252.176(a).
---------------------------------------------------------------------------

The final rule includes modifications in response to concerns
raised by commenters, including comments made to the proposal for
covered companies. The Board's final rule applicable to covered
companies and the final rule applicable to FBOs have been aligned to
the extent such alignment is appropriate. For example, the definition
of ``covered foreign entity'' has been revised in the final rule to
refer to financial consolidation standards rather than concepts of BHC
Act control as under the proposal, which also is consistent with the
approach in the final rule for covered companies. Similarly, FBOs that
are not GSIBs will have until July 1, 2020, to comply with its
requirements, as is the case with similarly situated covered companies.
Although the major components of the SCCL for foreign banking
organizations are the same as the requirements applicable to covered
companies, there are some differences between these requirements. For
example, as discussed in more detail below, the SCCL would not apply to
exposures of a U.S. IHC or of the combined U.S. operations of an FBO to
the FBO's home country sovereign entity, regardless of the risk weight
assigned to that sovereign entity under the Board's capital rules (12
CFR part 217).

D. Key Terminology and Concepts

1. Major Counterparty, Major Foreign Banking Organization, and Major
Intermediate Holding Company
Under the proposal, a ``major foreign banking organization'' would
have been defined to mean any FBO with total consolidated assets of
$500 billion or more. Similarly, a ``major U.S. intermediate holding
company'' would have been defined to mean a U.S. IHC with total
consolidated assets of $500 billion or more. Under the proposal, major
foreign banking organizations and major U.S. IHCs would have been
subject to the more stringent 15 percent of tier 1 capital limit with a
major counterparty (defined to mean a U.S. GSIB, foreign GSIB, or
nonbank financial company supervised by the Board).
Some commenters argued that major FBOs should be defined as GSIBs,
in the same manner as ``major covered company'' would have been defined
in the proposal for covered companies. These commenters noted that a
GSIB determination is based on indicators that correlate to an
institution's systemic importance rather than simply consideration of
its size, and that basing the classification of FBOs and U.S. IHCs as
``major'' based on size alone would grossly overstate the systemic
impact of these entities on the U.S. financial system. Some commenters
suggested the Board define a major FBO as an FBO that meets the
following criteria: (i) The FBO is a GSIB as determined by the
Financial Stability Board; and (ii) the FBO is required to have an IHC
for its U.S. operations. These commenters urged that major
counterparties also be identified in this manner.
Similar to the definition of ``major covered company'' with respect
to covered companies, the final rule generally defines ``major foreign
banking organization'' as a covered FBO that has the characteristics of
a GSIB under the global methodology.\195\ This should address in large
part commenters' concerns with respect to FBOs. As discussed above, a
U.S. IHC with total consolidated assets of $500 billion or more would
present significant risk because of both its size and the likelihood
that such a U.S. IHC would have significant cross-border exposure.\196\
Therefore, the Board believes that a total consolidated assets
threshold of $500 billion or more provides a reasonable indication of a
U.S. IHC's ability to impact U.S. financial stability while providing a
bright-line threshold that aids administrability of the rule.
---------------------------------------------------------------------------

\195\ ``Global methodology'' is defined in the Board's
Regulation YY as ``the assessment methodology and the higher loss
absorbency requirement for global systemically important banks
issued by the Basel Committee on Banking Supervision, as updated
from time to time.'' 12 CFR 252.2(o).
\196\ As of March 31, 2018, all U.S. IHCs had less than $500
billion in total consolidated assets.
---------------------------------------------------------------------------

2. Eligible Guarantor
Under the proposal, ``eligible protection provider'' for FBOs would
not have included the FBO or any entity that is an affiliate either of
the U.S. IHC or of any part of the FBO's combined U.S. operations.
Commenters argued that the exclusion of an FBO and its affiliates would
hinder effective enterprise-wide risk management.
As noted, the final rule replaces the term ``eligible protection
provider'' with ``eligible guarantor,'' as that is the term used in the
Board's capital rules. The Board has decided not to extend the
definition of eligible guarantor to the FBO or any entity that is an
affiliate either of the U.S. IHC or of any part of the FBO's combined
U.S. operations.\197\ Extraterritorial application of the final rule is
limited by excluding exposures of the FBO outside the U.S. IHC, or its
combined U.S. operations, from the SCCL. Similarly, hedges that are
initiated and booked by the FBO outside of the U.S. IHC or its combined
U.S. operations are not subject to the SCCL.

[[Page 38489]]

Further, this approach preserves consistent treatment with the SCCL
applicable to covered companies--since those covered companies are
subject to SCCL on a consolidated basis, a hedge provided by one
subsidiary to another subsidiary would not result in any reduction of
credit exposure of the covered company. If the Board were to change the
definition as requested, an FBO or U.S. IHC would be able to reduce its
credit exposures in a way unavailable to covered companies. For these
reasons, the Board has decided not to expand the definition of eligible
guarantor as requested.
---------------------------------------------------------------------------

\197\ See final rule Sec. 252.171(p).
---------------------------------------------------------------------------

3. Eligible Collateral
The proposal would have excluded from ``eligible collateral'' debt
and equity securities, including convertible bonds, issued by an
affiliate of the U.S. IHC or by any part of the combined U.S.
operations of the FBO. FBO commenters argued that this was
discriminatory and noted that a similar restriction did not appear in
the definition of eligible collateral for covered companies. In
response to comments, the final rule applicable to covered companies
clarifies that, with respect to application of the SCCL to covered
companies, ``eligible collateral'' does not include debt securities or
equity securities issued by the covered company or its affiliate.\198\
---------------------------------------------------------------------------

\198\ See final rule Sec. 252.171(l).
---------------------------------------------------------------------------

Some commenters also expressed concern with the limitation on
eligible collateral that would have required a U.S. IHC or the combined
U.S. operations of an FBO to have a perfected, first priority security
interest in the collateral. Those commenters argued that this
requirement could interfere with effective enterprise-wide risk
management and urged recognition of collateral where a non-U.S. branch
has a security interest if the collateral is held for the benefit of
the combined U.S. operations of the FBO. The Board believes that
covered foreign entities that operate in the United States should be
subject to creditor protections that are consistent with U.S. law and,
therefore, has not modified this requirement. Moreover, with respect to
exposures within the United States and outside an FBO's U.S. IHC, an
FBO that certifies that it complies on a consolidated basis to a home
country SCCL regime consistent with the large exposure standard would
be subject to its home country requirements, not the final rule, in
which case a perfected, first priority security interest in collateral
may not be required.
4. Counterparty
The final rule generally defines ``counterparty'' in the same
manner as the final rule that applies to covered companies.\199\ The
Board received similar comments concerning the definition of
``counterparty'' in the proposed rule for FBOs as with the proposed
rule for covered companies, and the definition has been modified in the
final rule in the same manner and for the same reasons as the revised
definition of ``counterparty'' in the final rule for covered companies,
as discussed earlier.
---------------------------------------------------------------------------

\199\ See final rule Sec. Sec. 252.71(e), 252.171(f).
---------------------------------------------------------------------------

One key difference between this definition in the final rule for
FBOs and the final rule for covered companies is that, with respect to
an FBO, the FBO's home country sovereign entity is not included as a
counterparty, notwithstanding the risk weight assigned to that
sovereign entity under the Board's Regulation Q (12 CFR part 217).\200\
This difference recognizes that an FBO's U.S. IHC and combined U.S.
operations may have exposures to the FBO's home country sovereign
entity that are required by home country laws or are necessary to
facilitate the normal course of business for the consolidated FBO. The
proposal included an exemption to exclude these exposures; however, in
light of the fact that these foreign sovereign entities would not be
considered companies formally subject to the requirements of section
165(e) of the Dodd-Frank Act, the Board believes it is more appropriate
simply to not include these entities as defined counterparties.
``Sovereign entity'' is defined in the final rule, as under the
proposal, to mean a central national government (including the U.S.
government) or an agency, department, ministry, or central bank, but
not including any political subdivision such as a state, province or
municipality.\201\
---------------------------------------------------------------------------

\200\ See final rule Sec. 252.171(f).
\201\ See final rule Sec. 252.171(hh).
---------------------------------------------------------------------------

Certain commenters requested clarification or confirmation that the
home country sovereign entity exemption includes a sovereign's agencies
and instrumentalities. Since the definition of ``sovereign entity''
includes an agency, department, ministry or central bank, these
entities would fall within the scope of the home country sovereign
entity exemption. Some commenters requested that the final rule extend
the scope of this exemption to include the sovereign's political
subdivisions. These commenters urged that there is no reason to treat
political subdivisions differently from sovereign agencies and
instrumentalities. As noted, the Board's final rule applicable to
covered companies includes a U.S. State (including all of its agencies,
instrumentalities, and political subdivisions) as a separate
counterparty because the severe distress or failure of a U.S. state or
municipality could have effects on a covered company that are
comparable to those caused by the failure of a financial firm or
nonfinancial corporation to which the covered company has a large
credit exposure. For the same reason, the Board includes as a separate
counterparty political subdivisions of a foreign sovereign entity
(including all of such political subdivision's agencies and
instrumentalities), and the final rule does not extend the exclusion
for exposures to an FBO's home country sovereign entity.

E. Credit Exposure Limits

Section 252.172 of the proposed rule contained the key quantitative
limitations on credit exposure of a covered entity to a single
counterparty.\202\ As noted, consistent with the final rule applied to
covered companies and the amendments to section 165(e) made by EGRRCPA,
the final rule would apply SCCL to an FBO with U.S. banking operations
and $250 billion or more in total global consolidated assets. The final
rule seeks to limit further the burden on FBOs by generally permitting
an FBO to comply with the SCCL for the combined U.S. operations of an
FBO by certifying to the Board that the FBO meets large exposure or
SCCL standards on a consolidated basis established by its home country
supervisor that are consistent with the large exposure standard.\203\
The final rule applies the SCCL to any U.S. IHC with $50 billion or
more in total consolidated assets that is a subsidiary of an FBO with
$250 billion or more in total global consolidated assets, consistent
with the proposal and the Board's other enhanced prudential standards
applicable to U.S. IHCs.\204\
---------------------------------------------------------------------------

\202\ See proposed rule Sec. 252.172.
\203\ An FBO that makes such a certification is required to
provide to the Board reports relating to its compliance with the
large exposure or SCCL standards of its home country supervisor
concurrently with filing the FR Y-7Q or any successor report.
\204\ See also section 401(g) of EGRRCPA.
---------------------------------------------------------------------------

A number of commenters argued that application of SCCL to foreign
banking organizations subject to comparable large exposure or single-
counterparty credit limit regimes in their home country is inconsistent
with the statutory mandate to give due regard to

[[Page 38490]]

the principle of national treatment and competitive equality.\205\
These commenters noted that certain provisions of the Dodd-Frank Act
expressly provide for the recognition of comparable home country
regulation,\206\ and contended that more jurisdictions are likely to
have comparable single-counterparty credit limit regimes following
development of the large exposure standard.
---------------------------------------------------------------------------

\205\ See 12 U.S.C. 5365(b)(2).
\206\ See, e.g., 12 U.S.C. 5365(b)(2)(B).
---------------------------------------------------------------------------

The principle of national treatment and equality of competitive
opportunity generally means that FBOs operating in the United States
should be treated no less favorably than similarly situated U.S.
banking organizations and should generally be subject to the same
restrictions and obligations in the United States as those that apply
to the domestic operations of U.S. banking organizations. The final
rule generally applies SCCL to FBOs in the same manner as to covered
companies, consistent with the principle of national treatment and
equality of competitive opportunity. In particular, the final rule uses
the same total consolidated assets threshold of $250 billion or more
for both covered companies and FBOs, and both covered companies and
FBOs are designated as ``major covered companies'' and ``major foreign
banking organizations'' based on whether those firms have certain
characteristics of GSIBs.\207\ The final rule's application of SCCL to
U.S. IHCs is tailored such that U.S. IHCs of similar size to covered
companies are subject to the same SCCL. Although the final rule for
FBOs differs from the final rule for covered companies by applying SCCL
to U.S. IHCs with total consolidated assets of at least $50 billion but
less than $250 billion, the SCCL applicable to this category of
companies is tailored relative to covered companies (a limit of 25
percent of capital stock and surplus rather than a limit of 25 percent
of tier 1 capital). Furthermore, application of the SCCL to these U.S.
IHCs promotes equality of competitive opportunity, since they represent
one portion of a significantly larger banking organization.
---------------------------------------------------------------------------

\207\ As noted, a U.S. IHC with total consolidated assets of
$500 billion or more would be considered a ``major U.S. intermediate
holding company.'' Although this threshold is not identical to the
standard applied to covered companies, the Board believes that an
entity with that level of total consolidated assets would present
significant risk because of both its size and the likelihood that
such a U.S. IHC would have significant cross-border exposure. As a
result, it is consistent with the principle of national treatment to
subject such U.S. IHCs to the same SCCL as a major covered company.
---------------------------------------------------------------------------

In addition, the final rule also does not include as a counterparty
the home country sovereign entity of an FBO, without regard to the risk
weight that applies to the sovereign. This treatment is consistent with
the exclusion of exposures to the U.S. government from the final rule.
Finally, as noted, the final rule permits FBOs to comply with the SCCL
for their combined U.S. operations by certifying to the Board that the
FBO meets large exposure or SCCL standards on a consolidated basis
established by its home country supervisor that are consistent with the
large exposure standard. This option should avoid subjecting an FBO to
duplicative SCCL standards. For all these reasons, the Board believes
it is providing due regard to the principles of national treatment and
equality of competitive opportunity in applying SCCL to FBOs through
this final rule.\208\
---------------------------------------------------------------------------

\208\ 12 U.S.C. 5365(b)(2).
---------------------------------------------------------------------------

As noted, the Board is developing a comprehensive proposal on
application of enhanced prudential standards to FBOs with total
consolidated assets of at least $100 billion but less than $250
billion, including any subsidiary U.S. IHC. In connection with this
proposal and other tailoring and implementation efforts related to
EGRRCPA, the Board may make amendments to the SCCL framework in this
final rule.

F. Gross Credit Exposure

Under the proposed rule, a covered entity would have been permitted
to calculate gross exposure to certain derivative transactions using
any methodology that it is permitted to use under the Board's capital
rules, including IMM. This treatment would have been the same as the
proposed treatment of covered companies. FBO commenters expressed
support for the proposal's flexibility in permitting use of IMM that
have been approved for risk based-capital purposes to value exposures
due to derivative transactions. However, commenters explained that an
FBO would be unable to benefit from this treatment with respect to its
U.S. IHC or its combined U.S. operations because there is currently no
approval process in place for FBOs to seek approval to use IMM in the
United States. As a result, these commenters indicated that an FBO
would need to use the standardized methodology, which does not fully
consider correlation between derivatives and any netting benefits, and
thus may overstate the entity's exposures, in valuing exposures due to
derivatives transactions of its U.S. IHC and its combined U.S.
operations. Some commenters urged the Board to provide an avenue in the
final rule for an FBO to obtain approval for its U.S. IHC and its
combined U.S. operations to use IMM in calculating exposures due to
derivatives transactions. In particular, these commenters argued that,
to the extent FBOs are subject to rigorous approval processes to use
IMM in their home countries, the Board should establish a process to
recognize and defer to home country regulators' approval of IMM and
thereby permit an FBO to use such methodologies in calculating
exposures due to derivative transactions of its U.S. IHC or its
combined U.S. operations, if desired. These commenters noted that this
approach would be consistent with the statutory mandate to give due
regard to comparable home country treatment.
Under the final rule, an FBO is authorized to measure its gross
credit exposure to a counterparty on a derivatives transaction using
the same valuation approaches as those set forth in the final rule
applicable to covered companies. As noted, an FBO that is subject on a
consolidated basis to a home country SCCL framework will be able to
comply with the SCCL for its combined U.S. operations by certifying to
the Board that the FBO complies with its home country SCCL framework.
To the extent the FBO's home country SCCL framework permits the use of
internal models to value derivative transactions, the FBO's
certification to the Board that the FBO complies with the SCCL
framework could be based, in part, on its measurement of derivatives
transactions using such models. In the case of a U.S. IHC, the U.S. IHC
is authorized under the final rule to value a derivative transaction
using any approach, including internal models, that the U.S. IHC is
authorized to use under the capital rules to value the derivatives
transaction.

