[Federal Register Volume 69, Number 232 (Friday, December 3, 2004)]
[Notices]
[Pages 70259-70261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26610]


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FEDERAL RESERVE SYSTEM


Agency Information Collection Activities: Announcement of Board 
Approval Under Delegated Authority and Submission to OMB

SUMMARY:

Background

    Notice is hereby given of the final approval of a proposed 
information collection by the Board of Governors of the Federal Reserve 
System (Board) under OMB delegated authority, as per 5 CFR 1320.16 (OMB 
Regulations on Controlling Paperwork Burdens on the Public). Board-
approved collections of information are incorporated into the official 
OMB inventory of currently approved collections of information. Copies 
of the OMB 83-Is and supporting statements and approved collection of 
information instrument(s) are placed into OMB's public docket files. 
The Federal Reserve may not conduct or sponsor, and the respondent is 
not required to respond to, an information collection that has been 
extended, revised, or implemented on or after October 1, 1995, unless 
it displays a currently valid OMB control number.

FOR FURTHER INFORMATION CONTACT:
    Federal Reserve Board Clearance Officer--Cindy Ayouch--Division of 
Research and Statistics, Board of Governors of the Federal Reserve 
System, Washington, DC 20551 (202-452-3829).
    OMB Desk Officer--Mark Menchik--Office of Information and 
Regulatory Affairs, Office of Management and Budget, New Executive 
Office Building, Room 10235, Washington, DC 20503, or e-mail to 
[email protected].
    Final approval under OMB delegated authority of the extension for 
three

[[Page 70260]]

years, with revision, of the following report:
    Report title: Semiannual Report of Derivatives Activity.
    Agency form number: FR 2436.
    OMB control number: 7100-0286.
    Frequency: Semiannual.
    Reporters: Large U.S. dealers of over-the-counter (OTC) 
derivatives.
    Annual reporting hours: 2,400 hours.
    Estimated average hours per response: 150 hours. Some reporters, 
because of their organizational structure, have significantly higher 
burden than the Federal Reserve's estimate. The Federal Reserve will 
consult with respondents to update the burden estimates and will file 
an amendment with OMB upon completion.
    Number of respondents: 8.
    General description of report: This information collection is 
voluntary (12 U.S.C. 248(a)(2) and 353-359) and is given confidential 
treatment (5 U.S.C. 552(b)(4)).
    Abstract: This voluntary report collects derivatives market 
statistics from eight large U.S. dealers of OTC derivatives. Data are 
collected on notional amounts and gross market values of the volumes 
outstanding of broad categories of foreign exchange, interest rate, 
equity- and commodity-linked OTC derivatives contracts across a range 
of underlying currencies, interest rates, and equity markets.
    This collection of information complements the ongoing triennial 
Survey of Foreign Exchange and Derivatives Market Activity (FR 3036; 
OMB No. 7100-0285). The FR 2436 collects similar data on the 
outstanding volume of derivatives, but not on derivatives turnover. The 
Federal Reserve conducts both surveys in coordination with other 
central banks and forwards the aggregated data furnished by U.S. 
reporters to the Bank for International Settlements, which publishes 
global market statistics that are aggregations of national data.
    Current Actions: The Federal Reserve proposed to revise the FR 2436 
by adding a table (with four sections) to collect data on credit 
default swaps (CDS). Given the very rapid growth of credit derivatives 
in recent years, the G-10 central banks determined that data on credit 
default swaps should be collected semiannually.
    The original proposal called for collection of data on the 
outstanding positions (notional, gross positive and gross negative 
market values) of credit default swap contracts for protection bought 
and protection sold by instrument type and counterparty type. 
Instrument types would be disaggregated into single-name and multiple-
name instruments. Counterparty types would be disaggregated into 
reporting dealers, other financial institutions, and nonfinancial 
customers. In addition, other financial institutions would be further 
disaggregated into: banks and securities firms; insurance, reinsurance, 
and financial guaranty firms; special purpose entities (SPEs); hedge 
funds; and other. Notional values would be further disaggregated by the 
credit rating of the underlying reference entity, by the sector of the 
underlying reference entity, and by the remaining maturity of 
outstanding credit default swap contracts.
    The Federal Reserve received one comment letter from a banking 
trade association. The commenter expressed strong opposition to the 
proposal, arguing that revisions to the voluntary FR 2436 would further 
tax members banks' resources, recommending the due date be changed to 
90 days after the report date from the current 60 days, and opposing 
the collection of credit derivative data.