G. Net Credit Exposure

The final rule describes how a covered foreign entity would convert
gross credit exposure amounts to net credit exposure amounts by taking
into account eligible collateral, eligible guarantees, eligible credit
and equity derivatives, and other eligible hedges (that is, a short
position in the counterparty's debt or equity securities). An FBO
generally would calculate its net credit exposure to a counterparty by
adjusting its gross credit exposure to that counterparty in the same
way as covered companies would adjust their gross credit exposures.
However, the definition of ``eligible collateral'' for

[[Page 38491]]

covered foreign entities would exclude debt or equity securities
(including convertible bonds) issued by an affiliate (rather than a
subsidiary) of the U.S. IHC or the combined U.S. operations of a
foreign banking organization. Referring to ``affiliate'' in the context
of FBOs preserves consistent treatment with covered companies, who are
subject to SCCL on a consolidated basis. As discussed above, the
definition of ``eligible guarantor'' would exclude the foreign banking
organization or any affiliate thereof, in order to preserve consistent
treatment with covered companies.\209\
---------------------------------------------------------------------------

\209\ See final rule Sec. 252.171(p).
---------------------------------------------------------------------------

H. Exposures to SPVs and Aggregation of Exposures to Connected
Counterparties

The final rule generally treats foreign covered entities in the
same manner as covered companies with respect to exposures to SPVs and
the application of the economic interdependence and control
relationship tests.\210\ This treatment includes modifications made in
the final rule for covered companies in response to public comments for
the same reasons discussed earlier in this SUPPLEMENTARY INFORMATION.
Just as in the proposal, under the final rule for FBOs, U.S. IHCs with
total consolidated assets of at least $50 billion but less than $250
billion generally are not required to apply the specialized SPV
treatment of section 252.175 of the final rule. However, the final rule
has been revised such that only a covered foreign entity or U.S. IHC
with $250 billion or more in total consolidated assets is required to
apply the economic interdependence and control relationship tests to
aggregate connected counterparties, unless the Board determines it is
necessary to apply these tests with respect to such a company to
prevent evasion of the rule.
---------------------------------------------------------------------------

\210\ See final rule Sec. Sec. 252.175-.176.
---------------------------------------------------------------------------

I. Exemptions

As with the proposal for covered companies, certain commenters also
requested exemptions for multilateral banks and certain supranational
entities, including the Bank of International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
and multilateral development banks that are assigned a zero percent
risk weight under the Board's capital rules.
As noted, section 165(e)(6) of the Dodd-Frank Act permits the Board
to exempt transactions from the definition of the term ``credit
exposure'' for purposes of this subsection, if the Board finds that the
exemption is in the public interest and is consistent with the purposes
of this subsection. The final rule provides the same exemptions for the
credit exposures of covered foreign entities as those provided in the
final rule for covered companies.\211\
---------------------------------------------------------------------------

\211\ See final rule Sec. 252.177(a). As noted, the final rule
retains the treatment for an FBO's exposures to a home country
sovereign entity, but does so by modifying the definition of
``counterparty'' to exclude these entities. See section III.D.4
supra for additional discussion.
---------------------------------------------------------------------------

J. Compliance

Under the proposed rule, a U.S. IHC and the combined U.S.
operations of an FBO with less than $250 billion in total consolidated
assets, and less than $10 billion in total on-balance-sheet foreign
exposures, would have been required to comply with the requirements of
the proposed rule as of the end of each quarter.\212\ Other U.S. IHCs
and FBOs would have been required to comply with the proposed rule on a
daily basis as of the end of each business day and submit a monthly
compliance report demonstrating its daily compliance.\213\ The final
rule, like the proposal, requires a U.S. IHC with total consolidated
assets of at least $50 billion but less than $250 billion to comply
with the requirements of the rule as of the end of each quarter, unless
the Board determines and notifies the U.S. IHC in writing that more
frequent compliance is required. Also like the proposal, the final rule
requires an FBO (with respect to its combined U.S. operations) or U.S.
IHC with total consolidated assets of $250 billion or more to comply
with the requirements of the rule on a daily basis, as of the end of
each business day. The final rule requires all covered foreign entities
to report compliance on a quarterly basis.
---------------------------------------------------------------------------

\212\ See proposed rule Sec. 252.178(a).
\213\ Id.
---------------------------------------------------------------------------

Under the proposal, an FBO would have been required to ensure the
compliance of its U.S. IHC and its combined U.S. operations. If either
the U.S. IHC or the combined U.S. operations were not in compliance
with respect to a counterparty, both the U.S. IHC and the combined U.S.
operations would have been prohibited from engaging in any additional
credit transactions with such a counterparty, except in cases when the
Board determines that such additional credit transactions were
necessary or appropriate to preserve the safety and soundness of the
foreign banking organization or financial stability.\214\ In
considering special temporary exceptions, the Board could have imposed
supervisory oversight and reporting measures that the Board determined
were appropriate to monitor compliance with the foregoing
standards.\215\
---------------------------------------------------------------------------

\214\ See proposed rule Sec. 252.178(c).
\215\ See proposed rule Sec. 252.178(d).
---------------------------------------------------------------------------

Commenters expressed concern with the fact that if either the U.S.
IHC or the combined U.S. operations of an FBO were not in compliance,
both the U.S. IHC and the combined U.S. operations would be prohibited
from engaging in any additional credit transactions with such a
counterparty (the ``cross-trigger''). Commenters contended there was no
similar restriction on U.S. covered companies (for example, the breach
of lending limits that apply to a national bank subsidiary would not
restrict lending or additional exposures by other parts of the
consolidated BHC). Commenters also noted that this provision would
create incentives for FBOs to shift banking, lending, and derivatives
activities to non-U.S. branches to avoid the potential curtailment of
activities that could result from operation of the cross-trigger.
As noted, the final rule modifies the manner in which the SCCL
apply to an FBO. In particular, an FBO that is subject on a
consolidated basis to a home country SCCL framework will be able to
comply with the SCCL for its combined U.S. operations by certifying to
the Board that the FBO complies with its home country SCCL framework.
If an FBO is able to make such a certification, the FBO would be viewed
as compliant with the final rule with respect to its combined U.S.
operations. As a result, any noncompliance by the FBO would be with
respect to its IHC. This modification should help mitigate concerns
raised by commenters regarding the cross-trigger.

K. Timing of Applicability

Under the proposal, FBOs and U.S. IHCs with less than $250 billion
in total consolidated assets and less than $10 billion in total on-
balance-sheet foreign assets would have been required to comply with
the proposed rule two years from the effective date of the proposed
rule, unless that time were extended by the Board in writing.\216\ FBOs
and U.S. IHCs with $250 billion or more in total consolidated assets or
$10 billion or more in total on-balance-sheet foreign assets would have
been required to comply with the proposed rule one year from the
effective date of any final rule, unless that time were

[[Page 38492]]

extended by the Board in writing.\217\ The proposal would have required
any company that became a covered company after the effective date of
the final rule to comply with the requirements of the rule beginning on
the first day of the fifth calendar quarter after it becomes a covered
entity, unless that time were accelerated or extended by the Board in
writing.\218\
---------------------------------------------------------------------------

\216\ See proposed rule Sec. 252.170(c)(1)(i),
252.170(c)(2)(i).
\217\ See proposed rule Sec. Sec. 252.170(c)(1)(ii),
252.170(c)(2)(ii).
\218\ See proposed rule Sec. 252.170(d).
---------------------------------------------------------------------------

Commenters argued that FBOs should have more time to comply with
the final rule, for reasons similar to those provided by commenters
concerning the proposal for covered companies. In particular, these
commenters argued that the one-year compliance period might be
insufficient for smaller organizations in light of the multiple and
complex requirements on the combined U.S. operations of an FBO.
The Board has determined to permit all covered foreign entities
that are not major FBOs or major U.S. IHCs until July 1, 2020, to
comply with the final rule, while major FBOs and major U.S. IHCs have
until January 1, 2020, to comply. This timing is similar to the final
compliance period for covered companies. Also similar to the final rule
for covered companies, the final rule requires a covered foreign entity
that becomes a covered foreign entity after the effective date of the
final rule to comply with the SCCL beginning on the first day of the
ninth calendar quarter after it becomes a covered foreign entity,
unless that time is accelerated or extended by the Board in writing.

IV. Impact Analysis

A quantitative impact study conducted by Board staff on the
proposal concluded that banking firms would generally have been able to
meet the proposed SCCL with modest adjustments. The study estimated
that the total amount of covered companies' credit exposure in excess
of the limits in the proposed rule would have been less than $100
billion, and that the overwhelming majority of this excess credit
exposure would have been credit exposure of major covered companies to
major counterparties. The final rule contains a number of recommended
modifications that would reduce this estimated impact. In particular,
the final rule would allow covered companies and U.S. IHCs to use
internal models to measure exposures from securities financing
transactions, which was one of the major sources of excess exposure.
Moreover, the narrower scope of application of the final rule,
including the narrower definitions of ``covered company'' and
``counterparty,'' would further reduce its impact. Finally, recent
staff analysis shows that covered companies and U.S. IHCs have very few
single-counterparty exposures above 5 percent of their tier 1 capital.
Thus, they are unlikely to exceed the credit limits of the final rule.
As a result, staff believes the final rule is unlikely to have a
material impact on covered companies and U.S. IHCs.
Importantly, the final rule provides covered companies and U.S.
IHCs with a compliance period of 18 to 24 months, which should allow
firms sufficient time to construct an infrastructure for monitoring and
reporting their credit exposures to the Federal Reserve and for
conforming any excess credit exposures. Covered firms will have a
number of relatively low-cost mechanisms for reducing any residual
excess credit exposures, including shifting exposures to other less-
concentrated counterparties, increasing margin requirements for some
derivatives or securities financing transactions, or increasing use of
derivative transactions that are cleared by qualifying central
counterparties.

V. Regulatory Analysis

A. Paperwork Reduction Act

Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 through 3521). The Board has
reviewed the reporting requirements in Sec. Sec. 252.78(a) and
252.178(a) of the final rule under the authority delegated to the Board
by Office of Management and Budget. As noted, the Board is addressing
these requirements in a separate notice published elsewhere in this
issue of the Federal Register.

B. Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that an agency prepare and make available an initial
regulatory flexibility analysis in connection with a notice of proposed
rulemaking.
The Board solicited public comment on this rule in a notice of
proposed rulemaking \219\ and has since considered the potential impact
of this rule on small entities in accordance with section 604 of the
RFA. Based on the Board's analysis, and for the reasons stated below,
the Board believes the final rule will not have a significant economic
impact on a substantial number of small entities.
---------------------------------------------------------------------------

\219\ 81 FR 14328 (Mar. 16, 2016).
---------------------------------------------------------------------------

Under regulations issued by the Small Business Administration
(SBA), a ``small entity'' includes a depository institution, bank
holding company, or savings and loan holding company with assets of
$550 million or less (small banking organizations).\220\ As discussed
in the SUPPLEMENTARY INFORMATION, the final rule generally would apply
to bank holding companies and foreign banking organizations with total
consolidated assets of $250 billion or more. Companies that are subject
to the final rule have consolidated assets that substantially exceed
the $550 million asset threshold at which a banking entity is
considered a ``small entity'' under SBA regulations. Because the final
rule does not apply to any company with assets of $550 million or less,
the final rule would not apply to any ``small entity'' for purposes of
the RFA. The Board does not believe that the final rule duplicates,
overlaps, or conflicts with any other Federal rules. In light of the
foregoing, the Board does not believe that the final rule would have a
significant economic impact on a substantial number of small entities
supervised.
---------------------------------------------------------------------------

\220\ See 13 CFR 121.201.
---------------------------------------------------------------------------

1. Statement of the need for, and objectives of the final rule.
In accordance with section 165 of the Dodd-Frank Act, the Board is
proposing to amend Regulation YY to establish SCCL for covered
companies and covered foreign entities in order to limit the risks that
the failure of any individual firm could pose to those
organizations.\221\ Section 165(e) requires the Board to implement the
SCCL by regulation. The reasons and justification for the final rule
are described above in more detail in this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

\221\ See 12 U.S.C. 5365(e).
---------------------------------------------------------------------------

2. Summary of the significant issues raised by public comment on
the Board's initial analysis, the Board's assessment of any such
issues, and a result of such comments.
The Board performed a regulatory flexibility analysis in connection
with the final rule. Moreover, the final rule does not impact small
entities as described below.
3. Small entities affected by the final rule and compliance
requirements.
The provisions of the final rule apply to covered companies and
covered foreign entities. Bank holding companies and foreign banking
organizations that are subject to the proposed rule therefore
substantially exceed the $550 million asset threshold at which a
banking entity would qualify as a small banking organization.

[[Page 38493]]

4. Significant alternatives to the final rule.
In light of the foregoing, the Board does not believe that this
final rule would have a significant negative economic impact on any
small entities.

C. Solicitation of Comments on the Use of Plain Language

Section 722 of the Gramm-Leach Bliley Act of 1999 requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The Board received no
comments on these matters and believes that the final rule is written
plainly and clearly.

List of Subjects in 12 CFR Part 252

Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.

Authority and Issuance

For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System amends 12 CFR part 252 as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY).

0
1. The authority citation for part 252 continues to read as follows:

Authority: 12 U.S.C. 321-338a, 481-486, 1467a(g), 1818, 1828,
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3904, 3906-
3909, 4808, 5361, 5365, 5366, 5367, 5368, 5371.

0
2. Add subpart H to read as follows:
Subpart H--Single-Counterparty Credit Limits
Sec.
252.70 Applicability and general provisions.
252.71 Definitions.
252.72 Credit exposure limits.
252.73 Gross credit exposure.
252.74 Net credit exposure.
252.75 Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
affiliates of the covered company.
252.76 Aggregation of exposures to more than one counterparty due to
economic interdependence or control relationships.
252.77 Exemptions.
252.78 Compliance.

Subpart H--Single-Counterparty Credit Limits

Sec. 252.70 Applicability and general provisions.

(a) In general. (1) This subpart establishes single counterparty
credit limits for a covered company.
(2) For purposes of this subpart:
(i) Covered company means
(A) Any bank holding company (other than a foreign banking
organization that is subject to subpart Q of this part, including any
U.S. intermediate holding company of such foreign banking organization)
with total consolidated assets that equal or exceed $250 billion; and
(B) Any U.S. bank holding company identified as a global
systemically important BHC pursuant to Sec. 217.402 of the Board's
Regulation Q (12 CFR 217.402).
(ii) Major covered company means any covered company that is a U.S.
bank holding company identified as a global systemically important BHC
pursuant to Sec. 217.402 of the Board's Regulation Q (12 CFR 217.402).
(b) Credit exposure limits. (1) Section 252.72 establishes credit
exposure limits for a covered company and a major covered company.
(2) A covered company is required to calculate its aggregate net
credit exposure, gross credit exposure, and net credit exposure to a
counterparty using the methods in this subpart.
(c) Applicability of this subpart. (1)(i) A company that is a
covered company as of October 5, 2018, must comply with the
requirements of this subpart, including but not limited to Sec.
252.72, beginning on July 1, 2020, unless that time is extended by the
Board in writing.
(ii) Notwithstanding paragraph (c)(1)(i) of this section, a company
that is a major covered company as of October 5, 2018, must comply with
the requirements of this subpart, including but not limited to Sec.
252.72, beginning on January 1, 2020, unless that time is extended by
the Board in writing.
(2) A covered company that becomes subject to this subpart after
October 5, 2018 must comply with the requirements of this subpart
beginning on the first day of the ninth calendar quarter after it
becomes a covered company, unless that time is accelerated or extended
by the Board in writing.
(d) Cessation of requirements. (1) Any company that becomes a
covered company will remain subject to the requirements of this subpart
unless and until its total consolidated assets fall below $250 billion
for each of four consecutive quarters, as reported on the covered
company's FR Y-9C, effective on the as-of date of the fourth
consecutive FR Y-9C.
(2) A covered company that has ceased to be a major covered company
for purposes of Sec. 252.72(b) is no longer subject to the
requirements of Sec. 252.72(b) beginning on the first day of the
calendar quarter following the reporting date on which it ceased to be
a major covered company; provided that the covered company remains
subject to the requirements of this subpart, unless it ceases to be a
covered company pursuant to paragraph (d)(1) of this section.

Sec. 252.71 Definitions.

[[Page 38494]]

of its subsidiaries to a single counterparty as calculated under this
subpart.
(d) Bank-eligible investments means investment securities that a
national bank is permitted to purchase, sell, deal in, underwrite, and
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
(e) Counterparty means, with respect to a credit transaction:
(1) With respect to a natural person, the natural person, and, if
the credit exposure of the covered company to such natural person
exceeds 5 percent of the covered company's tier 1 capital, the natural
person and members of the person's immediate family collectively;
(2) With respect to any company that is not a subsidiary of the
covered company, the company and its affiliates collectively;
(3) With respect to a State, the State and all of its agencies,
instrumentalities, and political subdivisions (including any
municipalities) collectively;
(4) With respect to a foreign sovereign entity that is not assigned
a zero percent risk weight under the standardized approach in the
Board's Regulation Q (12 CFR part 217, subpart D), the foreign
sovereign entity and all of its agencies and instrumentalities (but not
including any political subdivision) collectively; and
(5) With respect to a political subdivision of a foreign sovereign
entity such as a state, province, or municipality, any political
subdivision of the foreign sovereign entity and all of such political
subdivision's agencies and instrumentalities, collectively.\1\
---------------------------------------------------------------------------

\1\ In addition, under Sec. 252.76, under certain
circumstances, a covered company is required to aggregate its net
credit exposure to one or more counterparties for all purposes under
this subpart.
---------------------------------------------------------------------------

(f) Covered company is defined in Sec. 252.70(a)(2)(i) of this
subpart.
(g) Credit derivative has the same meaning as in Sec. 217.2 of the
Board's Regulation Q (12 CFR 217.2).
(h) Credit transaction means, with respect to a counterparty:
(1) Any extension of credit to the counterparty, including loans,
deposits, and lines of credit, but excluding uncommitted lines of
credit;
(2) Any repurchase agreement or reverse repurchase agreement with
the counterparty;
(3) Any securities lending or securities borrowing transaction with
the counterparty;
(4) Any guarantee, acceptance, or letter of credit (including any
endorsement, confirmed letter of credit, or standby letter of credit)
issued on behalf of the counterparty;
(5) Any purchase of securities issued by or other investment in the
counterparty;
(6) Any credit exposure to the counterparty in connection with a
derivative transaction between the covered company and the
counterparty;
(7) Any credit exposure to the counterparty in connection with a
credit derivative or equity derivative between the covered company and
a third party, the reference asset of which is an obligation or equity
security of, or equity investment in, the counterparty; and
(8) Any transaction that is the functional equivalent of the above,
and any other similar transaction that the Board, by regulation or
order, determines to be a credit transaction for purposes of this
subpart.
(i) Depository institution has the same meaning as in section 3 of
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(j) Derivative transaction means any transaction that is a
contract, agreement, swap, warrant, note, or option that is based, in
whole or in part, on the value of, any interest in, or any quantitative
measure or the occurrence of any event relating to, one or more
commodities, securities, currencies, interest or other rates, indices,
or other assets.
(k) Eligible collateral means collateral in which, notwithstanding
the prior security interest of any custodial agent, the covered company
has a perfected, first priority security interest (or the legal
equivalent thereof, if outside of the United States), with the
exception of cash on deposit, and is in the form of:
(1) Cash on deposit with the covered company or a subsidiary of the
covered company (including cash in foreign currency or U.S. dollars
held for the covered company by a custodian or trustee, whether inside
or outside of the United States);
(2) Debt securities (other than mortgage- or asset-backed
securities and resecuritization securities, unless those securities are
issued by a U.S. government-sponsored enterprise) that are bank-
eligible investments and that are investment grade, except for any debt
securities issued by the covered company or any subsidiary of the
covered company;
(3) Equity securities that are publicly traded, except for any
equity securities issued by the covered company or any subsidiary of
the covered company;
(4) Convertible bonds that are publicly traded, except for any
convertible bonds issued by the covered company or any subsidiary of
the covered company; or
(5) Gold bullion.
(l) Eligible credit derivative means a single-name credit
derivative or a standard, non-tranched index credit derivative,
provided that:
(1) The contract meets the requirements of an eligible guarantee
and has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap, the contract
includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference
exposure, subject to any applicable minimal payment threshold that is
consistent with standard market practice and with a grace period that
is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship, or
inability of the reference exposure issuer to pay its debts, or its
failure or admission in writing of its inability generally to pay its
debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer
an exposure to the protection provider at settlement, the terms of at
least one of the exposures that is permitted to be transferred under
the contract provide that any required consent to transfer may not be
unreasonably withheld; and
(7) If the credit derivative is a credit default swap, the contract
clearly identifies the parties responsible for determining whether a
credit event has occurred, specifies that this determination is not the
sole responsibility of the protection provider, and gives the
protection purchaser the right to notify the protection provider of the
occurrence of a credit event.
(m) Eligible equity derivative means an equity derivative, provided
that:
(1) The derivative contract has been confirmed by all relevant
parties;
(2) Any assignment of the derivative contract has been confirmed by
all relevant parties; and
(3) The terms and conditions dictating the manner in which the
derivative contract is to be settled are incorporated into the
contract.

[[Page 38495]]

(n) Eligible guarantee has the same meaning as in Sec. 217.2 of
the Board's Regulation Q (12 CFR 217.2).
(o) Eligible guarantor has the same meaning as in Sec. 217.2 of
the Board's Regulation Q (12 CFR 217.2).
(p) Equity derivative has the same meaning as ``equity derivative
contract'' in Sec. 217.2 of the Board's Regulation Q (12 CFR 217.2).
(q) Exempt counterparty means an entity that is identified as
exempt from the requirements of this subpart under Sec. 252.77, or
that is otherwise excluded from this subpart, including any sovereign
entity assigned a zero percent risk weight under the standardized
approach in the Board's Regulation Q (12 CFR part 217, subpart D).
(r) Financial entity means:
(1)(i) A bank holding company or an affiliate thereof; a savings
and loan holding company as defined in section 10(n) of the Home
Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding
company established or designated for purposes of compliance with this
part; or a nonbank financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that
is organized under the laws of a foreign country and that engages
directly in the business of banking outside the United States; a
federal credit union or state credit union as defined in section 2 of
the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national
association, state member bank, or state nonmember bank that is not a
depository institution; an institution that functions solely in a trust
or fiduciary capacity as described in section 2(c)(2)(D) of the Bank
Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan
company, an industrial bank, or other similar institution described in
section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C.
1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money
lender; installment lender; consumer lender or lending company;
mortgage lender, broker, or bank; motor vehicle title pledge lender;
payday or deferred deposit lender; premium finance company; commercial
finance or lending company; or commercial mortgage company; except
entities registered or licensed solely on account of financing the
entity's direct sales of goods or services to customers;
(B) A money services business, including a check casher; money
transmitter; currency dealer or exchange; or money order or traveler's
check issuer;
(iv) Any person registered with the Commodity Futures Trading
Commission as a swap dealer or major swap participant pursuant to the
Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that
is registered with the U.S. Securities and Exchange Commission as a
security-based swap dealer or a major security-based swap participant
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.);
(v) A securities holding company as defined in section 618 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an
investment adviser as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company
registered with the U.S. Securities and Exchange Commission under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company
that has elected to be regulated as a business development company
pursuant to section 54(a) of the Investment Company Act of 1940 (15
U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an
investment company under section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is
deemed not to be an investment company under section 3 of the
Investment Company Act of 1940 pursuant to Investment Company Act Rule
3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(vii) A commodity pool, a commodity pool operator, or a commodity
trading advisor as defined, respectively, in sections 1a(10), 1a(11),
and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10),
1a(11), and 1a(12)); a floor broker, a floor trader, or introducing
broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and
1a(31)); or a futures commission merchant as defined in section 1a(28)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(viii) An employee benefit plan as defined in paragraphs (3) and
(32) of section 3 of the Employee Retirement Income and Security Act of
1974 (29 U.S.C. 1002);
(ix) An entity that is organized as an insurance company, primarily
engaged in writing insurance or reinsuring risks underwritten by
insurance companies, or is subject to supervision as such by a State
insurance regulator or foreign insurance regulator;
(x) Any designated financial market utility, as defined in section
803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(12 U.S.C. 5462); and
(xi) An entity that would be a financial entity described in
paragraphs (r)(1)(i) through (x) of this section, if it were organized
under the laws of the United States or any State thereof; and
(2) Provided that, for purposes of this subpart, ``financial
entity'' does not include any counterparty that is a foreign sovereign
entity or multilateral development bank.
(s) Foreign sovereign entity means a sovereign entity other than
the United States government and the entity's agencies, departments,
ministries, and central bank collectively.
(t) Gross credit exposure means, with respect to any credit
transaction, the credit exposure of the covered company before
adjusting, pursuant to Sec. 252.74, for the effect of any eligible
collateral, eligible guarantee, eligible credit derivative, eligible
equity derivative, other eligible hedge, and any unused portion of
certain extensions of credit.
(u) Immediate family means the spouse of an individual, the
individual's minor children, and any of the individual's children
(including adults) residing in the individual's home.
(v) Intraday credit exposure means credit exposure of a covered
company to a counterparty that by its terms is to be repaid, sold, or
terminated by the end of its business day in the United States.
(w) Investment grade has the same meaning as in Sec. 217.2 of the
Board's Regulation Q (12 CFR 217.2).
(x) Major counterparty means any counterparty that is or includes:
(1) A major covered company;
(2) A top-tier foreign banking organization that meets the
requirements of Sec. 252.172(c)(3) through (5); or
(3) Any nonbank financial company supervised by the Board.
(y) Major covered company is defined in Sec. 252.70(a)(2)(ii) of
this subpart.
(z) Multilateral development bank has the same meaning as in Sec.
217.2 of the Board's Regulation Q (12 CFR 217.2).
(aa) Net credit exposure means, with respect to any credit
transaction, the gross credit exposure of a covered company and all of
its subsidiaries calculated under Sec. 252.73, as adjusted in
accordance with Sec. 252.74.
(bb) Qualifying central counterparty has the same meaning as in
Sec. 217.2 of

[[Page 38496]]

the Board's Regulation Q (12 CFR 217.2).
(cc) Qualifying master netting agreement has the same meaning as in
Sec. 217.2 of the Board's Regulation Q (12 CFR 217.2).
(dd) Securities financing transaction means any repurchase
agreement, reverse repurchase agreement, securities borrowing
transaction, or securities lending transaction.
(ee) Short sale means any sale of a security which the seller does
not own or any sale which is consummated by the delivery of a security
borrowed by, or for the account of, the seller.
(ff) Sovereign entity means a central national government
(including the U.S. government) or an agency, department, ministry, or
central bank, but not including any political subdivision such as a
state, province, or municipality.
(gg) Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company under
applicable accounting standards; or
(2) For a company that is not subject to principles or standards
referenced in paragraph (gg)(1) of this definition, consolidation would
have occurred if such principles or standards had applied.
(hh) Tier 1 capital means common equity tier 1 capital and
additional tier 1 capital, as defined in the Board's Regulation Q (12
CFR part 217) and as reported by the bank holding company on the most
recent FR Y-9C report on a consolidated basis.
(ii) Total consolidated assets. A company's total consolidated
assets are determined based on:
(1) The average of the bank holding company's total consolidated
assets in the four most recent consecutive quarters as reported
quarterly on the FR Y-9C; or
(2) If the bank holding company has not filed an FR Y-9C for each
of the four most recent consecutive quarters, the average of the bank
holding company's total consolidated assets, as reported on the
company's FR Y-9C, for the most recent quarter or consecutive quarters,
as applicable.

Sec. 252.72 Credit exposure limits.

(a) General limit on aggregate net credit exposure. No covered
company may have an aggregate net credit exposure to any counterparty
that exceeds 25 percent of the tier 1 capital of the covered company.
(b) Limit on aggregate net credit exposure of major covered
companies to major counterparties. No major covered company may have
aggregate net credit exposure to any major counterparty that exceeds 15
percent of the tier 1 capital of the major covered company.

Sec. 252.73 Gross credit exposure.

(a) Calculation of gross credit exposure. The amount of gross
credit exposure of a covered company to a counterparty with respect to
a credit transaction is, in the case of:
(1) A deposit of the covered company held by the counterparty, loan
by a covered company to the counterparty, and lease in which the
covered company is the lessor and the counterparty is the lessee, equal
to the amount owed by the counterparty to the covered company under the
transaction.
(2) A debt security or debt investment held by the covered company
that is issued by the counterparty, equal to:
(i) The market value of the securities, for trading and available-
for-sale securities; and
(ii) The amortized purchase price of the securities or investments,
for securities or investments held to maturity.
(3) An equity security held by the covered company that is issued
by the counterparty, equity investment in a counterparty, and other
direct investments in a counterparty, equal to the market value.
(4) A securities financing transaction must be valued using any of
the methods that the covered company is authorized to use under the
Board's Regulation Q (12 CFR part 217, subparts D and E) to value such
transactions:
(i)(A) As calculated for each transaction, in the case of a
securities financing transaction between the covered company and the
counterparty that is not subject to a bilateral netting agreement or
does not meet the definition of ``repo-style transaction'' in Sec.
217.2 of the Board's Regulation Q (12 CFR 217.2); or
(B) As calculated for a netting set, in the case of a securities
financing transaction between the covered company and the counterparty
that is subject to a bilateral netting agreement with that counterparty
and meets the definition of ``repo-style transaction'' in Sec. 217.2
of the Board's Regulation Q (12 CFR 217.2);
(ii) For purposes of paragraph (a)(4)(i) of this section, the
covered company must:
(A) Assign a value of zero to any security received from the
counterparty that does not meet the definition of ``eligible
collateral'' in Sec. 252.71(k); and
(B) Include the value of securities that are eligible collateral
received by the covered company from the counterparty (including any
exempt counterparty), calculated in accordance with paragraphs
(a)(4)(i) through (iv) of this section, when calculating its gross
credit exposure to the issuer of those securities;
(iii) Notwithstanding paragraphs (a)(4)(i) and (ii) of this section
and with respect to each credit transaction, a covered company's gross
credit exposure to a collateral issuer under this paragraph (a)(4) is
limited to the covered company's gross credit exposure to the
counterparty on the credit transaction; and
(iv) In cases where the covered company receives eligible
collateral from a counterparty in addition to the cash or securities
received from that counterparty, the counterparty may reduce its gross
credit exposure to that counterparty in accordance with Sec.
252.74(b).
(5) A committed credit line extended by a covered company to a
counterparty, equal to the face amount of the committed credit line.
(6) A guarantee or letter of credit issued by a covered company on
behalf of a counterparty, equal to the maximum potential loss to the
covered company on the transaction.
(7) A derivative transaction must be valued using any of the
methods that the covered company is authorized to use under the Board's
Regulation Q (12 CFR part 217, subparts D and E) to value such
transactions:
(i)(A) As calculated for each transaction, in the case of a
derivative transaction between the covered company and the
counterparty, including an equity derivative but excluding a credit
derivative described in paragraph (a)(8) of this section, that is not
subject to a qualifying master netting agreement; or
(B) As calculated for a netting set, in the case of a derivative
transaction between the covered company and the counterparty, including
an equity derivative but excluding a credit derivative described in
paragraph (a)(8) of this section, that is subject to a qualifying
master netting agreement.
(ii) In cases where a covered company is required to recognize an
exposure to an eligible guarantor pursuant to Sec. 252.74(d), the
covered company must exclude the relevant derivative transaction when
calculating its gross exposure to the original counterparty under this
section.
(8) A credit derivative between the covered company and a third
party where the covered company is the protection provider and the
reference asset is an obligation or debt security of the counterparty,
equal to the maximum potential loss to the covered company on the
transaction.