Detailed Discussion of the Comments

Collection of Credit Derivative Data

    The commenter noted that Schedules HC-L and HC-R of the 
Consolidated Financial Statements for Bank Holding Companies (FR Y-9C; 
OMB No. 7100-0128) already collect credit derivative information for 
protection bought and sold on notional values and counterparty ratings 
(investment grade versus below investment grade), as well as gross 
positive and negative fair values. Therefore, the commenter recommended 
that credit derivative data be included on the FR 2436 in Tables 3A-3C, 
``Equity and Commodity-Linked Contracts,'' to obtain the regional 
detail. The Federal Reserve proposes to reduce the amount of detail to 
be collected under the proposal, but not to the extent recommended by 
the commenter. The purpose of the FR 2436 is to understand the size and 
scope of global over-the-counter (OTC) derivatives markets, which is 
why the report collects detail on derivatives counterparties (reporting 
dealers, other financial institutions, and nonfinancial customers), as 
well as on market risk factors (such as currencies for interest rate 
and foreign exchange contracts) that are not collected on the FR Y-9C. 
Moreover, the Federal Reserve and other central banks have a particular 
interest in credit and credit risk and how they are intermediated in 
the global financial system, which is why relatively more detail is 
being requested on credit derivatives as compared to other derivatives 
markets of comparable size.
    The commenter indicated that it would be very burdensome for 
respondents to report detailed data on the sector of the counterparty. 
This information is not used in respondents' risk management systems 
and would have to be coded manually for each counterparty. In response, 
the Federal Reserve proposes to reduce the number of counterparty 
categories to five: (1) Reporting dealers; other financial 
institutions, broken into (2) banks and securities firms, (3) insurance 
firms, and (4) other; and (5) nonfinancial customers. Although the 
Federal Reserve was interested in seeing a breakout of the amount of 
business done with hedge funds and SPEs, these counterparties will be 
included in (4) other. This item will provide an upper bound on 
contracts with hedge funds and SPEs, at much less burden to reporters.
    The commenter also stated that data on reference entities would be 
very burdensome to report because such data are also not kept in the 
respondents' risk management systems. The commenter emphasized that 
reference entity information was especially burdensome for multiple-
name instruments. In response, the Federal Reserve proposes to drop 
reporting of reference entity information by sector and rating category 
for multiple-name instruments, as the burden associated with such data 
are not likely to match its usefulness. Moreover, the Federal Reserve 
is concerned that the quality of data for multiple-name instruments 
might be low, due to the difficulty involved in reporting such data.
    Regarding the proposed reference entity sector breakdowns, the 
commenter explained that breaking corporate reference entities into 
financial and nonfinancial would be significantly more burdensome than 
simply splitting out sovereign reference entities. The Federal Reserve 
viewed splitting out sovereign reference entities to be the most 
important split for sector of the reference entity and therefore 
propose to reduce the number of categories for sector of reference 
entity to two (sovereigns and non-sovereigns).
    The commenter also explained that breaking out investment-grade of 
reference entities into AA and above, and A and below would be 
significantly more burdensome than just reporting investment grade, 
below investment grade, and unrated. The Federal Reserve viewed below 
investment grade and unrated as the most important rating categories to 
identify and therefore propose to reduce the number of

[[Page 70261]]

categories for the rating of the reference entity to three (investment 
grade, below investment grade, and not rated).
    The commenter stated that a bank's credit risk on a credit 
derivative contract is to the counterparty and not to the reference 
entity (or underlying obligor), and that therefore, information on the 
reference entity may be misleading. However, this assertion is only 
true for protection purchased via credit default swaps. For protection 
sold via credit default swaps, a bank is, indeed, exposed to the credit 
risk of the underlying reference entity. In any case, as noted above, 
the purpose of this report is to understand the size and scope of 
global OTC derivatives markets, not individual banks' credit exposures 
from credit derivatives contracts.
    The commenter also stated that many credit derivative transactions 
are entered into as a hedge on a bank's loans and securities 
portfolios, but because the FR 2436 would not capture data on the loans 
or securities that are being hedged, the information reported may be 
misleading. However, as noted above, the purpose of this report is to 
understand the size and scope of global OTC derivatives markets, not 
individual banks' credit exposures from credit derivatives contracts.

Opt-Out of Filing the Report

    The commenter requested that the Federal Reserve consider giving 
banks a procedure to opt-out of filing the report or opt-out of filing 
individual schedules because the FR 2436 is a voluntary and statistical 
report and is not necessary for supervisory purposes. The report is 
collected from only the eight largest derivatives dealers (four banks 
and four investment banks) that are headquartered in the United States. 
The Federal Reserve feels the usefulness of the data would be 
substantially reduced if any of these reporters were to opt out of 
filing the report or a schedule from the report and therefore request 
that respondents submit all schedules of the FR 2436. As demonstrated 
in the responses to the commenter's other suggestions, the Federal 
Reserve is taking several steps to reduce the burden of supplying these 
data. In addition, Federal Reserve staff will work with individual 
respondents, as needed, to make the process of providing this valuable 
information as smooth as possible, including extending the filing 
deadline in order to give them more time to address the revisions.

Effective Date

    The commenter stated it would be very difficult for respondents to 
implement for the December 2004 report date, as originally proposed, 
because compiling the data are burdensome and because they must address 
revisions to a number of other reporting forms. The commenter requested 
an additional year to implement the proposal. In response, the Federal 
Reserve proposes to phase-in the revisions, collecting more basic data 
for the December 2004 and June 2005 report dates (phase 1) and 
collecting the remaining data (phase 2) as of December 2005. The basic 
data would include notional values for contracts bought and sold and 
gross positive and negative market values, for single-name and multi-
name instruments, for three counterparty categories (reporting dealers, 
other financial institutions, and nonfinancial customers), and the 
notional value of contracts for three different maturity splits. The 
basic data would not include any detail on reference entities.

Filing Deadline

    The commenter stated that the 60-day filing period has become 
increasingly burdensome for respondents because the filing period has 
been shortened for a number of supervisory reports. Also, the commenter 
noted that the data collection process is still manual at most 
institutions. The commenter asked for 90 days to file the report. In 
response, the Federal Reserve proposes to extend to 75 days, from 60 
days, the report submission date.

    Board of Governors of the Federal Reserve System, November 29, 
2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-26610 Filed 12-2-04; 8:45 am]
BILLING CODE 6210-01-P