[[Page 38497]]

(b) Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
subsidiaries. Notwithstanding paragraph (a) of this section, a covered
company must calculate pursuant to Sec. 252.75 its gross credit
exposure due to any investment in the debt or equity of, and any credit
derivative or equity derivative between the covered company and a third
party where the covered company is the protection provider and the
reference asset is an obligation or equity security of, or equity
investment in, a securitization vehicle, investment fund, and other
special purpose vehicle that is not a subsidiary of the covered
company.
(c) Attribution rule. Notwithstanding any other requirement in this
subpart, a covered company must treat any transaction with any natural
person or entity as a credit transaction with another party, to the
extent that the proceeds of the transaction are used for the benefit
of, or transferred to, the other party.

Sec. 252.74 Net credit exposure.

(a) In general. For purposes of this subpart, a covered company
must calculate its net credit exposure to a counterparty by adjusting
its gross credit exposure to that counterparty in accordance with the
rules set forth in this section.
(b) Eligible collateral. (1) In computing its net credit exposure
to a counterparty for any credit transaction other than a securities
financing transaction, a covered company must reduce its gross credit
exposure on the transaction by the adjusted market value of any
eligible collateral.
(2) A covered company that reduces its gross credit exposure to a
counterparty as required under paragraph (b)(1) of this section must
include the adjusted market value of the eligible collateral, when
calculating its gross credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of this section, a covered
company's gross credit exposure to a collateral issuer under this
paragraph (b) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction if valued in accordance with Sec. 252.73(a).
(c) Eligible guarantees. (1) In calculating net credit exposure to
a counterparty for any credit transaction, a covered company must
reduce its gross credit exposure to the counterparty by the amount of
any eligible guarantee from an eligible guarantor that covers the
transaction.
(2) A covered company that reduces its gross credit exposure to a
counterparty as required under paragraph (c)(1) of this section must
include the amount of eligible guarantees when calculating its gross
credit exposure to the eligible guarantor.
(3) Notwithstanding paragraph (c)(2) of this section, a covered
company's gross credit exposure to an eligible guarantor with respect
to an eligible guarantee under this paragraph (c) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction prior to recognition of the eligible
guarantee if valued in accordance with Sec. 252.73(a).
(d) Eligible credit and equity derivatives. (1) In calculating net
credit exposure to a counterparty for a credit transaction under this
section, a covered company must reduce its gross credit exposure to the
counterparty by:
(i) In the case of any eligible credit derivative from an eligible
guarantor, the notional amount of the eligible credit derivative; or
(ii) In the case of any eligible equity derivative from an eligible
guarantor, the gross credit exposure amount to the counterparty
(calculated in accordance with Sec. 252.73(a)(7)).
(2)(i) A covered company that reduces its gross credit exposure to
a counterparty as provided under paragraph (d)(1) of this section must
include, when calculating its net credit exposure to the eligible
guarantor, including in instances where the underlying credit
transaction would not be subject to the credit limits of Sec. 252.72
(for example, due to an exempt counterparty), either
(A) In the case of any eligible credit derivative from an eligible
guarantor, the notional amount of the eligible credit derivative; or
(B) In the case of any eligible equity derivative from an eligible
guarantor, the gross credit exposure amount to the counterparty
(calculated in accordance with Sec. 252.73(a)(7)).
(ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases
where the eligible credit derivative or eligible equity derivative is
used to hedge covered positions that are subject to the Board's market
risk rule (12 CFR part 217, subpart F) and the counterparty on the
hedged transaction is not a financial entity, the amount of credit
exposure that a company must recognize to the eligible guarantor is the
amount that would be calculated pursuant to Sec. 252.73(a).
(3) Notwithstanding paragraph (d)(2) of this section, a covered
company's gross credit exposure to an eligible guarantor with respect
to an eligible credit derivative or an eligible equity derivative under
this paragraph (d) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible credit derivative or
the eligible equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction prior to recognition of the eligible credit
derivative or the eligible equity derivative if valued in accordance
with Sec. 252.73(a).
(e) Other eligible hedges. In calculating net credit exposure to a
counterparty for a credit transaction under this section, a covered
company may reduce its gross credit exposure to the counterparty by the
face amount of a short sale of the counterparty's debt security or
equity security, provided that:
(1) The instrument in which the covered company has a short
position is junior to, or pari passu with, the instrument in which the
covered company has the long position; and
(2) The instrument in which the covered company has a short
position and the instrument in which the covered company has the long
position are either both treated as trading or available-for-sale
exposures or both treated as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit. (1) In
computing its net credit exposure to a counterparty for a committed
credit line or revolving credit facility under this section, a covered
company may reduce its gross credit exposure by the amount of the
unused portion of the credit extension to the extent that the covered
company does not have any legal obligation to advance additional funds
under the extension of credit and the used portion of the credit
extension has been fully secured by eligible collateral.
(2) To the extent that the used portion of a credit extension has
been secured by eligible collateral, the covered company may reduce its
gross credit exposure by the adjusted market value

[[Page 38498]]

of any eligible collateral received from the counterparty, even if the
used portion has not been fully secured by eligible collateral.
(3) To qualify for the reduction in net credit exposure under this
paragraph, the credit contract must specify that any used portion of
the credit extension must be fully secured by the adjusted market value
of any eligible collateral.
(g) Credit transactions involving exempt counterparties. (1) A
covered company's credit transactions with an exempt counterparty are
not subject to the requirements of this subpart, including but not
limited to Sec. 252.72.
(2) Notwithstanding paragraph (g)(1) of this section, in cases
where a covered company has a credit transaction with an exempt
counterparty and the covered company has obtained eligible collateral
from that exempt counterparty or an eligible guarantee or eligible
credit or equity derivative from an eligible guarantor, the covered
company must include (for purposes of this subpart) such exposure to
the issuer of such eligible collateral or the eligible guarantor, as
calculated in accordance with the rules set forth in this section, when
calculating its gross credit exposure to that issuer of eligible
collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its
net credit exposure to a counterparty under this section, a covered
company must apply, as applicable:
(1) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible collateral
and calculating its gross credit exposure to an issuer of eligible
collateral, pursuant to paragraph (b) of this section, the currency
mismatch adjustment approach of Sec. 217.37(c)(3)(ii) of the Board's
Regulation Q (12 CFR 217.37(c)(3)(ii)); and
(2) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible guarantee,
eligible equity derivative, or eligible credit derivative from an
eligible guarantor and calculating its gross credit exposure to an
eligible guarantor, pursuant to paragraphs (c) and (d) of this section,
the currency mismatch adjustment approach of Sec. 217.36(f) of the
Board's Regulation Q (12 CFR 217.36(f)).
(i) Maturity mismatch adjustments. For purposes of calculating its
net credit exposure to a counterparty under this section, a covered
company must apply, as applicable, the maturity mismatch adjustment
approach of Sec. 217.36(d) of the Board's Regulation Q (12 CFR
217.36(d)):
(1) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible collateral or
any eligible guarantees, eligible equity derivatives, or eligible
credit derivatives from an eligible guarantor, pursuant to paragraphs
(b) through (d) of this section, and
(2) In calculating its gross credit exposure to an issuer of
eligible collateral, pursuant to paragraph (b) of this section, or to
an eligible guarantor, pursuant to paragraphs (c) and (d) of this
section; provided that
(3) The eligible collateral, eligible guarantee, eligible equity
derivative, or eligible credit derivative subject to paragraph (i)(1)
of this section:
(i) Has a shorter maturity than the credit transaction;
(ii) Has an original maturity equal to or greater than one year;
(iii) Has a residual maturity of not less than three months; and
(iv) The adjustment approach is otherwise applicable.

Sec. 252.75 Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
subsidiaries of the covered company.

(a) In general. (1) For purposes of this section, the following
definitions apply:
(i) SPV means a securitization vehicle, investment fund, or other
special purpose vehicle that is not a subsidiary of the covered
company.
(ii) SPV exposure means an investment in the debt or equity of an
SPV, or a credit derivative or equity derivative between the covered
company and a third party where the covered company is the protection
provider and the reference asset is an obligation or equity security
of, or equity investment in, an SPV.
(2)(i) A covered company must determine whether the amount of its
gross credit exposure to an issuer of assets in an SPV, due to an SPV
exposure, is equal to or greater than 0.25 percent of the covered
company's tier 1 capital using one of the following two methods:
(A) The sum of all of the issuer's assets (with each asset valued
in accordance with Sec. 252.73(a)) in the SPV; or
(B) The application of the look-through approach described in
paragraph (b) of this section.
(ii) With respect to the determination required under paragraph
(a)(2)(i) of this section, a covered company must use the same method
to calculate gross credit exposure to each issuer of assets in a
particular SPV.
(iii) In making a determination under paragraph (a)(2)(i) of this
section, the covered company must consider only the credit exposure to
the issuer arising from the covered company's SPV exposure.
(iv) For purposes of this paragraph (a)(2), a covered company that
is unable to identify each issuer of assets in an SPV must attribute to
a single unknown counterparty the amount of its gross credit exposure
to all unidentified issuers and calculate such gross credit exposure
using one method in either paragraph (a)(2)(i)(A) or (a)(2)(i)(B) of
this section.
(3)(i) If a covered company determines pursuant to paragraph (a)(2)
of this section that the amount of its gross credit exposure to an
issuer of assets in an SPV is less than 0.25 percent of the covered
company's tier 1 capital, the amount of the covered company's gross
credit exposure to that issuer may be attributed to either that issuer
of assets or the SPV:
(A) If attributed to the issuer of assets, the issuer of assets
must be identified as a counterparty, and the gross credit exposure
calculated under paragraph (a)(2)(i)(A) of this section to that issuer
of assets must be aggregated with any other gross credit exposures
(valued in accordance with Sec. 252.73) to that same counterparty; and
(B) If attributed to the SPV, the covered company's gross credit
exposure is equal to the covered company's SPV exposure, valued in
accordance with Sec. 252.73(a).
(ii) If a covered company determines pursuant to paragraph (a)(2)
of this section that the amount of its gross credit exposure to an
issuer of assets in an SPV is equal to or greater than 0.25 percent of
the covered company's tier 1 capital or the covered company is unable
to determine that the amount of the gross credit exposure is less than
0.25 percent of the covered company's tier 1 capital:
(A) The covered company must calculate the amount of its gross
credit exposure to the issuer of assets in the SPV using the look-
through approach in paragraph (b) of this section;
(B) The issuer of assets in the SPV must be identified as a
counterparty, and the gross credit exposure calculated in accordance
with paragraph (b) must be aggregated with any other gross credit
exposures (valued in accordance with Sec. 252.73) to that same
counterparty; and
(C) When applying the look-through approach in paragraph (b) of
this section, a covered company that is unable to identify each issuer
of assets in an SPV must attribute to a single unknown counterparty the
amount of its gross credit exposure, calculated in

[[Page 38499]]

accordance with paragraph (b) of this section, to all unidentified
issuers.
(iii) For purposes of this section, a covered company must
aggregate all gross credit exposures to unknown counterparties for all
SPVs as if the exposures related to a single unknown counterparty; this
single unknown counterparty is subject to the limits of Sec. 252.72 as
if it were a single counterparty.
(b) Look-through approach. A covered company that is required to
calculate the amount of its gross credit exposure with respect to an
issuer of assets in accordance with this paragraph (b) must calculate
the amount as follows:
(1) Where all investors in the SPV rank pari passu, the amount of
the gross credit exposure to the issuer of assets is equal to the
covered company's pro rata share of the SPV multiplied by the value of
the underlying asset in the SPV, valued in accordance with Sec.
252.73(a); and
(2) Where all investors in the SPV do not rank pari passu, the
amount of the gross credit exposure to the issuer of assets is equal
to:
(i) The pro rata share of the covered company's investment in the
tranche of the SPV; multiplied by
(ii) The lesser of:
(A) The market value of the tranche in which the covered company
has invested, except in the case of a debt security that is held to
maturity, in which case the tranche must be valued at the amortized
purchase price of the securities; and
(B) The value of each underlying asset attributed to the issuer in
the SPV, each as calculated pursuant to Sec. 252.73(a).
(c) Exposures to third parties. (1) Notwithstanding any other
requirement in this section, a covered company must recognize, for
purposes of this subpart, a gross credit exposure to each third party
that has a contractual obligation to provide credit or liquidity
support to an SPV whose failure or material financial distress would
cause a loss in the value of the covered company's SPV exposure.
(2) The amount of any gross credit exposure that is required to be
recognized to a third party under paragraph (c)(1) of this section is
equal to the covered company's SPV exposure, up to the maximum
contractual obligation of that third party to the SPV, valued in
accordance with Sec. 252.73(a). (This gross credit exposure is in
addition to the covered company's gross credit exposure to the SPV or
the issuers of assets of the SPV, calculated in accordance with
paragraphs (a) and (b) of this section.)
(3) A covered company must aggregate the gross credit exposure to a
third party recognized in accordance with paragraphs (c)(1) and (2) of
this section with its other gross credit exposures to that third party
(that are unrelated to the SPV) for purposes of compliance with the
limits of Sec. 252.72.

Sec. 252.76 Aggregation of exposures to more than one counterparty
due to economic interdependence or control relationships.

(a) In general. (1) If a covered company has an aggregate net
credit exposure to any counterparty that exceeds 5 percent of its tier
1 capital, the covered company must assess its relationship with the
counterparty under paragraph (b)(2) of this section to determine
whether the counterparty is economically interdependent with one or
more other counterparties of the covered company and under paragraph
(c)(1) of this section to determine whether the counterparty is
connected by a control relationship with one or more other
counterparties.
(2) If, pursuant to an assessment required under paragraph (a)(1)
of this section, the covered company determines that one or more of the
factors of paragraph (b)(2) or (c)(1) of this section are met with
respect to one or more counterparties, or the Board determines pursuant
to paragraph (d) of this section that one or more other counterparties
of a covered company are economically interdependent or that one or
more other counterparties of a covered company are connected by a
control relationship, the covered company must aggregate its net credit
exposure to the counterparties for all purposes under this subpart,
including, but not limited to, Sec. 252.72.
(3) In connection with any request pursuant to paragraph (b)(3) or
(c)(2) of this section, the Board may require the covered company to
provide additional information.
(b) Aggregation of exposures to more than one counterparty due to
economic interdependence. (1) For purposes of this paragraph, two
counterparties are economically interdependent if the failure, default,
insolvency, or material financial distress of one counterparty would
cause the failure, default, insolvency, or material financial distress
of the other counterparty, taking into account the factors in paragraph
(b)(2) of this section.
(2) A covered company must assess whether the financial distress of
one counterparty (counterparty A) would prevent the ability of the
other counterparty (counterparty B) to fully and timely repay
counterparty B's liabilities and whether the insolvency or default of
counterparty A is likely to be associated with the insolvency or
default of counterparty B and, therefore, these counterparties are
economically interdependent, by evaluating the following:
(i) Whether 50 percent or more of one counterparty's gross revenue
is derived from, or gross expenditures are directed to, transactions
with the other counterparty;
(ii) Whether counterparty A has fully or partly guaranteed the
credit exposure of counterparty B, or is liable by other means, in an
amount that is 50 percent or more of the covered company's net credit
exposure to counterparty A;
(iii) Whether 25 percent or more of one counterparty's production
or output is sold to the other counterparty, which cannot easily be
replaced by other customers;
(iv) Whether the expected source of funds to repay the loans of
both counterparties is the same and neither counterparty has another
independent source of income from which the loans may be serviced and
fully repaid; \1\ and
---------------------------------------------------------------------------

\1\ An employer will not be treated as a source of repayment
under this paragraph because of wages and salaries paid to an
employee.
---------------------------------------------------------------------------

[[Page 38500]]

(i) Counterparty A owns, controls, or holds with the power to vote
25 percent or more of any class of voting securities of counterparty B;
or
(ii) Counterparty A controls in any manner the election of a
majority of the directors, trustees, or general partners (or
individuals exercising similar functions) of counterparty B.
(2)(i) Notwithstanding paragraph (c)(1) of this section, if a
covered company determines that one or more of the factors in paragraph
(c)(1) is met, the covered company may request in writing a
determination from the Board that counterparty A does not control
counterparty B and that the covered company is not required to
aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph
(c)(2) of this section, the Board may grant temporary relief to the
covered company and not require the covered company to aggregate
counterparty A with counterparty B provided that, taking into account
the specific facts and circumstances, such indicia of control does not
result in the entities being connected by control relationships for
purposes of this subpart, and provided that such relief is in the
public interest and is consistent with the purpose of this subpart and
12 U.S.C. 5365(e).
(d) Board determinations for aggregation of counterparties due to
economic interdependence or control relationships. The Board may
determine, after notice to the covered company and opportunity for
hearing, that one or more counterparties of a covered company are:
(i) Economically interdependent for purposes of this subpart,
considering the factors in paragraph (b)(2) of this section, as well as
any other indicia of economic interdependence that the Board determines
in its discretion to be relevant; or
(ii) Connected by control relationships for purposes of this
subpart, considering the factors in paragraph (c)(1) of this section
and whether counterparty A:
(A) Controls the power to vote 25 percent or more of any class of
voting securities of Counterparty B pursuant to a voting agreement;
(B) Has significant influence on the appointment or dismissal of
counterparty B's administrative, management, or governing body, or the
fact that a majority of members of such body have been appointed solely
as a result of the exercise of counterparty A's voting rights; or
(C) Has the power to exercise a controlling influence over the
management or policies of counterparty B.
(e) Board determinations for aggregation of counterparties to
prevent evasion. Notwithstanding paragraphs (b) and (c) of this
section, a covered company must aggregate its exposures to a
counterparty with the covered company's exposures to another
counterparty if the Board determines in writing after notice and
opportunity for hearing, that the exposures to the two counterparties
must be aggregated to prevent evasions of the purposes of this subpart,
including, but not limited to Sec. 252.76 and 12 U.S.C. 5365(e).

Sec. 252.77 Exemptions.

(a) Exempted exposure categories. The following categories of
credit transactions are exempt from the limits on credit exposure under
this subpart:
(1) Any direct claim on, and the portion of a claim that is
directly and fully guaranteed as to principal and interest by, the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, only while operating under the conservatorship or
receivership of the Federal Housing Finance Agency, and any additional
obligation issued by a U.S. government-sponsored entity as determined
by the Board;
(2) Intraday credit exposure to a counterparty;
(3) Any trade exposure to a qualifying central counterparty related
to the covered company's clearing activity, including potential future
exposure arising from transactions cleared by the qualifying central
counterparty and pre-funded default fund contributions;
(4) Any credit transaction with the Bank for International
Settlements, the International Monetary Fund, the International Bank
for Reconstruction and Development, the International Finance
Corporation, the International Development Association, the
Multilateral Investment Guarantee Agency, or the International Centre
for Settlement of Investment Disputes;
(5) Any credit transaction with the European Commission or the
European Central Bank; and
(6) Any transaction that the Board exempts if the Board finds that
such exemption is in the public interest and is consistent with the
purpose of this subpart.
(b) Exemption for Federal Home Loan Banks. For purposes of this
subpart, a covered company does not include any Federal Home Loan Bank.
(c) Additional exemptions by the Board. The Board may, by
regulation or order, exempt transactions, in whole or in part, from the
definition of the term ``credit exposure,'' if the Board finds that the
exemption is in the public interest and is consistent with the purpose
of 12 U.S.C. 5365(e).

Sec. 252.78 Compliance.

(a) Scope of compliance. (1) Using all available data, including
any data required to be maintained or reported to the Federal Reserve
under this subpart, a covered company must comply with the requirements
of this subpart on a daily basis at the end of each business day.
(2) A covered company must report its compliance to the Federal
Reserve as of the end of the quarter, unless the Board determines and
notifies that company in writing that more frequent reporting is
required.
(3) In reporting its compliance, a covered company must calculate
and include in its gross credit exposure to an issuer of eligible
collateral or eligible guarantor the amounts of eligible collateral,
eligible guarantees, eligible equity derivatives, and eligible credit
derivatives that were provided to the covered company in connection
with credit transactions with exempt counterparties, valued in
accordance with and as required by Sec. 252.74(b) through (d) and (g).
(b) Qualifying Master Netting Agreement. With respect to any
qualifying master netting agreement, a covered company must establish
and maintain procedures that meet or exceed the requirements of Sec.
217.3(d) of the Board's Regulation Q (12 CFR 217.3(d)) to monitor
possible changes in relevant law and to ensure that the agreement
continues to satisfy these requirements.
(c) Noncompliance. (1) Except as otherwise provided in this
section, if a covered company is not in compliance with this subpart
with respect to a counterparty solely due to the circumstances listed
in paragraphs (c)(2)(i) through (v) of this section, the covered
company will not be subject to enforcement actions for a period of 90
days (or, with prior notice to the company, such shorter or longer
period determined by the Board, in its sole discretion, to be
appropriate to preserve the safety and soundness of the covered company
or U.S. financial stability), if the covered company uses reasonable
efforts to return to compliance with this subpart during this period.
The covered company may not engage in any additional credit
transactions with such a counterparty in contravention of this rule
during the period of noncompliance, except as provided in paragraph
(c)(2).

[[Page 38501]]

(2) A covered company may request a special temporary credit
exposure limit exemption from the Board. The Board may grant approval
for such exemption in cases where the Board determines that such credit
transactions are necessary or appropriate to preserve the safety and
soundness of the covered company or U.S. financial stability. In acting
on a request for an exemption, the Board will consider the following:
(i) A decrease in the covered company's capital stock and surplus;
(ii) The merger of the covered company with another covered
company;
(iii) A merger of two counterparties; or
(iv) An unforeseen and abrupt change in the status of a
counterparty as a result of which the covered company's credit exposure
to the counterparty becomes limited by the requirements of this
section; or
(v) Any other factor(s) the Board determines, in its discretion, is
appropriate.
(d) Other measures. The Board may impose supervisory oversight and
additional reporting measures that it determines are appropriate to
monitor compliance with this subpart. Covered companies must furnish,
in the manner and form prescribed by the Board, such information to
monitor compliance with this subpart and the limits therein as the
Board may require.

0
3. Add subpart Q to read as follows:

Subpart Q--Single-Counterparty Credit Limits

Sec.
252.170 Applicability and general provisions.
252.171 Definitions.
252.172 Credit exposure limits.
252.173 Gross credit exposure.
252.174 Net credit exposure.
252.175 Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
affiliates of the covered foreign entity.
252.176 Aggregation of exposures to more than one counterparty due
to economic interdependence or control relationships.
252.177 Exemptions.
252.178 Compliance.

Sec. 252.170 Applicability and general provisions.

(a) In general. (1) This subpart establishes single counterparty
credit limits for a covered foreign entity.
(2) For purposes of this subpart:
(i) Covered foreign entity means:
(A) A foreign banking organization with total consolidated assets
that equal or exceed $250 billion with respect to its combined U.S.
operations; and
(B) Any U.S. intermediate holding company of such a foreign banking
organization with total consolidated assets that equal or exceed $50
billion, including a U.S. intermediate holding company that is a bank
holding company.
(ii) Major foreign banking organization means a foreign banking
organization that is a covered foreign entity and meets the
requirements of Sec. 252.172(c)(3) through (5).
(iii) Major U.S. intermediate holding company means any covered
foreign entity that is a U.S. intermediate holding company and has
total consolidated assets that equal or exceed $500 billion.
(b) Credit exposure limits. (1) Section 252.172 establishes credit
exposure limits for covered foreign entities, major foreign banking
organizations, and major U.S. intermediate holding companies.
(2) A covered foreign entity is required to calculate its aggregate
net credit exposure, gross credit exposure, and net credit exposure to
a counterparty using the methods in this subpart.
(c) Applicability of this subpart--(1) Foreign banking
organizations. (i) A foreign banking organization that is a covered
foreign entity as of October 5, 2018, must comply with the requirements
of this subpart, including but not limited to Sec. 252.172, beginning
on July 1, 2020, unless that time is extended by the Board in writing.
(ii) Notwithstanding paragraph (c)(1)(i) of this section, a foreign
banking organization that is a major foreign banking organization as of
October 5, 2018, must comply with the requirements of this subpart,
including but not limited to Sec. 252.172, beginning on January 1,
2020, unless that time is extended by the Board in writing.
(iii) A foreign banking organization that becomes a covered foreign
entity subject to this subpart after October 5, 2018 must comply with
the requirements of this subpart beginning on the first day of the
ninth calendar quarter after it becomes a covered foreign entity,
unless that time is accelerated or extended by the Board in writing.
(2) U.S. intermediate holding companies. (i) A U.S. intermediate
holding company that is a covered foreign entity but not a major U.S.
intermediate holding company as of October 5, 2018, must comply with
the requirements of this subpart, including but not limited to Sec.
252.172, beginning on July 1, 2020, unless that time is extended by the
Board in writing.
(ii) Notwithstanding paragraph (c)(2)(i) of this section, a U.S.
intermediate holding company that is a major U.S. intermediate holding
company as of October 5, 2018, must comply with the requirements of
this subpart, including but not limited to Sec. 252.172, beginning on
January 1, 2020, unless that time is extended by the Board in writing.
(iii) A U.S. intermediate holding company that becomes a covered
foreign entity subject to this subpart after October 5, 2018 must
comply with the requirements of this subpart beginning on the first day
of the ninth calendar quarter after it becomes a covered foreign
entity, unless that time is accelerated or extended by the Board in
writing.
(d) Cessation of requirements--(1) Foreign banking organizations.
(i) Any foreign banking organization that becomes a covered foreign
entity will remain subject to the requirements of this subpart unless
and until its total consolidated assets fall below $250 billion for
each of four consecutive quarters, as reported on the covered foreign
entity's FR Y-7Q, effective on the as-of date of the fourth consecutive
FR Y-7Q.
(ii) A foreign banking organization that is a covered foreign
entity and that has ceased to be a major foreign banking organization
for purposes of Sec. 252.172(c) is no longer subject to the
requirements of Sec. 252.172(c) beginning on the first day of the
calendar quarter following the reporting date on which it ceased to be
a major foreign banking organization; provided that the foreign banking
organization remains subject to the requirements of this subpart,
unless it ceases to be a foreign banking organization that is a covered
foreign entity pursuant to paragraph (d)(1)(i) of this section.
(2) U.S. intermediate holding companies. (i) Any U.S. intermediate
holding company that becomes a covered foreign entity will remain
subject to the requirements of this subpart unless and until its total
consolidated assets fall below $50 billion for each of four consecutive
quarters, as reported on the covered foreign entity's FR Y-9C,
effective on the as-of date of the fourth consecutive FR Y-9C.
(ii) A U.S. intermediate holding company that is a covered foreign
entity and that has ceased to be a major U.S. intermediate holding
company for purposes of Sec. 252.172(c) is no longer subject to the
requirements of Sec. 252.172(c) beginning on the first day of the
calendar quarter following the reporting date on which it ceased to be

[[Page 38502]]

a major U.S. intermediate holding company; provided that the U.S.
intermediate holding company remains subject to the requirements of
this subpart, unless it ceases to be a U.S. intermediate holding
company that is a covered foreign entity pursuant to paragraph
(d)(2)(i) of this section.

Sec. 252.171 Definitions.

Unless defined in this section, terms that are set forth in Sec.
252.2 of this part and used in this subpart have the definitions
assigned in Sec. 252.2. For purposes of this subpart:
(a) Adjusted market value means:
(1) With respect to the value of cash, securities, or other
eligible collateral transferred by the covered foreign entity to a
counterparty, the sum of:
(i) The market value of the cash, securities, or other eligible
collateral; and
(ii) The product of the market value of the securities or other
eligible collateral multiplied by the applicable collateral haircut in
Table 1 to Sec. 217.132 of the Board's Regulation Q (12 CFR 217.132);
and
(2) With respect to cash, securities, or other eligible collateral
received by the covered foreign entity from a counterparty:
(i) The market value of the cash, securities, or other eligible
collateral; minus
(ii) The market value of the securities or other eligible
collateral multiplied by the applicable collateral haircut in Table 1
to Sec. 217.132 of the Board's Regulation Q (12 CFR 217.132).
(3) Prior to calculating the adjusted market value pursuant to
paragraphs (1) and (2) of this section, with regard to a transaction
that meets the definition of ``repo-style transaction'' in Sec. 217.2
of the Board's Regulation Q (12 CFR 217.2), the covered foreign entity
would first multiply the applicable collateral haircuts in Table 1 to
Sec. 217.132 of the Board's Regulation Q (12 CFR 217.132) by the
square root of \1/2\.
(b) Affiliate means, with respect to a company:
(1) Any subsidiary of the company and any other company that is
consolidated with the company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards
referenced in paragraph (b)(1) of this section, any subsidiary of the
company and any other company that would be consolidated with the
company, if consolidation would have occurred if such principles or
standards had applied.
(c) Aggregate net credit exposure means the sum of all net credit
exposures of a covered foreign entity and all of its subsidiaries to a
single counterparty as calculated under this subpart.
(d) Bank-eligible investments means investment securities that a
national bank is permitted to purchase, sell, deal in, underwrite, and
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
(e) Capital stock and surplus means, with respect to a U.S.
intermediate holding company, the sum of the following amounts in each
case as reported by the U.S. intermediate holding company on the most
recent FR Y-9C on a consolidated basis:
(1) The tier 1 capital and tier 2 capital of the U.S. intermediate
holding company, as calculated under the capital adequacy guidelines
applicable to that U.S. intermediate holding company under subpart O of
the Board's Regulation YY (12 CFR part 252, subpart O); and
(2) The excess allowance for loan and lease losses of the U.S.
intermediate holding company not included in its tier 2 capital, as
calculated under the capital adequacy guidelines applicable to that
U.S. intermediate holding company under subpart O of the Board's
Regulation YY (12 CFR part 252, subpart O).
(f) Counterparty means with respect to a credit transaction:
(1) With respect to a natural person, the natural person, and, if
the credit exposure of the covered foreign entity to such natural
person exceeds 5 percent of its capital stock and surplus in the case
of a U.S. intermediate holding company that is a covered foreign entity
with total consolidated assets of less than $250 billion, or 5 percent
of its tier 1 capital in the case of a foreign banking organization
that is a covered foreign entity or a U.S. intermediate holding company
with total consolidated assets that equal or exceed $250 billion, the
natural person and members of the person's immediate family
collectively;
(2) With respect to any company that is not an affiliate of the
covered foreign entity, the company and its affiliates collectively;
(3) With respect to a State, the State and all of its agencies,
instrumentalities, and political subdivisions (including any
municipalities) collectively;
(4) With respect to a foreign sovereign entity that is not assigned
a zero percent risk weight under the standardized approach in the
Board's Regulation Q (12 CFR part 217, subpart D), other than the home
country foreign sovereign entity of a foreign banking organization, the
foreign sovereign entity and all of its agencies and instrumentalities
(but not including any political subdivision), collectively; and
(5) With respect to a political subdivision of a foreign sovereign
entity such as a state, province, or municipality, any political
subdivision of the foreign sovereign entity and all of such political
subdivision's agencies and instrumentalities, collectively.\1\
---------------------------------------------------------------------------

\1\ In addition, under Sec. 252.176, under certain
circumstances, a covered foreign entity is required to aggregate its
net credit exposure to one or more counterparties for all purposes
under this subpart.
---------------------------------------------------------------------------

(g) Covered foreign entity is defined in Sec. 252.170(a)(2)(i) of
this subpart.
(h) Credit derivative has the same meaning as in Sec. 217.2 of the
Board's Regulation Q (12 CFR 217.2).
(i) Credit transaction means, with respect to a counterparty:
(1) Any extension of credit to the counterparty, including loans,
deposits, and lines of credit, but excluding uncommitted lines of
credit;
(2) Any repurchase agreement or reverse repurchase agreement with
the counterparty;
(3) Any securities lending or securities borrowing transaction with
the counterparty;
(4) Any guarantee, acceptance, or letter of credit (including any
endorsement, confirmed letter of credit, or standby letter of credit)
issued on behalf of the counterparty;
(5) Any purchase of securities issued by or other investment in the
counterparty;
(6) Any credit exposure to the counterparty in connection with a
derivative transaction between the covered foreign entity and the
counterparty;
(7) Any credit exposure to the counterparty in connection with a
credit derivative or equity derivative between the covered foreign
entity and a third party, the reference asset of which is an obligation
or equity security of, or equity investment in, the counterparty; and
(8) Any transaction that is the functional equivalent of the above,
and any other similar transaction that the Board, by regulation,
determines to be a credit transaction for purposes of this subpart.
(j) Depository institution has the same meaning as in section 3 of
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(k) Derivative transaction means any transaction that is a
contract, agreement, swap, warrant, note, or option that is based, in
whole or in part, on the value of, any interest in, or any quantitative
measure or the occurrence of any event relating to, one or more
commodities,

[[Page 38503]]

securities, currencies, interest or other rates, indices, or other
assets.
(l) Eligible collateral means collateral in which, notwithstanding
the prior security interest of any custodial agent, the covered foreign
entity has a perfected, first priority security interest (or the legal
equivalent thereof, if outside of the United States), with the
exception of cash on deposit, and is in the form of:
(1) Cash on deposit with the covered foreign entity or an affiliate
of the covered foreign entity (including cash in foreign currency or
U.S. dollars held for the covered foreign entity by a custodian or
trustee, whether inside or outside of the United States);
(2) Debt securities (other than mortgage- or asset-backed
securities and resecuritization securities, unless those securities are
issued by a U.S. government-sponsored enterprise) that are bank-
eligible investments and that are investment grade, except for any debt
securities issued by the covered foreign entity or any affiliate of the
covered foreign entity;
(3) Equity securities that are publicly traded, except for any
equity securities issued by the covered foreign entity or any affiliate
of the covered foreign entity;
(4) Convertible bonds that are publicly traded, except for any
convertible bonds issued by the covered foreign entity or any affiliate
of the covered foreign entity; or
(5) Gold bullion.
(m) Eligible credit derivative means a single-name credit
derivative or a standard, non-tranched index credit derivative,
provided that:
(1) The contract meets the requirements of an eligible guarantee
and has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap, the contract
includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference
exposure, subject to any applicable minimal payment threshold that is
consistent with standard market practice and with a grace period that
is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship, or
inability of the reference exposure issuer to pay its debts, or its
failure or admission in writing of its inability generally to pay its
debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer
an exposure to the protection provider at settlement, the terms of at
least one of the exposures that is permitted to be transferred under
the contract provide that any required consent to transfer may not be
unreasonably withheld; and
(7) If the credit derivative is a credit default swap, the contract
clearly identifies the parties responsible for determining whether a
credit event has occurred, specifies that this determination is not the
sole responsibility of the protection provider, and gives the
protection purchaser the right to notify the protection provider of the
occurrence of a credit event.
(n) Eligible equity derivative means an equity derivative, provided
that:
(1) The derivative contract has been confirmed by all relevant
parties;
(2) Any assignment of the derivative contract has been confirmed by
all relevant parties; and
(3) The terms and conditions dictating the manner in which the
derivative contract is to be settled are incorporated into the
contract.
(o) Eligible guarantee has the same meaning as in Sec. 217.2 of
the Board's Regulation Q (12 CFR 217.2).
(p) Eligible guarantor has the same meaning as in Sec. 217.2 of
the Board's Regulation Q (12 CFR 217.2), but does not include the
foreign banking organization or any entity that is an affiliate of
either the U.S. intermediate holding company or of any part of the
foreign banking organization's combined U.S. operations.
(q) Equity derivative has the same meaning as ``equity derivative
contract'' in Sec. 217.2 of the Board's Regulation Q (12 CFR 217.2).
(r) Exempt counterparty means an entity that is identified as
exempt from the requirements of this subpart under Sec. 252.177, or
that is otherwise excluded from this subpart, including any sovereign
entity assigned a zero percent risk weight under the standardized
approach in the Board's Regulation Q (12 CFR part 217, subpart D).
(s) Financial entity means:
(1)(i) A bank holding company or an affiliate thereof; a savings
and loan holding company as defined in section 10(n) of the Home
Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding
company established or designated for purposes of compliance with this
part; or a nonbank financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that
is organized under the laws of a foreign country and that engages
directly in the business of banking outside the United States; a
federal credit union or state credit union as defined in section 2 of
the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national
association, state member bank, or state nonmember bank that is not a
depository institution; an institution that functions solely in a trust
or fiduciary capacity as described in section 2(c)(2)(D) of the Bank
Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan
company, an industrial bank, or other similar institution described in
section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C.
1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money
lender; installment lender; consumer lender or lending company;
mortgage lender, broker, or bank; motor vehicle title pledge lender;
payday or deferred deposit lender; premium finance company; commercial
finance or lending company; or commercial mortgage company; except
entities registered or licensed solely on account of financing the
entity's direct sales of goods or services to customers;
(B) A money services business, including a check casher; money
transmitter; currency dealer or exchange; or money order or traveler's
check issuer;
(iv) Any person registered with the Commodity Futures Trading
Commission as a swap dealer or major swap participant pursuant to the
Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that
is registered with the U.S. Securities and Exchange Commission as a
security-based swap dealer or a major security-based swap participant
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.);
(v) A securities holding company as defined in section 618 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an
investment adviser as defined in section 202(a) of the

[[Page 38504]]

Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment
company registered with the U.S. Securities and Exchange Commission
under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or
a company that has elected to be regulated as a business development
company pursuant to section 54(a) of the Investment Company Act of 1940
(15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an
investment company under section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is
deemed not to be an investment company under section 3 of the
Investment Company Act of 1940 pursuant to Investment Company Act Rule
3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(vii) A commodity pool, a commodity pool operator, or a commodity
trading advisor as defined, respectively, in sections 1a(10), 1a(11),
and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10),
1a(11), and 1a(12)); a floor broker, a floor trader, or introducing
broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and
1a(31)); or a futures commission merchant as defined in section 1a(28)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(viii) An employee benefit plan as defined in paragraphs (3) and
(32) of section 3 of the Employee Retirement Income and Security Act of
1974 (29 U.S.C. 1002);
(ix) An entity that is organized as an insurance company, primarily
engaged in writing insurance or reinsuring risks underwritten by
insurance companies, or is subject to supervision as such by a State
insurance regulator or foreign insurance regulator;
(x) Any designated financial market utility, as defined in section
803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(12 U.S.C. 5462); and
(xi) An entity that would be a financial entity described in
paragraphs (s)(1)(i) through (x) of this section, if it were organized
under the laws of the United States or any State thereof; and
(2) Provided that, for purposes of this subpart, ``financial
entity'' does not include any counterparty that is a foreign sovereign
entity or multilateral development bank.
(t) Foreign sovereign entity means a sovereign entity other than
the United States government and the entity's agencies, departments,
ministries, and central bank.
(u) Gross credit exposure means, with respect to any credit
transaction, the credit exposure of the covered foreign entity before
adjusting, pursuant to Sec. 252.174, for the effect of any qualifying
master netting agreement, eligible collateral, eligible guarantee,
eligible credit derivative, eligible equity derivative, other eligible
hedge, and any unused portion of certain extensions of credit.
(v) Immediate family means the spouse of an individual, the
individual's minor children, and any of the individual's children
(including adults) residing in the individual's home.
(w) Intraday credit exposure means credit exposure of a covered
foreign entity to a counterparty that by its terms is to be repaid,
sold, or terminated by the end of its business day in the United
States.
(x) Investment grade has the same meaning as in Sec. 217.2 of the
Board's Regulation Q (12 CFR 217.2).
(y) Major counterparty means any counterparty that is or includes:
(1) A U.S. bank holding company identified as a global systemically
important BHC pursuant to Sec. 217.402 of the Board's Regulation Q (12
CFR 217.402);
(2) A top-tier foreign banking organization that meets the
requirements of Sec. 252.172(c)(3) through (5); or
(3) Any nonbank financial company supervised by the Board.
(z) Major foreign banking organization is defined in Sec.
252.170(a)(2)(ii) of this subpart.
(aa) Major U.S. intermediate holding company is defined in Sec.
252.170(a)(2)(iii) of this subpart.
(bb) Multilateral development bank has the same meaning as in Sec.
217.2 of the Board's Regulation Q (12 CFR 217.2).
(cc) Net credit exposure means, with respect to any credit
transaction, the gross credit exposure of a covered foreign entity and
all of its subsidiaries calculated under Sec. 252.173, as adjusted in
accordance with Sec. 252.174.
(dd) Qualifying central counterparty has the same meaning as in
Sec. 217.2 of the Board's Regulation Q (12 CFR 217.2).
(ee) Qualifying master netting agreement has the same meaning as in
Sec. 217.2 of the Board's Regulation Q (12 CFR 217.2).
(ff) Securities financing transaction means any repurchase
agreement, reverse repurchase agreement, securities borrowing
transaction, or securities lending transaction.
(gg) Short sale means any sale of a security which the seller does
not own or any sale which is consummated by the delivery of a security
borrowed by, or for the account of, the seller.
(hh) Sovereign entity means a central national government
(including the U.S. government) or an agency, department, ministry, or
central bank, but not including any political subdivision such as a
state, province, or municipality.
(ii) Subsidiary. A company is a subsidiary of another company if
(1) The company is consolidated by the other company under
applicable accounting standards; or
(2) For a company that is not subject to principles or standards
referenced in paragraph (ii)(1) of this definition, consolidation would
have occurred if such principles or standards had applied.
(jj) Tier 1 capital means common equity tier 1 capital and
additional tier 1 capital, as defined in subpart O of the Board's
Regulation YY(12 CFR part 252, subpart O).
(kk) Tier 2 capital means tier 2 capital as defined in subpart O of
the Board's Regulation YY (12 CFR part 252, subpart O).
(ll) Total consolidated assets. (1) A foreign banking
organization's total consolidated assets are determined based on:
(i) The average of the foreign banking organization's total
consolidated assets in the four most recent consecutive quarters as
reported quarterly on the FR Y-7Q; or
(ii) If the foreign banking organization has not filed an FR Y-7Q
for each of the four most recent consecutive quarters, the average of
the foreign banking organization's total consolidated assets, as
reported on the foreign banking organization's FR Y-7Q, for the most
recent quarter or consecutive quarters, as applicable; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(2) A U.S. intermediate holding company's total consolidated assets
are determined based on:
(i) The average of the U.S. intermediate holding company's total
consolidated assets in the four most recent consecutive quarters as
reported quarterly on the FR Y-9C; or
(ii) If the U.S. intermediate holding company has not filed an FR
Y-9C for each of the four most recent consecutive quarters, the average
of the U.S. intermediate holding company's total consolidated assets,
as reported on the company's FR Y-9C, for the most recent

[[Page 38505]]

quarter or consecutive quarters, as applicable; or
(iii) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards.

Sec. 252.172 Credit exposure limits.

(a) General limit on aggregate net credit exposure. No U.S.
intermediate holding company that is a covered foreign entity may have
an aggregate net credit exposure to any counterparty that exceeds 25
percent of the consolidated capital stock and surplus of the U.S.
intermediate holding company.
(b) Limit on aggregate net credit exposure for U.S. intermediate
holding companies with total consolidated assets that equal or exceed
$250 billion and foreign banking organizations that are covered foreign
entities. (1) No U.S. intermediate holding company with total
consolidated assets that equal or exceed $250 billion that is a covered
foreign entity may have an aggregate net credit exposure to any
counterparty that exceeds 25 percent of the tier 1 capital of the U.S.
intermediate holding company.
(2) No foreign banking organization that is a covered foreign
entity may permit its combined U.S. operations to have aggregate net
credit exposure to any counterparty that exceeds 25 percent of the tier
1 capital of the foreign banking organization.
(c) Limit on aggregate net credit exposure of major U.S.
intermediate holding companies and major foreign banking organizations
to major counterparties. (1) No major U.S. intermediate holding company
may have aggregate net credit exposure to any major counterparty that
exceeds 15 percent of the tier 1 capital of the major U.S. intermediate
holding company.
(2) No major foreign banking organization may permit its combined
U.S. operations to have aggregate net credit exposure to any major
counterparty that exceeds 15 percent of the tier 1 capital of the major
foreign banking organization.
(3) For purposes of this subpart, a top-tier foreign banking
organization will be a major counterparty if it meets one of the
following conditions:
(i) The top-tier foreign banking organization determines, pursuant
to 12 CFR 252.153(b)(6), that the top-tier foreign banking organization
has the characteristics of a global systemically important banking
organization under the global methodology; or
(ii) The Board, using information available to the Board,
determines:
(A) That the top-tier foreign banking organization would be a
global systemically important banking organization under the global
methodology;
(B) That the top-tier foreign banking organization, if it were
subject to the Board's Regulation Q, would be identified as a global
systemically important BHC under 12 CFR 217.402 of the Board's
Regulation Q; or
(C) That the U.S. intermediate holding company, if it were subject
to 12 CFR 217.402 of the Board's Regulation Q, would be identified as a
global systemically important BHC.
(4) Each top-tier foreign banking organization that controls a U.S.
intermediate holding company must submit to the Board by January 1 of
each calendar year through the U.S. intermediate holding company:
(A) Notice of whether the home country supervisor (or other
appropriate home country regulatory authority) of the top-tier foreign
banking organization of the U.S. intermediate holding company has
adopted standards consistent with the global methodology; and
(B) Notice of whether the top-tier foreign banking organization
prepares or reports the indicators used by the global methodology to
identify a banking organization as a global systemically important
banking organization and, if it does, whether the top-tier foreign
banking organization has determined that it has the characteristics of
a global systemically important banking organization under the global
methodology pursuant to 12 CFR 252.153(b)(6).
(5) A top-tier foreign banking organization that controls a U.S.
intermediate holding company and prepares or reports for any purpose
the indicator amounts necessary to determine whether the top-tier
foreign banking organization is a global systemically important banking
organization under the global methodology must use the data to
determine whether the top-tier foreign banking organization has the
characteristics of a global systemically important banking organization
under the global methodology.
(d) Foreign banking organizations subject on a consolidated basis
to a large exposures or single-counterparty credit limit regime by its
home-country supervisor. (1) Notwithstanding paragraphs (a) through (c)
of this section, a foreign banking organization that is a covered
foreign entity is not required to comply with the requirements of this
subpart with respect to limits on the aggregate net credit exposure of
its combined U.S. operations if the foreign banking organization
certifies to the Board that it meets large exposure standards on a
consolidated basis established by its home-country supervisor that are
consistent with the large exposures framework published by the Basel
Committee on Banking Supervision (Basel Large Exposures Framework),
unless the Board determines in writing, after notice to the foreign
banking organization, that compliance with this subpart is required.
(i) For purposes of this paragraph, home-country large exposure
standards that are consistent with the Basel Large Exposures Framework
include single-counterparty credit limits and any restrictions set
forth in ``Supervisory framework for measuring and controlling large
exposures'' (2014) (Basel LE Standard), as implemented in accordance
with the Basel LE Standard.
(ii) [Reserved]
(2) A foreign banking organization that is a covered foreign entity
must provide to the Board reports relating to its compliance with the
large exposure standards described in paragraph (d)(1) of this section
concurrently with filing the FR Y-7Q or any successor report.

Sec. 252.173 Gross credit exposure.

(a) Calculation of gross credit exposure. The amount of gross
credit exposure of a covered foreign entity to a counterparty with
respect to a credit transaction is, in the case of:
(1) A deposit of the covered foreign entity held by the
counterparty, loan by a covered foreign entity to the counterparty, and
lease in which the covered foreign entity is the lessor and the
counterparty is the lessee, equal to the amount owed by the
counterparty to the covered foreign entity under the transaction.
(2) A debt security or debt investment held by the covered foreign
entity that is issued by the counterparty, equal to:
(i) The market value of the securities, for trading and available-
for-sale securities; and
(ii) The amortized purchase price of the securities or investments,
for securities or investments held to maturity.
(3) An equity security held by the covered foreign entity that is
issued by the counterparty, equity investment in a counterparty, and
other direct investments in a counterparty, equal to the market value.
(4) A securities financing transaction must be valued using any of
the methods that the covered foreign entity is authorized to use under
the Board's Regulation Q (12 CFR part 217, subparts D and E) to value
such transactions:

[[Page 38506]]

(i)(A) As calculated for each transaction, in the case of a
securities financing transaction between the covered foreign entity and
the counterparty that is not subject to a bilateral netting agreement
or does not meet the definition of ``repo-style transaction'' in Sec.
217.2 of the Board's Regulation Q (12 CFR 217.2); or
(B) As calculated for a netting set, in the case of a securities
financing transaction between the covered foreign entity and the
counterparty that is subject to a bilateral netting agreement with that
counterparty and meets the definition of ``repo-style transaction'' in
Sec. 217.2 of the Board's Regulation Q (12 CFR 217.2);
(ii) For purposes of paragraph (a)(4)(i) of this section, the
covered foreign entity must:
(A) Assign a value of zero to any security received from the
counterparty that does not meet the definition of ``eligible
collateral'' in Sec. 252.171(l); and
(B) Include the value of securities that are eligible collateral
received by the covered foreign entity from the counterparty (including
any exempt counterparty), calculated in accordance with paragraphs
(a)(4)(i) through (iv) of this section, when calculating its gross
credit exposure to the issuer of those securities;
(iii) Notwithstanding paragraph (a)(4)(i) and (ii) of this section
and with respect to each credit transaction, a covered foreign entity's
gross credit exposure to a collateral issuer under this paragraph
(a)(4) is limited to the covered foreign entity's gross credit exposure
to the counterparty on the credit transaction;
(iv) In cases where the covered foreign entity receives eligible
collateral from a counterparty in addition to the cash or securities
received from that counterparty, the counterparty may reduce its gross
credit exposure to that counterparty in accordance with Sec.
252.174(b).
(5) A committed credit line extended by a covered foreign entity to
a counterparty, equal to the face amount of the committed credit line.
(6) A guarantee or letter of credit issued by a covered foreign
entity on behalf of a counterparty, equal to the maximum potential loss
to the covered foreign entity on the transaction.
(7) A derivative transaction must be valued using any of the
methods that the covered foreign entity is authorized to use under the
Board's Regulation Q (12 CFR part 217, subparts D and E) to value such
transactions:
(i)(A) As calculated for each transaction, in the case of a
derivative transaction between the covered foreign entity and the
counterparty, including an equity derivative but excluding a credit
derivative described in paragraph (a)(8) of this section, that is not
subject to a qualifying master netting agreement; or
(B) As calculated for a netting set, in the case of a derivative
transaction between the covered foreign entity and the counterparty,
including an equity derivative but excluding a credit derivative
described in paragraph (a)(8) of this section, that is subject to a
qualifying master netting agreement.
(ii) In cases where a covered foreign entity is required to
recognize an exposure to an eligible guarantor pursuant to Sec.
252.174(d), the covered foreign entity must exclude the relevant
derivative transaction when calculating its gross exposure to the
original counterparty under this section.
(8) A credit derivative between the covered foreign entity and a
third party where the covered foreign entity is the protection provider
and the reference asset is an obligation or debt security of the
counterparty, equal to the maximum potential loss to the covered
foreign entity on the transaction.
(b) Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
affiliates. Notwithstanding paragraph (a) of this section.
(1) Unless the Board applies the requirements of Sec. 252.175 to
the transaction pursuant to Sec. 252.175(d), a U.S. intermediate
holding company that is a covered foreign entity but has less than $250
billion in total consolidated assets must:
(A) Calculate pursuant to Sec. 252.173(a) its gross credit
exposure due to any investment in the debt or equity of, and any credit
derivative or equity derivative between the covered foreign entity and
a third party where the covered foreign entity is the protection
provider and the reference asset is an obligation or equity security
of, or equity investment in, a securitization vehicle, investment fund,
and other special purpose vehicle that is not an affiliate of the
covered foreign entity; and
(B) Attribute that gross credit exposure to the securitization
vehicle, investment fund, or other special purpose vehicle for purposes
of this subpart.
(2) A foreign banking organization that is a covered foreign entity
or a U.S. intermediate holding company with total consolidated assets
that equal or exceed $250 billion must calculate pursuant to Sec.
252.175 its gross credit exposure due to any investment in the debt or
equity of, and any credit derivative or equity derivative between the
covered foreign entity and a third party where the covered foreign
entity is the protection provider and the reference asset is an
obligation or equity security of, or equity investment in, a
securitization vehicle, investment fund, and other special purpose
vehicle that is not an affiliate of the covered foreign entity.
(c) Attribution rule. Notwithstanding paragraph (a) of this
section, a covered foreign entity must treat any transaction with any
natural person or entity as a credit transaction with another party, to
the extent that the proceeds of the transaction are used for the
benefit of, or transferred to, the other party.

Sec. 252.174 Net credit exposure.

(a) In general. For purposes of this subpart, a covered foreign
entity must calculate its net credit exposure to a counterparty by
adjusting its gross credit exposure to that counterparty in accordance
with the rules set forth in this section.
(b) Eligible collateral. (1) In computing its net credit exposure
to a counterparty for any credit transaction other than a securities
financing transaction, a covered foreign entity must reduce its gross
credit exposure on the transaction by the adjusted market value of any
eligible collateral.
(2) A covered foreign entity that reduces its gross credit exposure
to a counterparty as required under paragraph (b)(1) of this section
must include the adjusted market value of the eligible collateral when
calculating its gross credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of this section, a covered
foreign entity's gross credit exposure to a collateral issuer under
this paragraph (b) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction if valued in accordance with Sec.
252.173(a).
(c) Eligible guarantees. (1) In calculating net credit exposure to
a counterparty for any credit transaction, a covered foreign entity
must reduce its gross credit exposure to the counterparty by the amount
of any eligible guarantee from an eligible guarantor that covers the
transaction.
(2) A covered foreign entity that reduces its gross credit exposure
to a counterparty as required under

[[Page 38507]]

paragraph (c)(1) of this section must include the amount of eligible
guarantees when calculating its gross credit exposure to the eligible
guarantor.
(3) Notwithstanding paragraph (c)(2) of this section, a covered
foreign entity's gross credit exposure to an eligible guarantor with
respect to an eligible guarantee under this paragraph (c) is limited
to:
(i) Its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction prior to recognition of the eligible
guarantee if valued in accordance with Sec. 252.173(a).
(d) Eligible credit and equity derivatives. (1) In calculating net
credit exposure to a counterparty for a credit transaction under this
section, a covered foreign entity must reduce its gross credit exposure
to the counterparty by:
(i) In the case of any eligible credit derivative from an eligible
guarantor, the notional amount of the eligible credit derivative; or
(ii) In the case of any eligible equity derivative from an eligible
guarantor, the gross credit exposure amount to the counterparty
(calculated in accordance with Sec. 252.173(a)(7)).
(2)(i) A covered foreign entity that reduces its gross credit
exposure to a counterparty as provided under paragraph (d)(1) of this
section must include, when calculating its net credit exposure to the
eligible guarantor, including in instances where the underlying credit
transaction would not be subject to the credit limits of Sec. 252.172
(for example, due to an exempt counterparty), either
(A) In the case of any eligible credit derivative from an eligible
guarantor, the notional amount of the eligible credit derivative; or
(B) In the case of any eligible equity derivative from an eligible
guarantor, the gross credit exposure amount to the counterparty
(calculated in accordance with Sec. 252.173(a)(7)).
(ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases
where the eligible credit derivative or eligible equity derivative is
used to hedge covered positions that are subject to the Board's market
risk rule (12 CFR part 217, subpart F) and the counterparty on the
hedged transaction is not a financial entity, the amount of credit
exposure that a entity must recognize to the eligible guarantor is the
amount that would be calculated pursuant to Sec. 252.173(a).
(3) Notwithstanding paragraph (d)(2) of this section, a covered
foreign entity's gross credit exposure to an eligible guarantor with
respect to an eligible credit derivative or an eligible equity
derivative under this paragraph (d) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible credit derivative or
the eligible equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction prior to recognition of the eligible credit
derivative or the eligible equity derivative if valued in accordance
with Sec. 252.173(a).
(e) Other eligible hedges. In calculating net credit exposure to a
counterparty for a credit transaction under this section, a covered
foreign entity may reduce its gross credit exposure to the counterparty
by the face amount of a short sale of the counterparty's debt security
or equity security, provided that:
(1) The instrument in which the covered foreign entity has a short
position is junior to, or pari passu with, the instrument in which the
covered foreign entity has the long position; and
(2) The instrument in which the covered foreign entity has a short
position and the instrument in which the covered foreign entity has the
long position are either both treated as trading or available-for-sale
exposures or both treated as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit. (1) In
computing its net credit exposure to a counterparty for a committed
credit line or revolving credit facility under this section, a covered
foreign entity may reduce its gross credit exposure by the amount of
the unused portion of the credit extension to the extent that the
covered foreign entity does not have any legal obligation to advance
additional funds under the extension of credit and the used portion of
the credit extension has been fully secured by eligible collateral.
(2) To the extent that the used portion of a credit extension has
been secured by eligible collateral, the covered foreign entity may
reduce its gross credit exposure by the adjusted market value of any
eligible collateral received from the counterparty, even if the used
portion has not been fully secured by eligible collateral.
(3) To qualify for the reduction in net credit exposure under this
paragraph, the credit contract must specify that any used portion of
the credit extension must be fully secured by the adjusted market value
of any eligible collateral.
(g) Credit transactions involving exempt counterparties. (1) A
covered foreign entity's credit transactions with an exempt
counterparty are not subject to the requirements of this subpart,
including but not limited to Sec. 252.172.
(2) Notwithstanding paragraph (g)(1) of this section, in cases
where a covered foreign entity has a credit transaction with an exempt
counterparty and the covered foreign entity has obtained eligible
collateral from that exempt counterparty or an eligible guarantee or
eligible credit or equity derivative from an eligible guarantor, the
covered foreign entity must include (for purposes of this subpart) such
exposure to the issuer of such eligible collateral or the eligible
guarantor, as calculated in accordance with the rules set forth in this
section, when calculating its gross credit exposure to that issuer of
eligible collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its
net credit exposure to a counterparty under this section, a covered
foreign entity must apply, as applicable:
(1) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible collateral
and calculating its gross credit exposure to an issuer of eligible
collateral, pursuant to paragraph (b) of this section, the currency
mismatch adjustment approach of Sec. 217.37(c)(3)(ii) of the Board's
Regulation Q (12 CFR 217.37(c)(3)(ii)); and
(2) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible guarantee,
eligible equity derivative, or eligible credit derivative from an
eligible guarantor and calculating its gross credit exposure to an
eligible guarantor, pursuant to paragraphs (c) and (d) of this section,
the currency mismatch adjustment approach of Sec. 217.36(f) of the
Board's Regulation Q (12 CFR 217.36(f)).
(i) Maturity mismatch adjustments. For purposes of calculating its
net credit exposure to a counterparty under this section, a covered
foreign entity must apply, as applicable, the maturity mismatch
adjustment approach of Sec. 217.36(d) of the Board's Regulation Q (12
CFR 217.36(d)):
(1) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible collateral or
any eligible guarantees, eligible equity derivatives, or eligible
credit derivatives from an eligible guarantor, pursuant to

[[Page 38508]]

paragraphs (b) through (d) of this section, and
(2) In calculating its gross credit exposure to an issuer of
eligible collateral, pursuant to paragraph (b) of this section, or to
an eligible guarantor, pursuant to paragraphs (c) and (d) of this
section; provided that
(3) The eligible collateral, eligible guarantee, eligible equity
derivative, or eligible credit derivative subject to paragraph (i)(1)
of this section:
(1) Has a shorter maturity than the credit transaction;
(2) Has an original maturity equal to or greater than one year;
(3) Has a residual maturity of not less than three months; and
(4) The adjustment approach is otherwise applicable.

Sec. 252.175 Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
affiliates of the covered foreign entity.

(a) In general. (1) This section applies only to a foreign banking
organization that is a covered foreign entity or a U.S. intermediate
holding company with total consolidated assets that equal or exceed
$250 billion, provided that:
(i) In order to avoid evasion of this subpart, the Board may
determine, after notice to the covered foreign entity and opportunity
for hearing, that a U.S. intermediate holding company with less than
$250 billion in total consolidated assets must apply either the
approach in paragraph (a) of this section or the look-through approach
in paragraph (b) of this section, or must recognize exposures to a
third party that has a contractual obligation to provide credit or
liquidity support to a securitization vehicle, investment fund, or
other special purpose vehicle that is not an affiliate of the covered
foreign entity, as provided in paragraph (c) of this section; and
(ii) For purposes of paragraph (a)(1)(i) of this section, the
Board, in its discretion and as applicable, may allow a covered foreign
entity to measure its capital base using the covered foreign entity's
capital stock and surplus rather than its tier 1 capital.
(2) For purposes of this section, the following definitions apply:
(i) SPV means a securitization vehicle, investment fund, or other
special purpose vehicle that is not an affiliate of the covered foreign
entity.
(ii) SPV exposure means an investment in the debt or equity of an
SPV or a credit derivative or equity derivative between the covered
foreign entity and a third party where the covered foreign entity is
the protection provider and the reference asset is an obligation or
equity security of, or equity investment in, an SPV.
(3)(i) A covered foreign entity must determine whether the amount
of its gross credit exposure to an issuer of assets in an SPV, due to
an SPV exposure, is equal to or greater than 0.25 percent of the
covered foreign entity's tier 1 capital using one of the following two
methods:
(A) The sum of all of the issuer's assets (with each asset valued
in accordance with Sec. 252.173(a)) in the SPV; or
(B) The application of the look-through approach described in
paragraph (b) of this section.
(ii) With respect to the determination required under paragraph
(a)(3)(i) of this section, a covered foreign entity must use the same
method to calculate gross credit exposure to each issuer of assets in a
particular SPV.
(iii) In making a determination under paragraph (a)(3)(i) of this
section, the covered foreign entity must consider only the credit
exposure to the issuer arising from the covered foreign entity's SPV
exposure.
(iv) For purposes of this paragraph (a)(3), a covered foreign
entity that is unable to identify each issuer of assets in an SPV must
attribute to a single unknown counterparty the amount of its gross
credit exposure to all unidentified issuers and calculate such gross
credit exposure using one method in either paragraph (a)(3)(i)(A) or
(B) of this section.
(4)(i) If a covered foreign entity determines pursuant to paragraph
(a)(3) of this section that the amount of its gross credit exposure to
an issuer of assets in an SPV is less than 0.25 percent of the covered
foreign entity's tier 1 capital, the amount of the covered foreign
entity's gross credit exposure to that issuer may be attributed to
either that issuer of assets or the SPV:
(A) If attributed to the issuer of assets, the issuer of assets
must be identified as a counterparty, and the gross credit exposure
calculated under paragraph (a)(3)(i)(A) of this section to that issuer
of assets must be aggregated with any other gross credit exposures
(valued in accordance with Sec. 252.173) to that same counterparty;
and
(B) If attributed to the SPV, the covered foreign entity's gross
credit exposure is equal to the covered foreign entity's SPV exposure,
valued in accordance with Sec. 252.173(a).
(ii) If a covered foreign entity determines pursuant to paragraph
(a)(3) of this section that the amount of its gross credit exposure to
an issuer of assets in an SPV is equal to or greater than 0.25 percent
of the covered foreign entity's tier 1 capital or the covered foreign
entity is unable to determine that the amount of the gross credit
exposure is less than 0.25 percent of the covered foreign entity's tier
1 capital:
(A) The covered foreign entity must calculate the amount of its
gross credit exposure to the issuer of assets in the SPV using the
look-through approach in paragraph (b) of this section;
(B) The issuer of assets in the SPV must be identified as a
counterparty, and the gross credit exposure calculated in accordance
with paragraph (b) must be aggregated with any other gross credit
exposures (valued in accordance with Sec. 252.173) to that same
counterparty; and
(C) When applying the look-through approach in paragraph (b) of
this section, a covered foreign entity that is unable to identify each
issuer of assets in an SPV must attribute to a single unknown
counterparty the amount of its gross credit exposure, calculated in
accordance with paragraph (b) of this section, to all unidentified
issuers.
(iii) For purposes of this section, a covered foreign entity must
aggregate all gross credit exposures to unknown counterparties for all
SPVs as if the exposures related to a single unknown counterparty; this
single unknown counterparty is subject to the limits of Sec. 252.172
as if it were a single counterparty.
(b) Look-through approach. A covered foreign entity that is
required to calculate the amount of its gross credit exposure with
respect to an issuer of assets in accordance with this paragraph (b)
must calculate the amount as follows:
(1) Where all investors in the SPV rank pari passu, the amount of
the gross credit exposure to the issuer of assets is equal to the
covered foreign entity's pro rata share of the SPV multiplied by the
value of the underlying asset in the SPV, valued in accordance with
Sec. 252.173(a); and
(2) Where all investors in the SPV do not rank pari passu, the
amount of the gross credit exposure to the issuer of assets is equal
to:
(i) The pro rata share of the covered foreign entity's investment
in the tranche of the SPV; multiplied by
(ii) The lesser of:
(A) The market value of the tranche in which the covered foreign
entity has invested, except in the case of a debt security that is held
to maturity, in which case the tranche must be valued at the amortized
purchase price of the securities; and
(B) The value of each underlying asset attributed to the issuer in
the SPV, each as calculated pursuant to Sec. 252.173(a).

[[Page 38509]]

(c) Exposures to third parties. (1) Notwithstanding any other
requirement in this section, a covered foreign entity must recognize,
for purposes of this subpart, a gross credit exposure to each third
party that has a contractual obligation to provide credit or liquidity
support to an SPV whose failure or material financial distress would
cause a loss in the value of the covered foreign entity's SPV exposure.
(2) The amount of any gross credit exposure that is required to be
recognized to a third party under paragraph (c)(1) of this section is
equal to the covered foreign entity's SPV exposure, up to the maximum
contractual obligation of that third party to the SPV, valued in
accordance with Sec. 252.173(a). (This gross credit exposure is in
addition to the covered foreign entity's gross credit exposure to the
SPV or the issuers of assets of the SPV, calculated in accordance with
paragraphs (a) and (b) of this section.)
(3) A covered foreign entity must aggregate the gross credit
exposure to a third party recognized in accordance with paragraphs
(c)(1) and (2) of this section with its other gross credit exposures to
that third party (that are unrelated to the SPV) for purposes of
compliance with the limits of Sec. 252.172.

Sec. 252.176 Aggregation of exposures to more than one counterparty
due to economic interdependence or control relationships.

(a) In general. (1)(i) Paragraphs (a)(2) through (d) of this
section apply only to a foreign banking organization that is a covered
foreign entity or a U.S. intermediate holding company with total
consolidated assets that equal or exceed $250 billion.
(ii) Paragraph (e) of this section applies to all covered foreign
entities.
(2)(i) If a covered foreign entity has an aggregate net credit
exposure to any counterparty that exceeds 5 percent of its tier 1
capital, the covered foreign entity must assess its relationship with
the counterparty under paragraph (b)(2) of this section to determine
whether the counterparty is economically interdependent with one or
more other counterparties of the covered foreign entity and under
paragraph (c)(1) of this section to determine whether the counterparty
is connected by a control relationship with one or more other
counterparties.
(ii) If, pursuant to an assessment required under paragraph
(a)(2)(i) of this section, the covered foreign entity determines that
one or more of the factors of paragraph (b)(2) or (c)(1) of this
section are met with respect to one or more counterparties, or the
Board determines pursuant to paragraph (d) of this section that one or
more other counterparties of a covered foreign entity are economically
interdependent or that one or more other counterparties of a covered
foreign entity are connected by a control relationship, the covered
foreign entity must aggregate its net credit exposure to the
counterparties for all purposes under this subpart, including, but not
limited to, Sec. 252.172.
(iii) In connection with any request pursuant to paragraph (b)(3)
or (c)(2) of this section, the Board may require the covered foreign
entity to provide additional information.
(b) Aggregation of exposures to more than one counterparty due to
economic interdependence. (1) For purposes of this paragraph, two
counterparties are economically interdependent if the failure, default,
insolvency, or material financial distress of one counterparty would
cause the failure, default, insolvency, or material financial distress
of the other counterparty, taking into account the factors in paragraph
(b)(2) of this section.
(2) A covered foreign entity must assess whether the financial
distress of one counterparty (counterparty A) would prevent the ability
of the other counterparty (counterparty B) to fully and timely repay
counterparty B's liabilities and whether the insolvency or default of
counterparty A is likely to be associated with the insolvency or
default of counterparty B and, therefore, these counterparties are
economically interdependent, by evaluating the following:
(i) Whether 50 percent or more of one counterparty's gross revenue
is derived from, or gross expenditures are directed to, transactions
with the other counterparty;
(ii) Whether counterparty A has fully or partly guaranteed the
credit exposure of counterparty B, or is liable by other means, in an
amount that is 50 percent or more of the covered foreign entity's net
credit exposure to counterparty A;
(iii) Whether 25 percent or more of one counterparty's production
or output is sold to the other counterparty, which cannot easily be
replaced by other customers;
(iv) Whether the expected source of funds to repay the loans of
both counterparties is the same and neither counterparty has another
independent source of income from which the loans may be serviced and
fully repaid; \1\ and
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(v) Whether two or more counterparties rely on the same source for
the majority of their funding and, in the event of the common
provider's default, an alternative provider cannot be found.
(3)(i) Notwithstanding paragraph (b)(2) of this section, if a
covered foreign entity determines that one or more of the factors in
paragraph (b)(2) is met, the covered foreign entity may request in
writing a determination from the Board that those counterparties are
not economically interdependent and that the covered foreign entity is
not required to aggregate those counterparties.
(ii) Upon a request by a covered foreign entity pursuant to
paragraph (b)(3) of this section, the Board may grant temporary relief
to the covered foreign entity and not require the covered foreign
entity to aggregate one counterparty with another counterparty provided
that the counterparty could promptly modify its business relationships,
such as by reducing its reliance on the other counterparty, to address
any economic interdependence concerns, and provided that such relief is
in the public interest and is consistent with the purpose of this
subpart and 12 U.S.C. 5365(e).
(c) Aggregation of exposures to more than one counterparty due to
certain control relationships. (1) For purposes of this subpart, one
counterparty (counterparty A) is deemed to control the other
counterparty (counterparty B) if:
(i) Counterparty A owns, controls, or holds with the power to vote
25 percent or more of any class of voting securities of counterparty B;
or
(ii) Counterparty A controls in any manner the election of a
majority of the directors, trustees, or general partners (or
individuals exercising similar functions) of counterparty B.
(2)(i) Notwithstanding paragraph (c)(1) of this section, if a
covered foreign entity determines that one or more of the factors in
paragraph (c)(1) is met, the covered foreign entity may request in
writing a determination from the Board that counterparty A does not
control counterparty B and that the covered foreign entity is not
required to aggregate those counterparties.
(ii) Upon a request by a covered foreign entity pursuant to
paragraph (c)(2) of this section, the Board may grant temporary relief
to the covered foreign entity and not require the covered foreign
entity to aggregate counterparty A with counterparty B provided that,
taking into account the specific facts and circumstances, such indicia
of control does not result in the entities being connected by control
relationships for purposes of this

[[Page 38510]]

subpart, and provided that such relief is in the public interest and is
consistent with the purpose of this subpart and 12 U.S.C. 5365(e).
(d) Board determinations for aggregation of counterparties due to
economic interdependence or control relationships. The Board may
determine, after notice to the covered foreign entity and opportunity
for hearing, that one or more counterparties of a covered foreign
entity are:
(1) Economically interdependent for purposes of this subpart,
considering the factors in paragraph (b)(2) of this section, as well as
any other indicia of economic interdependence that the Board determines
in its discretion to be relevant; or
(2) Connected by control relationships for purpose of this subpart,
considering the factors in paragraph (c)(1) of this section and whether
counterparty A:
(i) Controls the power to vote 25 percent or more of any class of
voting securities of Counterparty B pursuant to a voting agreement;
(ii) Has significant influence on the appointment or dismissal of
counterparty B's administrative, management, or governing body, or the
fact that a majority of members of such body have been appointed solely
as a result of the exercise of counterparty A's voting rights; or
(iii) Has the power to exercise a controlling influence over the
management or policies of counterparty B.
(e) Board determinations for aggregation of counterparties to
prevent evasion. Notwithstanding paragraphs (b) and (c) of this
section, a covered foreign entity must aggregate its exposures to a
counterparty with the covered foreign entity's exposures to another
counterparty if the Board determines in writing after notice and
opportunity for hearing, that the exposures to the two counterparties
must be aggregated to prevent evasions of the purposes of this subpart,
including, but not limited to Sec. 252.176 and 12 U.S.C. 5365(e).

Sec. 252.177 Exemptions.

(a) Exempted exposure categories. The following categories of
credit transactions are exempt from the limits on credit exposure under
this subpart:
(1) Any direct claim on, and the portion of a claim that is
directly and fully guaranteed as to principal and interest by, the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, only while operating under the conservatorship or
receivership of the Federal Housing Finance Agency, and any additional
obligation issued by a U.S. government-sponsored entity as determined
by the Board;
(2) Intraday credit exposure to a counterparty;
(3) Any trade exposure to a qualifying central counterparty related
to the covered foreign entity's clearing activity, including potential
future exposure arising from transactions cleared by the qualifying
central counterparty and pre-funded default fund contributions;
(4) Any credit transaction with the Bank for International
Settlements, the International Monetary Fund, the International Bank
for Reconstruction and Development, the International Finance
Corporation, the International Development Association, the
Multilateral Investment Guarantee Agency, or the International Centre
for Settlement of Investment Disputes;
(5) Any credit transaction with the European Commission or the
European Central Bank; and
(6) Any transaction that the Board exempts if the Board finds that
such exemption is in the public interest and is consistent with the
purpose of this subpart.
(b) Additional exemptions by the Board. The Board may, by
regulation or order, exempt transactions, in whole or in part, from the
definition of the term ``credit exposure,'' if the Board finds that the
exemption is in the public interest and is consistent with the purpose
of 12 U.S.C. 5365(e).

Sec. 252.178 Compliance.

(a) Scope of compliance. (1) Using all available data, including
any data required to be maintained or reported to the Federal Reserve
under this subpart, a foreign banking organization that is a covered
foreign entity or a U.S. intermediate holding company with total
consolidated assets that equal or exceed $250 billion must comply with
the requirements of this subpart on a daily basis at the end of each
business day.
(2) Using all available data, including any data required to be
maintained or reported to the Federal Reserve under this subpart, a
U.S. intermediate holding company with less than $250 billion in total
consolidated assets must comply with the requirements of this subpart
on a quarterly basis, unless the Board determines and notifies the
entity in writing that more frequent compliance is required.
(3) A covered foreign entity must report its compliance to the
Federal Reserve as of the end of the quarter, unless the Board
determines and notifies that entity in writing that more frequent
reporting is required.
(4) In reporting its compliance, a covered foreign entity must
calculate and include in its gross credit exposure to an issuer of
eligible collateral or eligible guarantor the amounts of eligible
collateral, eligible guarantees, eligible equity derivatives, and
eligible credit derivatives that were provided to the covered foreign
entity in connection with credit transactions with exempt
counterparties, valued in accordance with and as required by Sec.
252.174(b) through (d) and (g).
(b) Qualifying Master Netting Agreement. With respect to any
qualifying master netting agreement, a covered foreign entity must
establish and maintain procedures that meet or exceed the requirements
of Sec. 217.3(d) of the Board's Regulation Q (12 CFR 217.3(d)) to
monitor possible changes in relevant law and to ensure that the
agreement continues to satisfy these requirements.
(c) Noncompliance. (1) Except as otherwise provided in this
section, if a covered foreign entity is not in compliance with this
subpart with respect to a counterparty solely due to the circumstances
listed in paragraphs (c)(2)(i) through (v) of this section, the covered
foreign entity will not be subject to enforcement actions for a period
of 90 days (or, with prior notice to the foreign entity, such shorter
or longer period determined by the Board, in its sole discretion, to be
appropriate to preserve the safety and soundness of the covered foreign
entity or U.S. financial stability), if the covered foreign entity uses
reasonable efforts to return to compliance with this subpart during
this period. The covered foreign entity may not engage in any
additional credit transactions with such a counterparty in
contravention of this rule during the period of noncompliance, except
as provided in paragraph (c)(2) of this section.
(2) A covered foreign entity may request a special temporary credit
exposure limit exemption from the Board. The Board may grant approval
for such exemption in cases where the Board determines that such credit
transactions are necessary or appropriate to preserve the safety and
soundness of the covered foreign entity or U.S. financial stability. In
acting on a request for an exemption, the Board will consider the
following:
(i) A decrease in the covered foreign entity's capital stock and
surplus;
(ii) The merger of the covered foreign entity with another covered
foreign entity;
(iii) A merger of two counterparties; or

[[Page 38511]]

(iv) An unforeseen and abrupt change in the status of a
counterparty as a result of which the covered foreign entity's credit
exposure to the counterparty becomes limited by the requirements of
this section; or
(v) Any other factor(s) the Board determines, in its discretion, is
appropriate.
(d) Other measures. The Board may impose supervisory oversight and
additional reporting measures that it determines are appropriate to
monitor compliance with this subpart. Covered foreign entities must
furnish, in the manner and form prescribed by the Board, such
information to monitor compliance with this subpart and the limits
therein as the Board may require.

By order of the Board of Governors of the Federal Reserve
System, July 24, 2018.
Yao-Chin Chao,
Assistant Secretary of the Board.
[FR Doc. 2018-16133 Filed 8-3-18; 8:45 am]
BILLING CODE 6210-01-P